Motel 6 Corporation

views updated

Motel 6 Corporation

14651 Dallas Parkway
Dallas, Texas 75240
(214) 386-6161
Fax: (214) 702-5996

Wholly Owned Subsidiary of Accor S.A.
Employees: 14,460
Sales: $600 million
SICs: 7011 Hotels & Motels

One of the most successful motel companies in the United States, Motel 6 Corporation operates a chain of budget motels that cover the country, providing affordable accommodations to both recreational and business travelers. Created by two former building contractors, Motel 6 recorded solid growth during the 1960s and early 1970s, propelling the company toward the vanguard of the U.S. budget motel industrya position the motel chain continued to hold through the mid-1990s.

In the early 1970s a new breed of motel operators began to emerge in the United States: a small group of companies no more than a decade old that promised to reshape an industry dominated by large and entrenched corporate giants. It was not the first time the lodging industry had undergone a radical transformation; years earlier the same large motel companies that stood atop the motel industry during the 1970s had captured an appreciable share of the overall lodging market from hotel operators by charging considerably lower room rates. Now, as these same motel companies reaped the rewards of their successful incursion of decades before, they found themselves vulnerable to attack by newer motel companies employing a similar strategy. In this latest revolution to sweep through the lodging industry, however, the motel industry turned against itself.

Leading this new attack against such larger motel chains as Holiday Inns and Sheraton were Scottish Inns of America, Inc., Chalet Suisse International, Inc., Days Inns of America, Inc., Econo-Travel Corporation, and a motel operator the Wall Street Journal referred to as the grandaddy of budget motel companies, Motel 6, Inc. Although the strategy employed by this relatively new band of budget motel companies was similar to the strategy once utilized by Holiday Inns and other large motel chainscharge lower rates than the competitiontheir approach was novel. Nearly all of the budget motel companies creating a stir in the lodging industry during the early 1970s were operated by management with professional backgrounds in construction rather than hotel management. Such was the case with Motel 6, one of the discount pack that would force motel industry stalwarts to rethink their marketing strategies.

Though it enjoyed an enviable market position in the early 1970s, Motel 6 was then only a decade old. Formed in 1962 by two Santa Barbara building contractors who specialized in low-cost housing projects, Motel 6 had clearly caught the motel industry by storm with its rapid growth. Mid-way through their careers as contractors, Paul A. Greene and William W. Becker decided to apply their talents to creating a motel that could charge rock-bottom prices yet still generate a profit, something they were aptly suited for given their construction experience. With $800,000 in cash, the two partners began formulating their plan to create a profitable bargain motel in 1960, starting initially with $4 per room per night as their target price. After exploratory research proved that figure too low, Greene and Becker raised their target price to $5 per night, then finally settled on $6 per night two years after beginning their design work. Once all the preliminary work was concluded and it was decided that a $6 nightly charge would cover land leases, mortgages, maid service, managers salaries, and building costs, Greene and Becker set to work, opening their first Motel 6 in 1962. Their 54-unit complex in Santa Barbara was itself a notable achievement and an exception to the other motels scattered across the country.

While Greene and Becker were constructing their first budget motel, other larger operators, such as Holiday Inns, were creating increasingly luxurious properties, emulating hotels rather than countering them as they had first done. Amid this growing trend toward grander motels with their necessarily higher prices, Greene and Becker offered an alternative: a motel without the amenities of other motels, but one that charged substantially less than its competition. There were numerous factors that enabled the two partners to charge $6 for a nights stay, chief among them the fact that they built the motel themselves. Other motel operators intent on securing a foothold in the budget motel market were, typically, businesspeople with hotel management experiencenot construction experiencewho set themselves to the task of creating and operating a budget motel after construction of their property was completed.

Not so with Greene and Becker. After spending two years developing a suitable model for their enterprise, Greene and Becker had designed nearly every aspect of their first Motel 6 to reduce costs wherever possible. The Santa Barbara property did not boast a dining facility, as did many large, higher priced motel chains. Beds were built flush to the floor to shorten the time required to clean each room, shower stalls were constructed with rounded edges to eliminate scrubbing in corners, glasses were replaced with Styrofoam cups, sheets were wash-and-wear, dressers were eliminated, television sets were outfitted with coin boxes that required a guest to deposit $.25 for six hours of viewing, and advertising for the motel relied exclusively on billboard announcements.

The first Motel 6 established a pattern for the many other Motel 6s to follow, a pattern that proved to be almost immediately successful. It was also a pattern predicated on ignorance of the motel industry, yet buttressed by expertise in the construction industry. As Becker later remarked to the Wall Street Journal regarding his companys genesis, When we entered the business, we had the advantage of not knowing anything about it, so we werent burdened by preconceived notions. Freed from the standard philosophy dictating other motel operators actions, the company expanded. Four years after the first Motel 6 opened, there were 26 motels in operation, each built for 50 percent of the construction costs other motel properties required. The company generated more than $4 million in sales in 1966 and earned more than $750,000, double the figures recorded the previous year. From California, Greene and Becker had moved into Utah, Nevada, and Arizona, and were awaiting the completion of a 12-story motel in Waikiki and two more motels in Iowa, targeting any community that had a population base of at least 50,000.

By this time Motel 6s advertising budget was less than it was at the companys inception four years earlier, declining as Motel 6 billboards were eliminated. But perhaps more remarkableand more indicative of the chains growing successwas its occupancy rate, the true measure of a lodging facilitys success. In 1962, the company recorded a 53 percent occupancy rate, a figure below the national average, but by 1966 Motel 6 was registering an 84.9 percent occupancy rate, well above the national average of 67 percent. This gave Greene and Becker all the encouragement they needed to continue expanding their motel chain. As Motel 6s successes mounted during the late 1960s, outside investors began paying closer attention to the companys burgeoning growth, attention Greene and Becker welcomed. In a 1967 interview with Newsweek, Becker stated as much, auguring Motel 6s future course when he remarked, Were sort of mavericks in this business, because weve done something that a lot of people said was impossible. Consequently, at times, we havent had the full confidence of the financial community ... being acquired by a conglomerate would certainly make us accepted members. Shortly thereafter, the company was acquired by City Investing Company, giving it the financial wherewithal to expand at a robust pace.

By the early 1970s, Motel 6 and its group of budget-oriented competitors also had begun to draw the attention of their larger, more luxurious competitors by capturing some of their market share. In 1972, budget motels, the most active of which were companies with construction expertise rather than motel or hotel management expertise, accounted for between 2 percent and 3 percent of the lodging industrys aggregate revenues of $9 billion, up from essentially zero before the decade began. The sudden rise and encroachment of budget motels was sufficient to force larger motel chains to adapt to the changing market conditions. But as Motel 6 had demonstrated a decade earlier, driving overhead costs down was not something to be accomplished administratively; it was something to be realized, first and foremost, by paying assiduous attention to construction costs and design plans.

One of the pioneers of this revolutionary concept, Motel 6 moved forward with optimistic plans, bolstered by the growing presence and acceptance of budget motels across the country, particularly in the southwestern and western United States. The company now had roughly 110 motels stretched across 30 states, with plans to add 570 motels by the end of the decade. Those plans were dashed, however, as growth slowed during the balance of the 1970s, at least in terms of the companys hopeful prognostications. Proposing to operate 680 motels by 1979, Motel 6 only had 378 properties in operation by 1985, the year City Investing Company sold the motel chain to an investor group led by Kohlberg, Kravis, Roberts & Company (KKR) for $881 million. Although City Investings divestiture of the budget motel chain was not directly related to Motel 6s laggard expansionCity Investings shareholders had voted to liquidate a majority of the companys assets to focus primarily on selling home insurancethere were clear indications that Motel 6 was suffering from potentially debilitating problems.

More alarming than the motel chains slower-than-expected expansion was its consistently shrinking occupancy rate, which declined from over 90 percent during the early 1970s, to 81 percent by 1981, and to 59 percent by the time of the sale by City Investing. Chiefly to blame for Motel 6s malaise were the same companies that had grown along with Motel 6 to be prodigious forces in the lodging industry during the 1960s and 1970s. By the 1980s competition among these companies had become intense, heightened after two decades of expansion that had blanketed the country with budget motels. In the drive to lure guests into its rooms, Motel 6 was losing ground and its expansion efforts were losing momentum. Meanwhile, its closest rivals began sprucing up their rooms, making them more hospitable, and consequently robbing Motel 6 of its historically high occupancy rates.

To ameliorate Motel 6s market position, the investor group led by KKR had several solutions in mind. Motel 6s new owners began adding amenities that Greene and Becker had previously eschewed (installing telephones and color television sets throughout the motel chains properties), placing an emphasis on attracting business travelers to complement the companys primary clientele of weekend pleasure travelers, and accelerating expansion. By far the most important change brought about by the companys new management was a major marketing push, the first advertising campaign put forth in Motel 6s history.

Spearheading the companys entry into the public spotlight was Joseph W. McCarthy, a former employee at Sheraton Corporation and Quality Inns who was hired by KKR in January 1986 to become Motel 6s president. Slated to air in the fall of that year, Motel 6s radio advertising campaign featured National Public Radio announcer Tom Bodett and his signature Motel 6 tag line, Well leave the light on for you. The advertisements were immediately successful and were quickly copied by fellow leading budget motel companies. Econo-Lodges hired comedian Tim Conway and Red Roof Inns hired Martin Mull, giving way to a new era in the budget motel industry, an era with a humorous slant. By 1988, thanks largely to the companys advertisements, Motel 6s occupancy rate had stopped its steady decline and climbed to nearly 73 percent, 6 percent higher than the current national average.

Once Motel 6s performance was invigorated by its radio advertising and the changes instituted by KKR, the motel chain stepped up its expansion efforts, hoping to improve upon or at least maintain its number two ranking in the United States. Trailing only Days Inns of America, Motel 6 increased its geographic presence in the late 1980s, expanding from 401 motels in 39 states in 1986 to 554 motels in 42 states by 1990. That year, the motel chain underwent its third change in ownership when Accor S.A.a $4 billion French conglomerate with holdings in restaurants, hotels, motels, travel agencies, car rental companies, and restaurant voucher firmspurchased Motel 6 from KKR for $1.3 billion.

Accor, which owned a chain of motels in Europe similar to Motel 6 that were called Formule 1, had made its initial move into the United States in 1979 when it opened a hotel in Minneapolis, a move that proved to be only moderately successful. Six years later, the company launched its Formule 1 concept, a motel chain that met with immediate success. By the late 1980s, Accor was ready to make another attempt to enter the U.S. lodging market and the acquisition of Motel 6 provided the means. The addition of Motel 6s more than 550 establishments vaulted Accor to the number two position worldwide and gave Motel 6, which retained its existing management, a new infusion of cash to wage its advertising war and continue expanding. In 1991, Accor purchased 53 Regal Inns and Affordable Inns from RHC Holding Corporation, bolstering the motel chains market position, while plans were formulated for Motel 6s advertising debut on television. With Tom Bodett continuing to serve as the motel chains spokesman, Motel 6 began broadcasting its first television commercials in 1992, by which time it had ascended to the countrys number one position, supported by the 672 motels that bore the Motel 6 name.

As Motel 6 entered the mid-1990s, it was competing for preeminence in the budget motel market in a decidedly different fashion than it had 30 years earlier, a change that was most discernible in the chains advertising efforts. The rooms composing the Motel 6 empire had changed as well, becoming slightly more luxurious than the units Greene and Becker had first designed. However, one characteristic remained constant throughout the companys history: Motel 6 rooms were typically the lowest-priced lodging accommodations offered by any regional or national competitor in the country. With this philosophy underpinning the motel chains success and the financial strength of Accor fueling its expansion, Motel 6 charted its future for the 21st century as a leader in a highly agressive industry.

Further Reading

Accor to Close 20 Motels Cites Security Problems, Wall Street Journal, October 21, 1992, p. All.

Bedding Down the Budget-Minded, Business Week, August 27, 1966, pp. 57-59.

City Investing Completes Sale, Wall Street Journal, February 27, 1985, p. 14.

Dunkin, Amy, Cheap Dreams: The Budget Inn Boom, Business Week, July 14, 1986, p. 76.

Fisher, Christy, and Ira Teinowitz, Budget Motels Take to Humor Ads, Advertising Age, November 14, 1988, p. 65.

Hayes, Mary, Motels Offer Rock-Bottom Rates to Those Wanting Bare Minimum, Business Journal San Jose, February 24, 1992, p. 22.

Lehner, Urban C, Economy Motels Lure Travelers with Prices as Low as $6 a Room, Wall Street Journal, December 26, 1972, p. 1.

Lodging: The Inn Crowd, Newsweek, February 19, 1973, pp. 69-70.

Motel 6 LP Acquires 46 Inns, Wall Street Journal, February 15, 1989, p. A4.

Motels: Discount House, Newsweek, October 9, 1967, p. 85.

Reier, Sharon, Bedroom Eyes, FW, June 9, 1992, pp. 56-59.

Riemer, Blanca, This Buy-America Bandwagon Could Hit a Few Potholes, Business Week, July 30, 1990, p. 34.

Teinowitz, Ira, Hotels, Rental Cars Hope for Sonic Boom, Advertising Age, June 15, 1992, p. 3.

Totty, Michael, Motel 6 Radio Ads Credited for Rise in Occupancy Rate, Wall Street Journal, May 12, 1988, p. 28.

Wade, Betsy, Motels Turn Their Attention to Security, New York Times, May 24, 1992, p. xx3.

Jeffrey L. Covell