Top-Tier Hotel Brands Move Down Market

In the last few weeks, the top-tier hotel brands Hyatt, Hilton, and Marriott have all announced new Midscale Extended-Stay sub-brands, reinforcing an emerging trend over the last several years where top-tier brands expand into more Midscale and Upper-Midscale brand offerings. These new product offerings appeal to guests and owners alike. Guests are responding to economic headwinds and seeking value in their lodging options. For owners the development cost and operating cost, provide a financial model that achieves better risk-adjusted returns in a business environment where construction and labor costs remain high, interest rates are elevated, and the availability of lending is tight.

In October 2022, Marriott International acquired City Express, a Midscale brand in Mexico. Regarding the acquisition, Brian King, Marriott President for the Caribbean and Latin America region, said “this is a historic moment for us to enter this category, and to purchase this number of hotels at once.” A few months later, during its first quarter 2023 earnings call on May 2, 2023, Marriott International CEO Anthony Capuano announced a new-build Midscale Extended-Stay brand that is simple, modern, and streamlined, with basic services and amenities for guests seeking longer stays at a midscale price point. With Mexico currently making up one fifth of tourism into the United States, it is plausible that Marriott could start peppering the Sunbelt of the United States with the City Express brand to accommodate travelers from Mexico who are already familiar with the name.

A week before Marriott’s announcement, during its first quarter 2023 earnings call on April 26, 2023, Hilton Hotels announced plans to introduce a new Midscale Extended-Stay brand in the coming months. This brand will focus on new construction and on filling the need for an average daily rate (ADR) below the Home2 Suites brand. Hilton estimates the first set of properties will begin opening in 2025-2026. Hilton Hotels’ other new brand, Spark, will focus on conversions and an economy-level service offering – offering even lower barriers to entry for owners and providing guests a lower price point. 

This comes on the heels of a similar move by Hyatt Hotels, who on April 18, 2023, introduced Hyatt Studios, a new Upper-Midscale Extended-Stay brand that, like the new Extended-Stay brands from Hilton and Marriott, will focus on new construction. Additionally, Hyatt Studios will focus on smaller markets that do not currently have other Hyatt brands. Hyatt Studios will be Hyatt’s first brand below the Upscale segment and, as of this announcement, has more than 100 signed letters of intent.

Previously, the top-tier brands held a markedly lower percentage of total US rooms below the Upscale category. These recent moves down the value chain are part of a trend that has been developing over the last five (5) years, one that we expect to become more prominent in the future, both through strategic brand acquisition and the organic development of new brands.

Marriott has increased its Upper-Midscale portion of rooms by 19.40%, from 13.92% of all rooms in 2017 to 16.62% in 2022. Hilton has dramatically increased its portion of Midscale rooms by 1860%, from a nearly non-existent 0.15% in 2017 to 2.94% in 2022; when combined with Upper-Midscale, it totals 312,292 rooms versus 232,351 in 2017, an increase of 34.41%. Hyatt has had nothing below Upscale until its most recent announcement.

Over the last 20 years, OTAs have facilitated an expansion of “price-first” guests that are distinct from “loyalty-first” corporate travelers. The top-tier brands lack of rooms below the Upscale segment has made it difficult to access price sensitive guests. Expanding the Midscale, Extended-Stay, and Upper-Midscale offerings not only serves these guests at their desired price point, but it also creates additional opportunities to transition the OTA customer towards loyalty. Newly attracted Midscale customers may become brand credit card users and be exposed to other incentives that guide them to products across the brand portfolio, creating a pipeline and pull towards brand loyalty.

Within the broader categories of Midscale and Upper-Midscale, the industry has seen a rapid expansion of Extended-Stay products. Owners fighting an ever-challenging labor market have found that Extended-Stay properties ease operational challenges with their lower expenses and higher margins, and they do so with more marketable ADRs that appeal to a growing segment of today’s hotel guests. The number of rooms is also attractive to owners, as most Extended-Stay room counts are approximately 100 rooms per property, a significant incentive when project financing remains challenging and cost of construction remains stubbornly high (the average number of rooms per property for Hyatt, Hilton, and Marriott are 287, 172, and 214, respectively).

With increased market volatility, higher interest rates, and a more price-sensitive hotel guest compared to even a year ago, hoteliers providing a solid hotel room at a reasonable price will increasingly outperform their competition in the years ahead. While the top-tier brands were not the trailblazers for defining this segment, their scale, experience, and brand recognition will firmly cement it, creating a differentiated and competitive product.

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