IHG’s Newest Product: The Strength of the Midscale

4 min read

After a long wait, Intercontinental Hotels Group (IHG) has finally revealed their new brand, Avid. This is an incredibly important move because it targets one of the most successful chain scales in the hospitality industry – the midscale transient travel brand. According to Intercontinental Hotel Group (IHG), the worldwide hotel company wanted to provide an excellent option for midscale travelers:

With the extended-stay Candlewood Suites as the only midscale brand in the company’s portfolio, IHG was not addressing the needs of an estimated 14 million travelers who could spend about $20 billion in roomnight revenue. – Elie Maalouf, CEO of the Americas, IHG

Did you catch that? 14 million travelers who could spend about $20 billion in room night revenue. The midscale market is extremely critical to the success of hotel companies seeking to expand their portfolio, and understanding that midscale market is incredibly important to hotel investors looking to make a smart investment move.

The new Avid product by IHG. Source: IHG

Why is the midscale market so foundational?

As mentioned in one of our vlogs, there are different types of chain scales that target different demographics of travelers.

The type of amenities and price point of a luxury hotel like the Ritz-Carlton is vastly different from the available amenities and price point of an economy property like a Red Roof Inn. At your Ritz-Carlton, you’ll have a pool and a hot tub (maybe several of each). Expectations include 24/7 concierge service, a spa, and at least one in-house restaurant. In lower chain scales, you’ll find just the basics: free wi-fi, a clean room, and maybe free breakfast. The price of a room sometimes can also reflect the amenities that it offers.

RevPAR Change - Hotel Investments

Midscale scale hotels have been on the rise faster than most other chain scales, while establishing higher long-term value than economy scale products.  Source: HVS

Here’s where midscale products come into play. Midscale hotels offer a happy medium between both ends of the hotel chain scale range. Midscale hotel assets are more resistant to declines in the national economy and downturns in the hotel cycle. When people are short on money, often the first things to go are the luxury items, or the “wants”. A family faced with a tighter budget may opt out of the Ritz Carlton, and will look to more affordable products, including midscale hotel products. On the other end, midscale hotels also offer a solid standard of quality higher than their economy hotel counterparts, and travelers (especially small business travelers) will definitely pay for that nicer midscale room as opposed to an economy room if they can afford it. This ability for midscale hotel products to do well in both thriving markets and struggling ones makes them a sturdy investment that is more resistant to fluctuations in the economy.

In addition, midscale hotels are often popular with business and corporate travelers, who make up the majority of hospitality revenue annually. Midscale products like IHG’s Avid provide the quality that many small businesses are accustomed to during business operations: wi-fi access, free breakfast, and plenty of conference and meeting space where they can meet clients and business partners.

As we’ve mentioned before, hotel investment options should always be carefully analyzed to make sure that it is an ideal investment for the market. Depending on the location, economic setting, and other market characteristics, it might be a strong option to invest in an upscale or even luxury hotel. In other markets, investing in an economy brand could be the best option. In Schaumburg, EquityRoots decided on a dual-brand model, one that combines the midscale market strength of a Holiday Inn Express combined with an amenity packed full-service Holiday Inn product with an in-house restaurant and bar component. For Schaumburg’s market, this strategy offered a strong amenity for surrounding businesses that demanded additional midscale market options.

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IHG’s launch of Avid makes this a good brand option for developers looking to offer a more consistent lodging product in markets where economy or independent properties are prevalent or in markets where Holiday Inn, Holiday Inn Express, and Staybridge products already exist and are running annual occupancy levels above 80%.  Prematurely investing in new brands before more established brands have recorded solid performance can be dangerous.  Another confusing part can be what to do if you build a new construction Avid in a market that already has older more established brands with lower cost basis.  It will be hard to sell rooms for a higher price, even if your property truly costs more to build than older properties, therefore I think it’s important to note that it is most advantageous to develop Avid only if you own the other IHG flags in the market.  Some brands like Hilton have already discovered this fact, and have created a priority method to develop newer flags like Home 2 and Tru, giving preference to the existing Hampton Inn franchisee in the market.

Sources:

Fox, Jena Tesse. “IHG launches new Avid brand to attract midscale travelers, developers.” Sep 18, 2017. Hotel Management.

“What’s driving customer loyalty for today’s hotel brands?” Consumer Intelligence Series. PwC.

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Do Brands Still Matter in 2017?

5 min read

Are Millennials Blind to Hotel Brands?

Do brand preferences still matter in the Millennial generation? This question comes up because Millennials have shown an emerging taste for untraditional, decentralized, and independent local providers of goods and services in what is commonly referred to as the “sharing economy”. The sharing economy has undoubtedly made an impact across multiple industries.  Sharing economy leaders like Uber and Airbnb are estimated to grow to $335 billion by 2025. This significant growth leaves many hoteliers and investors alike wondering how the hotel industry will continue to change moving forward. Many are also asking if hotel brands matter at all? After all, Millennials seem to be happy with online travel agents (OTA’s) where brand loyalty doesn’t matter, or online platforms like Airbnb which reveal a preference for more communal, local, and location-authentic lodging experiences.

Are Millennials Blind to Hotel Brands?

Despite higher preferences than their older counterparts, Millennials still show strong preferences for branded hotels.

The travel and hospitality marketing firm MMGY Global launched a study hoping to answer questions about these changing hospitality preferences among American travelers. (You can check out the full article here.) Peter Yesawich from MMGY Global has some great insights worth checking out, and below is a snippet of that report:

MMGY Global

Source: MMGY Global

Highlights from the Study

Our team at EquityRoots also wanted to take a look at the study results to find a conclusive answer on whether or not hotel brands will still matter into the future.

In short, yes – brands still matter, and investing in the right hotels can still lead to a fruitful real estate investment.  It’s true that Millennials still show more interest in a shared economy, especially compared to other age demographics. Knowing this, are hotels still solid real estate investments? Yes, of course they are. Millennials’ preferences are still similar to their older counterparts, including high preferences for full-service flags like Hilton, Marriott, and IHG (77%) as well as all-suites properties (70%). Looking at cumulative interest across all age groups, we see that big brand hotels are still preferred by a vast majority.

The rise of the sharing economy doesn’t take away from brand loyalty. Let’s take a look at our Millennial Airbnb travelers as a case-in-point. Bed and breakfast operations have existed way long before Airbnb (and even before the rise of hotel room standardization in products like Hilton and Holiday Inn). However, brands like Airbnb and HomeAway are streamlining alternative lodging, gaining strong loyal users. Even though Airbnb users are staying in different hosts’ accommodations from trip to trip, many Airbnb users continue to use only the Airbnb platform to find those rooms. In other words, they are familiar with the brand Airbnb and choose to book through there the same way that many travelers today maintain degrees of loyalty among the Hilton or IHG or Marriott. Despite the huge variance that might exist on Airbnb’s platform, users have come to Airbnb repeatedly with some sense of standardization and expectations.

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Hotel Brands Continue to Evolve

The question now becomes “how do current hotel brands adjust to capture the sharing economy audience?” It’s a question that hotels are already taking steps to answer including by:  

– Developing new hotel products like Marriott’s Moxy, Hilton’s Tru, and IHG’s Avid that target the emerging Millennial preferences

– Partnering with Airbnb to provide food and beverage solutions

– Offering “local experiences” and trips that are commonly utilized by the sharing economy.

The hotel investor can rest at ease. Hotel products from strong, established hotel brands aren’t going away anytime soon. Corporate travelers and companies still prefer lodging with hotels, considering hotel brand benefits such as loyalty points and more established quality standards across a wealth of hotel franchise locations. If anything, the hotel industry is thriving, continuing a trend of growth since 2010 as hotel demand increases faster than hotel supply. On top of this increasing demand, hotel companies continue to innovate and appeal to travelers, whether it be through adopting new food and beverage options, creating more communal living arrangements or utilizing the latest technology to provide travelers with instant check-in and other amenities. As the hotel industry continues to evolve, hotel investors will need to keep a fresh eye open for both strong performers in the present day, as well as potential performers in the future.

Sources

“2017 Set to Bring Modest Growth for U.S. Hotel Industry.” Zacks Equity Research. Jul 17, 2017. NASDAQ. 

“Global Portrait of American Travelers.” MMGY Global.

Moyer, Liz. “Hotels, Feeling the Pinch of Airbnb, Promote Local Experiences.” May 29, 2017. The New York Times. 

Simon, Elaine. “Food-and-beverage an opportunity for hotels, Airbnb to partner.” Sep 22, 2017. Hotel Management. 

Yaraghi, Niam and Ravi, Shamika. “The Current and Future State of the Sharing Economy.” Brookings India. 

 

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