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What's ahead: A strategic look at lodging trends
~
Lodging Trends
j~
What's Ahead: A Strategic Look at Lodging Trends An analysis of 16 years of lodging-industry data reveals patterns worth noting
by Bruce H. Walker BACK IN 1976 IN TEXAS, when the world was still reeling from an oil shortage, roughly 29 million room-nights were sold in Texas. For the next five years real lodging-industry growth exceeded 10 percent every y e a r - - t h a t is, 10 percent more guests every year
Bruce Walker, former senior vice president of marketing for La Quinta Motor Inns and, before that, for Holiday Inns, is publisher of the newsletter MarketShare and president and founder of San Antonio-based Source Strategies Incorporated.
for five years straight--until 1981, when some 41 million room-nights were sold (see Exhibit 1). In the same five years room supply kept pace with the huge growth in demand and occupancies hovered in the low 70-percent area. Then, in the last half of 1982, the oil bust hit and demand abruptly stopped growing and, instead, declined 2 percent in 1982 and 3 percent more in 1983. But the worst part is, supply didn't stop growing when demand stopped growing. Without added supply, the decline in demand alone would have meant occupancies would © 1993, Cornell University.
28
have declined from 72.1 percent in 1981 to around 68.5 percent in 1983, a minor setback at worst.
Runaway Supply In 1982 there were 166,000 rooms in Texas. By 1987, when supply finally stopped growing, there were 219,000 rooms--a growth rate of 6.3 percent every year for that fiveyear period. 1At the same time real demand actually declined, from 41 million in 1981 to 38 million in 1987. Predictably, the result was 1Today t h e r e a r e some 225,000 hotel rooms in Texas, w h i c h r e p r e s e n t s 7 to 8 percent of the U.S. supply. This article r e p o r t s on d a t a collected from Texas lodging properties d u r i n g the period 1976-1992.
THE CORNELL H.R.A. QUARTERLY
the well-publicized state-wide industry disaster: average occupancy in 1987 was 47.5 percent. G r o w i n g , again. Although the demand for hotel rooms dropped off during 1981-1987, growth resumed in 1988, and every year since then demand has grown about 3.5 percent and is expected to continue to grow indefinitely, in the 2- to 3.5-percent range. If it does, the occupancy rate for the industry will reach a reasonably profitable 65 percent within the next three to five years. What follows are ten observations and lessons (and accompanying explanations) that can be extracted from Texas's lodgingindustry experience from 1976 to 1992.
Supply and Demand (1) The problem was not sluggish demand growth so much as oversupply. Obviously, oversupply hurt the Texas lodging industry. What matters the most in any industry that continues to grow is knowing (A) what geographic areas are undersupplied or have reasonable growth prospects, and (B) what segments and brands will be the greatest beneficiaries of that growth. Growth in Chains (2) To be part of a growing market, operate under a chain name. While the overall market was slightly down from 1981 through 1987, the chain market never stopped growing (Exhibit 2) despite the fact that chain occupancy dropped from 75 percent in 1981 (77,000 rooms) to 52 percent in 1987 (134,000 rooms), after which it has been rising annually (Exhibit 3). The independents, however, went through a terrible decline, from 21 million roomnights in 1980 to just 12 million in 1987 (Exhibit 2). OCTOBER 1993
EXHIBIT 1 Room-nights sold in Texas (1976-1992) (Millions) 46
...........................................................................................................................................................................................................................
44
ii~ !1 ................................................................................................................................................................................................................... ~.~i;11.....................................
.o'2 i;illlliiii;211ii2212212111; ilii Oiiii;i;,1211
iiiilllllll
i i illi ;il
36
34 30
...........:(i...............................................................................................................................................................................
32 f........=.....
........................................................................................................................................................................................................................
'76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92
Upscale Lodging (3) Many consumers are buying product that is high-quality and high-price and avoiding low-price and low-quality offerings. Referring to the segment distinctions shown in Exhibit 4, high-price lodging grew to 56 percent of the total market in 1988, which represents an annual growth rate of 6 percent (from 42 percent of the market's total dollar volume in 1980). That means demand growth occurred for those products priced above midscaleproperty prices: all suite, middle upscale, upscale, and luxury properties. Conversely, the properties priced at midscale rates and lower accounted for 58 percent of the total in 1980 and 29
EXHIBIT 2 Room-nights sold in Texas, independents versus chains (1980-1992) (Millions)
24 22 20
181
,,,,,
16 14 12 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92
--I-
-El-- Chain-affiliated
Independents
EXHIBIT 3 Chain-hotel occupancy, 1980-1992 (Texas) (Percent)
x* (77,000 rooms)
75
65
6O 55
50
.
.
.
.
.
.
',
',
',
',
'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92
EXHIBIT 4
EXHIBIT 5
Brand names by segment
Market share: high- versus low-price lodging (Texas)
HIGH-PRICE PROPERTIES
Luxury
oo8Iii
(Percent of lodging revenues)
Fairmont Hotels Four Seasons Hotels Westin Hotels & Resorts
Upscale Hyatt Hotels Lowes Anatole Marriott Hotels, Resorts, & Suites Omni Hotels Stouffer Hotels
52
...............................
50
. . . . . . . . . . . . . . .
48 46
/
................... .......................................i l l ............... /
44
.......................... ~ ; ........................... I
Middle upscale Courtyard by Marriott Doubletree Hotels Harvey Hotels Hilton Hotels Radisson Hotels Sheraton Hotels, Inns, Resorts, All-suites Wyndham Hotels & Resorts
40
.........................
'80
'82
'84
-I--High-price properties
'86
'88
'90
'92
-rJ- Mid- and low-price properties
EXHIBIT 6 Occupancies: high- versus low-price lodging (Texas)
All-suite AmeriSuites (Howard Johnson) Embassy Suites Guest Quarters Suite Hotels Hawthorn Suites Homewood Suites Lexington Hotel Suites Residence Inn by Marriott
(Percent)
7o7 Ii8° 65
.........
I...........
MID- TO LOW-PRICE PROPERTIES
-,X"m . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Full-service midscale Best Western Howard Johnson Holiday Inns Quality Inns Ramada Inns and Hotels
Limited-service midscale Drury Inns Hampton Inns Homeplace Inns La Quinta Motor Inns
Budget AIIstar Inns (Motel 6) Comfort Inns (Choice International) Days Inns Econo Lodges (Choice International) Exel Inns Motel 6 Park Inns Red Roof Inns Rodeway Inns (Choice International) Super 8 Motels Travelodge (Forte Hotels)
'80
'82
'84
-I-High-price properties
'86
have since dropped to 42 percent. While the economic recession of the past five years has buoyed the economy group and put a crimp in the growth of high-price products, the underlying demand trend is for products in high-price and highquality segments (see Exhibit 5).
Upscale Occupancy Advantage (4) In tough economic times the high-price player can cut rate to hold occupancy---a move the lowprice operator cannot counter (by suddenly adding more upscale facilities). 30
'88
'90
'92
-[3-Mid- and low-price properties
While overall chain occupancy dropped from 75 percent in 1981 to 52 percent in 1987, the high-price chains' occupancies never dropped that low. In the early 1980s the low-price hotels had occupancies similar to the high-price group (see Exhibit 6). When the market became oversupplied, however, the highprice hotels lowered their rates in an effort to limit their losses and keep occupancy from falling below 60 percent, a move that midscaleand budget-product operators simply could not make. The result was that occupancies rates among THE CORNELL H.R.A. QUARTERLY
low-price chains dropped into the 40s, a full 10 points or more below the high-price hotels. While neither group was making money, the high-price hotels at least had relatively high occupancies that mitigated the economic losses. Moreover, the spread in occupancy between high- and lowprice hotels has narrowed only slightly since 1987, again supporting the notion that there's an advantage to being a high-price player in the market.
The Midscale Tragedy (5) It is not feasible to operate a restaurant physically inside a midprice hotel for long-term profit. The operation will lose money, thereby affecting the ability to price rooms competitively and, eventually, interfering with the ability to afford renovations. The data suggest that fullservice midscale hotels are among the sources of the growing supply (market share) of the high-price operations (Exhibit 5). For this analysis, the full-service midscale segment comprises Best Western, Holiday Inns, Howard Johnson, Quality Inns, and Ramada Inns. It represents midmarket properties that traditionally offered a hotel restaurant--perhaps the biggest strategic mistake of the 1980s (see Exhibit 7). In 1980, the Boston Consulting Group studied 150 full-service Holiday Inns and found that they were subsidizing their restaurants an average of $19 per occupied room. Put another way, $19 of the daily revenue from each occupied guest room was being used to keep the hotel's restaurant operational. That's why "Piper's," a restaurant concept developed by Holiday Inns in the early 1980s, was tried and then abandoned. Instead, the company created Hampton Inns and Embassy Suites and in 1989 sold the Holiday Inn brand to Bass PLC. OCTOBER 1993
EXHIBIT 7 Chain-hotel market share (Texas) (Percent of dollars) 5 5
...........................................................................................................................................................................................
50
................................................................................
45
....................................................................................................................................................................................
40
...... ~ . . . ~ .
35
...................................................................................................................................................
.............................~
30
...........................................................
.......................
~
...........................
20 15
...........................................................................................................................................................
10
.........
5 I
~
I
'80
~
'82
I
'84
- B - Full-service midscale
~
I
~
'86
I
J
'88
I
~
I
'90
'92
---13-Limited-service midscale
- B - Budget
Walker's Favorite Brands (Brands likely to be long-term winners) In alphabetical ordec BRAND~
SEGMENT--
BRAND'---
SEGMENT----
AmeriSuites Best Western Comfort Inn Courtyard Doubletree Drury Inns Embassy Fairfield Inn Four Seasons Guest Quarters
Suites Midscale Budget Middle upscale Middle upscale Limited-service midscale Suites Limited-service midscale Luxury Suites
Hampton Inns Holiday Express La Quinta Marriott Motel 6 Red Roof Residence Sheraton Super 8
Limited-service midscale Limited-service midscale Limited-service midscale Upscale Budget Budget Suites Middle upscale Budget
U.S. and Texas markets compared: Occupancy, average daily rate, revenue per available room; First quarter, 1993 OccuP,.c~ (%! ................ADR
($) ..........................mv"A"
All Texas chains Total U.S. market*
62.4 58.5
$59.16 $61.35
Difference
3.9
-$2.19
*Source: Lodging Outlook
31
($) ........
$36.92 $35.89 i
$1.03
Growth
EXHIBIT 8 Mid- to low-price chain-hotel occupancies (Texas) (Percent) 95
........
85 80 75 70
55
5o
.................
................................................................................ .
.
.
.
.
45
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
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.
. . . . . .
................................................................ '80
'82
'84
'86
m--Full-sewice
'88
'90
'92 -B-Budget
-D-Limited-sewice
EXHIBIT 9 Budget-segment REVPARversus Market (Texas) (Percent) 80 I
.....................................................................
75
70 = 65
60
55
I
i
'88 - I - - Comfort Inns
I
i
'89
I
'90
- D - Red Roof Inns
i
I
I
'91
'92
- U - Super 8
--O- Budget Segment
in Limited Service
(6) Traditional midprice lodging with restaurants will be replaced by high-quality, limited-service chains. Hotels without restaurants that offer high-quality rooms in a limited-service facility include La Quinta, Hampton, Drury, and, in Texas, Homeplace. Those brands have improved their performance over the past five years, and their revenue per available room (REVPAR)continues to grow. On the other hand, full-service hotels' REVPARis holding steady, while the number of such properties declines. Midscale limited-service hotels' market share is growing despite being constrained by lack of new supply. And in the third quarter of 1992 the combined occupancy of 117 such properties averaged a startling 76.3 percent (Exhibit 8). Whether Holiday Express and Ramada Limited can expand fast enough to make those brands profitable remains to be seen. The volume of the first Holiday Express has been at the same level as its predecessor, a fullservice Holiday Inn, so success may be possible. Hampton Inns, La Quinta, and Drury Inns also are making inroads and will accelerate expansion when they gain the needed financing. Whichever company can be the first to open 500 high-quality outlets will win, because the resulting advertising clout and market visibility will be overwhelming.
No-Growth Budgets (7) Investments in the budget category should be made on the basis of buying a low-price asset. The business will improve, but demand growth will be modest. The budget-chain segment has virtually the same share of market in 1992 as it had in 1980
32
THE CORNELL H.R.A. QUARTERLY
(Exhibits 7 and 9). It is neither growing nor shrinking and is therefore not likely to generate many fortunes. 2 Nevertheless, within the past five years three budget brands have outperformed Texas's economy-segment averages: Comfort Inn, from 70 percent of market REVPARto 77 percent in 1992; Red Roof, from 64 percent to 79 percent; and Super 8, from 59 percent to 79 percent (Exhibit 9). The rest of the budget operators have either not improved at all or have declined. Allstar, Econo Lodge, and Travelodge are among those that have declined.
EXHIBIT 10 High-~ice chain-hotel occupancies (Texas) (Percent)
80 75 70 65 60 55 50 45 '80
Winners: Limited Service, All Suite, and Courtyards (8) Pay the premiums necessary to get a brand that performs. Limited-service, all-suite, and courtyard-style properties generally follow all the above lessons. They are affiliated with a chain, don't generally incorporate an inhouse restaurant, and fall in the high-price categories. Of the fast-growing, high-price chain products, suite-style properties are the fastest growing. They grew from a dollar share of 3 percent in 1980 to about 8 percent by the end of 1992. Once supply comes into better balance in the industry overall, suite hotels may stabilize at about 15 percent of the market. Since about 1986, suitestyle hotels have enjoyed the highest occupancies among all the high-price segments (see Exhibit 10).
'82
'86
'88
-E}- Upscale
'90
....I -
All Suite
'92 - 4 1 - Middle U p s c a l e
EXHIBIT 11 Courtyard and other middle-upscale properties' REVPARversus market (Texas) (Percent) 170
~
...................
165
.............................................................................................. c . . . . . . ! !
160
.............................. ~J~ ----~:~:: ~ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
155
...........................;>~ .....................................................................................................
......... i
..............
,/
j/
150
.................................. .......i..~<':: "
145
........................................................................................................................
14o]
~
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I
135I ........................................................................................................................... 1~0
.....................................................................................................................................................
125
....... i.................................;............................ i ........................ ;........................... i ........................... '88
'89
-i-- Courtyard
2Editors' note: The owners of Motel 6 might. not agree with that assessmen~ See, for example: Mark W. Cunningham and Chekitan Dev, "Strategic Marketing: A Lodging 'End Run,'" The Cornell Hotel and Restaurant Administration Quarterly, 33, No. 4 (August 1992), pp. 36-43. :Also, on the East Coast, the developers of Microtel would like to think otherwise, too. Their relatively new lodging concept is generating occupancies 20 percent higher than the industry average. See: George Justu~, "Mierotel: How 'Simple' Translates Into Subcess," The Cornell Hotel and Restaurant Administration Quarterly, 32, No. 4 (December 1991), pp. 50-54.
OCTOBER 1993
'84
-II- L u x u r y
33
'90
, ......................
~i ................... ;............................. i.................. '91
--£3- O t h e r m i d d l e - u p s c a l e p r o p e r t i e s
'92
EXHIBIT 12 Marriott and other upscale properties" REVPARversus market (Texas) (Percent) 210
205
n.
L [: : : i ............ . . . . . . . . . . . . . . . .
/
2oo I i
. . . . . . . . . . ......... ........... . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
I:'.,0
-::::
. . . . . . . . . . . . .
195
185
'89
'88 Marriott
'90
'91
'92
t 3 - O t h e r upscale properties
EXHIBIT 13
selves in the supply glut of the 1980s, their REVPARperformance continues to improve faster than that of their direct competition, which bodes well for Marriott's future as demand catches up with supply and hotels become profitable again. In 1990 Marriott hotels passed the rest of the upscales in yield and they have widened the gap since (see Exhibit 12). In all of 1992 Marriott's REVPARwas 4 percent higher than that of rival H y a t t and only 12 percent less than Westin. Marriott's market share is now more than twice Hyatt's in Texas, giving Marriott a marketing advantage that is tough to beat.
Room revenues 1989-1992 (Texas)
History of Occupancy
($millions)
(10) The U.S. lodging industry is entering the most consistently positive period of occupancy and rate growth in more than 30 years. Because of bad hotel investments in the 1980s, money needed now for refurbishing and new construction to meet rising demand is difficult to obtain. That situation, however, creates a wonderful opportunity for those who do have access to cash or financing--namely, the opportunity to buy hotels. Through acquisition of existing properties, it's possible to increase market share while supply is held steady. J u s t remember, high-price brands have higher occupancies than low-price brands and certain brands enjoy higher occupancies than others. Why? The answer's not simply site selection, because all developers do that function fairly well. The reason ultimately boils down to consumer demand and how hotel companies respond to that demand, co
700 t
.....
i~
65O 600 550 5O0
45O '90
'89
First quarter
'91 ,~,:" Second quarter
Marriott's Courtyard products are a great success story. An examination of the 14 Marriott Courtyards operating in Texas shows that in 1988 those properties were about five points ahead of the REVPARyields of the other midscales and upscales (approximately 144 percent versus 139). Since then, Courtyards have jumped to 170 percent of the market average while the other midscales and upscales moved
'92 • Third quarter
'93 • Fourth quarter
modestly to 145 (Exhibit 11, on the previous page). In the summer quarter of 1992, Marriott's Courtyards almost matched the REVPARof Marriott hotels overall and that of Westin as well.
Marriott: A Success (9) I f you operate at Marriott's price level, operate a Marriott. Although Marriott developers m a y have overextended them34
THE CORNELL H.R.A. Q U A R T E R L Y
Lodging Trends
j~
What's Ahead: A Strategic Look at Lodging Trends An analysis of 16 years of lodging-industry data reveals patterns worth noting
by Bruce H. Walker BACK IN 1976 IN TEXAS, when the world was still reeling from an oil shortage, roughly 29 million room-nights were sold in Texas. For the next five years real lodging-industry growth exceeded 10 percent every y e a r - - t h a t is, 10 percent more guests every year
Bruce Walker, former senior vice president of marketing for La Quinta Motor Inns and, before that, for Holiday Inns, is publisher of the newsletter MarketShare and president and founder of San Antonio-based Source Strategies Incorporated.
for five years straight--until 1981, when some 41 million room-nights were sold (see Exhibit 1). In the same five years room supply kept pace with the huge growth in demand and occupancies hovered in the low 70-percent area. Then, in the last half of 1982, the oil bust hit and demand abruptly stopped growing and, instead, declined 2 percent in 1982 and 3 percent more in 1983. But the worst part is, supply didn't stop growing when demand stopped growing. Without added supply, the decline in demand alone would have meant occupancies would © 1993, Cornell University.
28
have declined from 72.1 percent in 1981 to around 68.5 percent in 1983, a minor setback at worst.
Runaway Supply In 1982 there were 166,000 rooms in Texas. By 1987, when supply finally stopped growing, there were 219,000 rooms--a growth rate of 6.3 percent every year for that fiveyear period. 1At the same time real demand actually declined, from 41 million in 1981 to 38 million in 1987. Predictably, the result was 1Today t h e r e a r e some 225,000 hotel rooms in Texas, w h i c h r e p r e s e n t s 7 to 8 percent of the U.S. supply. This article r e p o r t s on d a t a collected from Texas lodging properties d u r i n g the period 1976-1992.
THE CORNELL H.R.A. QUARTERLY
the well-publicized state-wide industry disaster: average occupancy in 1987 was 47.5 percent. G r o w i n g , again. Although the demand for hotel rooms dropped off during 1981-1987, growth resumed in 1988, and every year since then demand has grown about 3.5 percent and is expected to continue to grow indefinitely, in the 2- to 3.5-percent range. If it does, the occupancy rate for the industry will reach a reasonably profitable 65 percent within the next three to five years. What follows are ten observations and lessons (and accompanying explanations) that can be extracted from Texas's lodgingindustry experience from 1976 to 1992.
Supply and Demand (1) The problem was not sluggish demand growth so much as oversupply. Obviously, oversupply hurt the Texas lodging industry. What matters the most in any industry that continues to grow is knowing (A) what geographic areas are undersupplied or have reasonable growth prospects, and (B) what segments and brands will be the greatest beneficiaries of that growth. Growth in Chains (2) To be part of a growing market, operate under a chain name. While the overall market was slightly down from 1981 through 1987, the chain market never stopped growing (Exhibit 2) despite the fact that chain occupancy dropped from 75 percent in 1981 (77,000 rooms) to 52 percent in 1987 (134,000 rooms), after which it has been rising annually (Exhibit 3). The independents, however, went through a terrible decline, from 21 million roomnights in 1980 to just 12 million in 1987 (Exhibit 2). OCTOBER 1993
EXHIBIT 1 Room-nights sold in Texas (1976-1992) (Millions) 46
...........................................................................................................................................................................................................................
44
ii~ !1 ................................................................................................................................................................................................................... ~.~i;11.....................................
.o'2 i;illlliiii;211ii2212212111; ilii Oiiii;i;,1211
iiiilllllll
i i illi ;il
36
34 30
...........:(i...............................................................................................................................................................................
32 f........=.....
........................................................................................................................................................................................................................
'76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92
Upscale Lodging (3) Many consumers are buying product that is high-quality and high-price and avoiding low-price and low-quality offerings. Referring to the segment distinctions shown in Exhibit 4, high-price lodging grew to 56 percent of the total market in 1988, which represents an annual growth rate of 6 percent (from 42 percent of the market's total dollar volume in 1980). That means demand growth occurred for those products priced above midscaleproperty prices: all suite, middle upscale, upscale, and luxury properties. Conversely, the properties priced at midscale rates and lower accounted for 58 percent of the total in 1980 and 29
EXHIBIT 2 Room-nights sold in Texas, independents versus chains (1980-1992) (Millions)
24 22 20
181
,,,,,
16 14 12 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92
--I-
-El-- Chain-affiliated
Independents
EXHIBIT 3 Chain-hotel occupancy, 1980-1992 (Texas) (Percent)
x* (77,000 rooms)
75
65
6O 55
50
.
.
.
.
.
.
',
',
',
',
'80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92
EXHIBIT 4
EXHIBIT 5
Brand names by segment
Market share: high- versus low-price lodging (Texas)
HIGH-PRICE PROPERTIES
Luxury
oo8Iii
(Percent of lodging revenues)
Fairmont Hotels Four Seasons Hotels Westin Hotels & Resorts
Upscale Hyatt Hotels Lowes Anatole Marriott Hotels, Resorts, & Suites Omni Hotels Stouffer Hotels
52
...............................
50
. . . . . . . . . . . . . . .
48 46
/
................... .......................................i l l ............... /
44
.......................... ~ ; ........................... I
Middle upscale Courtyard by Marriott Doubletree Hotels Harvey Hotels Hilton Hotels Radisson Hotels Sheraton Hotels, Inns, Resorts, All-suites Wyndham Hotels & Resorts
40
.........................
'80
'82
'84
-I--High-price properties
'86
'88
'90
'92
-rJ- Mid- and low-price properties
EXHIBIT 6 Occupancies: high- versus low-price lodging (Texas)
All-suite AmeriSuites (Howard Johnson) Embassy Suites Guest Quarters Suite Hotels Hawthorn Suites Homewood Suites Lexington Hotel Suites Residence Inn by Marriott
(Percent)
7o7 Ii8° 65
.........
I...........
MID- TO LOW-PRICE PROPERTIES
-,X"m . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Full-service midscale Best Western Howard Johnson Holiday Inns Quality Inns Ramada Inns and Hotels
Limited-service midscale Drury Inns Hampton Inns Homeplace Inns La Quinta Motor Inns
Budget AIIstar Inns (Motel 6) Comfort Inns (Choice International) Days Inns Econo Lodges (Choice International) Exel Inns Motel 6 Park Inns Red Roof Inns Rodeway Inns (Choice International) Super 8 Motels Travelodge (Forte Hotels)
'80
'82
'84
-I-High-price properties
'86
have since dropped to 42 percent. While the economic recession of the past five years has buoyed the economy group and put a crimp in the growth of high-price products, the underlying demand trend is for products in high-price and highquality segments (see Exhibit 5).
Upscale Occupancy Advantage (4) In tough economic times the high-price player can cut rate to hold occupancy---a move the lowprice operator cannot counter (by suddenly adding more upscale facilities). 30
'88
'90
'92
-[3-Mid- and low-price properties
While overall chain occupancy dropped from 75 percent in 1981 to 52 percent in 1987, the high-price chains' occupancies never dropped that low. In the early 1980s the low-price hotels had occupancies similar to the high-price group (see Exhibit 6). When the market became oversupplied, however, the highprice hotels lowered their rates in an effort to limit their losses and keep occupancy from falling below 60 percent, a move that midscaleand budget-product operators simply could not make. The result was that occupancies rates among THE CORNELL H.R.A. QUARTERLY
low-price chains dropped into the 40s, a full 10 points or more below the high-price hotels. While neither group was making money, the high-price hotels at least had relatively high occupancies that mitigated the economic losses. Moreover, the spread in occupancy between high- and lowprice hotels has narrowed only slightly since 1987, again supporting the notion that there's an advantage to being a high-price player in the market.
The Midscale Tragedy (5) It is not feasible to operate a restaurant physically inside a midprice hotel for long-term profit. The operation will lose money, thereby affecting the ability to price rooms competitively and, eventually, interfering with the ability to afford renovations. The data suggest that fullservice midscale hotels are among the sources of the growing supply (market share) of the high-price operations (Exhibit 5). For this analysis, the full-service midscale segment comprises Best Western, Holiday Inns, Howard Johnson, Quality Inns, and Ramada Inns. It represents midmarket properties that traditionally offered a hotel restaurant--perhaps the biggest strategic mistake of the 1980s (see Exhibit 7). In 1980, the Boston Consulting Group studied 150 full-service Holiday Inns and found that they were subsidizing their restaurants an average of $19 per occupied room. Put another way, $19 of the daily revenue from each occupied guest room was being used to keep the hotel's restaurant operational. That's why "Piper's," a restaurant concept developed by Holiday Inns in the early 1980s, was tried and then abandoned. Instead, the company created Hampton Inns and Embassy Suites and in 1989 sold the Holiday Inn brand to Bass PLC. OCTOBER 1993
EXHIBIT 7 Chain-hotel market share (Texas) (Percent of dollars) 5 5
...........................................................................................................................................................................................
50
................................................................................
45
....................................................................................................................................................................................
40
...... ~ . . . ~ .
35
...................................................................................................................................................
.............................~
30
...........................................................
.......................
~
...........................
20 15
...........................................................................................................................................................
10
.........
5 I
~
I
'80
~
'82
I
'84
- B - Full-service midscale
~
I
~
'86
I
J
'88
I
~
I
'90
'92
---13-Limited-service midscale
- B - Budget
Walker's Favorite Brands (Brands likely to be long-term winners) In alphabetical ordec BRAND~
SEGMENT--
BRAND'---
SEGMENT----
AmeriSuites Best Western Comfort Inn Courtyard Doubletree Drury Inns Embassy Fairfield Inn Four Seasons Guest Quarters
Suites Midscale Budget Middle upscale Middle upscale Limited-service midscale Suites Limited-service midscale Luxury Suites
Hampton Inns Holiday Express La Quinta Marriott Motel 6 Red Roof Residence Sheraton Super 8
Limited-service midscale Limited-service midscale Limited-service midscale Upscale Budget Budget Suites Middle upscale Budget
U.S. and Texas markets compared: Occupancy, average daily rate, revenue per available room; First quarter, 1993 OccuP,.c~ (%! ................ADR
($) ..........................mv"A"
All Texas chains Total U.S. market*
62.4 58.5
$59.16 $61.35
Difference
3.9
-$2.19
*Source: Lodging Outlook
31
($) ........
$36.92 $35.89 i
$1.03
Growth
EXHIBIT 8 Mid- to low-price chain-hotel occupancies (Texas) (Percent) 95
........
85 80 75 70
55
5o
.................
................................................................................ .
.
.
.
.
45
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
. . . . . .
................................................................ '80
'82
'84
'86
m--Full-sewice
'88
'90
'92 -B-Budget
-D-Limited-sewice
EXHIBIT 9 Budget-segment REVPARversus Market (Texas) (Percent) 80 I
.....................................................................
75
70 = 65
60
55
I
i
'88 - I - - Comfort Inns
I
i
'89
I
'90
- D - Red Roof Inns
i
I
I
'91
'92
- U - Super 8
--O- Budget Segment
in Limited Service
(6) Traditional midprice lodging with restaurants will be replaced by high-quality, limited-service chains. Hotels without restaurants that offer high-quality rooms in a limited-service facility include La Quinta, Hampton, Drury, and, in Texas, Homeplace. Those brands have improved their performance over the past five years, and their revenue per available room (REVPAR)continues to grow. On the other hand, full-service hotels' REVPARis holding steady, while the number of such properties declines. Midscale limited-service hotels' market share is growing despite being constrained by lack of new supply. And in the third quarter of 1992 the combined occupancy of 117 such properties averaged a startling 76.3 percent (Exhibit 8). Whether Holiday Express and Ramada Limited can expand fast enough to make those brands profitable remains to be seen. The volume of the first Holiday Express has been at the same level as its predecessor, a fullservice Holiday Inn, so success may be possible. Hampton Inns, La Quinta, and Drury Inns also are making inroads and will accelerate expansion when they gain the needed financing. Whichever company can be the first to open 500 high-quality outlets will win, because the resulting advertising clout and market visibility will be overwhelming.
No-Growth Budgets (7) Investments in the budget category should be made on the basis of buying a low-price asset. The business will improve, but demand growth will be modest. The budget-chain segment has virtually the same share of market in 1992 as it had in 1980
32
THE CORNELL H.R.A. QUARTERLY
(Exhibits 7 and 9). It is neither growing nor shrinking and is therefore not likely to generate many fortunes. 2 Nevertheless, within the past five years three budget brands have outperformed Texas's economy-segment averages: Comfort Inn, from 70 percent of market REVPARto 77 percent in 1992; Red Roof, from 64 percent to 79 percent; and Super 8, from 59 percent to 79 percent (Exhibit 9). The rest of the budget operators have either not improved at all or have declined. Allstar, Econo Lodge, and Travelodge are among those that have declined.
EXHIBIT 10 High-~ice chain-hotel occupancies (Texas) (Percent)
80 75 70 65 60 55 50 45 '80
Winners: Limited Service, All Suite, and Courtyards (8) Pay the premiums necessary to get a brand that performs. Limited-service, all-suite, and courtyard-style properties generally follow all the above lessons. They are affiliated with a chain, don't generally incorporate an inhouse restaurant, and fall in the high-price categories. Of the fast-growing, high-price chain products, suite-style properties are the fastest growing. They grew from a dollar share of 3 percent in 1980 to about 8 percent by the end of 1992. Once supply comes into better balance in the industry overall, suite hotels may stabilize at about 15 percent of the market. Since about 1986, suitestyle hotels have enjoyed the highest occupancies among all the high-price segments (see Exhibit 10).
'82
'86
'88
-E}- Upscale
'90
....I -
All Suite
'92 - 4 1 - Middle U p s c a l e
EXHIBIT 11 Courtyard and other middle-upscale properties' REVPARversus market (Texas) (Percent) 170
~
...................
165
.............................................................................................. c . . . . . . ! !
160
.............................. ~J~ ----~:~:: ~ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
155
...........................;>~ .....................................................................................................
......... i
..............
,/
j/
150
.................................. .......i..~<':: "
145
........................................................................................................................
14o]
~
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I
135I ........................................................................................................................... 1~0
.....................................................................................................................................................
125
....... i.................................;............................ i ........................ ;........................... i ........................... '88
'89
-i-- Courtyard
2Editors' note: The owners of Motel 6 might. not agree with that assessmen~ See, for example: Mark W. Cunningham and Chekitan Dev, "Strategic Marketing: A Lodging 'End Run,'" The Cornell Hotel and Restaurant Administration Quarterly, 33, No. 4 (August 1992), pp. 36-43. :Also, on the East Coast, the developers of Microtel would like to think otherwise, too. Their relatively new lodging concept is generating occupancies 20 percent higher than the industry average. See: George Justu~, "Mierotel: How 'Simple' Translates Into Subcess," The Cornell Hotel and Restaurant Administration Quarterly, 32, No. 4 (December 1991), pp. 50-54.
OCTOBER 1993
'84
-II- L u x u r y
33
'90
, ......................
~i ................... ;............................. i.................. '91
--£3- O t h e r m i d d l e - u p s c a l e p r o p e r t i e s
'92
EXHIBIT 12 Marriott and other upscale properties" REVPARversus market (Texas) (Percent) 210
205
n.
L [: : : i ............ . . . . . . . . . . . . . . . .
/
2oo I i
. . . . . . . . . . ......... ........... . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
I:'.,0
-::::
. . . . . . . . . . . . .
195
185
'89
'88 Marriott
'90
'91
'92
t 3 - O t h e r upscale properties
EXHIBIT 13
selves in the supply glut of the 1980s, their REVPARperformance continues to improve faster than that of their direct competition, which bodes well for Marriott's future as demand catches up with supply and hotels become profitable again. In 1990 Marriott hotels passed the rest of the upscales in yield and they have widened the gap since (see Exhibit 12). In all of 1992 Marriott's REVPARwas 4 percent higher than that of rival H y a t t and only 12 percent less than Westin. Marriott's market share is now more than twice Hyatt's in Texas, giving Marriott a marketing advantage that is tough to beat.
Room revenues 1989-1992 (Texas)
History of Occupancy
($millions)
(10) The U.S. lodging industry is entering the most consistently positive period of occupancy and rate growth in more than 30 years. Because of bad hotel investments in the 1980s, money needed now for refurbishing and new construction to meet rising demand is difficult to obtain. That situation, however, creates a wonderful opportunity for those who do have access to cash or financing--namely, the opportunity to buy hotels. Through acquisition of existing properties, it's possible to increase market share while supply is held steady. J u s t remember, high-price brands have higher occupancies than low-price brands and certain brands enjoy higher occupancies than others. Why? The answer's not simply site selection, because all developers do that function fairly well. The reason ultimately boils down to consumer demand and how hotel companies respond to that demand, co
700 t
.....
i~
65O 600 550 5O0
45O '90
'89
First quarter
'91 ,~,:" Second quarter
Marriott's Courtyard products are a great success story. An examination of the 14 Marriott Courtyards operating in Texas shows that in 1988 those properties were about five points ahead of the REVPARyields of the other midscales and upscales (approximately 144 percent versus 139). Since then, Courtyards have jumped to 170 percent of the market average while the other midscales and upscales moved
'92 • Third quarter
'93 • Fourth quarter
modestly to 145 (Exhibit 11, on the previous page). In the summer quarter of 1992, Marriott's Courtyards almost matched the REVPARof Marriott hotels overall and that of Westin as well.
Marriott: A Success (9) I f you operate at Marriott's price level, operate a Marriott. Although Marriott developers m a y have overextended them34
THE CORNELL H.R.A. Q U A R T E R L Y