It's Time for Accor to Get Some Respect

The French hotel chain is scoring big with budget-priced inns in Europe and the U.S. -- and outpacing upscale rivals like Hilton and Marriott

Don't expect luxury at the Ibis Euston, a 380-room hotel on a busy street near London's Euston train station. There's no room service, and instead of a gym, guests wanting to exercise are offered directions to a nearby park. But the rooms are modern and reasonably sized, and the lobby is tastefully furnished. Even more attractive are the prices: $111 a night on weekends and $127 on weekdays, compared with $200 and up at most full-service London hotels. Breakfast isn't included, but there's a buffet for less than $10. "It's a good location, and it's value for money," says Caroline Hendry, a legal secretary from Hertfordshire, checking into the Ibis for a few days' sightseeing.

Satisfied customers such as Hendry have helped Ibis' owner, Paris-based hotel group Accor, ride out a brutal industry downturn. With more than 90% of its business coming from low- and mid-priced hotels including Europe's Ibis and America's Motel 6 and Red Roof Inns, Accor has held up better than rivals such as Hilton Group, Host Marriott, and InterContinental whose more upscale hotels are suffering from a steep drop in luxury tourism and high-end business travel.

Of course, no travel company can escape unscathed this year. A combination of global economic malaise, SARS, and the war in Iraq have dampened bookings across the board. On Sept. 10, Accor posted first-half earnings of $118 million, down 52% from the year before. Sales dropped 7.8% to $3.7 billion. The company admitted it doesn't foresee much improvement in the second half, issuing a full-year profit forecast of $557 million, down 29% from last year and well below most analysts' expectations.

CEO Jean-Marc Espalioux is taking the downturn in stride. He's sticking with an ambitious plan to open 180 hotels this year, bringing Accor's total to about 4,000 worldwide. That includes Eastern Europe, where Accor is introducing its budget brands as well as midscale hotels such as Mercure and Novotel, and China, where Accor plans to open its first budget hotels this fall. But most of the planned expansion is in Western Europe, where Accor is already the biggest hotel chain by far. "During this period of crisis, we're taking the opportunity to strengthen our market leadership," he says.

Bravado? Perhaps a bit. But fundamentally, it's a strategy that makes sense. Despite this year's gloomy outlook, Accor's core European budget hotel business is lucrative and has plenty of room to grow, even though it has doubled in size over the past decade. Until recently, most budget accommodations in Europe were small independent hotels or bed-and-breakfasts. But Accor, starting with the Ibis chain in 1974, began changing all that. Growth has accelerated sharply with the rise of discount airlines such as Ryanair that have put a spur-of-the-moment trip to London or Paris within reach of Europeans who couldn't have afforded it before. "Budget or limited-service hotels are just taking off in Europe, and no one except Accor is really catering to it," says Anna Barnfather, a London-based hotels analyst at Bear Stearns & Co. Occupancy rates at its Europe budget hotels are 70%, compared with only 63% at its U.S. budget properties. With only $3.3 billion net debt, Accor also has the financial strength to expand.

Still, the markets expect some tough slogging. Accor shares, after climbing more than 30% since the beginning of the year, have fallen back more than 10% in recent days. Espalioux says Accor is working hard to lure back customers by offering promotions for weekend getaways and last-minute Internet bookings, and courting business travelers from small- and mid-size companies. Merging the purchasing and back-office operations of Accor's European hotel chains should cut costs. By sticking to what it does best -- the unglamorous budget-hotel business -- Accor looks set for a nice long stay.

By Carol Matlack in Paris, with Laura Cohn in London

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