NEW YORK—Thriving in the economy sector has innate challenges in the best of times. Margins are tight with scant wiggle room to offer any extra discounts, while many amenities that other segments sometimes charge for are free for guests to enjoy. So-called roadside locations, which occupy a large portion of the segment, may see substantial traffic in vacation months, but then have to get really creative to pull business in the rest of the year. For many economy-property owners, staying two steps ahead has become a daily dance.
Right now, however, owners operating at the lower end of the industry spectrum can take some comfort that in terms of performance they are expected to be second only to their brethren in the luxury tier, at least when it comes to anticipated RevPAR growth for 2014.
In its March issue of Hotel Horizons, PKF-HR forecast luxury hotels would achieve the greatest gains in RevPAR this year, continuing last year’s momentum; however, it cites the second largest RevPAR growth coming from hotels in the economy segment.
This shifts the paradigm just a bit from 2013, which was the fourth consecutive year that hotels in the United States experienced RevPAR growth. Smith Travel Research (STR) showed 2013 RevPAR increased 5.4%, stemming from an occupancy gain of 1.5% and ADR gain of 3.9%, and PKF-HR noted the three upper-priced chain-scale categories achieved greater gains in RevPAR compared to the lower-priced segments during the year, a consistent factor since 2009.
“One thing I can say about the economy segment is that for 2014 and 2015, the outlook looks good for this segment,” said STR VP Vail Brown. “While the other segments recovery will level, the economy segment will grow strong in 2014 and 2015. RevPAR is projected to land around 5.1% in 2014 and 6.2% in 2015.”
According to PKF-HR, the positive outlook for the lower-priced chain-scales persists beyond 2014. It noted, “Occupancy levels for all three upper-priced chain-scale categories are forecast to remain above 70% through 2017, thus allowing for significant gains in ADR.” This, in turn, is expected to find travelers looking toward the lower-tier hotels for more affordable accommodations. Adding to this, PKF-HR indicated, is “continued improvement in employment levels, an economic indicator closely correlated with the demand for upper-midscale, midscale and economy properties.”
At Choice Hotels International, which counts Econo Lodge, Rodeway Inn and Suburban Extended Stay among its economy brands, Craig Mustard, head of domestic brand management, economy brands, was enthused about the STR outlook.
“Smith Travel Research recently predicted this would be the ‘Year of Economy’ and Choice is looking forward to harnessing momentum based on that statement to grow Econo Lodge and make it even stronger,” he said.
“We expect the economy segment to grow at a faster pace than many other segments over the next year or two for several reasons,” said STR’s VP/Operations Chad Church. “One, the economy segment has not fully recovered from the downturn while most other segments of the market are exceeding prior peak levels; two, we follow employment figures closely when tracking our economy forecast, particularly certain segments of the employment market: construction and trades, manufacturing, etc. As these segments improve, we expect an increase in economy hotel demand; and three, there is little to no supply growth in the segment and that helps current operators. No new supply means no new competitors and stronger occupancy and rate growth.”
Growth is nothing new to long-time economy chain Motel 6, which now has more than 1,100 properties. According to CEO Jim Amorosia, the company expects to open roughly 165 hotels this year and more than 200 properties in 2015.
“We’re going to be doing some pretty serious growth over the next couple of years,” he said.
He also noted that with the financial support of parent company Blackstone, Motel 6 has committed to updating the entire system with the brand’s new look, which includes its new Phoenix prototype rooms.
Amorosia noted that the brand had originally intended to update just the company’s owned portfolio but opted to do it on a market-by-market basis, including franchised hotels.
He added that owners have been supportive of the refresh. “Franchisees have been very complimentary and coordinated in regard to seeing that if we’re doing what we want to do they fully understand the reason why they should be doing it at the same time. So we’re putting across the same face,” he said.
He noted that some 300 hotels were updated in 2013, with another 300 and 400 expected to be updated in 2014 and 2015, respectively. He noted the entire chain should be updated by the first quarter of 2016.
The economy segment has long been viewed as the gateway into the lodging industry for those looking to make a stake for themselves in business and Mustard expressed optimism that the current environment is right for such ambition.
“From our perspective, especially with our economy brands, we see a lot of franchisees who have owned other businesses and want to break into the hospitality industry. On the development front, we are seeing an environment that is more promising than we have experienced in several years. That is a great sign for Choice Hotels and for the lodging industry,” he said.
Mustard said its Rodeway Inn brand is also growing, owing largely to its flat-fee franchise model. “The flat fee is highly appealing for independent operators looking to become part of a well-known brand,” he said, noting the entry point segment exposes new (and existing) developers/owners to the chain’s global distribution system and loyalty rewards program, Choice Privileges. As of year-end 2013, Rodeway Inn had 441 hotels open, with 39 under development.
Just as the industry itself continues to recover from the lingering effects of the economic downturn, many travelers also have come away less free-wheeling with their discretionary income when it comes to hotels; however, even at the economy level, they still expect value for the dollar spent.
“There are many different types of economy guests. What they all have in common is they continue to want a great price, but also expect great quality,” said Mustard. Toward this, Choice has been refreshing the brands in its stable. For example, this past year, Econo Lodge introduced new, more-stylish bedding. “It was a very cost-effective, rolling implementation that took into account the economic hardships franchisees have faced in recent years. So, we spread the bedding program out over time and didn’t require hotels to commit all of the cost at once,” said Mustard. “This was a highly effective approach that got hotels up to compliance and earned good will with our operators since we were willing to work with them on solutions.”
Sustainability also has become a distinct focus for all segments. This past year, Econo Lodge became the first economy brand to implement a mandatory “green” program, “Demonstrating that caring for the environment can be done at any level,” said Mustard. “Econo Lodge’s ‘Room to be Green’ program emphasizes energy conservation, water conservation, recycling and waste reduction. As a result of the program, this past year, more than 830 Econo Lodge hotels helped reduce annual water usage by an estimated six million gallons and energy usage by an estimated 12 million kWh,” he said. As of year-end 2013, Econo Lodge had 914 hotels open, with 32 under development.
Choice’s other economy brand, Suburban Extended Stay (which straddles two segments) also is focused on meeting the demands of the value-oriented guest, particularly those who need to call a hotel home for a period of time, as well as developers and owners.
Bill Petschonek, brand strategy director, Suburban Extended Stay and MainStay Suites, indicated even at the economy level, the brand provides a host of features that resonate with the price-conscious guest, whether they’re transient or long term. Among them are well-equipped kitchens, complimentary premium cable television, free high-speed Internet access, voicemail, onsite washers and dryers and weekly housekeeping service.
For owners and developers, he noted the brand rolled out an updated prototype in 2013 “that is more efficient to build and cheaper to operate. Suburban also offers a unique conversion product for owners of traditional hotels. This cost-effective conversion of a standard hotel room into Suburban rooms can obtain the operating efficiencies and performance of extended-stay hotels,” he said. As of year-end 2013, the brand had 64 hotels open, with 26 under development.