Go classy with economy

Business economy hotels are soon to arrive in the Middle East, but how will they fit into the regional hotel pecking order?

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By  John Irish Published  July 1, 2003

|~||~||~|When it comes to 5-star treatment at reasonable prices, the Gulf has quite a record. The schizophrenic nature of hotel pricing in the region means more often than not that you’ll walk into a luxury property, haggle a little and find yourself lounging around in a top class hotel for as little as $40 in the height of summer.

Throw in the volatile political surroundings of the Middle East and pretty much at most times of the year the corporate, package or Joe Bloggs traveller will return home astounded by the ten days of stardom they never thought they’d be able to afford.

In that sort of climate, you wouldn’t be a fool for thinking that a business economy style hotel may not fit into the Middle East’s burgeoning hotel market. Clean, tidy and cheerful, they might be, but ultimately why go for 3-star, when you can afford 5?

In August, however, Dubai is set to see the unveiling of French hotel giant Accor’s 210-room budget hotel Ibis. Meanwhile, later in the year, the Marriott Group will open the doors of a mid-scale 310-room Courtyard hotel in Kuwait. Clearly, somebody out there is adamant that this is the way forward.

“The business economy [hotel] does not exist in the Middle East yet, so we took the challenge to introduce it into the region,” explains Ignace Bauwens, general manager of the Ibis World Trade Centre Dubai. “We think that the Dubai market is ready for business economy hotels.”

The business economy hotel concept is very simple. It provides a good, efficient service at reasonable prices. Instead of a mini-bar or room service, the guest has round the clock food & beverage downstairs. Gone are the robes, shower caps and herbal essences adorning 5-star bathrooms, and in their place come the bare essentials: soap and a towel.

In a market, such as Europe or the United States, where traditionally there is a defined mature hotel stratum, economy brands have found a niche. Accor, for example, possesses over 650 Ibis properties crossing all 5 continents.

However, for it to succeed in the Middle East, the first step will be to encourage investors that this is the way forward. Once investors are onside, the region’s predominant travelling public, which at present is the Arabs themselves, will need to be convinced that the cheaper brands are actually value for money.
According to Elie Younes, travel consultant at HVS International, hotel developments in the region have been geared for too long to 5-star properties.

“People tend to think that 5-star hotels have better margins because of average rates, but neglect the fact that the demand for such properties is saturated. Investors also consider that the cost of land is very high so they believe they should build 5-star hotels rather than 3-star,” says Younes. “The operating expenses of a 5-star hotel property in the Middle East are similar to that of a limited service hotel, so the investors will say, I’ll have a 5-star instead.”

Nevertheless, while investor philosophy is entrenched in the minimum effort maximum gain approach, Younes argues that this needn’t be the case. He suggests that as long as the budget property is not too large, the cost of developing it will remain low, thus increasing return on investment, even if average room rates are low.

If investor psyche is one problem, then developing a mature market for economy hotels to succeed in is equally important. At present two factors are holding back the industry: Pricing and the tourist mindset.

Geopolitical circumstances mean that 5-star hotels in the region are reluctant to keep their prices high in times of crises. Accor argues, however, that consumers need to see the bigger picture.“It’s true that the 5-star hotels are slashing the prices, but which prices?
When you get a hotel, do you pay just the price of the room? No, you go to the bar, you go to the restaurant, breakfast, etc and then you start paying the five star prices,” says Aly El Zayed, director of marketing and sales, Accor Hotels Dubai.

While the regional politics often dicates hotel prices, a concerted effort must be made to standardise pricing structures. Accor’s Bauwens believes that the Ibis will be an education for the regional market. “For me it is amazing to see what the 5-star hotels are doing here. I’m not saying that it’s not the same in Brussels [Ignace was formerly based in the Belgian capital], but at least we talked.

Somewhere along the line there must be a coherency [in pricing].”
Bauwens points to the first Iraqi war as an example where hoteliers in Europe have learned their lesson and where the Middle East must follow. In 1991, a wide scale slash in room rates meant that it took almost 5 years for the industry to recover. In contrast, following 9/11, Accor was among the hotel groups not to go over board with reductions and while occupancy levels did fall, the market was able to bounce back quickly.

“What they forget is when they drop their price from 100 to 50, that’s 50% [reduction], but if you want to go from 50 to 100 that’s a 100% increase and that’s very difficult, particularly as the market here [Middle East] is not very elastic,” explains Younes.

Consequently, the hope is that by introducing an alternative, internationally renowned economy hotel, the industry will grow at all levels, creating an environment where hotels are true to their value.
The second issue is the tourist mindset. Arab tourists, who constitute the largest portion of those travelling to the region, are accustomed to cheap deals for 5-star accommodation. Added to that, international business travellers, to a certain degree, have got used to added comfort at reasonable prices.

“If you look at the concept of Ibis, it’s comfortable accommodation but very basic in terms of amenities, at least that’s what we’ve seen in the West. It is not something that goes down too well in this market, because the standard of 5-star hotels is such that even the 4-star hotels such as the Ibis in Paris would be difficult to sell in this market,” says Sumit Acharya, manager for Thomas Cook, UAE.
While the question of amenities is often posed to these budget hotels, Accor belives this is a side issue. It claims that the mere fact it is offering transparency in pricing, the same menu of services whether in Asia, Europe or Dubai and a promise of a quality to its customers will eventually stand it in good stead.

Additionally, as the number of international visitors coming to the region grows — Dubai for example is predicting 30 million visitors by 2010 — then the more likely it is people will look for alternative accommodation.

Who will run these properties may also become an issue further down the road. Despite franchising over 800 properties around the world,
Accor will manage the Ibis in Dubai. The reasoning behind this, according to HVS’s Younes, is that when a market is fairly strong with high margin expectations, like Dubai, the operator is likely to favour a management contract, even for lower scale brands. The exception, he says, is when the owner requires a franchise deal to reduce the amount of fees paid to the operator.

However, with the 3-star hotel experiment new and uncertainty in the region ever present, other big players may choose to franchise for their economy brands. This would be seen as a way of minimalising financial risk and developing brand awareness, even if the cost ultimately may be a loss of management control.

“It should always be a win-win; situation, you should be able to control the standards of your brand and a franchiser should know that the brand promise has to be lived up to, because the customer is expecting it,” asserts Bauwens.

The first budget hotels in the region will face a battle for market share from the higher priced properties. In the short term, they will need to fight off aggressive room rate incentives. In the US, for example, lower scale hotels exerienced downward occupancies, partly because upscale properties downgraded to such a degree that both corporate customers and leisure guests now possess expectations that they can have better quality at lower cost. The upscale hotels made initial gains, but in the long term, not only have daily rates fallen by 3.5% in 2002, but also restoring previous rates has become difficult.

Accor is not alone in introducing economy business hotels to the region. Marriott is sure that the Courtyard brand will encourage a flood of economy hotels. “I would love to go to the customer with all the options available: you’ve got economy, you’ve got furnished, you’ve got full-scale 5-star. It’s your choice where you stay,” says Osama Hirzalla, director of sales and marketing, Middle East and Africa, Marriott Hotels.

Guy Epsom, Hilton’s regional sales and marketing director, believes that with the region already possessing a vibrant hotel market, including locally run 3-star hotels, there is space for international standard economy hotels. “We have the top and bottom of the scale in the world of hotels. The budget economy hotels will neatly fill the space between them. A budget brand such as Hilton’s Scandic would fit the Middle East market very well.”

But not everybody is convinced. Khaled bin Sulayem, director general of Dubai’s Department of Tourism and Commerce Marketing is uncertain as to whether the time for these properties has arrived, suggesting that in the emirate’s case, it still had to develop a comprehensive upmarket trade.

Sami Zoghbi, Le Meriden’s regional manager agrees with this. He argues that with regard to intra-regional travel, Arab countries must improve border and visa procedures to ease road traffic. Only then, and as regional no frills airlines such as menaJet take off or a train network materialises will a new regional market, not looking for beach hotels, gravitate towards the likes of the Ibis.
For business economy hotels to succeed, Younes stresses, that properties must first open in cities such as Cairo, Beirut or Dubai, where there is a good level of corporate demand. Traditionally, budget hotels are positioned at strategic points around cities, be it motorways, airports or business areas.

The Dubai Ibis, for one, is next to new conference facilities, and the larger hotels are looking over their shoulders. Despite regional uncertainty, price wars and a low level of interest amongst customers, Younes remains optimistic on the future of these hotels. “Whenever there is a market crisis [they] will be safer than a 5-star property. They can more easily reduce prices due to lower operating expenses. They could even be market killers for some destinations,” he says. ||**||

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