Read: At Budget Hotels, Growing Pains By ERIC N. BERG, Special to The New York T
ID: 1198663 • Letter: R
Question
Read:
At Budget Hotels, Growing Pains
By ERIC N. BERG, Special to The New York Times
November 17, 1989
PEORIA, Ill.— Judging by the jammed parking lot at the Fairfield Inn here, one might think that the budget hotel business is flourishing. But now, with more than 50 such chains in business, the supply of inexpensive rooms is beginning to outstrip even the surging demand for them, and occupancy levels and profits are sliding.
Some of the best-known names in the hotel industry - including Marriott, Ramada and Quality Inns International - have been opening hotels with no-frills rooms for as little as $25 a night. Their target, increasingly, is the business traveler whose cost-cutting employer is no longer willing to foot a bill of $75 or more.
The result has been a fierce competition for market share. Many operators are cutting prices further, stepping up their advertising and even resorting to giveaways. Indeed, industry analysts now joke of ''amenity creep'' - a move from offering spartan rooms to providing simple perquisites like shampoo and free phone calls, and then on to more exotic frills like facsimile transmission and phones that permit computer hookups.
Given such competition, industry experts say, a number of chains will be driven out of business or forced to merge.
Budget hotels are not new. Motel 6 dates from the 1960's, when it offered rooms for $6 a night, and the Days Inns chain started in the 1970's. Days Inn is still the largest chain of budget hotels, with 81,600 rooms expected by the end of the year; Motel 6 is second, with 60,000.
But in the last two years one big hotel chain after another, troubled by stagnating revenues in their full-service hotels, have entered what was once a land of ersatz leather furniture, gold shag rugs and bathtubs with broken tile. The Marriott Corporation, for example, developed Fairfield Inns; the Ramada Corporation acquired Rodeway Inns, and Prime Motor Inns Inc., which owns the Howard Johnson hotels, acquired Wellesley Inns, a budget chain operating in the Northeast. Quality Inns International, which already owned the Comfort Inns chain of ''luxury'' budget hotels, the third-largest chain, developed Sleep Inns. Old Chains Expanding
Even industry old-timers are getting into the act. Kemmons Wilson, the founder of Holiday Inns, has started his second chain, Wilson Inns, expected to open 14 properties by next month.
Meanwhile, budget hotels in existence for years are expanding rapidly. Days Inns of America, the Atlanta-based chain, recently developed Daystop, a barebones operation for $25 a night. And Hampton Inns, which since its inception in 1984 has replaced the since-sold Holiday Inns as the principal lodging chain of the Holiday Corporation, plans to open 55 budget hotels this year, up from 40 in 1988.
''Years ago we used to have rooming houses; now we have budget hotels,'' said Steven Brenner, a leading industry consultant based in New York.
Market figures bear this out. Since 1981, the number of hotel rooms over all has increased by 2 percent annually, according to Laventhol & Horwath, an accounting and consulting firm. But the number of budget rooms grew by 20 percent in 1988 and is projected to rise 17 percent this year, to 613,500 rooms, according to Laventhol.
So fast has the growth of inexpensive hotels been that by the end of the year roughly one in five of the three million hotel rooms in America will be in the budget category. Rates Sharply Lower
Budget hotels are for people concerned mostly about a clean bed and bath, a television set and a telephone. Rates average $32 a night, compared with more than $60 a night for conventional full-service hotels.
Yet in many ways, some budget hotels are hard to distinguish from their full-service counterparts. At the Fairfield Inn in Peoria, for example, guests get two queen-sized beds and a large work area, and can tune in scores of television channels received by a satellite dish out back.
But at the lower end are the so-called hard budget hotels, which offer one bed and a shower but not a bathtub, and in some cases bath towels that might more appropriately be called paper towels.
While the pace of development of budget-hotel rooms has recently shown signs of abating, growth is still so overheated that ''small, regional chains will be hard-pressed to compete,'' said Daniel W. Daniele, a Laventhol executive who tracks the budget-hotel business. ''Only the big national companies will have the marketing dollars to maintain a competitive edge.'' Consolidation Under Way
The industry shakeout has already produced consolidation. Motel 6 acquired Sixpence Inns, a budget chain operating in the West, as well as parts of Envoy Inns, which is in the Midwest. Kings Inn, an inexpensive chain in the Southwest, became part of the Comfort Inn chain. And Skylight Inns, which also operates in the Middle West, joined the hugeTravelodge chain.
The budget hotels' success has not been at the expense of the most luxurious hotels. Top executives and other wealthy people continue to stay at such hotels. Rather, the chains have been taking business from more middle-of-the-road properties like Holiday Inn, Ramada Inn and Howard Johnson's.
Some hotel chains have steered clear of the budget-inn business, fearing it might adulterate their image.
''You can't be all things to all people under one brand name,'' said William Hulett, president of the Stouffer Hotel Company, which has not entered the budget business. ''Ultimately, that confuses people. When people think of Stouffer hotels, we want them to think it will cost them $100 a night to stay there.'' A Lower Break-Even Point
Big hoteliers that do invest in budget chains like the much lower break-even point of those hotels, largely the result of less fixed overhead than their full-service brethren. They need be only 52 percent to 55 percent full, compared with 65 percent to 68 percent for a full-service hotel.
What is more, occupancy rates at some budget hotels now run close to 70 percent. While the budget hotels have scored their greatest successes among self-employed entrepreneurs, independent salespeople and other travelers paying their own way, more and more big corporations have begun to send lower-level employees to budget hotels to control costs. Some of the companies are: General Motors, General Electric, Procter & Gamble, I.B.M. and Caterpillar. Business travelers now make up the budget hotels' largest customer group, providing 42 percent of revenues.
Moreover, the financial risk posed by budget hotels is much lower than that of the more expensive hotels. Because they are often placed in rural areas and outside major cities, where land costs are low, budget hotels can be built for as little as $32,000 a room. ''A full-service room can cost double that to build,'' said Robert F. Fitzgerald, chief executive of Rodeway Inns. Profits Lower
Most budget-hotel properties remain in the black. An economy hotel that charges the industry average of $32 a night for a room might pay about $7.50 a day for linens, laundry and cleaning for that room. Another $7.50 a day may go for overhead and the hotel manager's salary. That leaves $17 before fixed charges like rent or mortgage, property taxes, insurance and interest are paid. After those expenses, profit now averages $1.09 before income taxes, down from $4.17 two years ago, according to Laventhol.
Questions:
7.1. What market structure do you think best characterizes the budget hotel industry? List each of the four market structures and explain whether or not you think that structure is a good fit for the budget hotel industry. Use specific references from the article in your answer.
7.3. The article states that the average price of a room was $32 a night. First, define fixed cost and variable cost. Then divide the $32 a night into three categories. Fixed costs, variable costs and profit. For the fixed and variable costs, include both a list of the items you included and the total amount.
Again, the sum of the three (fixed cost, variable cost and profit) should equal $32.
7.4. You are the manager of a budget hotel. It is 8:00pm on a Tuesday night. You currently are at 70% capacity. A businesswoman comes in and asks about rates for a room. After telling her that the rate is $32, she offers to pay you $25. Does it make economic sense to accept her offer? Use your knowledge of economics and explain why or why not.
7.2. "Judging by the jammed parking lot at the Fairfield Inn here, one might think that the budget hotel business is flourishing. But now, with more than 50 such chains in business, the supply of inexpensive rooms is beginning to outstrip even the surging demand for them, and occupancy levels and profits are sliding."Illustrate the above statement on the supply and demand curve for budget hotel rooms below. Determine which curve or curves are shifting and in which direction
Explanation / Answer
There are four types of market structure 1. Perfect competative Market
2.Monopoly Market,
3.Monopolistic market
4 Oligopoly market
For maximize profit monopoly market is better but for the growth of the hotal business monopolistic market is the best option.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.