Alternatives embrace transparency

Investors into the alternative accommodation market were attracted by the ability to accurately gauge returns, delegates at the Hotel Alternatives Event 2018, hosted by Hotel Analyst in London, were told.

Hostels and the budget hotel sector were seen to provide the most clarity, with guests too welcoming a stripped back approach to accommodation.

Navneet Bali, chairman, Meininger Hotels, said: “Hotels don’t know what their Ebitda/sq m is.”

George Westwell, director, Cheval Residences, speaking later in the day, echoed his comments, telling the audience: “Traditionally we’ve used revpar, which I think is dead – we’re not talking like-for-like. We should be looking at profit per sq m and taking account of the cost of acquisition.”

Sean Worker, CEO, Bridgestreet, added: “Companies looking for a low-cost high value model and they are recoiling from the traditional hotel model.”

Cost was an issue central to the event and one where the budget hotels and hostels displayed an edge. Guy Parsons, CEO, EasyHotel, said: “The budget hotel market in the UK is following what happened in the US, where super-budget brands developed. The need for Premier Inn to push its rates up – because it’s a large PLC  – and the need for Travelodge to get a return on its large investment left a gap in the market we were also able to take buildings which hotels cannot take.  We’re generating returns of 12% +. For franchising we are making low double-digit returns. We’ve achieved rates outside London which are higher than London under our new revenue management system – we have no instruction to repress rates”

Parsons added: “In terms of Brexit we have a very low staffing cost, but it is back office where we are seeing cost inflation. The last downturn pulled property prices down, which creates opportunity. But uncertainty is a threat – interest rates are going to go up and we have a lot of people who have not experienced mortgages going up, and wages are not keeping pace with CPI.”

Tom Walsh, CEO, Staycity, added: “Brexit is creating business challenges, staffing is becoming tighter and the OTA universe is in a state of flux, creating more opportunity than threat, with competition driving lower costs of distribution.”

The potential for increased competition to push down the cost of distribution was raised earlier in the day by Patrick Angwin, senior director, Horwath HTL, who commented: “The sharing economy aggregators are bring together supply and bringing it to demand, leading to pressure on commission rates they also put pressure on rates from transparency and bookability of non-hotel accommodation types.”

The OTAs were seen by many as a required route to market. Parsons said: “When you’ve got two leviathans like Whitbread and Travelodge you can stand alone, but we see the OTAs as part of the mix as long as it makes economic sense to do so.”

Bali added: “As far as consumers are aware they are not aware of the brand, particularly in new markets, so 50% of our business comes from OTAs and that will remain for the next four years.”

Angwin questioned whether the yield gap between hotels and alternatives would close as there was more transparency for investors, adding: “Over the last decade we’ve seen unprecedented yield compression as a result of ultra-loose monetary conditions. We are now at a turning point. We’re looking at convergence of yields, property types, who the consumer is and using the same distribution platforms. You must tap into the experience economy, but you must be flexible, that differentiation cannot come at the cost of being able to change the use of the accommodation.”

Angwin described hostels as “the true hotel alternative. Over the last decade the product has changed significantly.  London has 2.8 beds per 1,000 youth visitors – Berlin has 11.2. There is great opportunity”.

Bali was eager to promote transparency to the assembled, telling delegates that Meininger Hotels outperformed the hotels market “because we pay market rent per sq m and our rent cover is 2.4 and the hotel sector pays 1.4 to 1.5, which makes us 40% more profitable per sq m. There is a risk when you enter the market that the cost is very high and maybe things are turning. But we are less likely to be impacted because we target leisure, school groups, which are counter-cyclical and also at a very low price point.

“The hostel market is very fragmented – 93% unbranded, so there is a niche for us. We get families staying with us, business people, student groups, backpackers, the celebration market.”

The budget hotel market was seen to share some trait with hostels, with a clear offering uncluttered with the conference space and F&B which was often lost in KPIs. Parsons said: “Guests don’t stay – they are coming for an event. You see them check in and then 20 minutes they are back out to do what they came to do.”

Later in the day Rohan Thakker, VP development & strategy, Yotel, described the brands expansion into ski resorts, describing “a product where the guest doesn’t spend much time in the hotel” eliminating the need for extensive common areas.

Nakul Sharma, CEO, Hostmaker, concluded: “A lot of the real estate in a traditional hotel is now redundant – 10 years ago the concierge was your friend, booking restaurants, taxis, theatre tickets, now you can do all that on your phone.”

HA Perspective [by Katherine Doggrell]: Angwin struck a chord with many delegates when he said: “Millennials are looking at housing as a service, not as something you own”. While he was describing the co-living sector, the comment underlined not only changing attitude to home ownership, but a mindset amongst guests which has become more demanding, and fostered more niche products across the hotel sector.

As Carl Michel, chairman, Veeve put is: “What’s happening now is elemental – it’s supply and demand beginning to be matched. All these formats existed in people’s minds, they just hadn’t been supplied.”

He added: “Hotels have created a lot of good brands, but a lot of trade brands of which you or I could possibly identify four of . We need to go back to understanding the consumer. They may not care about the room if it’s a destination.”

As guests have become more demanding, so too have owners. The first incarnation of EasyHotel was an exercise in unbundling – guests could pay more for sheets, rooms to be cleaned and other edifying scenarios. The sector has not followed the budget airline market to quite that extent, but investors have become more demanding in terms of knowing where their cash is going. Parsons has previously told this publication that his investors were not the type of hotel owners looking for a fancy restaurant to show off to their friends, they wanted returns.

And this is what the alternatives sector is delivering – a happy dose of clarity. Every part of the operation must be made to justify itself. This works in the budget and hostel sectors where the product is now massively commoditised, it does not work in the luxury sector, where look and feel are less quantifiable.

Posted on behalf of Hotel Analyst