Sector Insight: Budget hotels - Chains cash in on bargain travel

The market is booming for economy mini-breaks and cheap business accommodation, writes Jane Bainbridge.

THE BACKGROUND

The budget hotel sector is benefiting from Britain's new attitudes to travel, with 38% growth over the past five years, and the same figure predicted for the next five. No-frills hotel rooms for £50 a night are seen as highly desirable by both business and leisure travellers, while independent boutique budget hotels offer 'luxuries' at affordable prices for those who want a little extra. Growth seems fairly certain, with the business market buoyant in a strong economy, while any downturn is likely to see a rise in demand for budget travel across the board.

Drive through any city centre, along an approach road to an airport or railway station and the rash of Travelodges and Holiday Inn Expresses gives a clear indication of how buoyant the budget hotel market has been of late.

It appears that Brits and tourists alike are keener to find a bargain room for mini leisure breaks than splash out more serious cash; budget hotels are outperforming the total hotel market by more than four times in the UK.

Many indicators point to this trend continuing. The 2012 Olympics should prove to be lucrative for the key operators, and the demographic groups most likely to stay in these hotels - 25- to 34-year-olds and 45- to 54-year-olds - are set to grow.

This market is dominated by two key players: Whitbread's Premier Travel Inn and Travelodge, which account for about 60% of the market. But the past few years have also seen a rise in the number of independent boutique budget hotels, offering luxury at affordable prices.

Interesting developments in this market have boosted trade, not least the introduction of smaller designer rooms, especially in urban settings. The boutique budget providers such as Yotel and nitenite, which have introduced capsule hotels to the UK, and others, such as base2stay, have all helped grow the appeal of lower-priced hotels to new customers.

Budget or economy hotels typically offer rooms for about £50 per night - although there is regional variation - and breakfast is usually excluded from the rate. Although business visitors are the key audience, the leisure market is increasing. It is not uncommon for a hotel to have a predominantly business clientele during the week and then host mainly families and mini-break tourists on the weekend.

Since 2001, the capacity at this end of the hotel market has grown by 43% to more than 85,000 rooms, according to Mintel. By the end of 2007, the value will be more than £1bn, an increase of almost 50% in five years. The spread of internet access has been an important factor, with key customer groups often booking their rooms independently online. Travelodge reports that 85% of its reservations are now made in this way.

The proliferation of cheap flights means more Brits than ever are taking holidays abroad, but they are more likely to take multiple holidays, including short domestic breaks. Whenever the UK experiences a heatwave there is a corresponding rise in domestic travel, as seen in 2003.

Although Whitbread and Travelodge dominate the market, they are pushing ahead with their expansion plans. The two combined are looking to add 87,000 rooms to their total capacity over the next four years.

Whitbread's Premier Travel Inn is the leading brand, with 38% share of total capacity. It has 490 hotels, offering more than 32,600 rooms in total. The hotel chain recently appointed RKCR/Y&R to its £9m advertising account ahead of its £22m rebrand to Premier Inn early next year.

Following the introduction of the smoking ban in public places in England last July, Premier Travel Inn decided to make all its UK hotels completely smoke-free by the start of 2008.

Managing director Patrick Dempsey said the decision was made following a complete no-smoking trial at some of its Scottish sites. 'We know our smoking guests understand the change, while non-smoking guests welcome the move,' he said. 'Our research also showed that guests are confused by the ban and its limitations, especially in hotels, so a complete ban will make it more straightforward for everyone.'

As a result, the group has ensured all its rooms are refreshed and are up to non-smoking standards.

Travelodge launched in 1985 and has grown rapidly to more than 300 hotels and 20,000 rooms. In September last year, private equity firm Permira sold the chain for £675m to Dubai International Capital. It recently appointed twentysix London as its digital creative agency to redesign its website (Travelodge.co.uk). The aim is to add functions and improve conversions and content. Marketing and sales director Daniel Heale said of the appointment: 'Currently 85% of room bookings are made online; we want to increase this to at least 95% and to offer customers a one-stop service so they can order everything they need for their stay.'

The chain has also introduced the latest version of its Travelpod - a mobile hotel room. It is 40% bigger than the initial prototype and includes a double bed, dressing table and chair; as well as features such as a DVD player, ambient lighting and a washroom with bio-degradable toilet. The Travelpod has been developed for use at outdoor events and will be tested over the coming months.

While future performance indicators are good, there are some issues that might affect this sector. There is a problem with limited availability of future sites, and increased competition, planning controls and the high cost of land will all have an impact on future growth.

However, it is predicted that the budget hotel market will be worth £1.5bn by 2012, an increase of 38% from 2007, according to Mintel.

UK BUDGET HOTEL OPERATORS 2007

Operator Brand Hotels Rooms

1 Whitbread Premier Travel Inn 480 32,600
2 Dubai International Capital Travelodge 306 19,594
3 InterContinental Holiday Inn Express 105 10,845
Hotel Group
4 Accor Ibis 48 6536
5 Quinlan Private Jurys Inn 15 3994
6 Mitchells & Butlers Innkeeper's Lodge 89 2700
7 Cendant Group/ Days Inn 35 2662
Wyndham Worldwide
8 The Real Hotel Company* Comfort Inn 34 1936
9 Louvre Hotels Campanile 16 1253
10 Accor Etap 7 1062
11 The Real Hotel Company* Sleep Inn 9 796
12 Accor Formule 1 5 401
Others 22 1286
Total 1171 85,665

Source: Mintel
*Formerly known as CHE Hotels Group


KEY UK HOTEL MARKET STATISTICS 2001-2006

2006 2004 2002

1 Occupancy rate (%) 78.3 78.0 72.9
2 Average room rate (pounds) 84.1 74.1 69.8
3 Revenue per available room (pounds) 65.9 57.8 50.1

Source: tri hospitality consultancy


INBOUND VISITS TO THE UK BY REASON FOR TRIP (000s)

2005 2003 2001 01-05
% chng

1 Holiday 9713 7973 7585 28
Inclusive 1875 1561 1958 -4
Independent 7838 6412 5627 39
2 Business 8168 6967 6778 20
3 Friends and relatives 8687 6978 5898 47
Other 3401 2797 2574 32
Total 29,970 24,175 22,835 31

Source: IPS, National Statistics/Mintel

ANALYST COMMENT - RICHARD ANNABLE, PARTNER, CARDINAL RESEARCH

Many people are realising that, when all you really do is sleep there, paying a fortune for a hotel room makes little sense. Enter the budget hotel - convenient, clean and comfortable.

Estimated to be worth about £1bn, this sector is growing fast. With just under 15% of the total UK market, it has grown 50% since 2000. The 25% market share it now enjoys in France and the US looks easily achievable here.

Many chains have followed the low-cost airlines focusing on basics to reel in price-conscious travellers. Others have the 'budget boutique' model, offering affordable 'luxury'. Urban in style and location, these appeal to young, price-sensitive, image-conscious consumers. Capsule hotels (easyHotel, Yotel) are also emerging near city centres and airports, where rents are high.

Business travellers represent the core market for the main operators - Premier Travel Inn, Travelodge and Holiday Inn. If the economy remains strong, this market should continue to grow, while any downturn is unlikely to have a great impact as appeal to value-seeking corporations will increase. Leisure travellers are also growing in importance, with expansion in the short-break market showing no sign of slowing, in spite of concerns over its environmental impact.

The future should see the big brands seeking further rapid growth through a combination of new sites and acquisitions. Innovations such as discounts for early bookers and services designed to appeal to leisure travellers are predicted. Increased differentiation is likely, broadening the appeal to older travellers and those looking for guaranteed standards without a uniform appearance. In short, budget hotels look here to stay.

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