Hospitality

Hospitality's #1 Pick

Low overhead keeps limited service ahead of the game.

When Choice Hotels International wanted to grow its Comfort Inn brand of limited-service hotels, the company found few primary cities where the chain didn't already exist. Rather than building more hotels in submarkets where it was represented, Choice Hotels took a new direction locating a property in Macon, Mo., population approximately 5,500.

"There was a conscious decision [at Choice Hotels] to move into small towns where there hasn't been any new construction recently," says David Pepper, the company's vice president of franchise sales and development in Silver Spring, Md. Until recently, only mom-and-pop and independent hoteliers chose such out-of-the-way places. But due to oversaturation and cost factors, many limited-service brands now are expanding into small markets.

Defining Limited Service

Limited service encompasses a wide variety of hotel chains, but generally refers to midscale hotels without food and beverage services. Food service is not very profitable for most hotels due to the high supply and labor expenses associated with food and beverage service, says Robert Mandelbaum, vice president and director of research information services at PKF Consulting's Hospitality Research Group in Atlanta. PKF's year-end 2003 estimates show that full-service hotels had a 23.3 percent profit margin versus limited-service hotels, which have a profit margin of 32.5 percent. "The vast majority of the difference in profit margins is attributed to whether or not the hotel has food and beverage service," he says.

Smith Travel Research's limited-service category also includes economy chains such as Econo Lodge, says Bobby Bowers, STR's senior vice president of marketing in Hendersonville, Tenn. PricewaterhouseCoopers differentiates the midscale without food and beverage and the economy categories as different levels of limited-service properties.

A precise definition of limited service is difficult to find. "The Courtyard by Marriott, in some people's eyes, is limited service, but it is also an upscale hotel, so it is not truly a limited-service property like Hampton Inn," says Bruce Ford, vice president of sales and marketing at Lodging Econometrics in Portsmouth, N.H.

Though industry definitions of the segment vary, limited service hotels are gaining popularity because they are easier and quicker to build than full-service properties, Ford says. For example, limited-service hotels opening today in Miami were planned in late 2002 and 2003, while luxury hotels that have opened in the past few years were planned before 2001.

Limited-service hotels also have lower operating expenses because they are very efficient, Ford says. They require less staff because they are newer and have better operating technologies, such as advanced property management software and more-efficient check-in processes.

Where Are They Going?

Choice Hotels' move to Macon is not without precedent, as hotel companies have included secondary and tertiary markets as part of their strategy for a number of years. "Holiday Inn and Ramada have been in small towns for 30 years, but the newer brands are midpriced without food and beverage," says John B. Corgel, a professor at Cornell University's School of Hotel Administration in Ithaca, N.Y.

"Choice Hotels has new brands and prototypes that fit into these smaller markets," Pepper says. "At a Sleep Inn, where room rates average $58, it only costs $35,000 per room to build, compared to a Comfort Inn, which costs $45,000 per room and rates start about $70. The construction cost savings result from smaller rooms and public spaces than are found in larger markets, " he says.

But limited-service hotel companies aren't looking just at small markets for new hotels. They also are scouting downtown sites in major cities, a strategy change from placing hotels only in suburban locations near expressway exits. For example, Hilton Hotels is building a large Hampton Inn in downtown Washington, D.C., and a 125-room Holiday Inn Express opened in downtown Pittsburgh last year, Ford says.

Sales Slow Due to High Profits

"Prior to first-quarter 2004, sales transactions during the past two years were slow because of the depressed hotel market," Ford says. " In 2003, low interest rates generated the few transactions involving limited-service hotels," he says. "Now, the limited-service category is doing so well operationally that no one is selling, except owners of the bad ones," Ford says.

"The high profit margins for limited-service hotels relative to other kinds of hotels and the higher incidence of individual ownership of these hotels, rather than corporate ownership, means that most owners are not looking to sell their assets, "Mandelbaum says. In 2003, limited-service hotel properties' profit margin of 32.5 percent bested the average of 26.3 percent for all hotel categories, according to PKF. Institutional investors generally are more interested in upscale properties than limited-service hotels, but some institutional investment sales have occurred.

Marketing Efforts Boost Returns

"Limited-service hotel marketing is now more aggressive than in the past," says Robert A. Zache, CCIM, president of Central Place Real Estate in Middleton, Wis., who works with Hilton and Marriott franchisees. "Due to competition and overbuilding, operators perform numerous customer base analyses, use direct-mail advertising, and conduct sales blitzes, during which a team from a home office management company goes out to meet and greet their best customers," he says.

Overall, limited-service operators have more direct contact with customers than in the past. "Basically, operators try to make people feel at home as much as possible," Zache says. To emphasize guest satisfaction, limited-service hotels are incorporating more amenities to compete with full-service brands. Swimming pools, whirlpools, and exercise rooms are common new amenities, and limited-service hotels have larger, more inviting lobbies than in the past, he says.

However, new amenities and facility improvements are costly and usually translate into higher room rates. ?At the same time, investors are probably taking a little less return on their money, but they are getting a more solid return because the properties are more competitive,? Zache says. ?Returns on investments for limited-service hotels are all over the map, but [operators] shoot for 15 percent to 20 percent.?

Hortense Leon

Hortense Leon is a Miami-based freelance writer. Limited-Service Hotels by the Numbers This year, the average daily room rate of midscale hotels without food and beverage will grow 1.9 percent from $68.48 to $69.77, and the economy segment\'s ADR will increase by 1.1 percent, according to PricewaterhouseCoopers\' lodging forecast. Revenue per available room for midscale hotels without food and beverage increased slightly from $39.19 in February 2003 to $40.99 in February 2004, according to Smith Travel Research. Occupancy rates have shifted little in the past three years, from 60.1 percent in February 2001 to 59.5 percent in February 2004. Location is one of the reasons that occupancy rates and other economic indicators haven\'t changed much in the limited-service segment in the last few years. ?The key thing to know about [hotels in] secondary markets is that they have been somewhat sheltered from the big [economic] downturn of 2001 and 2002 because they get more drive-to, rather than fly-to, traffic,? says Bruce Ford, vice president of sales and marketing at Lodging Econometrics in Portsmouth, N.H. Limited-service hotels have accounted for 40 percent to 45 percent of non-casino new hotel openings each year since 1999, the peak of the hotel boom, according to Lodging Econometrics. Of the 592 non-casino hotels that opened in 2003, 262 were limited service, or 44 percent. In 2004, that ratio will stay the same, as 256 out of 582 non-casino hotels expected to open will be limited service.

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