Budget Boom or Budget Bust?

Does “budget” mean lower cost?

19 May 2016
According to a report from JLL’s Hotels & Hospitality Group and promotional agency London & Partners, since 2012 more than 50 percent of the 18,000 hotel rooms opening in London have been in the budget sector. Budget brand share in the UK hotel market is expected to increase with the two major players – Travelodge and Premier Inn – continuing to promote accelerated growth over the next few years.
So, why is this sector seeing such strong engagement from hotel operators within the UK market and does “budget” mean lower cost?
The best place to start is with what a hotel in the budget sector means to the traveller. Typically the services provided will be limited. So, for example, if you arrive after 10pm you probably won’t have access to an extensive menu of food you would see at a full service hotel, and if there is prepared food available it certainly wouldn’t be delivered to you. Similarly, during normal operating hours you may be able to access services but these will probably be provided by a limited number of staff. These two examples talk to why hotels in this sector can be attractive to hotel operators – the cost of staffing is substantially lower than the level of employment you need to provide in a full service hotel.
This is where historically a “budget” hotel could charge a substantially lower rate – simply because their overheads were far lower. However, over the last few years some of budget brands like Premier Inn have built upon the confidence their brand delivers to travellers by yielding prices upwards, to the extent that we now see Premier Inns charging the same kind of prices as full service four star hotels. What you have to remember is that this premium isn’t getting you the additional services and flexibility that you will get at a full service hotel, and ultimately as a business traveller you will typically be travelling at a variety of times which may mean that a limited service hotel doesn’t provide the services you need when you need them.
The upward trend in cost with Premier Inn has opened up the market for lower cost suppliers. Certainly the investment from Travelodge into its portfolio over the last few years now provides a confident limited service brand at the type of price you would expect, but there has also been a growth in supply from the likes of Airbnb which would by and large pitch at a lower cost than Premier Inn. There’s a case for putting Airbnb into this limited service budget sector, simply because the services you can access are not going to be consistently flexible. Furthermore, for any company paying for employee travel, there needs to be a confidence in the service being provided as led by duty of care to a traveller which as fundamentally a leisure based entity, Airbnb cannot really provide.
So, where does this leave us? The growth in the budget sector sees an increase in the rooms available with a product ultimately focused on yield which can demand an excessive cost per night. Commercially this may make a budget sector hotel a possibility where a developer may not have considered a hotel to be viable. The truth however is that any market works best where there is competition, not solely based upon price, but also in the services provided, so the risk is that this kind of growth in limited service hotels may result in “budget bust” for the business traveller which ultimately drives up cost and impacts profitability.
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