Mid-tier hotel formulas for success
Ibis, Best Western and Toyoko Inn good business role models
By Joo Young-min
Mid-tier hotels in Korea refer to no-frill places that provide a clean and comfortable stay for about $100, far less than their upscale peers.
In the trade-off between price and upscale features, mid-tier hotels don’t have a swimming pool, bellman, doorman, valet parking, room service or spacious rooms. The typical room size is only 26.5 square meters. However, they generally have a small business service with free Internet access and one or two food and beverage facilities.
More than half of the global top 20 hotel brands are mid-tier hotel brands. U.S. hotel chains Best Western and Holiday Inn rank first and second respectively in this wide category.
Before 2000, luxury domestic and foreign hotels dominated the hospitality industry in Korea. There was little choice for travelers who did not want to stay in cheap, 3-star or below hotels, which are often too shabby and out of date to satisfy customer satisfaction.
After 2000, foreign mid-tier hotels began to fill the void. Best Western of the U.S. opened its first hotel in Seoul in 2001, followed by Ibis of France in 2003, Toyoko Inn of Japan in 2007, and Courtyard by Marriott of the U.S. in 2009.
The arrival of such foreign hotels in Korea quickened after Ibis Ambassador Myeongdong opened in 2006 and achieved very strong room occupancy.
Situated in a favorite shopping area for Chinese and Japanese tourists, the Ibis had a 96 percent occupancy rate in 2009 with the average daily rate (ADR) of 116,000 won per night exceeding the average performance of four-star deluxe hotels in Seoul that had an 83 percent occupancy rate with the average rate of 107,000 won on average.
With a reputation for offering affordable prices for service quality that is close to the high end, mid-tier hotels will likely gain more elasticity because the continuing lackluster economic environment will fuel preference for no-frills accommodation.
Domestic luxury hotel brands have taken note and entered the lower price segment. The Lotte Hotel has introduced the Lotte City Hotel brand for the mid-market and Hotel Shilla has a similar plan under consideration.
The government also is responding. It is preparing support measures, including increased lending from its tourism fund to significantly address the undersupply of low and mid-tier hotels.
Here are three conditions for success of mid-tier hotels.
Implementing low-cost strategies
To hold down costs, only essential facilities and services should be offered. For example, vending machines that sell beverages, snacks and daily necessities on each floor of a hotel can replace in-room mini-bars and room service.
The size of the workforce also should be limited to keep labor costs in check. This can be achieved without sacrificing service and maintenance if employees are trained to perform multiple tasks.
At Toyoko Inn all regular employees, including managers, change light bulbs, repair drain pipes and maintain communication equipment.
At Ibis hotels, the front desk staff handles reservation calls in addition to its regular check-in and check-out duties and the general manager’s secretary performs public relations and personnel administrative tasks. Meanwhile, the manager of the Ibis unit also oversees the hotel’s restaurant and bar and even serves food and drinks to guests.
Thanks to such multi-skilled employees and expertise sharing among its chain hotels, Ibis has been able to keep its labor costs to sales ratio to between 13 and 16.5 percent. This means a considerable saving in labor costs compared to competitors.
Thirdly, collective bulk buying should be exercised to lower unit costs on a wide range of products and services. Also, to reduce maintenance costs, it would be best to designate one company to handle equipment installation and maintenance on a continuous basis.
In fact, Ibis chain hotels jointly purchase amenities and materials, and Toyoko Inn group reduces maintenance costs by having sister company, Toyoko Inn Denken, responsible for hotel construction and equipment installation.
Possessing differentiated content
Although the business model of mid-tier hotels calls for limited services, it does not mean differentiated services are not needed. Special features, of course, can be developed by leveraging innate strengths.
As a French hotel famous for a highly developed and refined food culture, Ibis has developed 20 types of restaurants and cafes by utilizing know-how from its experience in catering.
In the case of Toyoko Inn, special consideration has been given to create a comfortable barrier-free environment for any guest with disability or the elderly. All Toyoko Inn units opened “Heartful Rooms” from August 2006, which have bathrooms that accommodate wheelchair-bound guests.
It is also necessary to develop services appealing to such targeted customers as women, businessmen and traveling families.
Holiday Inn offers a promotion for children, “Kids Stay & Eat Free,” to create a family-friendly atmosphere. Children under the age of 13 are guaranteed to stay free when sharing a room with up to two adults and to have free meals when taken from the children’s menu.
Lastly, it is important to find ways that complement disadvantages such as guests possibly feeling cramped because of the small size of their room or loss of privacy because of room sharing.
Toyoko Inn offers a “Business Twin” room to provide privacy to businessmen who are on a tight budget and must share a room. The room uses its bathroom as a room divider and each guest has own writing desk, TV, and fridge.
Securing competent talent
Competent employees are naturally essential to the ability of any hotels to deliver high quality hospitality service. But the lower a hotel class is, the more difficult it is to hire and retain quality individuals.
To overcome this drawback and empower employees to perform various tasks, it is necessary to devise incentives such as fast promotions and overseas training opportunities to outstanding employees.
Ibis hotels in Korea fill general manager posts with Koreans, making it the first global hotel chain to use locally hired employees for the position. The ground-breaking personnel policy has attracted Korean graduates of hotel management from prestigious universities in the U.S. and Switzerland.
However, there is also a need to have a penalty system to go along with incentives, so as to prevent employee laxity and sustain necessary tension.
Toyoko Inn urges poorly performing employees to reflect on themselves and make strenuous efforts by forcing them to wear red name tags in the hotel managers meeting. By granting authority to work, the Japanese hotel chain also encourages employees to find solutions on their own.
This case study was provided by Samsung Economic Research Institute (SERI). Joo Young-min is a research fellow at SERI.