Motels pin growth to upscale frills, usual economy
Driving down the strip of motels, fast-food restaurants, and souvenir shops in Traverse City, Mich., ``all the motel signs beckon spa, spa, spa,'' a businessman relates in disbelief. Looking for cheap accommodations for himself and his crew, he was amazed to find luxuries like hot tubs, saunas, and steam rooms in inns and motels dotting northern Michigan. While exotic touches are unusual, extras like those found in expensive hotels are rapidly spreading to motel rooms across the country. Even the cheapest now offer color televisions, free movies, and direct-dial telephones.
But the price is still 20 percent to 50 percent below that of full-service hotel rooms.
Fewer available sites, rising land costs, and a market that is close to saturation have pushed industry standards up, analysts say, and this has helped create a more demanding consumer.
The Motel 6 line prides itself on offering the lowest price of any national chain, but as of this year it had to stop charging extra for color TV and movies and installed telephones in all of its 48,000 rooms. Marketing vice-president Hugh Thrasher says that because ``most hotels don't charge extra for these things, no matter how modest the extra cost, people just didn't want to pay it.''
``It's tougher and tougher to make any money in the hotel business because of the excess of supply,'' says Robert McGrail, senior vice-president of marketing at Days Inns of America, one of the largest United States hotel chains.
It seems like a vicious circle. As competition in budget lodging has intensified, ``in order to capture a market that's gotten more sophisticated motels have to offer more and more amenities,'' says Timothy Downey, an industry analyst at the accounting firm Laventhol & Horvath.
Unlike full-service hotels, which charge high rates for the extras included, economy/limited-service hotels rely mainly on room occupancy to generate income. But some industry-watchers warn that by including extra services at no extra charge, these motels will lose a major source of income. They say the practice may increase overhead expenses and cut into profits, hurting the economy/limited-service properties the way full-service hotels were stung in the early 1980s.
Amid stable occupancy rates for the entire lodging industry, occupancy for the economy segment has experienced a consistent decline since 1981.
But that hasn't stopped rapid growth, nor has it kept large chains like the Marriott Corporation and Ramada Inc. from jumping in with their own versions of budget lodging. Another large franchiser, Quality Inns International, has announced plans to build 300 ``McSleep'' hotels, with rooms under $30, by 1990. McDonald's Corporation is not pleased with its choice of name, however, and has threatened to sue Quality.
Industry leaders say they expect to have an additional 965 properties and 95,100 rooms by the end of next year, according to the latest report by Laventhol & Horvath. That's a 22 percent increase over last year's combined total of 4,448 properties and 432,800 rooms.
Some wonder where all this growth, after conversions and franchising, is going to come from in a market that appears built to capacity.
Already about 15 percent of the industry's rooms are less than $30 a night, and 25 percent are between $30 and $40, says Jeannine Moss at the Hospitality Lodging and Travel Research Foundation. This means that about 40 percent of total rooms are in the economy range. The economy segment is 12 times as great as it was in 1970.
But the limited-service lodging sector is optimistic that demand will catch up with the expansion of rooms available. Industry confidence springs partly from the recent spurt in growth of the economy and the all-suite sector, which is often more expensive but roomier.
When recent congressional tax reform dampened development at the high end of the market by making financing much tougher, the low end grew more appealing. And because of lower operating costs - no room service or bellhops, for example - and the ability to generate profits within the first year of operation, limited-service chains are an even more attractive prospect for investors.
Because up to 45 percent of all US companies now set specific limits on corporate travel expenses, operators expect to see most new demand coming from corporate travelers seeking low-cost, high-quality accommodations. ``People now realize that accommodations in the economy segment are all they need for good value,'' says Loren Steele, president of Super 8 Motels.
Others are not so sure about the economy segment's prospects. ``If we go into the recession that some people are talking about,'' demand won't catch up with supply, says Mr. Downey of Laventhol & Horvath.
The growth that is occurring, he says, is mainly ``a gobbling up of the weak by the strong.'' A lot of the new development is by people in the apartment building trade, he explains, who spend less on actually putting up a building and more on upgrading the interior.
Already the market squeeze has forced the big chains to advertise heavily. A good many of the top 50 are spending a significant amount of money on marketing to develop business even before the customer leaves his local community.
And big-name budget motels, like Motel 6 and Super 8, which have always relied on word of mouth to draw in customers, ``have to work harder to let them know we're out there,'' says Mr. Thrasher at Motel 6.
The gap is also widening between successful and unsuccessful hotels, and those that have been doing poorly are doing worse. According to Laventhol & Horvath's report, only three or four major chains will be controlling the hotel marketplace by the early 1990s.
Specialists urge that chains focus on generating additional revenues by offering in-room amenities at small charge. Residence Inn, which was recently bought by the Holiday Corporation, for example, signed a five-year contract with a video company to provide each of the hotel's 200 rooms with a video entertainment option.
The use of other marketing techniques has also been suggested, like greater use of personal computers to let guests make reservations from their homes through a data bank network.