Market snapshot: Budget hotels

The market

There are an estimated 1,078 budget hotels in the UK, operating 69,365 rooms, according to the British Hospitality Association (BHA). Mitchells & Butlers has predicted an increase to more than 85,000 rooms by the end of 2007.

With an average room rate of £45, the market can be valued at more than £3bn, in line with the most recent estimates from consultancy Deloitte that put the market as being worth more than £3.25bn.

Key players

The biggest players in the budget hotel market are undoubtedly Whitbread’s Premier Travel Inn and venture capital company Permira’s Travelodge brand, with respectively around 460 and 270 hotels between them.

Other major players include InterContinental’s Express by Holiday Inn brand, with more than 102 sites, Mitchell & Butler’s Innkeeper’s Lodge (79) and Accor’s Ibis brand (44).

While the market is dominated by the big players, there are also new notable brands coming, or due to come, into the market, including Accor’s “hard budget” brand Etap – which is poised to be rolled out in the UK – Simon Woodroffe’s more upmarket Yotel brand, which is planned to launch in the autumn, and the Stelios Haji-Ioannou’s EasyHotel group, which is set to total 38 hotels by 2011.

Growth prospects

Earlier this year a survey by Barclaycard Business found that, worryingly, use of budget hotels by business travellers had fallen for the third consecutive year, although average hotel spend had continued to rise.
 
It found just 58% of business travellers had stayed in a budget hotel over the past year, compared with 61% in 2004 and 69% in 2003.

But any decline in occupancy levels reported by budget hotels are probably less to do with the market coming off the boil and more down to increased supply within the market, suggests consultant Melvin Gold.

“The budget hotel market has much greater maturity to it now. It has undergone extremely rapid growth and is no longer the new kid on the block. But it is still growing,” he says.

The market is also an innovative one, as seen by recent pricing initiatives by Travelodge, including selling in rooms in 90 minute timeslots during the World Cup.

“Travelodge in particular has become very entrepreneurial under its venture capital ownership,” says Gold.

Travelodge also recently posted a 19% increase in turnover on the back of price cuts and a significant investment in online bookings, with bookings on the company’s web reservations growing by 92% in the past year.

Premier Travel Inn has also stated, ambitiously, that it wants to add 45,000 rooms to its portfolio by 2010.

The market is definitely growing, says Simon Hudspeth, head of the hotel consultancy side of property company Christie & Co.

“There are some low, even record low, yields being achieved at the moment. There is a general hunger for property investment, and budget hotels are very much a part of that,” he says.

“There is more competition for sites now than there has been at any time in the past two to three years” he adds.

Key trends

There has been a lot of talk about the sector moving towards a “luxury budget” concept, with operators such as Sinclair Beecham, co-founder of the Pret à Manger sandwich shop chain, planning to open a luxury budget hotel in London in the autumn.

There is also the launch of the Yotel brand later this year, which is modelled on Japanese capsule hotels, plus brands such as Nitenite, Base2stay and Ken McCulloch’s Dakota “super budget” brand.

The difficulty with all this is that, in reality, budget hotels can only move so far from their roots and pricing point, argues Gold

Growing competition around property has meant operators having to think more laterally about what can make a budget hotel, with a lot more interest in existing city or town centre sites and larger properties, contends Christie & Co’s Hudspeth.

“Both Travelodge and Premier Travel Inn are driven by a fantastic appetite for growth. Both have very, very ambitious growth plans and it is more appealing for them to acquire going concerns and develop them rather than new builds,” he adds.

As likely candidates will tend to be from the three-star, mid-market end of the market, that means that sector is now being put under pressure by the budget sector from two directions: customers being attracted away and budget operators being attracted in.

For instance, Premier Travel Inn had recently bought seven Holiday Inns from operators LRG through Christie & Co , he points out.

Another trend being seen among bigger players such as Whitbread is looking at land banks, particularly their pub estate, to see whether there is scope for development there, perhaps for smaller hotels, says Gold.

“The supply side will continue to grow, and the demand side will be stimulated by increasingly innovative marketing and pricing,” predicts Gold.

Future prospects

“There are a wealth of investors looking to come into the market,” says Gold. But the really big issue on the horizon, according to both Gold and Hudspeth, is when Permira sells up Travelodge.

Permira has already admitted it is auditioning advisers to help decide the future of the brand, with options believed to include refinancing, a £1b sale, flotation, or a venture capital-backed management buyout.

Speculation has focused on Whitbread and Accor as possible trade buyers, although Permira has made it clear that it would not welcome a takeover by Whitbread which, in any case, would trigger an investigation by the Office of Fair Trading under competition rules.

“When Permira eventually sells Travelodge that will change the landscape,” says Hudspeth.

“And it is widely believed that they desire to exit sooner rather than later,” he adds.

Elsewhere, with the market maturing and properties harder to come by, a lot of the focus at the moment appears to be on looking at innovative ways of growing, particularly the development of franchise models.

InterContinental is understood to be looking at developing a franchise model to expand its Express by Holiday Inn brand and Accor, too, is looking at whether a franchise model might work for Etap.

Choice Hotels is also thought to be keen to use a franchise model for at least some of the roll out its Sleep Inn brand.

Earlier this year the group said it planned to be a “more aggressive” force in the market, and aims to open 60 Sleep Inns within the next two years.

“Franchising allows more entrepreneurial investors to get a foothold in the market,” says Gold.

Another issue exercising the budget market, as it is the whole hotel market, is that of the imposition of a bed tax.

A recent report by Travelodge, for instance, found a 10% bed tax on English hotels would wipe £12.5m off takings over the three-night May bank holiday.

By Nic Paton

UK's leading budget hotel brands, 2005