In a sea of differentiated hotel product, how does a developer choose the right one?

RoadToNATHIC

Ok, you, Mr. Developer, have decided to jump into or expand your reach in the hotel business. Smart move; particularly right now as the industry’s metrics continue to hit record highs.

Still, with new supply looming and the always-present threat of a dire economic event, how do developers or investors decide what’s the best product to build or buy based on their financial position? Then, once a tier or market is identified, what flag are you going to hang on the front door?

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These important questions will look to be answered during the “Choosing Your Segment” panel at the North America Tourism & Hospitality Investment Conference in November. Brand execs will jostle for position, extolling the virtues of their segments and their brands. The hope is to make a convincing argument as to why they are the smart money.

Scaling Down
With the cost to build upper-upscale and luxury hotels high, the select-service and limited-service segments have flourished not only with developers, due to their lower costs to build and operating overhead, but so, too, with consumers, driven by what they see as a value-oriented buy choice.

As Arik Kono, VP of North America development and acquisitions for Starwood Hotels & Resorts Worldwide, explained, the select-service segment is a good investment option for developers for many reasons.  “The time to design and build is typically shorter with a lower cost to develop and operate,” he said. “Additionally, these hotels are easier to finance with less risk given the straightforward development process, smaller scale and simpler construction. They are also more resilient in a downturn.”

That’s the developer’s win; consumers, Kono said, are also hip to the idea of select service. “They have taken a shine to brands in this segment because of how design driven they are and, many times, offering amenities on par with full-service hotels, but at a fraction of the cost.”

As time has progressed, select-service hotels have also become even more design driven than ever before, a trend brought about as much by consumer expectations as by cheaper and better quality materials . “With the democratization of design, and through stores like Ikea, Pottery Barn, Zara, quality, modern-designed products are now available to the masses,” Kono said.  “When guests travel they are looking for design and amenities that resemble what they have at home or desire.

“Guests today can get a product that makes sense for the traveler who is looking for limited offerings that meet their needs on the road while not sacrificing design or the amenities they are looking for,” Kono continued, citing, for example, the notion that WiFi is important, while a spa is not.

Starwood refers to its select-service offerings as specialty select—brands in what Kono said continue to be the company’s fastest-growing segment. Starwood opened 35 new hotels and signed 100 new deals in 2014 across the Four Points by Sheraton, Aloft and Element brands. The momentum continues, Kono said. “We signed as many Aloft deals in the first half of 2015 as we did in all of 2014.”

Successes in select service are trickling down into limited service, a segment that carries many of the same characteristics as select service.

Unsurprisingly, when a limited service hotel is penciled out, developers can expect a cheaper cost model with high margins and manageable expenses.

Wyndham Hotel Group is one of the leaders in the limited-service space and its SVP of franchise sales and development, Jere Robinson, echoed many of the same attributes as Starwood’s Kono when he discussed limited service.

“Many of the biggest draws for developing a limited-service asset are financially based,” he said. “They typically require significantly less money to build than their full-service counterparts and, as a result, it makes financing these types of properties more accessible to a broader range of developers.

“What’s more, they also offer greater flexibility when it comes to segment, from economy to upper midscale, and in turn provide more predictable margins thanks to lower overhead and greater operational efficiencies.”

Robinson said the reasons consumers are attracted to limited service are similar to the reasons why developers are: they provide strong value.

“Consumers remember all too well the financial challenges they faced coming out of the recession and while many of them have recovered, the lessons learned remain,” he said.  “Limited-service properties allow guests to maximize the value of their dollar while still experiencing a product that hits on all their travel needs.”

Wyndham Hotel Group has a spectrum of brands, many of which play in the limited-service space, including Days Inn and Super 8. That variety, Robinson said, is a big strength that goes toward meeting the needs of developers and travelers across a variety of price points and segments. “A substantial part of our portfolio plays to the limited-service model,” Robinson said. “It’s an essential part of who we are, and something we know and do very well.”

What, then, is the future of limited service, according to Robinson? “It’s really going to center on finding innovative ways to further elevate the guest experience, increase operational efficiencies and drive greater returns,” he said. “Developers are looking for products that maximize their investment and so it’s up to us to deliver.”

Boutique & Going Soft
Perhaps no product and space have had more exposure in the hotel industry of late than boutique and soft brands.

One hotel company with its hands in both is Best Western Hotels & Resorts, which has two boutique products in Vib, for the upper-midscale, urban space, and the newly launched Glo, targeted for the midscale segment in secondary markets.

Design driven, experiential and crafted to highlight the locale it’s in boutique hotels have been trendy since Ian Schrager and Bill Kimpton spun the concept out.

Michael Morton, VP of owner relations for Best Western, said the roll out of Vib and Glo is as much about tapping into the desires of today’s traveler, as it is growing the company’s footprint, particularly in primary urban locations.

For the traveler, it’s an appeal for uniqueness and something beyond the cookie-cutter experience. And while, sure, much of the boutique product built today has the millennial traveler in mind, that demographic isn’t the only one focused on.

“It’s something for millennials, we get that,” Morton, who is 50, said. “But it’s not just millennials; boutique appeals to lots of travelers. If you build something solely for one generation, you’ll have some success, but realize there are other people and so you need to appeal.”

Boutique is often mentioned in the same breath with the adjectives chic and sexy. In Vib and Glo, Best Western is rolling out product distinct from its core Best Western brand, and that gives developers more options.

“It allows us to get into markets where we are currently underrepresented,” Morton said. Other hotel companies do the same. If I don’t have another way of putting existing brands in, well, here’s a new one.”

These hotel types are also attractive to developers. Usually, the guestroom footprint is smaller and more efficient. For developers tight on space, which is usually the case in downtown, urban locations, it’s a win.

“If you can build 110 rooms instead of 80, you just made it that more attractive,” Morton said. “That’s why we feel there is traction. You can get a third more rooms in the same footprint. It’s going to pencil out really nice.

New brands of this ilk are also attracting a new type of developer. Whereas core Best Western hotels are mostly owner operated, brands like Vib bring with them, oftentimes, multiple partners and a third-party operator.

With soft brands, hotel companies are going after independent hotels that still want to retain a sense of autonomy, but want some help, particularly on the distribution front. BW Premier Collection looks to tap into that.

“They have their own traditions and don’t want to sacrifice that,” Morton said of these independent hotels. “We see opportunity this way: We bring them a significant opportunity for cost savings.

Independent hotels, invariably, “do a ton of OTA business,” in Morton’s words. “They don’t have a brand booking opportunity and, in many cases, when negotiating with the likes of Expedia or Priceline, don’t have a lot of leverage, and are paying upwards of 30-percent commissions.”

One of the strengths of BW Premier Collection, Morton pointed out, is its shorter terms, just a four-year contract with the option to opt out after 12 months. “Some ask for long, sometimes 20-year commitments. The relationships are onerous. We can do an analysis of contributions to all a hotel’s channels and can save significant dollars.”

NATHIC is Nov. 4-6 at the Fontainebleau Miami Beach. Click here to read the program and register for the conference.

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