The most contentious part of the hotel ecosystem in coming years won’t involve fighting over the highest-paying customer.
Instead, it’s already playing out at the more affordable end of the hotel food chain.
The biggest hotel companies, such as Marriott International and Hilton, historically focused on brands in the upper-midscale segment (like Hampton and Fairfield Inn) and above. When inflation first surged amid rising gas prices, hotel executives pointed to their higher-end brand logic as a strategy because their typical customers were in a more secure financial position and, thus, a little more immune to price increases.
That logic appears to have gone out the window in recent months.
Marriott plans to acquire Mexico-based City Express, a chain of affordable midscale hotels across Latin America. Marriott’s push into midscale means duking it out with brands like Ramada by Wyndham, Tru by Hilton, Avid by IHG and Sleep Inn from Choice Hotels.
The biggest head-scratcher is Hilton’s push into the premium economy segment with Spark — a brand expected to open its first hotels in the U.S. later this year. Hilton CEO Christopher Nassetta indicated it could eventually have the highest hotel count of any Hilton brand. It will largely achieve that goal by having more existing hotel owners convert their properties into Spark’s branding requirements.
What’s driving the trend? Think of it as adding a new level to the loyalty program food chain. Economy and midscale brands have lower nightly rates, meaning they will attract younger travelers who aren’t yet able to shell out for something like a Ritz-Carlton or a Waldorf Astoria.
Providing an option to these travelers means they will be exposed to the hotel company’s loyalty program earlier. They are more likely to stick with it as they get more disposable income for travel.
“If you look at that customer base, at least half, arguably more than half, of that customer base are customers that are early in their travel lives that are going to grow up and do other things,” Nassetta said on an investor call this month. “The sooner you get them into the system and building loyalty with them, the better off you are.”
“I mean it’s not sexy, OK? It’s not as sexy as lifestyle or luxury,” he added. “But in terms of an opportunity to be a value contributor in the billions of dollars for this company and its shareholders, I’m as excited about this as anything else we’ve done.”
Inside the battle for budget travelers
The chatter at the recent Americas Lodging Investment Summit in Los Angeles swirled around the idea Hilton was coming for the business of Wyndham and Choice Hotels — two hotel parent companies with a significant presence in the budget and economy hotel space.
Wyndham has brands like Super 8 and Days Inn while Choice Hotels owns brands like Econo Lodge and Rodeway Inn. Hilton leaders are focusing on selecting only the highest-quality hotels to fold into Spark, potentially dealing a blow to Choice and Wyndham development teams looking to do the same.
But the leaders of these companies don’t appear to be losing sleep over going head-to-head with Hilton or Marriott.
“When we look at the quality of what we’re delivering to our hotels and we look at that marketplace, be it midscale or economy, we are winning the better quality hotels that are out there,” Choice Hotels CEO Patrick Pacious said on an investor call earlier this month. “From the standpoint of the competitive nature, we’re winning hotels that we want to win.”
Wyndham CEO Geoffrey Ballotti indicated on his company’s investor call this month that winning over budget hotel owners and the clientele isn’t as easy as just launching a new brand.
He noted that not only is Wyndham more affordable to travelers than some of its competitors, the company’s budget brands are also cheaper to operate on the ownership front. Wyndham’s renovation and build-out costs related to the company’s brand standards run between three and five times less than “many of our larger brand peers,” Ballotti said.
“We have the most recognized economy brands in the space, and we’ve been in this space for over 30 years,” he added. “We know these customers. We know these owners, and we know it’s important to both.”
The budget battle is on.