Branded Midprice, Economy Hotels On The Rise In Europe

Overall hotel development pipelines in other regions dwarf that of Europe, but leaders of several multibrand hotel companies view the continent as fertile ground for growing their economy and midprice brands.

Europe's hotel development pipeline as of June stood at about 800 hotels, or about 132,000 rooms, according to STR Global. Comparatively, the U.S. pipeline stands at about 2,700 projects totaling about 327,000 rooms, with the Asia/Pacific region at 1,840 hotels totaling more than 400,000 rooms. Yet, even as China, India and Latin America continue to dominate discussions of hotel development plans for the upper-tier brands, Choice Hotels International, whose portfolio is largely in the midprice and economy tiers, is looking elsewhere.

"We see Europe as our next big opportunity outside of the United States," Choice president and CEO Stephen Joyce said at NYU's Hospitality Industry Investment Conference in June. "The market is largely unbranded and is beginning to want to be branded. There's been a strong movement for the last 10 to 12 years, and it feels like it's picking up."

Choice particularly aims to grow in Central Europe and the United Kingdom, primarily through conversions, Joyce said. Earlier this year, for example, the company partnered with U.K. hotel operator Akkeron Hotels Group to convert nine of its hotels to Choice brands. Eastern Europe also is on Choice's radar, though growth in that region relies more on new builds, he said.

Best Western International also is seeking independent hotels to join its portfolio in mature European markets.

In France, Best Western has grown its number of rooms by 50 percent during the past 10 years, and now has 313 properties in the country, said Oliver Cohn, directeur general of Best Western France. Best Western adds about 20 properties each year in France, about 60 percent of them conversions, and the company has a goal of about 400 properties total there in the next few years.

"We are already present in most of the destinations except Deauville and Calais in the northwest of France, some cities in the suburbs of Paris and Beaune in the east," Cohn said. "We also want to reinforce our presence in cities where tourist flows are important, like Paris, Bordeaux, Marseille or Toulouse, and attain an 8 to 10 percent market share."

Similarly, Best Western in Germany is adding about 15 hotels each year, 75 percent of which are conversions, Best Western Germany CEO Marcus Smola said. About 80 percent of the properties in the country are unbranded, he said.

In Italy, even fewer hotels are branded. Of about 16,000 hotels in the three- and four-star segments, only about 6 percent are branded, Best Western Italia CEO Giovanna Manzi said. Best Western, with 182 hotels, is the largest chain in the country, followed by Holiday Inn, with 50 hotels. Best Western is adding between 10 and 15 hotels per year in Italy.

"In this area, it is more of a problem of the mentality and attitude to recognize the value of a brand than anything else," Manzi said. "New construction is a little bit higher compared to the past, due to a favorable real estate policy, but Italian real estate values are very high, so it is difficult to build new hotels in interesting locations apart from airports or new areas."

Distribution challenges are one of the main reasons independent hotels in Europe are more interested in joining a brand, Joyce said. Getting onto global distribution systems and other electronic distribution channels can be prohibitively expensive for hotels that are not part of a larger group with negotiating clout, he said.

Of course, converting independent hotels into established economy and midprice brands is more complicated than sticking a sign out front. Hilton Worldwide president and CEO Christopher Nassetta said that while Europe is one of Hilton's largest growth markets—its current pipeline is about 25,000 rooms—many independent hotels there could never fit into Hilton's brands. As such, while Hilton is doing conversions in Europe, many of the Hilton Garden Inn and Hampton properties are new builds.

"The product has so many obsolescence issues," Nassetta said at the NYU conference. "These small independent hotels [not only lack] an affiliation with a chain and engines that can drive loyal customers, but often they have product that doesn't work: small rooms, small bathrooms, no technology or no air conditioning. Europeans want the same things we want."

Joyce agreed that the conversion route would not work for all brands.

"They tend to be smaller hotels with lots of different room types, but that's something we do for a living," he said. "For our brands, there are some basics, but we can have some flexibility on the architecture and room type, and our customers are willing to accept that."

Other companies are seeking opportunities with new brands. Marriott International, for example, earlier this year announced a new economy brand, Moxy Hotels, for Europe. It plans to open its first hotels next year in Italy (Milan), Germany (Munich and two in Berlin) and the United Kingdom, all of which will be new builds. In all, Marriott plans to add 150 franchised properties in Europe over the next 10 years.

Such ultra-basic hotel brands as Tune and CitizenM, which are somewhat of a hotel-hostel hybrid, are another segment to watch, said Harry Douglass, a senior associate at lodging consulting and research supplier HVS. Such hotels operate on what he called the Ryanair model: small rooms with basic bathroom facilities, and even such basic amenities as hair dryers and television use coming at an extra cost. The hotels have been expanding quickly across Europe and are likely to see significant investment from developers in the coming years, according to HVS.

Some even use the "cabin" room-type, meaning a room with no natural daylight. While it's already accepted in Scandinavia—not surprising, since many major Scandinavian cities have short winter days with limited sunlight, anyway—this configuration also is under consideration for central London and other areas where development is expensive, Douglass said.

Although those hotels might seem more suited to backpackers than bankers, they are seeing a growing acceptance from corporate travelers, according to Douglass. He used one himself in St. Petersburg, which is one of the more expensive cities in Europe for hotel stays, in conjunction with a few nights at luxury properties so he would be able to stay longer while reducing costs for his client, he said.

"They're seeking ways to reduce cost, and 30 percent of [that cost] often is circulation space you don't need," he said. "What it can allow is people staying a night before or after a meeting or event, whereas before, these people had to make day trips to avoid accommodation costs."