Midprice Brands Outperform Other Industry Price Points

The midprice hotel tier, and particularly the midprice without food and beverage category, during 2003 outshined the other industry segments. Based on data from the first two months of 2004, the midprice segment continues to stand out, benefiting from the upswing in lodging demand and showing signs of outperforming other hotel price points. However, the jury is still out on whether buyers this year will stick with midprice inventory now that the economy is strengthening and travel budget restrictions might be easing.

Still, for the past three years many buyers who traditionally focused on full service hotels paid more attention to the midprice chains. The trend of buyers trading down was much discussed, though it remains unclear how many actually abandoned full service properties or simply added more moderate priced options to their list of approved providers.

"You could say it was the best of times, it was the worst of times," said Phil Cordell, senior vice president of brand management for Hampton, which is part of Hilton Hotels Corp. "For the industry overall, 2003 was a year of expected recovery that never really came, despite some early optimism. Brands that succeeded had to make lemonade out of lemons, and many of those were midscale."

Paralleling the rest of the industry, the midprice tier's occupancy rates and room revenues improved as the year progressed. "It was a constant lift from about September on, steady month-over-month growth," said Nancy Johnson, executive vice president and brand leader of Carlson Hospitality's Country Inns & Suites brand. "It's what made us so cautiously optimistic heading into 2004."

The midprice segment's relative success could be attributed to the business travel profile these brands attract. "Our core traveler is the mid-level, managerial or technical person, the road warrior who continues to travel no matter what happens," Cordell said. "It's the resiliency in that market that pulled midscale through in 2003 and that bodes well for 2004."

Location also is a factor. "There's the price advantage, but in many markets the best hotels for us basically are midprice," said Kari Knoll Kesler, sourcing specialist for travel, meetings and promotions for ING Americas in Minneapolis.

According to PricewaterhouseCoopers last month, demand in the U.S. midprice without F&B category is expected to jump 7.5 percent in 2004 versus 2003. This compares favorably to a 4.5 percent increase in demand forecast across all lodging price points. "The increase in demand means the segment should be able to achieve growth in average daily rate of 1.9 percent," said Bjorn Hanson, global leader of the PwC hospitality and leisure practice.

There will not be comparable growth in occupancy rates, however, because supply growth has been strong. In fact, supply for midprice hotels will rise by 3.7 percent in 2004, compared with a 1.4 percent supply increase for the lodging industry overall. Supply growth for the tier is forecast to jump another 4.7 percent in 2005. Revenue for the midprice sector also will rise, if only moderately, according to PwC. Revenue per available room is expected to increase 5.3 percent for the lodging industry overall, but PwC predicted that RevPAR for midprice hotels will exceed that by half a percentage point.

The significance of trading down is debatable. "We've spent a lot of time talking to travel managers, and a trend we've seen is that they're buying more midscale properties," said Hoyt Harper, senior vice president of brand management for Four Points by Sheraton, part of Starwood Hotels & Resorts Worldwide. "We've seen a number of buyers move from larger, upscale hotels to smaller properties or airport locations."

Yet, trading down has been accompanied by companies trying midprice rather than hotels in the economy and budget tiers. "We've seen some trading down affect business travel, but there's also been some trading up as rates came down," said Chad Waetzig, Marriott International senior vice president for select service brand management, which includes Courtyard by Marriott.

Rate compression has been widespread. In these instances, chains at one price point drop rates to remain competitive with hotels at the price point below. "Upscale hotels actually moved rate down in order to maintain business," Harper said. "Consequently, we were forced to move rates just to maintain our share."

The extent of brand swapping may be exaggerated. "There might not have been as much switching as everyone thinks," said Adrian Kurre, senior vice president of brand management for Hilton Garden Inn. "We don't think we've been stealing from full service hotels as much as from other limited service brands."

In negotiating with buyers, Harper cited instances where Four Points opted to add benefits rather than lower rates. "We chose to keep the rate constant, but might add complimentary breakfast or some other value-add amenity for select buyers," he said.

Moving into the second quarter of 2004, confidence is growing among midprice hotel operators. "People are optimistic," said Tom Higgins, president and CEO of Best Western International, "but the real proof remains the same—what is the kind of marketshare you can capture, and will we be able to overcome the limited pricing power we've faced?"