REPORT FROM THE U.S.—Despite being overshadowed by the midscale-without-food-and-beverage segment and experiencing declining supply, demand and occupancy since the mid-1990s, the midscale-with-food-and-beverage segment still can be a viable option for consumers—even though the segment has challenges to overcome.
One of those challenges is the need to reinvent itself, according to Bobby Bowers, senior VP, operations for Smith Travel Research.
Bobby Bowers, senior VP, operations for Smith Travel Research
“It’s kind of the original segment that launched mass hotel development, and that goes back to Holiday Inn in the 1950s,” he said. “It became an all-things-to-all-people type of product. In the early days it was a great concept, but it kind of outgrew itself, outlasted its time.
“From the supply standpoint and perception standpoint, it’s on the decline.”
One of the largest obstacles the segment faces is the age of the hotels.
“One of the reasons why upscale and midscale without food and beverage tend to be performing better is the product is newer,” Bowers said. “They have really driven development in the industry in terms of rooms added over the past 10 years or more. (Midscale-with-F&B) has so much of the older product that’s holding it back.”
New will always trump old at this price point, according to Mark Young, brand senior VP for Ramada Worldwide, a division of Wyndham Worldwide.
“Developers like to build those midscale-without and economy hotels because they’re shiny and great,” he said. “Customers like new and shiny. On any corner in any town, if a property looks new, they’re going to try it out.”
Midscale with F&B 2009 performance
||YOY % change
| Source: Smith Travel Research
The segment’s supply decline is a direct result of the age of its hotels, according to Bowers.
“You’ve got a lot of product that is obsolete or is in markets that are no longer viable,” he said. “That’s why a lot of times people will tell you the industry is not overbuilt, it’s underdemolished.”
Mark Carrier, chairman of the IAHI, the owners’ association for InterContinental Hotels Group, said the explosive growth of the brands through new construction is no longer in the offing.
Mark Young, brand senior VP for Ramada Worldwide
“We’re at a point that hotels that are in the pipeline will work their way through, but there won’t be a large number of hotels being built in the next four or five years,” he said. “Now it’s, ‘how do you make the hotels you have work better?’”
Carrier also is senior VP of the B.F. Saul Company Hotel Division, which owns and operates 19 properties, five of which are in the midscale-with-F&B segment.
Young said that when a property joins the Ramada brand, a large investment is required to overcome the age of the hotel.
“When a property changes its flag, we want to make sure that there’s a pretty expansive punch list that the new owner is going to have to do to make it new inside and outside,” he said. “If you don’t have a crisp new look, it doesn’t have the impact. Customers aren’t going to look at it if it’s just a new flag. Customers are going to want to try something that looks new and looks fresh.”
Dan Sweiger, senior director, brand planning for Choice Hotels International, said the limited-service segment also poses a challenge because of its lower construction costs and simpler operations, which attracted a great deal of new construction investment in the past decade, as well.
“New product typically fares better, of course, but only having half the rooms to fill can make your (revenue per available room) look pretty good, too,” he said. “From a consumer standpoint, the proliferation of services and information has made today’s travelers more self-sufficient. There’s less reliance on having everything under one roof than there used to be.”
Choice’s offerings in the midscale-with-F&B segment are Clarion, Quality Inn and Quality Suites.
InterContinental Hotels Group is in the middle of relaunching its Holiday Inn brand because it realized it needed to get serious about quality and building momentum, according to Carrier. The US$1-billion effort involves more than 4,000 hotels around the world.
“The effort to relaunch the brand was absolutely necessary but had to be done in conjunction with guest satisfaction,” he said. “(The brand looked at) signage and brand hallmarks and ensuring the basic service quality, cleanliness and physical renovations were all at a good level or above.”
Affect of the Great Recession
Of course, the Great Recession has had an impact on the recent performance of the segment. Bowers said the rotten economy has hit occupancy in the lower segments harder.
“Unemployment is going to continue to be very high,” he said. “Until that starts to change, they’re probably going to lag a bit in their stabilization of occupancy. You’re beginning to see occupancy begin to be flat to slightly up. You’ll probably continue to see that for awhile.”
Click image to enlarge.
Click image to enlarge.
When comparing midscale with F&B to its midscale relative, midscale without F&B had higher ADR, RevPAR and occupancy in 2009, and smaller percentage drops in all three measures, according to STR.
“It’s easy to talk in broad strokes, but you get down to the fact that you’ve got to pencil the deal,” Bowers said. “You really have to evaluate the market you’re in, what your demand generators will be, are there other F&B options out there, are you going to have a lot of demand for meetings.
The good news
Despite the negatives associated with the segment, there are some advantages to balance the scale.
“(Midscale-with-F&B hotels) are the heart and soul of American communities large and small, an affordable place where people gather for a wide range of activities that are central to our lives, from wedding receptions and reunions to business meetings and service organization functions,” Sweiger said. “For all these important gatherings, we need more services and amenities than a limited-service hotel can offer. And many refer better value than the high cost of expensive upscale hotels.”
Dan Sweiger, senior director, brand planning for Choice Hotels International
Carrier said the segment has the ability to attract multiple market segments at an attractive price point.
“If you have a good location and the ability to appeal to leisure travelers and other travelers, you’re far better positioned than a narrowly focused brand,” he said.
The key to success in this segment is to have banquet business, according to Young.
“If you have banquet business, you can afford a chef,” he said. “You can afford good management. If you’re going to depend on a restaurant and bar without banquet business, you’re not going to make any money.”
Carrier said that for midscale-with-F&B hotels to be successful, they have to have aggressive local sales-and-marketing efforts.
“It’s got to be a lot of local promotions and taking advantage of brand options,” he said. “If you do have a good local sales effort, you can reach consumers, meeting planners and tour operators directly. They need to interact with the hotel and find that person at the hotel that’s going to manage their needs.”
Does the fact that the peak of good times for the midscale-with-F&B segment is so far in the past indicate a future without these types of hotels?
Not at all, although some changes need to be made, according to Bowers.
“The concept of it will absolutely be important,” he said. “What you call it might be a matter of semantics, but the concept of providing midscale-with-F&B products will stay forever.
“It’s been viable from the start and will continue to be 30 years from now.”
Sweiger said there will always be a need for an affordable place to gather for important events like wedding receptions and business meetings, but agreed that midscale full-service hotels must either evolve or perish.
“Upscale full service is already in the midst of a full-scale renaissance,” he said. “Older ‘big box’ product is being phased out, and in its place they’re building smaller, simpler full-service product with concepts like ‘balanced full service’ and ‘select service.’ Brands like Hilton Garden Inn and Choice’s Cambria Suites are changing the upscale landscape. But middle-class America needs a value alternative, so I expect to see this flow into midscale full-service brands like Clarion in the coming years.”
More brands need to do what Holiday Inn is doing, even though that’s easier said than done, Bowers said.
“What that means is develop the products that people want,” he said. “No matter what you call it, you have to develop a fresh product in a viable market, market it in the right way that’s innovative to get to the customers you want to get to.”
Hotels in the segment need active managers to keep the segment relevant, according to Carrier.
“The flexibility and the attributes of the segment provide a really solid local platform for success as long as the operators continue to innovate and do the local sales and marketing to make it relevant,” he said. “If that is done and you’re in a good location, it will be successful.
“It’s not a dead segment by any stretch, but you’ve got it do it well.”