Digging In

If anything sets the extended-stay hotel segment apart from the rest of the lodging industry, it is perception and reality, magnitude and momentum. In the mid-1970s, Jack DeBoer may have resembled Jed Clampett, running a new, quirky concept called Residence Inn out of Wichita, KS. Marriott Corp. verified that DeBoer had indeed struck gold when it bought the chain in 1987.

Similarly, in 1995 capitalist/industrialist Wayne Huizenga figured out new ways to mine the gold when he formed Extended Stay America, the rare startup that delivered exactly what it promised: a nationwide chain of wholly owned, lower-priced extended-stay hotels. The niche-within-a-niche proved irresistible as the years passed. Major brand owners scrambled to cover the price point created by Extended Stay America, which was growing so fast that by 2001, it was the third-largest owned-and-operated hotel company in the world.

The magnitude of what DeBoer had forged in Wichita became crystal clear to even a non-hotelier when Blackstone Group, an equity firm that specializes in privatizing large public assets, targeted Extended Stay America. The deal was completed in 2004 for $3 billion. Savvy investors can flip houses. Blackstone flipped Extended Stay America after absorbing a smaller chain, selling what was now called Extended Stay Hotels to the Lighthouse Group in 2007 for $8 billion.

So how does one gauge the pulse of the extended-stay segment in 2008, so soon after the chessboard was overturned by the blockbuster 2007 deal? Lodging Hospitality spoke with five major operators of extended-stay brands to discuss strategy, segmentation, pricing and other issues that govern their lucrative businesses.

The fundamentals have not changed. Operators of extended-stay hotels are trying to lure customers looking to stay five or more nights with attractive pricing, competitive amenities or a mix of both. Franchisors of extended-stay hotels are looking for the next vein of gold ore, but it isn't easy in a crowded mine. DeBoer may have been the first prospector, but today there are conservatively two dozen vital brands in the segment, all trying to match his feat.

Peggy Fang Roe, vice president, extended-stay brand management, Marriott International, considers extended stay as more of a niche than part of the lodging mainstream, because based purely on numbers, extended-stay hotels represent just eight percent of room supply. But the segment captures 10 percent of room demand, which has compelled Marriott to widen its product offering over the years. “We accommodate any length of stay,” she says.

In addition to Residence Inn, Marriott has marketed a lower-priced sister brand, TownePlace Suites. Both aim at the five-day-plus customer, but also attract transient business. That's not the case with Executive Apartments, Marriott's international brand of temporary housing, and ExecuStay, its domestic counterpart, although the business models differ significantly.

Executive Apartments are often built onto hotels to attract expatriates, while ExecuStay is an apartment management entity. “Our sales point is fully furnished temporary housing in a virtual inventory,” says Barbara Shuster, senior director of sales and marketing, Marriott ExecuStay. “We don't own any buildings.”

Just as Marriott maps the marketplace by length of stay, others focus on market coverage and new business. Robert Radomski, vice president, brand management, extended-stay brands, InterContinental Hotels Group, points out the segment is unique in that operators and developers have been able to add to supply without quenching the demand, partly due to the number of traditional hotel guests switching to an extended-stay hotel when given the chance.

“There always has been the demand out there, (guests) have just been staying at transient hotels,” he says. “And some operators are becoming specialists because they know what pieces of land are best for this segment.” Office parks used to be the predominant demand generators, but now they have been joined by medical facilities, schools, military bases and government offices, he says. “Also, the suburban markets have been filled in, so now extended-stay hotels have moved downtown.”

IHG's two extended-stay brands, Staybridge Suites and Candlewood Suites, are being marketed on the assumption that the two most fertile price segments are the mid-tier (for Staybridge) and lower-tier (Candlewood). Radomski says it's a challenge to develop fast enough to support IHG's belief in those segments. “We have more in the pipeline than we have open; our competitors have strong pipelines and there's no reason why we can't continue the momentum,” he says.

One key strategy for every player involved in a high-demand, fast-growing segment is to maintain guest loyalty. “This audience is a fairly narrow niche,” Radomski says. “It's big in terms of room nights, but narrow in terms of contacts. It comes down to a hotel needing to own its backyard, within a five-mile radius.”

He also feels that brand loyalty becomes fairly self-evident in an extended-stay hotel. “Most guests can survive a three-night hotel, but for a 30-night hotel stay or longer, there is so much more at stake,” he says. “Once these guests find a hotel they have a good experience with, they are extremely brand loyal.”

Another hotel brand owner with a two-brand approach is Choice Hotels International, which, like IHG, has one extended-stay brand it created, MainStay Suites, and one it purchased, Suburban Extended-Stay Hotels. Together they have a development pipeline of 100 executed franchise agreements, or about 9,000 hotel rooms.

Kevin Lewis, president of Choice's extended-stay brands and head of AH&LA's Extended Stay Lodging Council, says that Choice's involvement represents a type of mainstreaming of the segment; what happens when one of the largest hotel franchisors in the world has a developer community hungry for a new type of hotel to build. “We have a lot of franchisees successful on the transient side of the business, we have developers looking at an alternative, and we give them a product,” he says.

In line with the development process, the guest mix at both brands assumes a certain amount of transient guests. Suburban aims for 80 percent of its bookings to be five days or more; MainStay will accept 60 percent.

While IHG addresses opposite ends of a mid-tier segment, Lewis says the MainStay and Suburban guests are “distinct with a little bit of overlap.” Suburban rents typically at $40, with MainStay at $70. “Suburban is blue or grey collar, MainStay is more grey collar/white collar.”

Two other brands contacted for this story do not directly compete with each other, but their pasts and futures may be inextricably linked. Homewood Suites, created in 1989 as perhaps the first competitor to Residence Inn, is owned by Hilton Hotels, which was purchased by Blackstone Group in July 2007, less than three months after Blackstone sold Extended Stay Hotels.

While all of these brands have been very generous and descriptive in their strategic branding and operational philosophy, executives from Hilton and Extended Stay Hotels can best illuminate the big picture for the business of extended-stay hotels.

Gary DeLapp, who started out as the president and CEO of Homestead Studio Suites, one of the acquired companies that gave Extended Stay Hotels its critical mass, is now CEO of the larger company. He says there is almost a night-and-day difference between the environment that Extended Stay America entered in 1995 and the one Extended Stay Hotels has come to dominate in the speed of its growth.

“There was less extended-stay competition and you had very low product awareness,” he explains “And no one rented rooms for less than seven days; today there are a lot more competitors. We compete more in the transient hotel space. Today, we rent rooms daily. There's been an assault on the customer base.”

When asked if the five brands — Extended Stay Deluxe, Extended Stay America, Homestead Studio Suites, Studio PLUS and Crossland — of Extended Stay Hotels cover more of the market than competitors with a two- or three-prong approach, DeLapp hints that five may be too many.

“We have always talked about consolidating the brands into a more manageable number,” he says. “We still target the moderate-priced customers, but we see two tiers, our core brand and a higher-end corporate customer.”

When asked a similar question, whether one extended-stay brand is enough for Hilton, Rebecca Wyatt, senior vice president, Homewood Suites by Hilton, replies, “With our ownership group, with Blackstone, we are looking at our whole portfolio. It's all I can give you today.”

Normally, under any other circumstance, such a non-committal statement would hardly be worth repeating, except Blackstone got out of the extended-stay business by selling Extended Stay Hotels after spending the better part of three years trying to consolidate the business. Now Blackstone finds itself back in the extended-stay business by proxy because it bought a $26-billion lodging company that includes 250 Homewood Suites hotels.

So when the CEO of the fastest-growing extended-stay hotel company in history says it may have too many brands, people will probably listen closely. And when Blackstone says it is looking at its hotel portfolio, it's probably not the same as other hotel portfolio managers looking at theirs. If past form holds true, anyway.

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