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Elevating economy and midscale: Technology can help these segments soar

ATLANTA—The economy and midscale segments of hospitality are in a state of evolution, with technology, changing customer expectations and increased competition making for great potential.

Held last month at AAHOA’s headquarters here, the Hotel Business Executive Roundtable, “Elevating Economy and Midscale to New Heights,” enabled 13 industry executives to share their varying opinions on the segments. The roundtable was hosted by RLH Corporation and sponsored by Arthur J. Gallagher & Co. R.E.

Hotel Business Associate Editor CJ Arlotta opened the discussion, asking, “How would you describe the current state of the midscale and economy segments?” That simple question led to a variety of answers.

Jay Litt, The Litt Group

“From a transaction standpoint, it is very healthy in the economy segment,” said Teague Hunter, president of Hunter Hotel Advisors. “All of the segments are, but I am very encouraged with the economy segment. When there is a property for sale, it sells very quickly. A lot of people have money and are looking to re-deploy it. In the economy segment, they fly off the shelf.”

Investors realize that there are opportunities in the sector. “They understand that segment, and they understand the value that the U.S. consumer is looking for,” said Tim Dick, director, National Hospitality Advisory Services Group, Real Estate Advisory Group with Duff & Phelps. “Let’s admit it: When we are traveling on our own dime, we are going to look for the best price value we can. Those sectors—the economy and the midscale—offer a strong price value offering.”

The travelers themselves have a lot to do with the success of both hotel segments, according to Paul Breslin, managing director of Horwath HTL’s Atlanta office and professor at Georgia State University. He noted that in some markets, the segments are booming, while in other areas, the hotels are struggling a bit. “I think it is a direct correlation to the user of those hotels, whether infrastructure work is going on in parts of the country,” he said. “They are booming with construction workers, and they are filling hotels at the midscale and economy level at a very positive rate.”

Technology and today’s travelers have made the segment more appealing. “The habit of travel today is ever-changing,” said Paul Sacco, chief development officer with RLH Corp. “The evolution of technology—and the fact that today’s travelers have become much more self-sufficient and [need]fewer frills and services in hotels—makes the midscale and economy segment appealing.”

Teague Hunter, Hunter Hotel Advisors

For Jay Burnett, VP of real estate for Auro Hotels, the economy segment is where the most technology benefit can occur. “The higher up the scale you get, to me, the more human interaction the guests want and need to navigate what this hotel offers, where to go and what to do,” he said. “As you go down the scale, it seems like that is where there is the most benefit to not have a human being or only a part-timer.”

Technology has changed the way the typical economy and midscale traveler picks the hotel in which they will be staying. “What he used to do is pull off [the highway]and be a walk-in,” said Bill Linehan, EVP/chief marketing officer with RLH Corp. “But walk-ins are very, very quickly diminishing… What they are doing is, for those road warriors who are the economy travelers, they are making their reservations on their phone, from the parking lot, or just literally miles away based on information they have gotten online.”

Ketan Patel, principal of the ROHM Group, said that the industry should look outside of the U.S. for inspiration to evolve in terms of using technology to the segment’s advantage. “Europe has got it down in the economy segment,” he said. “When you go outside of the U.S., the rest of the world has figured out economy much better than we have… The rooms are basically 10-ft. by 15-ft. at best. You go in there, they have one person and you have automatic check-in. The employee is gone after 10 p.m., and you use the ATM machine to check in and out. They are running phenomenal bottom-line numbers. They figured out their consumer base and they have great reviews. There are people signing them up left and right over there because of their profitability and ease of operation.”

The customers at those hotels know what to expect. Patel also believes that brands in the U.S. can do a better job of training their customers to do the same when they stay on their properties. “The best brands that are not in our industry that have been ridiculously successful have trained their customer base—‘This is what it is, this is what you get, we are going to execute it perfectly and you are going to keep coming back.’ We live in Atlanta, and we have Chick-fil-A right down the street. We are all trained—you aren’t going to get burgers at Chick-fil-A,” he said. “They have executed one thing very well. They’re not trying to be a fine-dining restaurant, but they have evolved in time. Their locations are better, their stores are better, but still, the product is what it is.”

Paul Sacco, RLH Corp.

Keith Thompson, principal with Avison Young Hospitality Group, said that a verified social media presence is something essential for a hotel operation these days, similar to billboards in years’ past. “In the mid-1990s, if we had a Holiday Inn, you would have four billboards going each way and we were spending $18,000 to $25,000 a month in billboards,” he said. “Travelers are pulling off the interstate and they are not walking in the front door, saying, ‘How much are your rooms tonight?’ The greatest value for image, for perception, and also booking is through social media. Seventy-three percent of people who book go to social media first. A lot of hotel owners just don’t realize the impact and the control of the comments that are on it.”

There was a disagreement among the panelists on who should be responsible for a hotel’s social media presence. Ketan Patel believes that the brands should be responsible for all of their locations. “I think that is the biggest failure, they are putting it on the property level—it is a failure, you are failing the industry when you do that,” he said. “They have to take full control of that world. That will then turn into this consistency we are looking at. So when the technology is there, you can divert the social media. You can make sure people get the right responses, all those kind of things, sitting up at the corporate level. At the property level, you can give them a heads-up.”

Breslin disagreed. “The problem with that, though, is that the social media presence gets down to that individual business level—what gets tweeted by your hotel or gets put on your Facebook page,” he said. “It is ‘We did backpacks for the school yesterday,’ or ‘We did a Habitat build yesterday.’ The comments that are coming in need to get responded to. How does that centralize back up at a corporate level?”

Thompson felt that it should not happen at the brand level because it is too labor intensive. “I know that because our social media firm with five vehicles, if they upload three a week to each one, it is 25 different posts per week, plus they have to respond almost 24/7. About 11 or 12 accounts is all an individual can handle,” he said. “It is another $25,000 to $30,000 per year per employee.”

For his part, Linehan said that the brands are all moving toward handling the social media themselves. “We have to. It is a matter of listening and responding,” he said. “When a consumer speaks, we all have an obligation to listen and to respond. Just as we have consumer-generated content on the web—TripAdvisor, Google, Expedia, all those that are aggregating that data—we are now starting to aggregate that data on social media, as well. We are listening. We are pushing that back to the hotels so that if there is a complaint or a compliment on social media, the hotel should be getting that in an aggregated program, and then they can respond back. We are monitoring that to make certain that they are responding; if not, we are actually responding.”

LEFT TO RIGHT: Gregg Waliis and CJ Arlotta, Hotel Business

Social media isn’t just about reaching guests, though. Hotel Equities’ Bryan DeCort, SVP of operations, noted, “The other side of this discussion relative to social media is the war on talent and what you are doing as an organization to track [them]through social media.” Whether a large brand or a small hotel, he said, social media enables employers to tell their story to potential applicants, and it’s important to “know the way that information gets pushed out to the user base that we are all going out to try and recruit right now. You do have the ability and the analytics to track the applicant flow in social media and how they navigate through that platform.”

Echoing many in the industry, the panelists agreed that labor is a big problem in hospitality. Jay Litt, founder of The Litt Group, said, “Today, you have limited-service and economy hotels where the GM is making $55,000. So, that is not a pool of talent that is going to move up,” he said. “We have lost our ability to train. We have lost our mentorship. It is a dead end, in many cases, and that is a problem.”

“The labor is a real challenge today, so when you are designing hotels, I think you have to keep in mind how we can clean them better and faster, more efficiently,” said Breslin. “I know that this sounds a bit futuristic, but it isn’t: How can we use automation or technology to clean? The labor is going to continue to be a real challenge. When you are creating this refresh and re-brand, I think we have to be cognizant of the clientele and what it takes to operate the hotel.”

One way to cut costs is to cut down on free amenities. “If you want to keep running an economy brand, you have to listen to what the guests want and stop giving all of these free amenities,” said HP Patel, CEO/president, Capital City Hospitality Group. “They don’t care for that. They would rather use that money to go eat out with their family. Reduce the amenities, reduce the footprint of the guestroom, and create some kind of experience.”

Capitalizing on that desire for experiential travel is what competitors like Airbnb and boutique hotels are doing, but without many of the costs. “When I see all of these 65- to 70-unit non-branded boutique hotels open all over the place, they are a danger to hotels that have brand costs,” said Litt. “The brand costs in full-service are into the teens—15% and 16% revenue—even though you don’t see it—you see a 9% or 10%. You add all that stuff up and it is like how did that happen? All of a sudden, you have this huge cost-through for the franchise. Franchises have to be really careful with that because it is going to change how these economy and midscale hotels deliver your 12-15% cash-on-cash returns.”

LEFT TO RIGHT: Roundtable sponsors gather for a photo—Arthur J. Gallagher & Co. R.E.’s Scott Arnim and Jackie Collins, and RLH Corp.’s Paul Sacco and Bill Linehan.

Grant Sabroff, SVP of business development for Concord Hospitality, views the economy segment as one that is a great place to start in the industry. “It is a great starting point to get into the business—lower costs of capital required as far as project costs; no food and beverage; it has an efficient operating model,” he said. “With the economy and mid-price properties, you can build smaller hotels and go into the tertiary and secondary markets. In many of those markets, you are looking at RevPARs that may be in the $70 to $90 range, so it really aligns well for the lower-tier properties. For some developers, developing a budget or mid-price property is a way to move up the chain scale as they want to grow their business.”

Kal Patel, president/CEO of Image Hotels, also sees the economy segment as a great stepping stone for those just entering hospitality: “It is still a good starting point today for someone to get in and learn how a hotel should be run,” he said. “You can’t just get into a Ritz-Carlton and just know the business. It is a great stepping stone for us.”

For Dick, despite all of the changes that the segments have seen and continue to see, one thing remains the same: “People still like a clean room, a good bed to sleep in, a nice product,” he said. HB

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