• Budget hotels take on the mid market

Alan Parker, CEO of Whitbread, declared at the end of April that "Economy lodging has come of age".

He based his conclusion on research which found budget brand usage by business travellers in the UK is ahead of mid market and upper full service brands for the first time.

During the results presentation for the 52 weeks to February 26th, other revelations showed just how much budget hotels were now competing head-on with their full-service rivals.

Whitbread was coy about revealing the full extent of its changes in what it called phase II of its strategic revenue management plan. What it was happy to admit was that reservation distribution is being widened, there is an "attack" on the full-service corporate market and there will be a new campaign for the leisure market.

Taking the first part, Premier Inn is now being made available on most distribution platforms, including the Global Distribution Systems used by travel agents and third-party intermediaries such as Expedia.

This is a step-change in terms of the budget approach: previously, to keep costs low, direct bookings were seen as the preferred route. Now, despite being the UK's biggest brand in room number terms, Premier Inn has conceded it needs to more fully embrace intermediaries to reach out, particularly to international guests.

Also changing is Premier Inn's flat pricing policy. This has not been truly flat for some time with different prices according to location and occasionally, for specific periods of peak demand at certain locations. Now, however, the company is trialling a dynamic pricing model that will see it alter prices more closely with demand.

Parker said the approach would be "quite innovative" but refused to elaborate. Likewise, Patrick Dempsey, head of Premier Inn, declined to reveal full details of the brand's push into the leisure market. He simply said that Premier Inn hope to exploit the expected higher proportion of Britons holidaying in the UK this year.

Finance director Chris Rogers reiterated the previously disclosed decision to rein in capex to £170m for the year, keeping cash flow neutrality by, in particular, slowing down the rate of organic growth.

Both Rogers and Parker, however, were careful not to rule out making acquisitions which would require use of the balance sheet.

The emphasis for Whitbread going forward was in three areas: outperforming competitors; taking advantage of financial strength; achieving planned efficiencies.

In competitive terms, the full-year looked like a strong result. Revpar was up 2.8% where as, according to data from TRI Hospitality's HotStats, the budget competition saw a drop of 2.5%.

Premier Inn did suffer in the second half (which, given the year-end of February 26th, is mostly post the Lehmans-induced economic crash) with revpar down 1.2%. However, Whitbread said its Premier Inn competitors were down 7.7%.

In terms of pricing, Premier Inn in city centres now sits just below both Jurys and Express but above Ibis, Travelodge and Etap. Parker argued that the significantly higher level of pricing for Thistle and Holiday Inn core brand (around the £100 mark rather than Premier Inn's city centre average of £70) meant this full-service competition would have to "come down a long way to operate at our price level".

Parker is also intent on taking the competition to these full-service operators. Research by BDRC found that last year, for the first time, business travellers used budget hotels more than they used mid-market or upper full service brands.

Given that more than 60% of Premier Inn's revenue already comes from corporate travellers it is a natural segment in which to push even harder. Premier Inn now has 14,000 business accounts, a growth of 14% during the year. Total business accounts sales were up 24% to £171m.

Parker boasted that by switching to Premier Inn corporate customers can cut their travel costs in half.

And it is not just on room prices where Premier Inn is doing battle. It offers complementary wi fi and has keenly priced food and beverage offers. A campaign offering dinner, drink and breakfast for £20 sold 20,000 packages in its first four weeks.

In terms of financial strength, while organic growth has slowed it is still to be 2,000 Premier Inn rooms in the current year, of which 1,700 are in the UK. The company is also developing its land bank for a future step-up of organic growth.

The results presentation also bullet pointed that Whitbread was "alert for shareholder value enhancing acquisition opportunities".

The cost-saving plans have been previously well flagged. Among the initiatives is the outsourcing of logistics, payroll and transactional accounting which will trim 500 (40%) of staff numbers at head office over two years.

 

HA Perspective: It could be argued that as well as coming of age, economy lodging is now merging with its full-service rivals. The line between what is a budget (economy) brand and a full-service brand is now so blurred as to be almost meaningless in a generic sense.

There remain clear distinctions (in some cases) between specific brands in terms of offer but it is increasingly hard to talk of a budget hotel sector as being separate to the overall hotel sector.

It was always something of an artificial separation – many guests have always been happy to migrate between the two – but the current straightened economy has forced all operators to widen their search for potential guests.

Previously, the debate in the budget sector was about amenity creep gradually moving budget hotels onto the patch of their full-service rivals. With comparatively large, usually newly built, rooms, wi fi, strong f&b offers and even meeting rooms in some cases (Premier Inn has over 100 hotels with such facilities), budget hotels look pretty similar (sometimes better) than their full-service rivals in terms of offer.

Now Whitbread is signalling loud and clear that budget brands are targeting the same guests and using similar distribution and revenue management techniques.

The fear with amenity creep was how many extra costs were being built in to the offer. And the same question arises with the new distribution. Whitbread was insistent that all distribution channels will retain rate parity but it was quiet on the extra costs of the new channels. This is not just a question of commissions but also of the added costs of maintaining the channels.

Of course, aggregated across a chain the size of Premier Inn, the costs of maintaining channels will be small. But it does suggest that the gap for new and emerging budget brands will be increasingly tight.

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