LONDON—The definition of what constitutes a budget hotel has changed more in the last few years than at any point in the history of the hotel industry.
Speaking at a panel titled “The budget sector” at the Hotel Investment in Europe, or Hot.E, conference, Navneet Bali, chairman of Meininger Hotels, said there have never been so many budget brands.
“There are so many brands,” Bali said. “Some are superior in quality, but they are all budget, limited service, and which guests are looking for value, as they do with airlines. What is the difference between EasyJet and Ryanair?”
Despite the number of budget hotels, there is still room in the U.K. for the segment to grow, even with Travelodge and peer brand Premier Inn already well established in the country, said Peter Gowers, CEO of Travelodge U.K.
“We think there are 250 markets in the U.K. where there is not a Travelodge, and we think there should be, and we are seeing a third category to reinforce supply, U.K. university towns and old, attractive market towns with cathedrals … we only have currently one property in Oxford, for example,” he said.
Gowers added that budget hotels are attractive to both investors and guests.
“For investors, it is about the risk-return profile, while for guests, value hotels come with a really clear pitch,” he said.
He said budget hotels provide a lot of opportunities for investors.
“Budget is a model with a mass demographic, resilience through the operating cycle and low capital reinvestment through the construction process,” Gowers said. “How some of these new brands will survive the first seven years of capital reinvestment will be interesting. If a new brand is very clever with design, as an example, it will just cost more to reinvest in it.”
Finding a niche
New budget hotels often gain momentum if they target a specific guest or launch their first property in a unique market. Meininger, for example, got its start in niche markets, Bali said.
“We have six hotels in Berlin, which is the HQ of the hostel world, and we could do with two more,” he said. “Subsidies still exist for German student groups to visit Berlin, the capital, the Bundestag. (Peer brand) Motel One has 12 there, and I think they, too, want more. And the celebration market is very healthy—stag and hen events, for example, also backpackers, flash packers, gap-year students, going to see a (soccer) game—so new hotels do still need to be very well located.”
Sharan Pasricha, founder and CEO of Ennismore, said Ennismore targets a different guest mix. The company started Hoxton Hotels in 2006 and launched NoCo earlier this year.
“Customers are fragmenting more and more in terms of their accommodations choice, and they are discerning where they spend their money,” he said. “If it is a fundamental trip then perhaps Travelodge works better.”
Pasricha added that today’s traveler has many more choices.
“Our entire thought process is that where you stay today says more about you than where someone stayed 10 years ago,” Pasricha said. “We could never compete with Travelodge if all you need is a pillow and a shower, but could we at a slight premium if we add more? We have lots of toys to play with.”
Bali said it’s still important for brand properties to have some similarity and to push return on investment. Gowers added that technology can be a potential pitfall.
“Where hotels fail is the speed in which they change tech,” Gowers said. “It has to be monetized, or the cost will cripple you.”
New entrants
Ennismore launched NoCo as a sister budget brand to Hoxton Hotels, Pasricha said.
“As (Shoreditch and East London) changed, Hoxton did, too,” Pasricha said. “It is certainly not budget, but I think it is value, although as (Gowers) said, that is relative. Five-hundred euros ($558.57) is value if (average daily rate) is €1,000 ($1,117.15).”
Pasricha said the challenge for NoCo was to create what he called the “Hoxton Hustle,” or a buzzing sense of community. The brand is in the process of signing its first couple of leases and wants to sign three or four a year on 25-year leases.
Budget brands do not necessarily have to gain huge scale to succeed, panelists said.
“Both (domination or cherry picking) work if you are very clear what your brand proposition is,” Gowers said. “Domestic scale allows (Travelodge) to run a national TV campaign viewed by double-digit million viewers—which leads to direct bookings—but building out across multiple markets and countries works very well if you are focused on a niche demographic.”