Wetherspoon opts for budget hotels

JD Wetherspoon, which brought soulless, music-free pubs complete with no-smoking areas and sparkling loos to the UK, is about to do something similar in the budget hotel sector.

The company has invested over 4m in buying up two hotels and converting them to its new “Wetherlodge” concept. The first lodge – The Shrewsbury Hotel – opens next September in Shrewsbury, and will have 22 rooms costing 30-35 a night. One of the lodge’s two floors will be non-smoking, the loos will no doubt sparkle and there will be a soulless JD pub attached to the hotel. There are plans for a second Wetherlodge to open in Glen Rothes in Scotland in mid-November.

Wetherspoon spokesman Eddie Gershon says: “In our pubs we talk about “CBS” – cleanliness, beer and service. The pubs are clean, the beer is good and so is the service. We are looking at bringing these values into hotels as well, to have the same standards in the hotels as in the pubs. We don’t want to differentiate between the hotels and the pubs.

“There’s not much going on in the hotels – if you want to eat you go into the pub. There is no room service. The hotels are not aimed at anyone in particular, but logically they would get business people.” In the same way as the pubs are aimed at anybody who wants a quiet drink, the hotels will cast the net wide. Typical budget hotel guests are families and business people.

However the rooms have televisions, trouser presses and hairdryers, which is more than can be expected from some of the larger chains of budget hotels.

The move into hotels is a departure for Wetherspoon, which has grown into a 240-strong pub chain since founder and chairman Tim Martin opened the first outlet in 1979. The bar concept has been an antidote to the wave of noisy theme pubs which have swept the country. This is the first time Wetherspoon has diversified out of pubs.

But City analysts are scaling back profit forecasts for the company amid fears that Wetherspoon’s pub roll-out is reaching saturation. Stuart Forshaw, brewery analyst at Charterhouse Tilney, says: “We are worried about the future direction of the company. It has made the running for so long, now it’s past its peak. Its pubs are represented in every town where it wants to be. It is a one-legged stool, and these have a habit of falling over.”

Gershon says the hotels were bought with a view to turning them into pubs, but “we thought let’s do something with them”, he says. He claims the move is “in no way, shape or form” a response to City pressure to diversify.

Analysts are cutting Wetherspoon’s profit forecasts for this year from 22m to about 20m. Still, this is an improvement on last year, when the company announced profits before tax of 17.6m – in itself a 34 per cent rise on the previous year – on turnover up 39 per cent to 139.4m.

There are 22,000 budget hotel rooms in the UK, a number that has doubled over the past five years and which looks likely to double again over the next five. The sector is attracting the interest of some of the biggest players in the industry.

It is dominated by Granada and Whitbread. Granada’s Travelodge has some 170 hotels around the country, with plans to build 25 more in city centres.

Whitbread’s Travel Inns, which first opened in 1987, now have about 200 hotels and plans to expand into city centres. Bass plans to introduce its Holiday Inn Express brand to the UK, and will invest up to 40m in nine franchised hotels in city centres.

Budget hotels grew in the UK in the early Nineties as catering companies looked at ways to soak up their unused land. Cheap hotels with reasonable standards have been successful in Europe, and French brands such as Campanile and Formule 1 are expanding into the UK. Railtrack is in talks with a hotel entrepreneur to build budget hotels on the land around its rail stations.

Mike Stapleton, head of the hotels team at consultants Deloitte & Touche, says: “Whitbread and Granada drove the growth of budget hotels from existing land banks using adjoining space. They provided food and beverages at the same time. But the reason why growth is constricted now is because they have used the majority of their land banks.” So budget hotels are moving into a new phase, looking for new sites, particularly in city-centres.

There is a clear commercial logic to budget hotels. Most hotels have high “operational gearing” – expensive additional services such as catering and room service which eat into margins, while room rental is profitable. By stripping out the extras, the budget hotels can make operating margins of 45 per cent of revenue, as opposed to 30 per cent for other hotels.

Wetherspoon has seen an opportunity to transplant its brand values of simple, clean catering into the hotel sector. But according to Stapleton, the sector is driven not so much by brand values, as by the simplicity of booking rooms. “Historically, supply has lagged behind demand, and there has not been head-on competition. As supply increases, it will be important to differentiate on price and facilities. But it is also about distribution and how easily you can book a room. Having a central booking number is as important as branding.”

The company will not have a distribution system for its budget rooms to start with, but will advertise in its customer magazine Wetherspoon News which has a circulation of some 250,000, distributed in its pubs. Wetherspoon’s Gershon says the two hotels will be a test and there are no plans at present to extend them. But he concedes that if successful, they could be expanded and a distribution system would be considered.

The move into budget hotels could spell a new lease of life for Wetherspoon as its pub roll-out faces saturation, but it requires weighty investment to buy the hotels and convert them. It is possible it will in time follow other players and build from scratch, but with increasing competition for available land, this will become more expensive. However, Wetherspoon has built up a reputation for clean, simple catering and this could serve it well in the dreary world of budget hotels.

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