Hilton, Marriott, and IHG Are Making Affordable Brands Development Priorities

Investors aren’t turning away from a market segment analysts see as the workhorse for major hotel companies — even if there are shinier places to park capital.

Resorts and lifestyle hotels were the hotel industry’s rare growth story during the pandemic. But construction and development activity at companies like Hilton and IHG show mid-scale brands like Tru, Home2 Suites, and Holiday Inn account for some of the largest shares of the industry’s development pipeline.

Hilton added nearly 100 hotels to its Tru portfolio since the beginning of 2020. Home2 Suites, with 379 projects in development at the end of the second quarter, accounts for the biggest share of Hilton’s U.S. development pipeline, according to Lodging Econometrics. Just three brands — Home2 Suites, IHG’s Holiday Inn Express, and Marriott’s Fairfield Inn — comprise 20 percent of the total hotel construction pipeline in the U.S.

Hilton leaders point to Tru as one of the company’s most resilient brands during the pandemic in terms of dealmaking, as the entirely new-build concept — first launched in 2016 — appeals to travelers with its minimalist design.

“All of those things that we’ve been touting as part of the brand all of a sudden had new meaning during Covid for travelers, so it kind of created this opening for the consumer side of things to maybe accelerate some brand awareness,” said Talene Staab, global head of Tru by Hilton.

New franchisees like the brand because Tru properties are generally more affordable to build than some of Hilton’s other offerings. Tru’s per-room construction costs at its launch ran at roughly $83,000 compared to more than $100,000 for Hampton. The brand essentially doubling its portfolio in less than two years also helps lenders open up to the concept, even in a tight lending market like now.

“The affiliation with Hilton and having the strength of that engine is certainly what we talked about with lenders, but I think there’s more opportunity just to introduce the lender world to the brand,” Staab said. “Now that we’ve got more distribution, I think people will be like, ‘Okay, I want to learn more.’ So our strategy is how do we make sure the lenders are clear about what the brand is and what it isn’t so they feel more competent and are freer to do the lending.”

Movement in the Midscale: The optimism about mid-scale brands makes sense despite hotel companies like Accor and IHG putting more stock in higher-end brands in recent months. Accor executives touted growth over the last year with ultra-luxury offerings like Raffles and lifestyle brands like Mondrian and SLS. IHG leaders announced plans earlier this month to roll out a luxury soft brand, one without regimented brand standards like an InterContinental.

But mid-scale brands have generally outperformed the rest of the industry during the pandemic. This segment of the market exceeded 2019 revenue per available room, the industry’s key performance metric, by more than 12 percent last week, according to STR.

While the strong performance includes summer leisure travel, mid-scale brands fared decently even during the depths of the pandemic due to their customer base including essential workers and road warriors who generally still traveled for work while many steered clear of the office.

“You are seeing the development sentiment in the mainstream segments come back and accelerate,” IHG CEO Keith Barr said on an investor call earlier this month. “Lenders are feeling more confident moving forward, too.”

Extended Stay Overlap: Lodging Econometrics generally sees the U.S. hotel construction pipeline to stay at around a 2 percent annual growth rate through 2023. Most of that growth will come from the upscale, mid-scale, and upper mid-scale — brands like Courtyard — segments. It shouldn’t come as a shock that roughly 80 percent of the U.S. hotel development pipeline comes from Marriott, Hilton, IHG, Hyatt, and Best Western — U.S. travelers have historically favored the brand familiarity.

But the major brands also have some competition nipping at their heels from the similarly resilient extended stay sector. Extended Stay America, fresh from Blackstone and Starwood Capital’s $6 billion takeover, could swell from 650 hotels to 1,000, the company’s CEO Bruce Haase told Skift earlier this summer. Part of that expansion includes a higher-end offering, Extended Stay America Premier Suites.

Sonesta International Hotels Corp. leaders also indicated plans to push into more of a higher-end offering of extended stay hotels following their RLH Corp. takeover earlier this year.

Sonesta CEO Carlos Flores told Skift in March he saw opportunity in offering multiple extended-stay brands, which include brands like Sonesta’s ES Suites brand as well as RLH’s GuestHouse Extended Stay, at different price points. Moving into more of an upscale extended-stay segment would arguably begin to push into the customer base who might typically look to book a stay at something like a Tru or a Fairfield.

“We’re making sure we’re good custodians of the brand and mining out all that value,” Flores said earlier this year of the company’s extended stay brands and potential next steps. “When we have great brands, we want to frack out as much value as possible.”

Hotels Dip a Toe in the Airline Unbundling Pool

The concept of unbundling services is the industry norm by now for airlines, but hotels haven’t been as into the idea.

Airlines put price premiums on advance seat assignments, meals, and even security screenings and boarding times. Hotels have generally kept the a la carte offerings on things like WiFi or debatable resort fees.

But now owners are trying to compensate for coronavirus losses on the financial front.
Hotel owners are toying with the idea of charging guests for a wider array of services, from use of a pool to daily housekeeping and earlier check-in times.

MCR Hotels, owner of properties like the TWA Hotel and High Line Hotel in New York City, is an early adopter, the Wall Street Journal reports. Early check-in and late check-out fees are $20 while use of a pool during a peak time, like a weekend, could run a guest $25. The use of fitness facilities or opting into breakfast also come at a price.

There is one silver lining: MCR is lowering the daily rates at the hotels where the practice is implemented.

Hotel Pushback: There is reason to think the concept could become a mainstream practice in relatively short order. Hilton already rolled back daily housekeeping as a brand standard at most of its U.S. hotels. Instead, guests can opt in. MCR — which owns roughly 20,000 hotel rooms — is the fourth-largest U.S. hotel owner by room count.

But not everyone is rallying around the idea of a la carte pricing in hospitality. Marriott, which is reviewing its brand standards ahead of a planned resumption sometime next year, is unlikely to adopt MCR’s model.

“We will continue to be influenced by what we hear from guests and partners,” Marriott CEO Anthony Capuano told the Journal. “But it would be folly to have a knee-jerk reaction to what may be a vocal minority.”

Given that companies like Marriott and Hilton set the brand standards, it is unlikely the pricing model hits a critical mass unless these major entities see it as a viable option. Hotel owners of a branded property would be unable to offer such a pricing concept without the permission of the brand.

Driving Dealmaking…or Driving it All Away: Travelers may initially balk at the idea of a la carte pricing, but MCR Hotels CEO Tyler Morse thinks it could eventually be a hit given how some travelers sparingly use amenities at a hotel. If the idea pans out, that could be a major selling point to potential franchisees.

Unbundling services and amenities presents an array of new revenue streams for hotel owners. Airlines doubled their a la carte pricing revenue for things like checked bags and onboard entertainment between 2015 and 2019. A la carte pricing for hotels could also be a revenue stream that isn’t shared with online travel agencies like a traditional room reservation.

Potential owners would likely flock to hotel brands that show this is a winning idea. But if it drives travelers away by the feeling that they’re being nickel and dimed, the pricing innovation could end up being a drag on development. The key to this may be to strike the right balance and only use the pricing unbundling selectively on things like early check-in and late check-out rather than the ability to use basic services like a fitness center or a pool.