Budget hotel concepts will transform the hotel industry in Asia

Posted on June 26, 2010

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Travelling to the East has started in the beginning of the 20th century with the first hotels becoming famous for being the base of some legendary adventurous travel writers such as Graham Greene, Somerset Maugham or Joseph Conrad. The Oriental hotel in Bangkok, Grand Hotel d’Angkor in Siem Reap, The Raffles in Singapore, The Strand in Yangon, The Metropole in Hanoi.
The hotel industry has then for a large part built itself on the foundations of these legendary hotels hosting the elite through out the century. The level of service they all offered (and still now do) has been the source of inspiration for a generation of hotelliers who have built their ideals on these foundations. For them, and we have to respect that, Asia is the land of hospitality excellence. The last region where the industry can still afford to (mostly due to cost of manpower) deliver a luxury experience and where guests can be treated as travellers in its noble sense as opposed to customers.

The travel industry has grown
Travel is not anymore the private hunting ground of the elite since it opened up to anyone and everyone in the 90’s with the increase of leisure time. Irrespectively of the destination and time of the year. Anyone wants to travel, needs to travel and can travel. The number of inbound travellers to Asia has grown by few 1000% and in any city or destination the price travellers are willing to pay for 5-star accommodation has sharply decreased. This new generation of travellers are not necessarily looking for a hotel experience but for a comfortable place to stay overnight, limited to the basics – done well. Comfortable hotel accommodation is not considered luxury anymore.

The concept of budget hotels is not new to the western world. The US have invented the motel concept in the 60’s, which was adapted to a European environment in the 70’s with creation of brands such as Ibis hotels or Formule 1.
Asia has for many years resisted very hard against that trend. For no real reason because domestic and intra-regional travellers have been for a long time now an ideal audience for that type of limited service concepts. But the hotel industry is in general very conservative and hermetic to innovation that rationalise the guest experience. And budget hotels a blasphemy.

I have been personally involved in the creation of four limited service hotel brands over the past 18 months. One in Indonesia (chain with 8 hotels under development), two in Thailand and one in India. Each time, the brief has been the same – creating an innovative brand that only offers what the customer is willing to pay for a good night sleep so that everyone and anyone is allowed to travel. No frills. So for the first time, the room rates were not positioned according a the level of service, but the service and unique selling proposition have to match a predefined rate. So if I am after a market segment that is willing to pay USD 40.00 a night, I have to build the best product possible to be able to offer that rate.

How do we get there?

The four main innovative aspects the budget hotel brands are looking at now:
+ Drastic reduction of construction cost – Prefab structures.
+ Limitation of the hardware to what the customer needs during his stay – a bed, a TV, a hot shower and a breakfast.
+ Streamlining of processes – booking, check-in, check-out, limited yet efficient service.
+ Elimination of non-profitable touched points (eg: multiple food and beverage outlets)
= Sharp reduction of the rates and increase of growth operating profit

For everyone who is intimately linked to Asia, this is a mini revolution that will re-shape the industry within 5 years.
It is a big change of thought process in the industry and not long until budget hotels are classified under the commodity product category.

Who are the players?

The strange thing is that Accor has been in Asia since the 80’s with several leading budget hotel brands up their sleeve but never went for it in a big way. They could have had a massive competitive advantage by having concepts ready to be rolled-out and be several years ahead of the competition. But whether it is due to a superiority complex or by fear to fight the norms of the industry, they never really made the move.

Starwood is now making some timid moves with Aloft and Four Points by Sheraton but, similar to Accor, Starwood is probably afraid of the consequences that a success could have on the rest of their network. USD200.00 for a Sheraton vs. USD100.00 at Four Points. Some company CFOs will quickly do the maths. Though Starwood has yet to enter the real budget hotels segment.

Tune Hotels (subsidiary of leading budget airline Air Asia) might be the one that is going to shake up the entire thing and create the domino effect with room rates starting at USD1.00 a night (a marketing trick but still..). Their first hotel opened only in 2007 in Kuala Lumpur (Malaysia). They now have over 60 hotels lined up in Malaysia, Indonesia, India, Thailand, Bangladesh, Vietnam, Philippines, Australia and United Kingdom. It is interesting to see that none of the top executives in the company have hospitality background (mostly from the music industry). Food for thought

By 2015 the industry in Asia will have been transformed. I have said in an earlier post that it would take one person to challenge all of this . This person might be Tony Fernandes, Group CEO of Air Asia. Big guts and big bucks.

Don’t get me wrong, there will always be room for a luxury segment offering exceptional service to elite travellers but it will force all of the lower tiers (upscale and midscale brands) to seriously look at their concepts because all the rates are going to be pulled down. To be able to enjoy similar gross operating profits there are compromises to be made. That is inescapable.

Fabrice Burtin – June 2010

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