Big Box Strategy

As with the retail products industry, there are winners and losers in the hotel industry. We're all familiar with winners in the retail industry, including brands such as Wal-Mart, Best Buy, and Circuit City. These brands follow a practice I refer to as Big Box Strategy.

How does Big Box Strategy work? When brands like Wal-Mart enter an area, they not only sell products that previously had been available in other, smaller retailers in the area, but they also offer products that previously had not been available in that area. As a result of this latent demand, total retail sales in that area grows, often significantly.

It essentially becomes a “Tale of Two Hotel Markets” when we study how Big Box Strategy plays out in the hotel industry. For example, I recently studied a hotel market that at first blush didn't appear to be able to absorb any more hotel rooms because the market was running an annual occupancy of only 53.1 percent. However, when I evaluated the performance of the strongest hotel brands in the market, I found that a more limited competitive market was running 72.8-percent occupancy. In other words, there may have been a market opportunity for a new hotel with a strong brand.

In the hotel industry, there is a preponderance of strong brands in the midscale without food & beverage (f&b) category, while there is a dearth of such brands in the midscale with f&b category. This difference translates into hotel performance and hotel values.

A few years ago, I predicted in this column that eventually, the average midscale hotel without f&b would be worth more on a per guestroom basis than the average midscale hotel with f&b. That's exactly what happened — primarily because midscale hotels without f&b include brands that have become preferred by American consumers.

More recently, I've been engaged to conduct hotel feasibility studies for proposed midscale hotels without f&b, and with strong brands, in some extremely small markets; in these cases, in cities with populations ranging between only 9,100 and 11,400 residents. In each case, the feasibility study showed support for a small, high-quality, well-located, chain-affiliated midscale hotel without f&b.

Interestingly, in each of these cases, Wal-Mart had recently opened a Supercenter in town, and in each case the proposed hotel I was studying was the only identifiable proposed hotel. That situation is much different than a medium-sized market where I recently completed a feasibility study which discovered no fewer than 10 proposed hotels, many of which had already broken ground. That medium-sized market was not huge either — its population was only 32,100.

All of this information suggests that hoteliers seeking development opportunities may find it feasible to enter relatively small markets with small, good-quality, well-located, chain-affiliated midscale hotels without f&b. This situation would be true particularly if the market is underserved with no such facility currently available, and also, if no other such hotels are currently proposed.

This hotel development opportunity is akin to Big Box Strategy because I usually find such development not only accommodates demand that previously had been accommodated in lower quality hotels in that market, but it accommodates latent demand that had not been accommodated in the subject market. For example, some guests dissatisfied with the quality of hotels in that market probably had been staying at better hotels in larger, nearby markets, and still others had stayed in the subject market for a shorter period of time than they truly desired.

The Penn State Index projects overall average U.S. hotel values and values for the six hotel types defined by Smith Travel Research. The Index projects that overall values are expected to increase by roughly nine percent this year. All hotel types are expected to achieve value increases in 2007. Luxury hotels are expected to register the largest dollar increases in value, increasing by approximately $28,000 per guest room, while midscale hotels without f&b are expected to experience the largest percentage increases in value this year, with a 10.2-percent increase. Most hotel types are expected to register lesser value increases in 2008 and 2009.


John W. O'Neill, MAI, CHE, Ph.D., is Managing Director of Hospitality Advisory Services, LLC, and Associate Professor in the School of Hospitality Management at The Pennsylvania State University. He can be reached at jwo3@psu.edu or 814-863-8984.

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