Whitbread said last week that the UK budget hotel sector "was the best place to be" due to the size of the market and the opportunity.
Rather than the sector reaching saturation, Whitbread claims to have identified 359 growth markets for its Premier Inn brand, including 242 where it has yet to establish a presence.
Over the next four years the company plans to add 55,000 rooms but even then it will have only entered half of the new markets it has identified.
During a detailed look at its business during an investor day presentation, the company described its structural transformation over the last five years from 10 business units to just two: coffee and the hotels and restaurants division. The latter accounted for 92% of 2008/09 profit.
The past five years had delivered transformation both culturally and in growth terms. The cultural change ranges from introducing the balanced score card approach at every unit to the sale of Chiswell Street, the former brewery where Whitbread started from more than 250 years ago.
The budget hotel business within the company has grown 135% in six years, from 18,173 rooms to 42,750 rooms forecast for this year end.
Budget hotels deliver superior returns to mid market, claimed Whitbread. Budget rooms were cheaper to build and delivered higher percentage profit.
And Whitbread's analysis, based on TRI Hospitality figures, showed income before fixed charges per room almost matched midmarket hotels in absolute terms.
The UK budget sector also has strong long term prospects with a compound annual growth rate of 10% over the next 10 years, according to projections from OC&C Strategy Consultants.
Whitbread claimed to be the best operator with the best model. It indentified two principal types of Premier Inn, standalone sites in city centres or at airports which were properties with 80 to 150 rooms on average, and joint sites alongside pub restaurants which typically had 50 to 80 rooms.
Rather than have a soft refurbishment after five years followed by more thorough remodelling after 10 years, Whitbread has policy of refurbishing rooms every three years.
The company's total annual spend on maintenance and refurbishment across its estate – including pub restaurants – is £60m.
Although market leader with a 37% share of the 110,00 plus budget rooms in the UK, Whitbread continues to grow faster than the budget sector average at 8.5% CAGR compared to 6.8%, over the last four years.
The company says it has a detailed network plan for all 1,700 postal towns in the UK and plans to develop using both the standalone and joint site models. The return on capital employed in both models is around 13%.
In addition, Premier Inn will add through extending existing sites and cherry-pick acquisitions. Rather than portfolio deals, individual sites or perhaps groups of two to three hotels are preferred.
The company is also developing a smaller footprint model with a reduced food and beverage offer and automated check-ins that can access what it calls micro-markets with a typical 40 room hotel.
Such markets might be ones unable to support bigger hotels or town centres where obtaining a bigger site was impossible. The potential was to added between 3,000 and 5,000 rooms.
Three expansion examples were given. In Glasgow, where there are already 11 hotels with 1,300 rooms, the expansion plan had identified a need for 1,500 rooms and a 12th hotel with 216 rooms is planned.
In Lincoln, which has just one existing site, a new 130 room property is being built. And in Newmarket, which has no Premier Inns a 80 room joint site is being planned with a forecast weekly turnover of £22,000.
The existing room stock will grow by 30% through the addition of 13,300 rooms over the next four years, taking the Premier Inn room count to 55,000. The company said 85% of the planned new rooms have already obtained planning permission.
The company is showing less aggression internationally. It is currently in two overseas markets, Dubai and India, and wants to add 10 hotels in each market over the next two to three years.
Patrick Dempsey, managing director of the hotels and restaurants division, said that after this period a decision would then be taken on the future development plans.
"We will build out to these levels and then we need to prove to ourselves that we can get occupancy up to UK levels," he said. If convinced, the way forward might include joint ventures or management contracts.
No expansion into new international markets was planned. He admitted that Dubai was proving a particularly difficult market right now with occupancy hitting as low as 30% at the three hotels there.
In the UK, the plan was to drive revpar through a volume-led strategy and take market share. A substantial increase in marketing is planned with investment in television advertising doubling with on-air adverts for 30 weeks planned for this year compared with 17 last year. A new commercial is being shot in March.
The £29 room promotion that had provoked a spat with Travelodge at the end of last year had delivered an additional £20m of revenue which Premier Inn had previously not been able to tap.
The issue for Premier Inn had been that its rates were less competitive 30 to 90 days out and the offer, although only accounting for 4% of room sales, brought in the more price sensitive customers.
The dynamic pricing strategy, which will be fully implemented by the end of February, will further boost Premier Inn's competitive position, creating demand via lower prices on shoulder night and exploiting opportunities to charge higher rates on peak demand days. The revpar improvement from the introduction of dynamic pricing is expected to be 2% to 3% over the next 18 months.
Premier Inn is operating a cap and collar to its price strategy, never falling below £29 and never being more than 50% above the core rate for a particular hotel. Dempsey claimed the Amadeus revenue management system being installed was the best in class.
Travel agents can now book via the Amadeus Global Distribution System but the booking fee will be paid for by the client to mitigate distribution costs. By using booking.com, Dempsey claimed to have added £30m of extra sales of which 40% was from overseas markets.
The future revenue management opportunity was around clusters, particularly the large groups of Premier Inns at cities like Manchester and Glasgow.
The final step in the Premier Inn drive push to add volume is via a customer relationship management strategy. A new CRM system is being launching in the second half of the current financial year with the intention of reducing customer churn and driving frequency.
Currently, Premier Inn has two million unique customers of which about 250,000 stay 25 nights or more.
The investor day concluded with a short presentation by finance director Chris Rogers during which he stressed that the recent sale and manage back of five hotels was simply to "test the market" and that Whitbread would remain a predominately freehold business.
He stressed that predominately meant nearer 80% than 50%. Currently 87% of Premier Inn's estate is freehold and the pipeline, which was 55% leasehold, might see this reduce to just below 80%.
HA Perspective: Only a week before Whitbread's investor day, Starwood Capital's Barry Sternlicht told the French press that his company might shed some of its luxury hotels to focus on the budget hotel business.
Given Louvre's exposure to the highly developed French budget hotel market, the most saturated in Europe, this was substantial support for Whitbread's view that there is much more to come from the UK market.
In reality, however, the sheer scale of Premier Inn in the UK means that the easy work is already done. Dynamic pricing will help Premier Inn heap further pain on its rivals and it would be a brave individual to bet against it in its ambitions to gain more market share.
Being lean and mean is what Whitbread is focused on. It referenced its success in streamlining overheads and cutting costs at unit level during its investor day. By taking out 1.5 minutes in the length of time it takes to clean a room the company estimates a saving of £4.5m.
Growing internationally is not conducive to such cost controls however and the impression given during the presentation was that it would be undertaken with extreme caution. This could prove a mistake.
Diminishing returns will eventually begin to set in for growth in the UK, even with Premier Inn's undoubted operational skill and even if the budget hotel market does exhibit the bullish growth possibilities Whitbread presented.