The value of budget hotels

07 August 2008
The value of budget hotels

The budget hotel has often been dismissed as naff by punters and people in the industry alike. But with an economic downturn and other changes afoot, there could be lasting growth rather than decline for this much-maligned sector, says Gemma Sharkey

Budget is often seen as another word for cheap - something that hasn't affected the rise of the cut-price airline, but which seems forever imprinted on the lower-priced, branded end of the hotel market. A budget room, in many people's minds, is four grey walls, a bed and a disc of desiccating soap on the sink if you're lucky. The comedian Steve Coogan certainly knew what he was doing when he housed his creation Alan Partridge, a failed TV chat show host at his lowest ebb, in a motorway motel. The result was bleak, seedy and comically desperate.

Both budget airline and budget hotel have come together in the case of the Easy group of companies, however, and Lawrence Alexander, chief executive of EasyHotel, the budget-hotel-chain sister to the low-cost EasyJet empire, believes that things are changing in the room-stay sector, too. "The negative association with budget hotels is all history now," he says. "Travelodge and Premier Inn have opened the market up to people in the UK who would have been afraid of walking into a hotel before."

The figures bear out talk of a growing market. According to Budget Hotel 2008 UK, a report by research company Business Development Research Consultants (BDRC), the budget hotel share of the domestic market increased from 28.9% in 2002 to 35.8% in 2007. The mid-scale full-service market fell by 3.2% during the same period, while the average annual revenue per available room (revpar) for a budget hotel exceeded £1m for the first time.

Further evidence of a market gap is provided by the latest moves at Hilton, the four-star operator. The company's new Hampton by Hilton brand is being brought over from the USA to the UK this year, and there are plans for up to 60. New venues are all beige wood, trendy retro 1970s carpet and shiny black-and-white-tiled and spotlit bathrooms. There are between 170 and 200 bedrooms per venue, with a panel TV and large workspace in each. Prices are between £69 and £99 a night.

The man in charge of the new roll-out, senior vice-president for brand management Phil Cordell, has spoken of a new generation of travellers and the need to "create an emotional connection" with such customers. Giving people a reason, apart from price, to stay in a budget hotel has been the challenge behind the new Hampton launch. "Although price will always play a role, it is value that the customer will seek when booking a hotel," says Cordell.

It's something different from Hilton, but then its traditional strength in the midmarket could be affected by the economic downturn. TRI Consulting has surmised that a reduction in domestic corporate travel and accommodation budgets would work in favour of "budget chains with strong brands, marketing and distribution power". TRI concluded that: "An element of business demand will be displaced from the branded mid-scale sector to the budget sector."

In fact, budget brands have already been encroaching on mid-sector suppliers by buying properties from them. In April the Real Hotel Company sold its three London hotels for £18.6m to Whitbread. The former brewer also had first refusal to acquire all 12 of the remaining Purple hotels. In the same month, Travelodge bought six hotels from the Menzies group for £85m. Premier Inn recently set aside £9m towards advertising. These firms have the finance and are newly buoyant in the current climate. "Independent hotels are poorly understood by the market, as people don't know what quality to expect when they get there," says hotel consultant Melvin Gold. "Brands, including those at the budget level, offer consistency."

Furthermore, there's money to be made from budget. With the emphasis on the room rather than peripheral details or food and beverage, there are huge cost savings. And as for takings, budget doesn't have to mean cheap. Premier Inn in its London King's Cross St Pancras property is aiming for £100 a night per room. Customers might have the perception that they are saving money by staying in a budget hotel, but the room fee doesn't have to compete with the very bottom end of the market.

Michael Levie, in charge of new Dutch budget brand CitizenM, believes that: "The wallet now has feelings. The customer used to end up in budget hotels by default, and it wasn't very exciting. If a business guest was staying in a Travelodge, you would never hear him say to an associate, ‘Come and meet me in the lobby.' But now, with the more design-friendly look, people are not embarrassed to come in and conduct business."

So, budget hotels are becoming newly attractive. They look better and are found in more appealing places, according to Guy Parsons, managing director of the UK arm of Travelodge. "Budget hotels are in places they didn't exist before," he says. "People are able to stay in locations that they want to. They have an alternative to the midmarket rubbish."

And then there's a design-led element to the sector, too. Levie's fashionable CitizenM brand will land in Glasgow by 2010. The Japanese pod-style hotel Yotel is small but, the owners would say, perfectly formed. The yacht cabin-style rooms of Nitenite in Birmingham are soon to be in London, Manchester and Bristol and there's the Big Sleep in Cardiff, part-owned by actor John Malkovich.

Speaking at the recent Economy & Budget Hotels World conference in London, Levie added: "Our customers like stylish design and great value. They need a hotel in a good location. What they don't want is unnecessary or hidden costs. They don't need marble fountains or outdated services."

People no longer want the old-fashioned trappings of luxury, in other words, so budget hotels can look good without spending as much as they needed to in the past. Yotel, Nitenite and CitizenM are built using prefabricated modules, something that James Briggs, director of Stoy Hayward Corporate Finance, referred to as "the future of hotel construction" in the context of the rising cost of building materials.

The new space-age-looking brands have quickly cornered part of the market with the use of certain products and technology as well as lighting systems in order to create a brand identity, and loyalty, with customers. Do these threaten the status of the less overtly designed major budget brands? According to Guy Parsons of Travelodge they do not. "The new budget-sector hotels are welcome to the industry. They will move the budget sector up and push the customer to abandon the midmarket - but they have fewer rooms than us per hotel in a smaller number of locations."

Certainly, there seems to be room for both, if the BDRC's statistics are to be believed. In the UK only 13.2% of branded stock is budget, compared with the USA, which has 25%, and France, with 23.4%. The main drivers are likely to be Whitbread's Premier Inn, which has plans to grow its chain to 55,000 bedrooms by the end of 2012 Travelodge, aiming at 70,000 bedrooms by 2020 and the French company, Accor, which has the market so sewn up in France that no other budget group dares to venture there.

Meanwhile, overseas expansion is being pushed by Premier Inn, which is opening a hotel in Dubai and has 80 in the pipeline for India by 2017. EasyHotel, which currently operates seven hotels, including two in Switzerland and one in Budapest, is developing five sites in Dubai which will open between July and December 2009.

Evidence that the budget area has come a long way is shown by the fact that mid- to luxury-end hotel operator Rezidor is interested. Group president Kurt Ritter spoke of his wish to launch a "colourful" budget brand, claiming that rival chains are offering "boring and depressing" architecture.

Whatever they look like, the balance sheets of most budget groups at present would make plenty of operators jealous.

CitizenM comes to the UK

The design-led budget hotel brand CitizenM keeps costs down by using modular construction in its hotels, prefabricating them in its own production facility. The units are then transported to the building site and assembled to create the hotel.

The Dutch firm aims to bridge the divide between low-end budget chains and full-service brands and has plans for 20 hotels across Europe in the next five years. Two of these will be in London, along with one in Berlin and another in Glasgow. Other potential locations include Edinburgh, Manchester, Barcelona, Berlin, Prague, Paris, Milan and Moscow. The company already operates a hotel at Amsterdam's Schiphol Airport and plans to open a second hotel early next year in Amsterdam's city centre.

Through regional partnerships, CitizenM also plans to roll out globally.

Hilton's Phil Cordell on the new budget

"One must challenge the notion that the hotel market fundamentally segments across price points. I believe - and I've seen this in the US market - that a visionary-focus service brand can create an experience that is attractive to lodgers across a wider range of price points.

"It is about projecting the brand as a social hub - one that enables customers to network, interact and share."

Phil Cordell is senior vice-president, brand management, Hampton by Hilton

What exactly is Budget?

In the UK, the umbrella term "budget" covers a wide-ranging sector and a range of brands: "ultra-budget", which includes brands like EasyHotel, "core-budget", including Travelodge and "upper-budget", such as Express by Holiday Inn. There are 28 budget brands operating in the UK today, with some 1,264 hotels.

Within the branded budget pie, Premier Inn holds the biggest slice, with 37%, followed by Travelodge at 23%, Express by Holiday Inn holds 13%, Ibis 7%, Jurys Inn at 5% and Innkeeper's Lodge at 3%.

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