Limited service, unlimited potential

zoom

Many in the industry have adopted a ‘wait-and-see’ mentality to economy hotels, keeping a close eye on properties such as the Ibis at the World Trade Centre in Dubai.

On this point both Slewka-Armfelt and Tarrant express an interest in watching the future success of easyHotel in the Middle East.

easyHotel has indicated it wants to build 38 properties across the region, starting with several in Dubai.

"I think it will work, but I don't know if 30 hotels will work in the region," Slewka-Armfelt says.

"The problem is: who are your customers? If you are going to charge US $40 a night do you have more value in a one-star or two-star ‘full-service' hotel, or are you better off in a very clean no-service hotel with 15m²? I don't know.

"I think there is room for all these products, except in depressed markets. If you have markets where the five-star price is very low, then logically the four-star price is lower and so on, so you will not be able to charge enough to make a decent return on investment [for a budget property]."

Tarrant says easyHotel is going to have to ‘make' a different market for their product, maybe tapping into the visiting friends and relatives (VFR) market segment popular in Europe and the United States.

"The mid-market [hotels] can cannibalise the lower levels of business travellers [from upper class hotels], whereas budget hotels have to create their own markets," he adds.

The big attraction

Accor's Slewka-Armfelt says his company will increase its porfolio of ‘economy' hotels - under the Ibis brand - to Amman, Muscat, Bahrain and Sharjah in the UAE during the next few years, after starting with the Ibis World Trade Centre property in Dubai.

"We were the first chain to open a business economy hotel in the Middle East," he says.

"There was always an initial concern among hotel companies about whether or not there is a demand for this type of product. But I think all those fears have now gone away, and most companies believe there is a very good market with a lot of potential in the segment."

Slewka-Armfelt believes the industry is often distracted by luxury properties.

"The official statistics often focus on five- and four-star hotels, but if you look at the total number of rooms in a given city you will find there are a substantial number of rooms in the no-star, one-star and two-star categories, and these hotels are running at high occupancies, which means there is a significant demand for this type of accommodation," he explains.

"It's just none of the major hotel companies have come into this part of the market."

A major motivational factor for the industry is dollars, and despite the lower room rates there is a lot of profit to be made from budget hotels.

Accor Middle East development manager Nicolas Broussaud says in terms of gross operating profit margins - measured as a percentage - a budget hotel "will always be a lot more profitable" than a five-star hotel.

"In terms of investment, return on investment and profitability, as a percentage, you will always have higher returns from a budget hotel," he explains.

"The risk derived from an investment across a five-star hotel is also a lot higher, because a budget hotel business model is more resilient.

"You could open a five-star hotel in Dubai today with a room rate of $300, and tomorrow it could go up to $350, but it could also go down to $250. But for a budget hotel the variation will be much lower, and the variation in return on investment will also be much lower."

Broussaud says worldwide trends show that a return on investment for a five-star hotel would take - on average - between seven and nine years, compared to the return on a budget hotel, an average of five to six years.

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic. Arabian Business would like to point out that only comments relevant to the story will be published. Any containing personal insults or inappropriate language will not be approved.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM