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HAF "This paradigm shift in the hotel industry means that there are places to ensure that operations are extremely well managed"

Fabrice Collet, CEO of B&B HOTELS, Hubert Viriot, CEO of YOTEL and Jean-Michel Dalmasso, CEO of Dalmata Hospitality discuss the rise of the budget hotel sector and why it is becoming increasingly attractive to investors who previously preferred the upscale segment.

Jean Michel Dalmasso and Hubert Viriot, before getting to the heart of the matter, could you introduce yourselves and your companies?

Hubert Viriot: I am the CEO of YOTEL, a hotel operator based in England. We currently operate 22 hotels under 3 different brands. YOTEL AIR which are capsule hotels in airports, YOTEL which is a lifestyle brand based in urban areas and more recently we have launched an extended stay - serviced apartments brand called YOTEL PAD. One third of our hotels are located in the United States, another third in Europe and the last third in Asia.

Jean-Michel Dalmasso: I created Dalmata Hospitality five years ago with my partners. It is the leading operator-owner of budget hotels in France. We have a multitude of brands, including Accor, B&B HOTELS, Louvre and Comfort. We have 3,200 rooms under management and we focused on the budget sector five years ago. It has been a real challenge for us to set up management methods for budget hotels as we would for more upscale hotels, which is the objective of Dalmata Hospitality.

Would you like to comment on the messages that Fabrice Collet shared during his speech?

Jean-Michel Dalmasso: What Fabrice Collet said, but also what Sylvie Bergeret said, we talk a lot about the resilience of the economy. As soon as we speak of the economy, we associate the qualifier of resilient, whereas on the upscale we don't know what that represents. Behind this there is a real subject because resilient is good as it protects at the bottom of the cycle. Indeed, the elasticity to economic growth is a protection on the downside but it is less strong on the upside.

The difficulty, and the challenge, was to show that even if we are resilient on the downside, we can also be better than performing on the upside. This is also what B&B HOTELS has demonstrated. It is possible to be resilient and at the same time perform well in the economic cycle.

I think this is a really important point. Five years ago, when I went to approach investors to set up the purchase operation, I had to convince them to invest in economic hotels and not upscale hotels, whose real estate dimension does not concern city centres or 4-star hotels. Now, I think that investors are much more sensitive and capable of understanding this subject.

Hubert Viriot: We have a particular positioning at YOTEL because we have questioned all the usual hotel classification systems. What we really retain from the economy is the size of the rooms and the operational efficiency of this segment. From a positioning, locality, development strategy and revenue management point of view, we are much closer to upscale hotels. This makes our product disruptive.

If you compare real estate and the number of rooms per square metre, we are very similar to chains such as B&B Hotels, but if you look at our RevPAR, we are much more similar to upscale brands. That's the advantage of our positioning, it allows us to get much higher performance in topline while keeping the operational and property efficiency of the business model.

The return to growth was very strong and for us it was special because not only did we benefit like everyone else from a faster than expected return of corporate and leisure demand. We doubled our portfolio during the health crisis, so we had the double effect of more hotels and more demand. As a result, our turnover has exploded and we have good prospects for the immediate future.

A sort of virtuous circle has finally been established. Fabrice Collet underlined this, and all three of you share this idea about the convenience hotel industry. This desire to get out of the tariff aspect, the minimum price in terms of product. Jean-Michel Dalmasso even underlined the fact that investors are beginning to understand the interest of this product and this gives value to the asset. Is this a phenomenon that you all see? Are your owner-investors convinced and now asking to develop further? Is it easy to find new entrants?

Hubert Viriot: All of our hotels are managed under management contracts and we have recently launched a franchise programme but until now we have always focused on the management side. Most of our hotels are in the hands of large American private equity funds. And they not only welcome the management contract, if not the franchise, but they have fully understood the advantage of our positioning and are actively seeking it.

There are more difficulties in France in particular and in other European countries because there is still within the investment community a great dependence on long-term leases with hotel operators. This seems to us to be somewhat aberrant since the lease puts a direct cap on the profitability of the hotel compared to what we can demonstrate to our investors under management or franchise contracts.

There is still this misunderstanding between the profitability that we can generate with our concept, which is best expressed through management contracts where the investor takes a certain risk. But here in Europe, it doesn't work well because there is a great desire on the part of investors to take as little risk as possible.

Fabrice Collet: This is a point of view that fits well with the Americans, but in Europe it is the opposite. We have the feeling that leasing is a very virtuous thing, especially because we, as operators, are in charge of the investment and therefore of the quality of the product. That being said, it is quite possible not to be on a lease and still have a very consistent quality. Is there an absolute truth between the two? I think both work.

Hubert Viriot: Absolutely, we started our brand in the United States, our main investors are American and it's true that over there the understanding of the lease is very limited. I think you'll discover that quickly if you grow B&B Hotels in the United States. It is not sought after there, on the contrary it is rather avoided. Not least because you can get access to extremely sophisticated investors who fully understand the risk they are taking in signing up a luxury hotel as an economy.

As a result, they have very hands-on asset management activities that allow them to accept the risk taken of having a management contract and not a lease. And we prefer the management contract because we keep control of the operations.

That's why it was fundamental for the launch of Yotel to do only management contracts to be able to demonstrate not only the quality of the physical product but also the experience that we can deliver. Today, the fact that we have succeeded in proving this in fifteen cities around the world, in Tokyo, New York and London, we are ready to work with highly qualified operators on franchise contracts. We are not yet ready to work with independent owner-managers. 

Jean-Michel Dalmasso: I would give two elements, the first is that operational quality is an element which has become essential following the crisis that we have experienced. Whereas before we worked for years in an oligopolistic market, B&B Hotels arrived and gave a new impetus to the market.

All the big operators have gone out of business, except for B&B Hotels and a very small Louvre Hotels Group. Those who own a lot of brands like Accor, that experience of the teams and that knowledge of the pure operation has completely disappeared. They try to say that with the management contracts that they propose, they are capable of operating the hotels, but the reality is that they become brand managers. People who are able to have the expertise to create and distribute new hotel concepts.

This paradigm shift in the hotel business means that there are places to ensure that the operational side is extremely well managed. When we did the fundraising to acquire this portfolio, I was asked "Why would you do better than Accor to manage these hotels? We did better because we are entrepreneurs and we are close to these teams, which is a key point.

The consequence of this is the renting that we have with equity investors but also with financiers. Today, to carry out any operation, we are obliged to approach the banks and to be able to secure from them a capacity to operate which is better than the others, otherwise we do not obtain financing. At Dalmata Hospitality we are extremely flexible, we are capable of contract management, leases, and buying all the hotels.

We systematically apply our operational procedures in such a way as to reassure the owner of the premises if we sign a lease, our own equity investors if we buy real estate, and to assure all the other investors if we have a management contract. What seems essential to me in the hospitality space today is not simply to create brands, because there is great intelligence in brand management. On the other hand, we must return to good management of all the hotels.

Hubert Viriot: I totally agree and to bounce back on this subject, as an independent company that grows with its own brands, we always face the same two questions: "How are you going to do it when you've never opened a hotel in our country? and "How are you going to operate better than other brands? Now it's getting easier because we're still on our 22nd opening and we have 14 more to come in 12 different countries.

Each time we demonstrate the same thing, that is to say that we manage to perform well because in each of our concepts we have hotels from other brands such as Accor, IHG or Marriott. We are always in the top 2 so in the local market our brand is showing all its capabilities. The main reason why our owners like us is precisely the entrepreneurial spirit we bring with the opening of each hotel. We are passionate about what we do and every new hotel we open is a flagship for the brand, which you can't get with a contract from a chain that has 5,000 hotels.

This question of strongly involving the teams, giving them the reins, making them responsible, is an element present in all three of your brands. Fabrice Collet, your shareholders are for example very involved.

Fabrice Collet: Yes indeed, we have manager-agents in many hotels for whom it is their business, so if the hotel is doing well it means that their business is doing well and if they are not doing well, their business is doing less well. We do have this idea that this is our business, our baby, our hotels and we take great care of it. That's the most difficult thing we have to do as we grow, not to lose that spirit. We don't want to become a big operator like others. We have to keep that entrepreneurial side but it's not easy and I hope we can do it.

Hubert Viriot, you decided to launch a new product a few months ago on a long term basis because you probably felt that it was the right time. Can you tell us more about it?

Hubert Viriot: It's a bit the opposite of what we started out doing because our first hotels were hotels that we sold by the hour. We went from ultra short stay to short stay and now we're taking the extended stay route. The reason why we are interested in the extended stay is that first of all it is a sector that has changed profoundly; extended stay now includes average stays of 3 to 5 nights, so not so long stays.

What intrigued us the most was the impact that actors like Airbnb have had on the market. When we looked at the extended stay operators, we could see that it was not very exciting. They were often failed real estate projects that were later transformed into serviced apartments or very economical without any real experience. We thought there was a real angle to be taken there to create a more differentiating brand with a real experience that is affordable and is recognised on huge platforms like Airbnb with a brand.

When we saw this opportunity in the market, we thought we could do the same thing in this area as we do in the hotel business. We're pretty much the only ones doing this because most of the players are much more upscale than us. It's all the more interesting post-Covid when we saw a strong demand for long stay.

Again, in the US, most of the projects we are currently working on are mixed-use projects. So you need to have a solution for both the hotel operator and the more residential part to be able to diversify the product. The last time we saw projects in the United States on a single-use basis, it was rather rare. I think the same trends are happening elsewhere in the world, quickly in Asia and more slowly in Europe because the projects are generally smaller in size.

Fabrice Collet: The arrival of mixed-use everywhere is obvious. Being able to provide solutions to the complexity of property development is going to be a key to the future. 

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