ONE OF THE MOST EAGERLY AWAITED AND GLAMOROUS HOTEL OPENINGS OF THE YEAR will take place this month in the heart of the City of London. Independently-owned, 252-room hotel the Ned will open its doors within the historic former Midland Bank HQ, designed by Sir Edwin ‘Ned’ Lutyens in the 1930s, following a £200 million transformation by Soho House founder Nick Jones.
A few miles away, Britain’s biggest hotel chain Premier Inn will open its latest UK hotel (joining 750-plus others) in the rather less salubrious surroundings of Heathrow Terminal Four. Opening in May, this 300-room property is part of the budget hotels boom that is reshaping the UK hotels scene and piling pressure on the independent hospitality sector.
Nearly two-thirds of hotel openings in the provinces last year were in the budget sector, according to estate agency group Knight Frank. In London, approximately half of new hotels were deemed to be budget properties.
This, it suggests, “is evidence of a structural change taking place and an underlying shift to greater branding and the hotel market becoming less fragmented” – code for emphasising that independent hoteliers are the ones under increasing pressure. The number of independent hotel rooms is estimated to have declined by some 40,000 during the past decade, according to veteran hotel industry consultant Melvin Gold.
And the position is getting worse for the non-chains. “Branded budget hotels are the fastest growing tier of the market by some margin,” says Gold, who adds that ‘branded budgets’ now account for about a fifth of the total UK serviced accommodation market.
Nonetheless, independent hotels are still a key force in the UK hospitality world. According to Gold’s analysis, the independent sector accounts for a majority of the market – albeit only just, with a 51per cent share (just over 380,000 rooms last year in slightly more than 38,000 hotels) – compared with just over 45 per cent for the branded chains (nearly 337,000 rooms from just under 3,000 properties).
The balance, almost 4 per cent, consists of the various marketing consortia that have developed for independently-owned hotels, such as Best Western or Pride of Britain Hotels, which give some independents the benefits of a branded chain without losing their independent identity.
But there seems little doubt that branded hotels will – sooner rather than later – be in the majority in the UK. Key to this is the shift in recent years by the leading hotel chains switching to an ‘asset-lite’ strategy, reducing their capital investment in bricks and mortar in favour of letting property investors put up the money in return for having a recognised brand name above the door.
The advantage for the major chains is clear: they can focus all their resources on the marketing and development of their brand portfolios, securing greater revenue streams than if they had their funds tied up in the property. This has seen a plethora of new brands being developed by the chains: for example Marriott, the world’s biggest hotelier following its acquisition of Starwood Hotels & Resorts Worldwide last year, now offers some 30 different niche brands globally, with 18 of these already in the UK.
But the rise of the millennial cohort – the generation stretching from those born in the early 1980s to the late 1990s (definitions vary slightly) – is another key reason why the big chains want so many brands. Millennials covet change and new ideas, embracing the latest technology and social trends (see panel, p78). While some independent hotels have the resources to compete for these travellers, with investment in smart technology and design, most do not. But the chains are well aware of their potential: Marriott believes they will form the biggest segment of its market by 2020.
Yet the short-term focus for both the chains and independents this year may be less on the rise of millennials but on how the demand for hotel accommodation holds up in face of the uncertainty caused by the UK’s planned departure from the EU.
London, by far the biggest of the UK hospitality markets, had a “challenging” year in 2016, according to business services giant PwC, as “tight travel policies pre and post the EU referendum took their toll on demand”. This was exacerbated, suggests hospitality data firm Hotstats, by an extra 4,500 rooms in the capital coming on stream last year, which diluted profitability – with profit per room in the capital falling by 2.6 per cent.
In contrast to London, PwC reports that most major provincial cities fared better than expected last year (apart from crisis-hit oil-capital Aberdeen) but they – as well as London – are likely to experience a more difficult time in the months ahead, partly due to a potential slowdown in corporate travel.
Last autumn, PwC carried out an online survey of 35 UK hotel chains, collectively accounting for 169,000 UK hotel rooms, and found that “many anticipated a fall in demand from conferences and meetings as well as transient corporate travellers”. It also found that just under half of all respondents expected contracted corporate business to decrease this year, while over a third thought it would remain the same.
Yet the gloom may be overdone. The Bank of England, which in the wake of the Brexit vote, forecast that the UK economy was likely to grow by only 0.8 per cent this year, then sharply revised its estimate in February up to 2 per cent, matching last year’s actual growth.
However, anecdotal evidence in early 2017 suggests that there is likely to be downward pressure on UK room rates from a more difficult business climate.
“The hoteliers we speak to indicate that it’s been a tough start to the year, but increased competition for mid-week corporate business means there are good rates available to buyers,” points out Andy Besent, UK and Ireland managing director of hotel booking agency HRS.
Besent also maintains that travel buyers should not dismiss the independent hotels sector in their planning decisions, arguing that they can offer value. “According to our recent research, corporates can save up to 10 per cent annually in the four-star segment and 15 per cent on three-star by using independent hotels in their travel programmes,” he says.
He acknowledges that “some corporate travel buyers are naturally cautious about independent hotels” but points out that “our research – based on unique corporate traveller reviews for us of their hotel experience – indicates that independent hotels perform at least as well as chain properties, particularly in the three- and four-star brackets.”
Independent hotels, of course, have other traditional attributes that can sometimes trump a rates-only focus. They offer a greater spread of locations, away from the town and city centres favoured by the chains, which may be more convenient for some trips. They also, by definition, offer greater individuality than a chain, something that many business travellers appreciate when faced with yet another cookie-cutter chain property.
But independent hotels can also provide uneven standards which star-rating systems and Tripadvisor reviews do not always identify, leading to irate travellers taking issue with their corporate bookers on their return. Chain hotels may be bland but you get what you pay for.
Switching from a chain to an independent has paid off for the Grand Brighton, one of the stalwart conference hotels on the south coast. The Grand was sold in 2014 by the De Vere Group (now part of the Principal Hotel Company) for about £50m to a private investor, understood to be Wittington Investments, the investment vehicle for the Garfield Weston family which owns retail assets including Selfridges and Primark. Kew Green Hotels, owned by a Chinese hotel group, manages the property. Andrew Mosley, the Grand’s general manager, says that even though “we may not have the marketing clout of a big chain, being an independent hotel gives us the freedom and ability to make our own strategic decisions”. He points out that the UK market is being challenged by newcomers such as Airbnb and other disruptors, which is changing attitudes and buying behaviour. “We are seeing corporates, who would usually attach themselves to a branded chain, now considering alternative accommodation options,” he says.
Yet chain hotels do have significant advantages over the bulk of the independent sector, especially in their long-established participation in the global distribution systems (GDSs), which traditionally have been preferred by TMCs when negotiating corporate deals for clients. Moreover, when corporate travellers and travel agents are able to access the rates negotiated and stored in the GDS, it makes it more likely that compliance will be improved, especially if an online booking tool is used.
LEVELLING THE PLAYING FIELD
The game-changer in hotel distribution has been the impact of the Online Travel Agencies (OTAs), led by the two major players Expedia (Hotels.com) and Priceline (Booking.com). “In a sense, this levels the playing field for independent hotels as they are as visible and searchable online as any other hotel, at least in theory,” says Gold.
But he believes the fact that independents usually lack the sophisticated revenue management tools used by major chains means they are often forced into offering competitive rates. At the same time, they still pay high rates of commission (up to 30 per cent in some cases) to the OTAs on any business gained.
The big chains do not like paying high commissions either, but they have the advantage of having some formidable weapons in their armoury, particularly their extensive loyalty schemes – something independent hotels generally lack. But a Barcelona-based company called Wanup has sought to remedy this by developing an online loyalty club specifically for independent hotels, with more than 400 already signed up.
In early spring 2016, Hilton was the first major chain to deploy its loyalty scheme ‘muscle’ when it launched a campaign (called ‘Stop Clicking Around’) to persuade travellers to book directly to secure exclusive discounts that aren’t available to the OTAs. The only qualification was that guests had to be members of its loyalty scheme, Hilton Honors).
Hilton’s rivals, including Marriott, IHG and Hyatt, soon followed suit but the result has not been as decisive for the chains as they had hoped, and there is some suggestion the OTAs have picked up extra bookings from elsewhere, ironically including from independent hotels.
“We have also seen some of the bigger chains reverse elements of this strategy and make the same deals available to TMCs,” says Ryan Johnson, FCM Travel Solutions account manager. “The fact is that corporates still like their bookers and travellers to have their choice of hotel all together in one place, so if the rate to the TMC is the same then they will continue to use it, rather than go direct.”
Smaller companies are also less sure about using OTAs. At MDDUS, a UK medical indemnity union for healthcare professionals, travel manager Peter Macey has just started a test trial with an OTA to see whether it offers a better deal. “But we have found it has its pitfalls, specifically to do with levels of billing,” he explains. “I require all our bookings to be on full account and full bill-back. And while most hotels are happy with that arrangement, very few online booking agencies are willing to offer this without some form of fee, indeed in its fullest flexible form.”
From experience, he adds: “I find that if or when we have issues at a hotel then the more cogs involved in the booking process, the longer the issues can take to get resolved.” Wise words indeed…
INDEPENDENT HOTELS ARE FIGHTING A LOSING BATTLE: with 40,000 rooms disappearing over the past decade, the future looks difficult with the big-brand chains set to gain a market majority for the first time.
The Old Lady of Threadneedle Street may know best: the Bank of England’s latest forecast for the economy is surprisingly buoyant, given the fears over Brexit held by many in the hospitality industry.
The flurry of new London luxury hotels (the Ned, Nobu, Ten Trinity Square) is misleading: half of all new accommodation in the capital last year was created in the branded budget sector which remains the fastest growing segment.
Loyalty remains the key weapon in the major chains’ armoury in their fight with the OTAs, which so far looks a draw: but independent hotels could benefit from a new generic loyalty scheme called Wanup.