Consolidation speculation in the budget hotel market

The budget hotel market in the UK has enjoyed stronger than average growth in the last decade. A small number of operators have steadily built their market share, and now there is media speculation that the two largest competitors will soon merge.

The Sunday Times speculates today that leisure group Whitbread has been holding secret talks to merge its Premier Inn budget-hotel business with the rival Travelodge chain in a move that would create a £3 billion hospitality giant.

Whitbread is a publicly quoted company, whereas Travelodge is currently owned by Dubai Investment Capital, a so-called sovereign fund (i.e. funds controlled by government that invests in overseas assets).

The budget-hotel sector is one of the bright spots in the leisure industry. It is growing three times faster than the rest of the hotel sector, according to Mintel, the market-research firm.

My guess would be that the budget sector will continue to out-perform the rest of the UK hotel industry, particularly as the economic downturn starts to bite (consumers will be increasingly looking for better value).

The deal is purely speculation, of course. Although in such matters there is rarely smoke without fire.

It is possible the deal might be referred to the Competition Commission, although even with a combined inventory of over 55,000 rooms, the enlarged business would still have a relatively low market share.

The UK hotel market is not heavily concentrated and is highly fragmented. However, it looks like there might soon be a dominant player in the star segment.