Cornell Study finds Low-end Properties benefit from High-end Neighbors

Opening a low-end hotel near high-end properties is generally a sound business strategy, according to a new report from Cornell’s Center for Hospitality Research (CHR).

The study, by professors Cathy A. Enz, Linda Canina, and Jeffrey Harrison, found that being different is good, but only when your operation is near a cluster of upper-scale properties. Comparing RevPAR results in year 2000 for 14,995 U.S. hotels, the team found that economy and budget hotels had higher RevPARs when they were located in markets with a high proportion of upscale and luxury hotels. On the other hand, luxury hotels that operated amid downmarket hotels suffer diminished RevPAR.

“We controlled for many demand-shaping factors such as chain affiliation and market location, and it turns out that co-location is a key contributor to RevPAR premiums for low-end hotels that operate near those in higher market segment,” explained Enz. “Looking at a particular hotel’s pricing strategy, we found that the more different a property is from the average property in a particular cluster, the greater the RevPAR benefit for a low-end hotel and the greater the detriment for a high end hotel.”

Translating the findings into practical terms, Enz said the study suggests that developers should locate luxury hotels away from clusters of midmarket hotels. At the same time, developers of economy or budget hotels might seek to locate near a cluster of luxury or upscale properties.

The data were drawn from operating information compiled by Smith Travel Research (STR), which is a partner with the Center for Hospitality Research. STR provided the data on the condition that results for individuals properties and chains not be disclosed. Responding to the study, STR President Mark Lomanno, pointed out two additional factors that seem to boost RevPAR. “Not only does the analysis quantify the benefits of chain affiliation, it also clearly establishes the relationship between intelligent site selection and superior performance," Lomanno said. “This study clearly dispels the notion that co-locating hotels is bad for business. In fact it often helps.”

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