Are limited-service hotels offering too much for too little?

The lobby of the Tru by Hilton Murfreesboro, Tenn., where guests can come for a free breakfast in the morning. Photo credit: Tru by Hilton (Tru Murfreesboro Lobby)

With complimentary breakfasts, free Wi-Fi and spacious gyms, limited-service hotels aren't limited at all. But as savvy travelers seek out best prices and value, the question arises: Are limited-service hotels offering too much at too low rates?

Turning a profit at a midscale ADR, not to mention at the economy level, is challenging, especially with midscale brands like Hilton’s Tru and Marriott’s Moxy offering perks in order to stand out from one another. And while the brands may aim for midscale prices, a hotel’s ADR can likely creep up to cover the amenities.

Brands in the midscale segment expect to have an ADR in the $120 range, Andrew Alexander, president of Red Roof Inn, said, a dollar amount he feels is high for midscale. Red Roof and Red Roof Plus fall in the economy segment, "but when they aggregate, our ADR is right on the border. But Red Roof Plus hotels are already playing in the midscale environment, with an ADR of around $78," Alexander said.

“I’m not even sure the major brands understand what the midscale segment is,” he continued. “When Moxy was first created, when Marriott first marketed it, they said it would be in economy, and we looked at it funny.” Moxy hotels are not charging less than $60 per night, he said, but approximately $100. “Understanding what economy is is relative outside of industry experts. People understand within the industry, but from a consumer standpoint, it’s a completely different world.” 

Limited F&B

Lightstone is behind four of New York City’s Moxy hotels, including the recently opened Times Square flagship property. “What you see is the industry responding to what we perceive are the desires of today's traveler,” Mitchell Hochberg, president of Lightstone, said. “There are a few things that a lot of brands are looking at adding to further the [guest] experience, but still doesn't make it a full-service property, particularly with regard to food and beverage.” Incorporating limited F&B into a limited-service hotel does not have to be expensive or difficult, he said. “Most travelers today, while they don't need a full-service restaurant in a hotel, would like to be able to quickly come down and grab a hot breakfast, and that's something that's fairly easy to incorporate into a select-service model, because it's a single meal, and it's something that's within a limited period of time. It doesn't require a full cook and full kitchen, yet it makes it a much more seamless experience for the guests.”

Similarly, limited bar options—some wine and beer available only during happy hour with a single bartender—can contribute to the guest experience, he said.  

“The goal, obviously, is to make money in everything that you do,” Hochberg said. “If you can break even on limited food and beverage—the breakfast and the bar—then you're providing an enhanced experience to your guests and you can still afford to charge the same rate.” 

Most Red Roof Inns do not offer breakfasts, Alexander said, citing a 2009 survey that asked travelers to rank economy brands. Red Roof was ranked second, which Alexander credits to not serving a bad breakfast that let guests drive away with a literal bad taste in their mouths at the end of a stay. “The customer was saying to hotels, ‘serve it if you can serve a good one,’ but I’m not sure anyone in economy or midscale is serving a good breakfast,” Alexander said. 

In fact, for the past two years, Marina MacDonald, CMO of Red Roof Inn, said guests have requested free Wi-Fi more than a free breakfast. “They want more money in their pocket,” she said. “About 150 of our hotels have breakfast, but Wi-Fi is more important.

Front-End Savings

Hilton’s new Tru brand, which launched last year, is midscale, Alexander contested, and while the rooms are small and functional, the brand’s amenities are still relatively heavy. “Their F&B and extensively decorated lobbies will lead to necessary ADR creep,” he predicted. 

But investors still see value in the brand, which, as of January, has more than 470 hotels in various stages of development, and are finding ways to prevent ADR creep. Raj Patel, chief development officer at Iowa-based Hawkeye Hotels, which is building a Tru in Minneapolis, said that the brand could keep its rates low by saving money on the front end.

While a new-build 100-room Super 8 or Holiday Inn Express need two acres to meet brand standards, Patel estimated that a Tru can fit on 1.5 acres, "so you have your land savings," he said. "And on the construction side of it, the overall envelope for a 100-room Tru hotel is going to be 10,000 to 15,000 square feet less than a comparable hotel.”

By reducing the cost of both land and construction, Patel said, the overall price per key—“and thus your debt service at the end of the day”—is lower. “And therefore you can still keep your rate affordable.” 

Hochberg had a similar experience with Moxy, keeping the guestrooms to under 200 square feet and incorporating more rooms on each floor. “As a result of more density, we can charge less,” he said. “We felt that our guests would sacrifice room size to have the services and keep the rate down.” 

“As a hotel developer, when you're going to develop in a market and you're looking at the brands that you want to put there, you are looking at the brands that are going to give you the highest occupancy and ADR,” Patel said. “That all relates directly to customer satisfaction, because when customers are satisfied, they'll continue traveling with that brand.”