The fastest-growing segment of the hotel industry offers limited amenities and lower prices. Younger people and business travelers are flocking to them.
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People who've noticed their flights getting more minimalist by the year—first the free food goes, then the drinks, then the movies, then the checked bags—may have noticed a similar trend playing out, albeit in a quieter way, in their hotel rooms.
Just as airlines got savvy to what many of their customers weren't willing to pay extra for, so too have hotel operators. More new hotels are ditching room service, valet parking, bell services and more, replacing them with basics like free Wi-Fi and breakfast, which you often don't get at pricier chains. The result has become one of the most profitable and fast-growing segments of the hotel industry.
Operators have dubbed these lower cost, amenity-light hotels "select service." Industry watchers say they represent the future of some of the world's biggest hospitality brands as they chase after younger travelers, who often have different priorities when it comes to spending their travel budget.
"Millennials consider it a God-given right to go on vacation and travel," said Bill Duncan, head of Hilton's focused service group. "Airlines have become more affordable. They're growing up traveling and they're not willing to compromise. They want hotels they can get into and out of quickly, and are affordable. Recent college graduates who stay there feel like they've made it — they feel good about staying here."
Ryan Meliker, a hospitality analyst with MLV and Co., said he's "probably the biggest bull on the Street when it comes to select service hotels," in an interview with BuzzFeed News. "Demand is up 239% versus 89% [for full-service properties] and select service hotels run margins that are about 10% higher because the expenses are more fixed. Without food and beverage you're generating much more cash flow to the bottom line, even if you're running at a lower rate than the full-service hotel next you."
Demand for these kind of rooms is driving new hotel developments. The U.S. supply of select service properties grew 3.5% last year, nearly four times the total hotel industry supply growth of .09%, according to a report compiled by hospitality consultancy STR Global.
Hilton Worldwide CEO Christopher Nassetta recently told analysts that select service projects represent 50% of Hilton's total deal pipeline for new builds in 2015. At Starwood, former CEO Frits van Paasschen said in February that the company's new build pipeline's focus has shifted to the select service segment for the year ahead.
The model has also, somewhat inadvertently, become the hospitality industry's answer to Airbnb, allowing a place for travelers to stay relatively cheaply, with threadbare amenities that encourage exploration of the surrounding area. Industry-wide, these hotels — brands like Hampton Inn, Courtyard by Marriott, and Holiday Inn Express — are gaining favor among younger travelers who want to spend less money and time in their hotels, putting the priority on their destinations rather than the properties in which they stay.
As demand for select service continues to rise, the corporate giants that own these brands are happy to keep building given how quickly and cheaply new properties go up and become profitable. This proliferation has in turn created fierce competition among the major select service parent companies, and, as a result, the hotels themselves are beginning to get nicer and nicer.
"What has happened is the nature of the select service segment used to be thought of as the seedy low-budget hotels, and that phenomenon has been turned it on its head and the hotel companies have made it a real value play, both for the consumer and the owner and operator," said Nikhil Bhalla, a hospitality analyst with FBR Capital Markets.
"The reason this has been so successful is that the room product has been improved substantially," he told BuzzFeed News. "If you go in today and someone asked you in the room whether it's full service, upscale luxury, or select service, you wouldn't be able to say."
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In 1983, Bill Marriott took a major roll of the dice when he opened what was then an experimental breed of hotel: the very first Courtyard by Marriott in Atlanta. The idea was to offer a hotel with the kind of quality standards synonymous with the Marriott brand, but light on amenities like room service, valet parking, and banquet space.
"Mr. Marriott said it was his gift to the hospitality industry, because it was his biggest risk and biggest reward," Marriott public relations director Nina Herrera-Davilla told BuzzFeed News on the eve of the opening of the 1,000th Courtyard by Marriott in Walla Walla, Washington, at the end of last month.
"It makes more business sense, and their popularity has grown through the years with business travelers," added Janis Millham, a senior vice president at Marriott overseeing a number of the company's select service brands. "It's in a lot of markets, where you want to be."
In opening Courtyard, Bill Marriott, who still serves as executive chairman of Marriott International, ignited the select service movement. Now, 32 years later, it is the most profitable and important part of every major hospitality company's slate of properties. Brands like Hilton's Hampton Inn and Homewood Suites, Starwood's Four Points by Sheraton, and Intercontinental's Holiday Inn and Holiday Inn Express have been linchpins in the portfolios of the biggest players in global hospitality.
And it becomes even more important as each of those global giants wages an all-fronts war with Airbnb, which is quickly capturing market share, especially among younger customers who may be forming lifelong travel habits.
"The next-generation traveler and the millennial traveler, what they value beyond new design and technology is they're not interested in paying a lot for a hotel; they want to experience the environment around them," said Dan Wasiolek, a hospitality analyst at Morningstar. "They want to explore outside the hotel room, they want cool design, a cool room, cool lobby where they can work and socialize and have a drink. The select service brands of Marriott equal about 49% of their total rooms. Courtyard has 21% of their rooms, and by the end of the year, 90% of those rooms will be renovated. In general they have a lot of exposure to this."
One of the reasons? Select service hotels are extremely profitable, cheap to operate, and easy to build, Wasiolek added.
"The operating costs are a lot lower at select service," he told BuzzFeed News. "At Hyatt, what they have noted is that their select service hotels have operating margins that are 5 to 10% below their full service, you don't have restaurants and all of the amenities."
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