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.
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
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.
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.
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.
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.
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.
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.
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
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.
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