Budget woes boost demand for 'cheap' boutique hotels

The Aloft Lexington hotel in Lexington, Mass., offers fashionable decor at a cheaper price - $119 per night compared with the $399 to $639 demanded at W Hotels, Aloft's upscale sister hotel.

The world's largest hotel companies, stung by the industry's biggest declines since the Great Depression, are trying to do for lodging what Ikea did for furniture: Offer fashionable products at low prices.

Starwood Hotels & Resorts Worldwide Inc., the third-biggest U.S. lodging company, is developing boutique hotels for frugal travelers that cost about $119 a night. That's a far cry from the $399 to $639 at the company's upscale W Hotels. InterContinental Hotels Group PLC is following a similar strategy with its boutique chain Hotel Indigo.

Both companies are seeking to capitalize on a formula popularized in the 1980s, when small, individual properties with luxury amenities, designer interiors, and quirky decor gained in popularity. This time, the demand for affordable, fashionable lodging was fueled by a recession that left many people unable or unwilling to spend as much on vacations.

"You mix the luxury elements into the lower-priced product and it's fair to presume that what's more value-driven is faring much better during the downturn and beyond," said David Katz, an analyst at Oppenheimer & Co. in New York.

The top four U.S. hotel companies reported revenue declines of 16 percent to 22 percent for the first nine months after rising unemployment dented consumer spending. Room rates will probably fall in 2010 for the second consecutive year as hotel owners offer discounts to lure customers, according to PricewaterhouseCoopers LLP.

Hotel operators are also battling a drop in business travel as companies try to save money. There has been a backlash against lavish spending by banks, insurers, and carmakers that were given government financial assistance, discouraging them from using expensive hotels for conferences and conventions.

The chains are designed for travelers who want a unique hotel experience without spending $500 a night.

Starwood's W Hotels, a boutique chain started in the late 1990s, are equipped with 400-thread count organic cotton Percale duvet covers by Swedish designer Anki Spets. The beds also have feather pillow-topped mattresses and leather headboards. Some lobbies are furnished with Philippe Starck pieces, such as Louis XV-style chairs.

"The demand for alternatives to the sameness of chain hotels has been growing and will continue to grow," said Marc Gordon, president of Morgans Hotel Group Co.

"Limited-service boutiques speak to an increasing part of the population that prefer alternative hotels to large chain hotels."

Those people may prefer to stay in stylish, quirky hotels without paying top prices, Mr. Gordon said.

The Morgans's namesake boutique hotel on Madison Avenue boasts an elegant lobby with armchairs and tables by 1930s designer Jean-Michel Frank. The lobby at its Mondrian hotel on Sunset Boulevard in West Hollywood features a swing. A standard room there for a mid-week stay was advertised at $275 a night, according to the Mondrian's Web site.

Average daily room rates at boutique hotels dropped 22 percent in January through September compared with a 9.1 percent decline across all U.S. hotel segments, according to Smith Travel Research of Hendersonville, Tenn.

A lack of financing forced Starwood to cut its original goal of starting 500 Aloft hotels by 2012 - the Aloft chain is a limited-service boutique brand. The White Plains, N.Y., company still expects to open 40 outlets by the end of this year and another 11 next year.

At IHG's budget boutique chain, Hotel Indigo, rooms feature dark hardwood floors and tall beds loaded with decorative pillows. There are 34 hotels in operation and as many as 15 will be added in 2010, said Janis Cannon, vice president of global brand management.

The increasing number of boutique hotels may swamp the market.

Marriott International Inc. is working on its own full-service boutique chain, named Edition, and plans to open the first two in Waikiki, Hawaii, and Istanbul next year, said Don Semmler, executive vice-president of brand management.

"There's a huge eruption of boutique brands," said David Loeb, an analyst at Robert W. Baird & Co.

"True luxury boutique hotels with impeccable service will come out as the winners, while those that look like luxury boutique hotels but are staffed with young, hip 20-something year-olds who are dressed in black and are indifferent to customers won't."

Aloft plans to expand from suburban into urban markets and will open two hotels in New York City in 2010.

"We've seen a democratization of design with Ikea, Pottery Barn, and Crate & Barrel," said Brian McGuinness, Starwood's senior vice president of specialty select brands. "Gen Y is the big story. Design is something they have been introduced to early on at relatively lower price points."