• Whitbread takes budget battle to corporates

Whitbread said that it expected to meet its full year profit expectations, after reporting an increase in corporate customers switching to its Premier Inn brand, which had bolstered its share of the branded budget and economy hotel market.

Alan Parker, the group's outgoing CEO, said that the brand had taken market share from "across the board, particularly from the other budget hotel chains", marking the first clear example of cannibalisation in a sector other operators are rushing to join.

The brand reported a 20% increase in corporate customers for the 24 weeks to August 19, taking it to 60% of its total business. The corporate account card now delivers between 25% and 30% of sales, around £200m per annum. Premier Inn combined this rise with growth in the leisure market, promoted by rates starting at £29.

Parker told a conference call: "We're taking market share both in the leisure and corporate market but the continued drift of large corporations towards us has been a sustained trend over the last 12 months."

Parker said that Premier Inn had benefited "both from market growth and from a continued improvement in our share of the market". The group's focus remains on room nights over rate. Increasing pricing, the CEO said, "would be the last resort" for the group's expansion strategy, which he said was focused on "offering value for money, improving our occupancy and building more rooms".

The group is looking at a goal of 80% occupancy in the long term, with the current year expected to close at between 76% and 77%, down from the 79.2% (up 9.5 percentage points on the year) reported for the half year, as a result of the anticipated weaker close to the year.

Occupancy peaked at 95% for the August bank holiday weekend, indicating the brand's strength in the leisure market, where it said it had seen a "very substantial improvement" in spend.

Further business is expected from the government as cost-cutting hits, with £7m of new business from civil servants seen during the 24 week period.

The rise in occupancy saw revpar up by 9.8%, with London hotels running "several percentage points" ahead of the rest of the estate. Jamie Rollo, an analyst at Morgan Stanley, said Premier Inn was the "first hotelier to get back to peak revpar".

The company has a pipeline of around 11,000 rooms (on a current estate of 42,000) with 2,700 rooms due to be added this year, up from around 1,800 last year. Parker said that he would like to see at least that number every coming year. The figure remains down from the highs seen around 2008/09 when the group added over 4,200 rooms. Parker said that he could envisage a return to that rate of expansion, but there were no current plans to do so.

Rollo suggested that Whitbread could sell around £300m of assets, following on from last year's test sale and leaseback to M&G Investments, the proceeds of which could fund further expansion, possibly back up to the 4,000 rooms level.

The UK's budget sector is one in which the fight for market dominance outweighs the fight for rate. Premier Inn currently has almost 38% of the total branded UK room stock, followed by Travelodge, according to the Budget Hotels 2010 UK (shortly to be published by Hotel Analyst in conjunction with TRI Hospitality Consulting).

This study shows that Travelodge's market share of the branded economy and budget hotel segments combined is 25% through just over 25,000 rooms. Next in line is IHG's Holiday Inn Express with almost 12,500 rooms, an 11% share and the largest franchisor in the sector.

Accor last week signed an agreement with franchisee Euro Hotels to open its second and third All Seasons in the UK as part of plans to add 800 hotels to its European franchise network by 2015.

New entrants in the UK include Tune Hotels,  which combines dynamic pricing with bundling – a model also favoured by EasyHotel – where guests don't pay for anything they don't specifically request, such as room cleaning (during, not between, stays). The Tune Hotel in Westminster is the first of 15 locations scheduled to open across the Greater London area by 2017, part of global expansion plans of 100 hotels by 2015.

Citizen M has also made its first move on the UK with a hotel in Glasgow, which brings a more design-led offering to the market. The group has also announced two forthcoming properties in London, one close to the Tate Modern, due to open next year, and a second in Tower Hill due to open in time for the 2012 Olympic Games, as well as two in New York.

As the sector moves out of recession and focus returns to the higher-rate luxury brands, owners and operators have not forgotten the depths of the downturn yet and are eager to ensure they have the cushion that budget brands provide in case of another fall.

 

HA Perspective: The economy and budget segments of the UK hotel industry have been the most dynamic in terms of growth. Premier Inn, as the dominant economy brand and the biggest hotel brand in the UK by room numbers, is the closest the UK industry has to a price setting, rather than price taking, hotel brand.

Accor has shown during this recession that its even stronger position in its domestic French market with Ibis has enabled it to outperform rivals. Premier Inn too looks to have gained market share during the downturn, notably business travellers, usually the bedrock for mid market hotels.

Throughout Alan Parker's time at Whitbread, Premier Inn has pursued a occupancy first strategy. Given that pricing power is now within grasp, it will be interesting to see whether new CEO Andy Harrison, who arrived at the start of this month, will continue to stress occupancy or instead switch fully into a revenue maximising pricing policy.

Dynamic pricing is now in operation across the estate but it is capped and controlled. As anyone trying to fly during peak periods will testify, Harrison was not afraid of pushing prices at easyJet when demand justified it.

How much flex he introduces remains to be seen but the period of fixed prices for the economy segment – a feature that was well received by consumers and created a considerable contrast with mid market rivals – is now over for the major players.

 

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