Budget hotels don’t have to feel cheap, the French owner of the Ibis chain says.
Accor SA (AC), Europe’s largest hotel company, is upgrading mattresses, pillows and digital access as consumers demand designer amenities across the price spectrum. Chief Executive Officer Denis Hennequin, who joined the Paris-based company from McDonald’s Corp. in January, is taking cues from retailers Hennes & Mauritz AB, Ikea and Fast Retailing Co.
“You might wear a Prada jacket with Uniqlo jeans,” said Hennequin, who has sold catering and casino businesses to focus on hotels. “It’s a different approach. Economy is smart.”
Accor, which generates about half its earnings from economy lodgings, is investing 150 million euros ($205 million) to expand the Ibis network by 70 percent. The chain now has more than 169,000 rooms in 1,570 hotels being branded Ibis Budget, Classic and Styles, catching up with InterContinental Hotels Group Plc (IHG)’s $1 billion makeover of Holiday Inns.
“This end of the market is great for Accor because it’s dependable,” said Ian Gamse, a hotel consultant at Otus & Co. in London, which advises Marriott International Inc. and Hilton Worldwide Inc. “Cheap doesn’t have to mean dirty or uncomfortable.”
Accor’s economy hotels outside the U.S., where it owns the Motel 6 brand, increased sales on a comparable basis by 7.5 percent in the third quarter, faster than at its luxury hotels or U.S. economy properties. European economy lodgings also had Accor’s highest occupancy rate at 77.7 percent and an average room rate of about $75, compared with $45 in the U.S.
Accor shares have dropped 35 percent in Paris this year, compared with a 13 percent decline for InterContinental and 8.7 percent for Whitbread Plc (WTB), owner of Premier Inns in the U.K.
Accor needs to “catch up” with InterContinental Hotels in terms of market share and brand recognition, said Berenice Lacroix, an analyst at Alphavalue in Paris. Ibis hotels had about 4 percent of the total European hotel chain market at the end of 2010, a figure that climbs to 6.1 percent for the enlarged economy brand, Gamse said.
There’s another factor at work, too: Consumers are increasingly consulting ratings sites like Expedia Inc.’s TripAdvisor to find hotels that are more than cheap and functional. Chains simply can’t keep dirty, badly maintained rooms a secret anymore.
Holiday Inn Express
IHG, which runs about 2,100 Holiday Inn Express locations, mostly in the U.S., is expected to report a 7 percent increase in third-quarter sales to $450 million on Nov. 8, according to the average of three analysts surveyed by Bloomberg. Accor’s total revenue rose 2.7 percent to 1.62 billion euros in the period. Premier Inn boosted first-half sales 11 percent.
Ibis hotels, currently in more than 50 countries, offer 24- hour receptions, bars and snacks, serve breakfast from 4 a.m. to noon and pledge to resolve complaints within 15 minutes or the service is free.
A single room in the central Milan Ibis for Nov. 1 was being offered for $91 on the chain’s website last week, with soundproofed rooms at the Malpensa airport location available for $66, compared to $107 at the four-star Novotel at the airport and $120 a night at the boutique hotel Mercure Milano Centro, also owned by Accor.
Investors have a “strong appetite” for economy hotels, which are more resilient than midscale and luxury hotels, said Gael Le Lay, head of hotel investment at Axa Real Estate. The asset manager has 70 Accor hotels in its portfolio, including 22 Ibis-branded properties; 25 under the Etap name, which will become Ibis Budget; and one All Seasons, to be called Ibis Styles with unlimited Wi-Fi access and flat-screen televisions.
“Renovation doesn’t create demand where there was none before nor does it affect corporate travel,” Gamse said. “But if Accor intends to spend the money itself, rather than trying to persuade owners of franchised properties to foot the bill, that’s probably because they think it’s worthwhile.” It may improve occupancy and won’t hurt operating margins, he said.
Franchisees, which had already committed to room upgrades at two of the three economy chains, are likely to approve of grouping Ibis.
“By pulling together three fragmented brands, we will come up to scale much faster,” Hennequin said.
Lower-priced hotels are less likely to suffer in an economic crisis, said Guillaume Rascoussier, an analyst at Oddo & Cie. in Paris. The euro zone economy is forecast to expand 0.7 percent next year, less than half the pace projected this year, according to 21 economists surveyed by Bloomberg.
“Prioritizing economy hotels, which remain the distinguishing factor for Accor, looks like a smart strategy,” Rascoussier wrote in a note to investors. Accor can control operating costs and predict performance more accurately with economy than upscale hotels, which tend to have more non-room facilities, such as conference and meeting spaces, with lower margins, higher staff costs and less stable demand, Gamse said.
The same customers may stay in a range of hotels depending on whether they’re travelling on business, with family or for a special occasion, Accor said.
“You can’t just say that economy brands are for poor people, and upscale brands are for rich people,” Gregoire Champetier, Accor’s global chief marketing officer, said at an investor day on Sept. 13. “That’s a thing of the past.”
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