the discount business model and hotel chains

Filed in archive Venture Capital on September 2, 2003

Obviously France is not an hotbed of innovation within the European Union. But still my vacation exposed me to a few easily visible interesting new business models. A development I had not noticed so strongly, is the emergence of more and more discount hotel chains in France. It's far from new, but the sheer number is fro me.

Formule 1 and Etap were some of the earlier ones. Accor, the mother company operates more than 3,700 hotels (423,000 rooms) in 90 countries. For a good while the concept was not challenged. Booking is usually via Internet or directly through a reception computer. Rooms are simple but clean. The hotel design is very practical. Efficiency is the major concern usually. Both chains have a nation wide coverage in France now.

So why does the discount model work for airlines like:

• Easyjet


• Germanwings


• HLX


• Ryanair

work?

• lower costs of products and services


• cheaper and highly automated sales process (Internet)


• elastic pricing or very customer focused pricing


• best use of spare capacity in flights, as there is no extra cost for passengers compared to an empty flight


• partly big price differences between established players and the new players


• cheap airports


• short cycles for starting and landing


• no paper

Hotels have many things in common with flights. Like fixed flight routes and leased aircrafts a hotel presents sunk costs. Costs occur independently from usage (besides cleaning). The customer group for a hotel is probably more consistent, but still an elastic or leveled pricing can appeal to different customers (prebooking, corporates, last minute). London, Paris and Milan have the highest relative hotel rates in the world according to the Economist. I'm just surprised that so few have tried to use the discount model to enter this market opportunity.

In France Mr. Bed, a smaller chain, is running the same concept as Formule 1 and is already operational in several cities. UK's entrepreneur no. 1 Stelios Haji-Ioannou wants to venture in the field with a similiar concept easyDorm.

A bit more inside into the industry offers this paper for budget (although much more luxurious) hotels in Scotland. Thanks Mario!