REPORT FROM THE U.S.—The wallet-conscious budget, select-service and midscale hotel segments are poised for major growth globally, thanks to wide-scale demand for affordable lodging products both in and outside of foreign city centers. Many large multinational and regional players are already ramping up for expansion, with more anticipated on the horizon.
There was a time when traveling abroad on a budget frequently led to hotel adventures of the worst kind, with guests arriving to find tiny, uncomfortable rooms with outdated furnishings. But nowadays with travelers looking to cut costs more than ever, offering an updated, high-quality branded hotel option is proving to be a slam-dunk around the globe.
“In the past, the decision to book a lower-category hotel would probably mean a small room with sub-standard bedding and questionable cleanliness. This is no longer the case,” said Duncan Webb, chief brand and communications officer for the Ozo hotel brand, recently launched in Asia by Thailand-based Onyx Hospitality Group. “Globally, there is noticeable growth in [value-priced] hotel categories, particularly the select-service segment. This trend is driven by the market demand for reduced travel expenses.”
Webb said the majority of today’s business-travel “road warriors” aren’t staying at 5-star city-center hotels, but are “seeking out quality accommodation options that still provide a good sleep experience in a clean and secure environment.”
Leisure and group travelers are also increasingly attracted to this type of accommodation, he said. The key is providing that service in a consistent, branded framework akin to what American guests expect at chain hotels in the United States.
“I think 50% of the inventory in Europe, if not more, is in the budget category, but only about 25% is in the branded segment,” says Ramesh Jackson, VP and global brand manager for Moxy Hotels, Marriott International’s first-ever foray into the budget sector. “Everything else is the mom-and-pop, bed-and-breakfast, one-off hotels. This is Marriott’s first venture into the budget segment; we’ve never played in this field, so it’s new for us, but we think it’s a great opportunity, and probably more so in Europe than anywhere else.”
Shifting yet steady
One of the factors making growth in the global budget and related sectors so attractive to hoteliers is the chance to court an entirely new and presently underserved customer base: young, millennial-generation travelers.
Newer brands targeting this demographic are often especially focused on offering a hip, comfortable, technologically savvy experience at an affordable price. Moxy, for example, offers 42-inch plasma screens and multiple built-in USB charging ports in every room, paired with smart-design concepts like removing the closet to save space and incorporating a self-service food-and-beverage outlet complete with pre-mixed cocktails.
“There are lots of young travelers. The primary audience for this segment for us is the millennials—your 20-somethings or those in their early 30s,” Jackson said. “They’re often individuals who are just starting their career, a business, a venture, so they don’t necessarily want to pay a €200-euro ($265) room rate for full-service Marriott hotels, but they want the consistency of a brand.”
And for a large multi-flagged conglomerate such as Marriott, the opportunity exists to engage those younger customers now with a budget product, and then offer a range of higher-priced choices later in that customer’s life, whether it’s a honeymoon resort or full-service hotel. Moxy will participate in Marriott Rewards, further encouraging guest loyalty.
“They start using Marriott Rewards, get comfortable with it, and hopefully as they progress in life and their career, they will move to our full-service hotels,” Jackson said. “It’s a new segment for us and new travelers for us. But we also do expect some of our current customers to use this as well. As (Marriott President and CEO) Arne (Sorenson) says, ‘Anyone who’s young, or young at heart, will love this brand.”
In some ways the value segment’s appeal transcends age, specifically when considering various sources of demand, such as group and business travel. While some economy product has a tangible youth focus, other hotels are playing-up the quality of their classic lodging offerings, like bedding. Ozo is employing a “snooze zone” concept in its guestrooms featuring top-quality beds and luxury bedding, black-out curtains, soft-closing doors and a range of fun, inventive sleep aids.
“As guests return to the property after dinner, we offer a complimentary ‘doze-off drink’ in the lobby,” explains Webb. “In the room, you can drift off to sleep to soothing music, with images of sheep slowly jumping across the TV screen. From the outset, the main objective of Ozo was to deliver a top-quality sleep experience.”
The hostel option
The ever-growing hunger for low-cost, quality accommodation has also spurred the global growth and standardization of hostels, especially in their traditional European setting. But they are also expanding rapidly through Asia, Africa and South America.
Existing hostel players such as A&O, St. Christopher’s Inns and Generator are all on the move, while larger budget hotel players are now aggressively entering the hostel market in order to complement their range of products. The recent acquisition of hostel chain Meininger by venerable travel and tour operator Cox & Kings is one example of what experts believe to be an increasing hybridization of these two products.
“Hotel groups now know that they need to offer a product in the limited-service brand and the hybrid product now, because they want to capture that younger generation and keep them with them,” said Harry Douglass, senior associate with HVS London, who recently published a study on growth in the hostel market. “There’s no doubt that hostels aren’t for everyone, but you’re getting that consistency of product and minimizing any disappointment.”
The cross-pollination between hotel and hostel has given rise to a modern mutation called a ho(s)tel, which combines the informal, group-room aspects of a traditional hostel with some of the services of a hotel.
This concept is helping branded hostels give other European limited-service chains such as Motel One, Tune and CitizenM a run for their money, especially because varying local restrictions often force developers to structure hostels like hotels, with as much as 50% of the room count comprised of double-bed guestrooms with bathrooms en suite.
Despite the cost of entry for a hotel-rooted company such as A&O, Douglass said the payoff is still there.
“It might be a massive capital cost in the short-term, but I don’t see discretionary spend capability for a private individual improving significantly in the medium-term, so therefore I think there will be solid growth in the hostel market,” Douglass said. “The world’s moving very fast, and you’ve got to act very quickly.”
The build-up
With expansion increasing globally within the budget, select-service, midscale and even hybrid ho(s)tel segments, the impact of the current wave of economical hotel growth will likely manifest itself in the coming years, inducing demand in markets that were previously undersold. Major cities such as Edinburgh, Scotland; Paris; Berlin; Amsterdam; and Barcelona have already shifted focus toward opening new limited-service and other budget properties, and it’s only the beginning.
Presently focused on the Asia-Pacific region, the first Ozo—the Ozo Wesley in the Wanchai district in Hong Kong—opened in May, and the brand has six more properties in development in Sri Lanka, Thailand and Malaysia.
The Middle East has seen a flourishing of the concept, too, with Dubai-based Emaar Properties recently partnering with Meraas Holding to launch Dubai Inn, a budget product that will be located next to theme parks in the United Arab Emirates.
Meanwhile in Europe, Moxy plans to grow to 50 hotels in the next five years and 150 locations within the next decade, with ground-up development slated in Germany; Austria; the United Kingdom; Ireland; Belgium; Italy; the Netherlands; Denmark; Finland; Norway; and Sweden.
“The market is evolving. More and more of what you’re seeing are people saying, ‘I have €70 ($93), but I don’t necessarily want to sacrifice quality,” Marriott’s Jackson said. “They still want comfort, but just a clean room, clean sheets and clean bathroom isn’t going to cut it anymore. They want style, a brand and some glamour, so to speak. That is the new standard.”