Multi-Brand Chains' Buys Extend Ext. Stay Presence

Blackstone Group's March announcement that it was acquiring Extended Stay America, following on the heels of InterContinental Hotel Group's December acquisition of Candlewood Suites, highlighted the increasing presence of multi-brand hotel companies in different extended stay pricing tiers. Buyers, however, who are in the process of negotiating with chains for their extended stay room nights, are not always clear as to the attributes of the upscale, midprice and economy tiers and how the price-value equation among them really differs.

When announcing the Candlewood deal, InterContinental Hotel Group president of the Americas Stevan Porter told BTN that IHG planned to manage the midprice brand separately from its existing upscale extended stay brand Staybridge Suites. He said Staybridge has been successful for IHG and did not see any conflict in managing Candlewood as well. "The points of differentiation are numerous and clear," Porter said.

Likewise, Blackstone intends to keep Extended Stay America distinct from its second extended stay brand, Homestead Studio Suites. "Homestead, which operates 132 hotels, will oversee management of the ESA portfolio, and there are no plans to rebrand any ESA properties into Homesteads," Extended Stay America chairman and CEO George Johnson told Wall Street analysts in March.

Yet, both ESA and Homestead fall under the economy extended stay umbrella. The 10 properties that ESA had under construction at the time of the acquisition announcement could complicate the matter. Johnson said the 10 would be completed. According to industry sources, however, the brand flag they ultimately fly could depend on the needs of individual markets.

Like the larger lodging industry, brands are defined as upscale, midprice or economy extended stay based on a variety of factors. Unlike traditional business hotels, though, space in this sphere is a critical criteria. "It fundamentally boils down to space and services, which translate into price," said Laura Bates, Marriott International senior vice president of extended stay brands, which include upscale Residence Inn and midprice TownePlace Suites. "With an upscale brand, you tend to get a spacious suite, full kitchen, free hot breakfast, evening social hour and grocery shopping service. That adds up to a greater value for the account."

By contrast, travelers at midprice extended stay hotels have less room and less access to services. "People who stay in the moderate tier tend to be value driven," Bates said. "They are willing to trade off those incremental services and be a bit more self-sufficient in order to get the better rate."

Staffing is also a point of differentiation among upscale and midprice hotels. "Upscale chains have 24-hour front desk service. By the time you get down to the economy tier, the front desk office only may be open from nine to five," said Jim Holthouser, senior vice president for brand management at upscale Homewood Suites by Hilton.

Holthouser said he was not disparaging the lower priced tiers. "These are smart products, but when you're paying $60 a night, you don't expect the same level of finish you do when you're buying a $96 a night product," he said.

Extended stay travelers from the same company frequently book brands at different tiers. "You'll see a more junior person, for example, stay at a TownePlace and a senior person stay at a Residence Inn, and the difference is really in their travel budgets," Bates said. "They understand the differences because they are dollar driven."

In situations where their choice of extended stay hotel is sold out, travelers tend to be segment loyal. "When given the option of a regular business hotel or an extended stay option, they opt for extended stay, if the length of the trip requires it," she said. "Even for a short extended stay visit, say a week, they may be able to get by in a regular hotel, even if the room is a bit crowded and uncomfortable. But if they can book an extended stay brand, they will."

Hotel companies that have two extended stay brands benefit when the properties are in close proximity. "You achieve a lot of synergy, particularly with the local sales effort. You can leverage a single sales team, for example, and it's very effective because the sales managers understand the extended stay concept, whether it's upscale or midprice," Bates said.

In terms of pricing, there can be significant leeway, even within a tier. "While it's generally accepted that there are three tiers—upscale, midprice and economy—in fact, you could have as many as six categories, if you want to differentiate strictly on price," said Mike Leven, chairman and CEO of U.S. Franchise Systems, whose brands include upscale extended stay Hawthorn Suites. "Within each of the three main tiers, there's significant rate differentiation at the brand level. Based strictly on price, you can go all the way to the bottom, where there are brands priced at $129 a week that cater to construction crews, for example."

Complicating pricing further, most brands typically offer a special pricing model where the daily rate goes down the longer the stay. "One of the reasons average daily rate for the economy tier is so low is because the length of stays tend to be longer," Holthouser said. "In fact, the further down the extended stay ladder you go, the longer the average becomes."

Citing 2003 industry data, Holthouser said average length of stay was five nights at the upscale tier, 14 nights at the midscale price point and 32 nights at the economy level.

Aside from trying to clarify any buyer confusion over extended stay price tiers, operators still spend time clarifying which business trips qualify as true extended stay and which belong in traditional business hotels. "Extended stay room nights make up an estimated one-third of all lodging industry demand. If you take that much demand and separate it by price point, you'll find there's plenty of demand to go around at the upscale, midprice and economy levels," Holthouser said. "Over time, we're making some inroads in making that clear. We don't have nearly the number of discussions with travel managers we had five years ago, but are we over the hump? We don't think so. We still have years of education ahead of us."

During the economic downturn, transient business hotels focused much more on attracting extended stays—even offering extended stay pricing—because they were eager to fill rooms. Similarly, some extended stay hotels, regardless of price point, sought transient bookings, even though it violated their own pricing model. "The mix of business on both our brands shifted a bit more toward the transient because of the economy. The hotels tried to get whatever customers they could," Bates said. "We tried to hold tight on extended stay occupancy as much as possible because that's the core of our model."

Tokyo Electron America travel manager Kevin Maguire, who is based in Austin, Texas, has used extended stay properties for transient stays whenever it made sense. "The cost savings were too significant to pass up," he said.

However, now that the economy is starting to rebound and demand is returning, extended stay hotels should return to seeking more true extended stay bookings. "But it will come about in a roundabout way," said Mark Skinner, a partner in The Highland Group, an Atlanta-based hospitality consulting firm that specializes in extended stay lodging. "When the market was strong, transient hotel operators turned away extended stay bookings because they could do better filling rooms on midweek nights at higher rates," he said. "As the market comes back, these operators will displace some of that extended stay business in favor of their traditional guests. The extended stay bookings then will gravitate back toward the extended stay hotels, and vice-versa."

Skinner described it as a domino effect. "Extended stay operators will start to look at these traditional guests and think, 'We need to get more of them,' " he said. "They'll end up deciding to close out some of their room inventory earlier on prime midweek nights popular with short-term transient guests."