INDEPENDENTLY BRANDED HOTEL MARKET OVERVIEW

 

With loyalty programmes continuing to grow in importance to retain customers, the global brands appear to be determined to own a brand portfolio that caters for all its customers’ needs from low-cost to luxury. Ownership of the customer is a key battle ground as the global brands compete with online travel agents (OTAs) such as Expedia and booking.com to secure the initial booking transaction.
Meanwhile, as the large global players race each other to become ever larger and focus their attentions on the OTAs, the independent sector has been developing and diversifying. Brands have been growing by targeting specific parts of the market, in some cases seemingly inventing a market, such as ‘affordable luxury’ or ‘poshtels’, and being laser focussed on creating their customer proposition for this market.
These developments have been supported by the increasing trend for consumers to take a keen interest in their choice of hotel regardless of whether they are travelling with work or booking their own holiday. This desire to take more control has then been aided by the democratisation of rating data through the likes of TripAdvisor. Now, once you decide where you want to stay, you can see which hotels are rated highest rather than having to rely on the safety of a global brand. Finally, while the global brands are competing head-on with the OTAs to capture booking activity, the independents have been able to utilise the OTA platforms to reach a global audience.
It is an exciting time for the independent sector as demonstrated by the success of the leading groups and the launch of the latest challengers. This vibrancy is sure to attract investors to the sector and drive M&A and transaction activity in the coming years.

Examples of leading brands
The European independent hotels market is incredibly diverse with successful businesses across the different hotel sub-sectors.
Here’s a snapshot of some of the key players:

Limited service
Motel One is a German budget design hotel chain with over 50 hotels right across Europe, including five in the UK – London,
Manchester and Newcastle. Each hotel has a unique design based on features of the local area. By 2017 Motel One plans to expand its network to 74 hotels with 18,000 bedrooms.

Affordable luxury
Dutch chain citizenM operates eight hotels in the Netherlands, UK, France and New York. The chain advertises itself as giving ‘affordable luxury for the people’. All hotels are designed with a unique compact style with large beds and windows and ‘mood pads’ to control amenities from one device.

Full service
The Swedish Scandic Hotels chain operates over 200 hotels with over 40,000 bedrooms in northern Europe. Scandic Hotels are advertised as blending contemporary design with modern technology – the chain was the first in the world to introduce online checkout for all its hotels.

Luxury
Firmdale Hotels is a collection of eight luxury boutique hotels in London and one in New York. All hotels are heavily design-led, with award-winning interior designer and co-owner Kit Kemp having styled each room uniquely to reflect a fresh English modern style.

Poshtels
Generator Hostels is a rapidly growing upscale hostel chain with locations across ten countries in western Europe and plans to open its first American property in 2017 in South Beach, Miami. With over 8,600 beds, the chain targets millennials attracted to design-led but affordable group accommodation.

This is an exciting time to be an independent hotel operator in the UK and beyond and the market is continually evolving and growing. The global brands continue to enjoy major advantages due to their scale and brand recognition but the best independent operators have demonstrated that significant success can be achieved despite this. Given the growth prospects and returns on offer we would expect this market to continue to attract investment and be an active source of M&A and transaction activity.

 

Challenges facing independent hoteliers

Although being independent undoubtedly has its benefits, there are a number of challenges facing operators competing against larger branded hotel chains. Some key challenges are as follows:

The benefits of scale: There is no doubt the global brands have a huge advantage due to their scale. For the biggest global firms they can offer rooms in locations to match the travel needs of their teams with the comfort of consistency from their brand standards. They also have the added draw of their reward schemes that can heavily influence the buying choices of frequent travellers. This inbuilt tendency to book the global brand often means the independent needs to outperform (either on price, service, style or location) in order to just hold their own.

Remaining fresh: Independent groups do not have the large stable of different brands that global groups can deploy. This means they have to work very hard to ensure that their focussed product is continuously invested in to ensure it remains relevant and fresh. This requires an investment in the form of capital investment in properties and the brand/offer and also in creative development to stay aligned with the changing tastes of customers.

Distribution: Using OTAs comes at a price. OTAs can charge over 25% of revenue as commission and often dilute the strength of relationship with customers. The best independent operators actively manage their distribution channels and use OTAs as one option, rather than the only option – social media for example is becoming increasingly important for referral traffic.

Access to the best sites: Securing the best sites in popular cities is an incredibly competitive process. Some of the most successful independent groups seem to have had the knack of spotting an up-and-coming location or finding redevelopment opportunities off-market in order to overcome this challenge.

Financing: Equity investors and lenders have typically been drawn to the global brands on the basis of a perceived lower level of risk compared to independent brands. This places even more emphasis on the ability of the independent to clearly articulate its USP and demonstrate how it can generate higher returns than the globally branded alternative.