Midmarket makes money.

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Author: Koss-Feder, Laura

Midpriced hotels have turned the comer and become significantly more profitable. The segment's strong performances--in occupancy, demand and rate increases--are due to several factors. A healthier economy is enabling more travelers, particularly on the leisure side, to trade up to midmarket hotels. Many older midmarket properties have been renovated, and thus have become better able to compete with some of the newer economy brands.

In addition, as rates go up, the price differential between the segments increases. This means that for many travelers, midmarket hotels have become a better value than upscale properties. A few years ago, the rate difference between upscale and mid-priced hotels was small, and some travelers opted for the upscale hotels.

Midpriced hotels also now offer services that business travelers and meeting attendees need. Some of these travelers, who formerly only stayed at upscale properties, have found that midmarket hotels suit their needs just as well.

The rebranding or introduction of some new midpriced brands--like ITT Sheraton Corp.'s Four Points Hotels and Hospitality Franchise Systems Inc.'s Wingate Inns--also demonstrates that there is faith in the continued growth of the segment, industry sources said.

"Midpriced is a good segment to be in if you have the right capital costs and invest back into your property," said Scott Brash, an Miami-based independent hospitality consultant. "Then, you are able to get better rates and compete effectively. The midpriced segment is now better able to retain guests, and not lose them down to the economy segment or up to the upscale segment."

Ted Mandigo, partner and director of national hospitality services at BDO Seidman in Chicago, said that midmarket hotels can do reasonably well in terms of rates and occupancies, since they have the meeting space and f&b capabilities that allow them to host small meetings. Such business remains at a high growth level for hotels.

"The limited-service properties that have popped up like mushrooms cannot host these functions," Mandigo said.

Midmarket-hotel executives said they believe that they are poised for the future. Many are toying with their f&b outlets, trying new concepts that are radically different from the traditional hotel restaurants. Others are even adding new services and amenities, as long as they are not labor-intensive and won't drive up room rates too much.

"More people are trading back up to full-service hotels, and at the same time these older properties are now renovating," said John Russell, president of Days Inns. "There are also no new midpriced, full-service hotels being built. This is good for occupancies."

Midpriced operators are more creative in how they run their f&b outlets, Russell said. Increasingly, properties will lease their restaurant space or be located next to a restaurant on one plot of land. Mid-priced hotels need to focus their attention on providing the necessary services for business travelers, such as modem hookups and better lighting, he said.

"These services are now being expected by business travelers and must be provided in order to remain competitive," Russell said.

Days Inns properties attract a mix of 40 percent business travelers and 60 percent leisure travelers.

"The future of the midpriced segment is very bright," said S. Kirk Kinsell, president, franchise, at ITT Sheraton Corp.

Sheraton operates the midpriced Four Points Hotels and Sheraton Inns brands. The new Four Points brand is a rebranding and updating of the existing Sheraton Inn midpriced concept.

"Price is less of an issue than it had been, and people feel a little more able to pay for more service," Kinsell said. "While they're not throwing money away,they are willing to pay for something that they see as being price/value-oriented."

In the future, f&b operations in mid-priced hotels will need to be operated to make money, rather than losing money, as in the past. These outlets will be operated in one of three ways, Kinsell said. In one scenario, a brand-name restaurant could be located adjacent to a hotel on one tract of land. Second, the hotel could have its own restaurant, with a significant amount of catering business geared toward meetings and other kinds of group travel. In the third case, the hotel could have a combination of the two, with both a brand-name eatery and a fair amount of catering business.

After the downturn in business during the past few years, midpriced hoteliers have realized that they have to spend money to make money and bring back some services to their properties, Kinsell said.

"They just have to make sure not to do this to the detriment of their guests by raising rates too high," he said.

Choice Hotels International plans to enhance the amenities it offers in its Quality Inns' special Choice rooms, said Peter Jordan, vice president of Quality Inns, Hotels & Suites. Both Quality and Clarion Hotels & Resorts are examining the possibility of offering a food-court concept as a way to provide food service more creatively and with less cost, said Joseph Lavin, senior vice president of new products. Lavin oversees the upper midscale Clarion brand. Lavin said he also is looking at ways to increase catering and banquet profitability.

"Overall, the midpriced segment has to meet or exceed the standards of the newer limited-service properties out there," he said. "Full-service hotels need to come up with better ways to make profits."

The slowdown in new construction also has benefitted the midpriced segment, said Scott Deaver, vice president of sales and marketing for Ramada Franchise Systems. Ramada, which draws 70 percent business travelers and 30 percent leisure, is attracting more guests from the upscale segment and more of the traditional upscale weekender business, Deaver said.

"Now there is a real opportunity for some rate growth over the next two years," he said.

Ramada is testing some business-class rooms in the Midwest, which will allow the brand to get $5 to $15 more per room per night. "As long as we can create services that don't need people to service them, we can provide enhancements that won't price us out of the market," Deaver said.

Later this year, Ramada also plans to test special rooms for leisure travelers. The rooms will offer small refrigerators, VCRs and coffee makers, Deaver said.

"Customers who got a taste of midpriced hotels during the recession liked what they found," said Eric Pfeffer, president and c.o.o. of Howard Johnson Franchise Systems. "We now have a larger core of corporate travelers. And due to greater consumer confidence, we also have a new group of leisure travelers who have traded up."

Howard Johnson currently has a mix of 44 percent business travelers, 56 percent leisure.

Pfeffer said the brand would like to add more features to its premier rooms, which offer such amenities as coffee makers, extra-large desks and dataports.

"We still have room to add more and raise rates a little bit," Pfeffer said. "We have to remember that compared to some other countries, we are still a travel bargain for tourists."

Pfeffer said that even though many hotels in the midmarket segment have been renovated, there is still more work that needs to be done.

"The customer is asking for this," Pfeffer said. "If you don't renovate, then you need to reposition."

The midpriced segment is now very stable, said Michael Leven, president and c.o.o. of Holiday Inn Worldwide.

He warned that the segment will be in danger in down economic cycles, but added that there always will be a need for midpriced hotels, particularly for the business traveler.

"In some smaller towns, a Holiday Inn is the only show in town for business travel or for a small meeting," Leven said.

John Greenleaf, brand executive for Courtyard by Marriott, said that managing f&b costs will be key to midpriced hotels' profit margins in the future. Courtyard is now offering a dinner selection, called "Quick Bites," in 100 of its 236 properties. Brand-name foods are being offered for $6.95, covering a hot entree, fruit, drink and dessert.

"We need to customize our f&b based on what people need at our properties, and this will vary from hotel to hotel," Green-leaf said. "We leave these decisions up to the individual general managers."

"This is a very good time for the mid-priced segment," said Robert Wilson, Best Western International's director of membership and development. "Some of the product quality in the lower-end hotels is becoming somewhat questionable. Average daily rates and occupancies are up in midpriced properties; we expect this to continue in the near future."

According to Wilson, Best Western's rates are up about 4 percent to 5 percent over last year, occupancies three to four points.

The brand is not losing business to the upscale segment, since there is a strong price differential between the two types of hotels, which was not the case a few years ago when all segments were taking part in heavy rate-cutting, Wilson said.

PHOTO (BLACK & WHITE): Kirk Kinsell

PHOTO (BLACK & WHITE): John Russell

PHOTO (BLACK & WHITE): Eric Pfeffer

Luxury

            Rate    Occupancy     Room       Room
                                  demand     supply

May 1995   $118.81    75.9%       up 3.9%   up 0.8%
May 1994    113.47    73.6        up 2.5    up 11

Upscale

            Rate    Occupancy     Room       Room
                                  demand     supply

May 1995   $79.25     71.2%       up 4.1%    up 1.4%
May 1994    76.39     69.3        up 2.7     up 2.3

MID-PRICED

            Rate    Occupancy     Room       Room
                                  demand     supply

May 1995   $60.45     69.3%       up 5.9%    up 2.0%
May 1994    57.62     66.8        up 3.7%    up 1.9%

Economy

            Rate    Occupancy     Room       Room
                                  demand     supply

May 1995   $46.65     64.9%       up 6.3%    up 2.0%
May 1994    44.37     62.3        up 1.7%    up 1.1%

Budget

            Rate    Occupancy     Room       Room
                                  demand     supply

May 1995   $35.97     63.1%       up 3.4%    up 0.4%
May 1994    33.99     61.3        up 1.9     up 0.4

Source: Smith Travel Research

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By LAURA KOSS-FEDER

H&MM MANAGING EDITOR