This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies.  Find out more here  Close
Economy hotels struggling to bounce back
December 5 2012

The economy segment has yet to recover from its late-1980s heyday. But ambitious brand refreshes and billions of dollars worth of investment could breathe new life into the segment.

  • The economy segment has not reported an average annual occupancy higher than 60% since 1995.
  • Lagging rates and revenues saw much of the existing supply deteriorate.
  • Budget hotels are under increased downward pressure from the midscale and upper midscale segments.

REPORT FROM THE U.S.—When Randy Smith first started compiling hotel performance data in his basement during the early days of STR, the economy segment was nearly bursting at the seams with demand.

Entire brands ran at 91%, 92% during the mid-1980s, the chairman and co-founder of STR, parent company of, recalled during a session at the Hotel Data Conference earlier this year. And they did so consistently month after month, year after year.

But then, the lumbering savings and loans crisis pulled the broader economy into the depths of recession—and the budget hotel sector went with it.

More than two decades have passed, but the segment has yet to fully recover. Economy hotels in the U.S. have not finished the year with an average occupancy of more than 60% since 1995, when the chain scale crossed the 12-month mark at 61.6%. The metric bottomed out in 2009 at 49.1%, a year in which budget hotels recorded six monthly average occupancies of less than 50%, according to STR.

As demand waned, so did revenues. The quality of hotel supply itself followed closely, Smith bemoaned during the conference.

“The economy segment is a fraction of what it used to be,” he said.

Today, cash-strapped economy hotel owners find themselves even worse for wear, choosing between debt payments and deferred maintenance. Hovering over ever presently are the thriving midscale and upper-midscale segments, which are creating compression and eating into margins and customer share.

“They’re in a real quandary,” Smith said of the economy segment. 

Blackstone jumps on board
But then: hope.

An affiliate of private equity behemoth Blackstone Group LP in May said it would purchase Accor’s Motel 6 and Studio 6 budget brands for $1.9 billion. The deal by itself signaled an unexpected appetite by investors for the economy sector—to say nothing of the $500 million Blackstone earmarked for capital improvements in the next three to five years.

“It’s great when smart people make investments in the same type of products that they either own or operate,” said Andy Alexander, president of Motel 6 competitor Red Roof Inn. “… We feel that Blackstone’s investment in Motel 6 really solidifies that there is value in the economy segment.”

Jim Amorosia, president of the newly formed G6 Hospitality that was created to manage Motel 6 and Studio 6 in the wake of the Blackstone acquisition, certainly thinks so.

“(Blackstone) recognized that they had such a great value opportunity in Motel 6 and its brand that they included right in their modeling an additional $500 million in terms of capital investment to renovate the system.”

Much of that will go toward the brand’s Phoenix room prototype, which was launched in 2008 but has yet to be implemented system wide. Only 250 or so of the brand’s approximately 1,100 hotels have been upgraded.  “Over the next five years, the entire system will be completed,” Amorosia said during the Motel 6 brand conference earlier this year.

But Blackstone’s ambitions extend beyond the existing portfolio. The firm has its eyes set on aggressive expansion that could more than double Motel 6’s existing footprint—first in previously untapped urban cores—and then forging ahead into uncharted international territory—most likely in Canada, where the brand already has 20 locations, followed by Mexico and then South America.

“We obviously believe the Motel 6 brand can easily be in the range of 2,500 hotels,” Amorosia said.

That move would buck the anemic growth that has plagued the segment in recent years. As of September year to date, 38 properties had left the segment for a total net loss of 19 hotels, according to STR. The trend was more pronounced during 2011, when the chain scale lost 53 properties for a total net loss of 24 hotels.

October year to date, the economy segment comprised 10,338 properties and 784,212 rooms, according to STR.

A tale of two brands
Red Roof Inn’s Alexander advised not to read too much into the numbers. Many economy properties have upbranded to the midscale segment; declining supply is not necessarily indicative of widespread foreclosures or demolitions, he said.

The proliferation of brands in recent years has all but blurred the lines between economy hotels and their midscale counterparts—a development in which Alexander is well-versed. Red Roof Inn’s rollout of its NextGen prototype, which will be executed in approximately 150 of the chain’s 350 properties by the first quarter of 2013, is a direct play to push back against such compression and define a position at the top of the economy segment.

When pressed about aspirations to eventually breach the midscale sector, Alexander said: “We do want to be at the top of the economy segment, but we want our band to appeal to midscale customers. That’s a little different than saying we want to be in the midscale segment.”

Red Roof’s approach has introduced more amenities and higher-quality finishes to its guest experience. And the efforts, which cost owners in the range of $4,000 to $10,000 a key, have been well received. Converted hotels saw a revenue-per-available-room bump of 11% during the first quarter compared with the 6% achieved throughout the rest of the system, Alexander said.

What’s more, satisfaction metrics such as “likelihood to return” have jumped 6 points in NextGen hotels, while “intent to recommend” has climbed by the same percentage.

G6 Hospitality is taking a decidedly different approach, carving out its position as the lowest-priced offering in the space.

“We were able to maintain and grow our market share against the segment because we still had the very clear image of Motel 6,” Amorosia said. “Because we own the position that we own, even though we had some occupancy deterioration during the recession, we actually grew our market share growth against the segment.”

While the brand’s Phoenix prototype provides a welcome upgrade, the renovation is conspicuously amenity light, he said. The approach was by design—a direct countermove against the amenity creep Amorosia observed from competitors as they tried to combat the downward pressure from midscale hotels.

But introducing new amenities only created further pressure on the segment by stacking up additional operating costs amid a recessionary environment, he added.

“A lot of times what happens is a lot of the brands … you’re providing a lot more for the client who does not need it,” said Alkesh R. Patel, chairman of the Asian American Hotel Owners Association and president of Trupadi, which owns and operates four independent economy properties, one of which will soon be converted to a Best Western.

But Alexander said the amenity play worked well for Red Roof as it introduced its NextGen concept.

“There’s this misnomer that people in the economy segment want to pay the least amount possible. It’s just really not an accurate way of describing our customer,” he said. “… While there’s certainly a level at which they don’t want to go above, there’s still substantial room to ask them to pay some more to get some more.”

“That’s where we’ve been headed and we’ve seen a lot of success as we’ve renovated our products.”

Untapped demand
While the economy segment struggles to regain its footing, brand executives and owners are optimistic about its long-term outlook.

“There is definitely big potential in the economy segment,” Patel said. “Blackstone’s acquisition says it all.”

“I don’t think the economy segment is ever going to go away, but I think there is going to continue to be some compression between flagged economy product and unflagged economy product,” Amorosia said.

Red Roof’s Alexander echoed that sentiment. “The brands in the economy segment are at risk of becoming commodities.”

But how to differentiate? System-wide product renovations are a step in the right direction, sources said, as are attempts to capture defined market segments. 

“What we’re working toward is that in three to five years, all of our properties are distinctive and have attributes that cause our consumer to be at that corner with all of our competitors at every corner and they pick Red Roof Inn because they know what we have is distinctive and distinctively what they want. That’s what NextGen is all about,” Alexander said.

Despite lagging performance metrics, there’s plenty of demand to go around, said STR’s Smith.

The budget sector is “probably one of the largest untapped potential markets in this country,” he said. “If we can make the segment relevant again, I really think there are a lot of travelers out there that would utilize that type of property.”

J Johnson
12/6/2012 11:48:00 AM
Being a road warrior, I often find myself in a Motel 6. The harsh reality is, Motel 6 is not likely to suceed if it cannot get its housekeeping standards improved. The poor housekeeping standards are driving travelers to other brands who will pay more to ensure their accommodations are clean and safe.
Login or enter a name   Post Your Comment  Check to follow this thread via email alerts (must be logged in)
(4000 characters max)

Comments that include blatant advertisements or links to products or company websites will be removed to avoid instances of spam. Also, comments that include profanity, lewdness, personal attacks, solicitations or advertising, or other similarly inappropriate or offensive comments or material will be removed from the site. You are fully responsible for the content you post. The opinions expressed in comments do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please report any violations to our editorial staff.

Hilton unveils Tru brand to fill midscale void
How independent hoteliers grab direct bookings
Is rate parity good or bad for the industry?
Sharing economy might be in Choice’s future
Tru design: Efficient rooms, versatile lobbies
Kimpton still grows a year after acquisition
ALIS 2016: LIIC members share opinions
Consultants share trends, advice for 2016
HSMAI Digital Marketing roundtable
Concord embraces change
Red Roof Inn on international track
Will Super Bowl expectations meet reality?
Industry outlook: A crash or soft landing?
STR: US results for week ending 30 January
Davidson launches Pivot as its lifestyle hub
Down cycle concerns complicate risk management
What’s alternative is becoming the new normal
Contact Us
Hotel News Now
18500 Lake Rd.
Suite 310
Rocky River, Ohio 44116
Copyright © 2004 - 2016 Hotel News Now, a division of STR, Inc. All Rights Reserved.   Privacy