Hotel giants seek refuge in niches

By David Jones and Deena Beasley

LONDON/LOS ANGELES (Reuters) - It's a trend pre-dating the global slowdown: big hotel chains are moving into the quirky boutique sector to tap into a niche of profitable growth. What's not clear now is how many can succeed.

Hotel revenues have fallen sharply since last October and shares in hotel groups in Europe fell by more than 30 percent in 2008 as investors anticipated pressure on earnings this year.

Nonetheless global giants from InterContinental -- the world's largest hotel group -- to Marriott and Starwood are launching boutique brands in Europe, with others set to follow as they face the biggest industry downturn in a generation.

Consulting firm PricewaterhouseCoopers in December forecast U.S. demand for hotels in 2009 would fall by 2 percent which, when coupled with an increase in supply, would reduce occupancy levels to 58.6 percent -- their lowest since 1971.

Against that backdrop boutique hotels -- individual and usually luxurious outlets -- offer big chains a chance to boost one of the industry's key measures: revenue per available room (RevPAR), which PwC saw sliding 5.8 percent in this year, after last year's estimated 0.8 percent decline.

The U.S. market looks the most exposed, according to Natixis Securities in a January 9 note. Britain, Spain and Italy look more vulnerable in Europe than France and Germany.

Picking a brand name that emphasizes the mood of the moment -- Indigo -- British-based InterContinental Hotels Group last month opened its first boutique brand outside America. The outlet near Paddington rail station in London brought its chain to 22, and it says it aims to reach 200 in four to five years.

"We saw an opportunity for a hotel with a bit of a difference, but the benefits of a big brand," said John Wagner, in charge of the brand for Europe, the Middle East and Africa.

Hoteliers entering the boutique niche are betting that travelers will seek better value as spending is squeezed, rather than settle for the usual boring "beige box" hotel room.

But as the big chains muscle in on ground hitherto occupied by smaller independents, the battle could be intense.

The latest data show in November U.S. hotel occupancy fell 10.6 percent, while room rates dipped 2.5 percent: the declines for boutique hotels were 12 percent and 12.7 percent, according to Smith Travel Research, which tracks the industry.

"Unfortunately, from where we are sitting right now the luxury sector is getting hit harder than the average hotel," said Smith Travel analyst Jan Freitag.

"Luxury hotels are having a harder time and boutique properties are competing at the luxury end," Freitag said, noting that many boutique properties are independently operated and lack the marketing muscle and frequent-stay programs associated with chain-affiliated hotels.

CAR PARKS, CHOCOLATE

Boutique hotels first appeared in the 1980s in the United States, followed in Europe with, for example, a converted multi-storey car park in Paris and a chocolate-themed hotel on England's south coast.