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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.
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.
The Mama Shelter, a budget-priced designer hotel in Paris's 20th arrondissement, was the brainchild of Serge Trigano, the son of the founder of Club Med, while the Chocolate Boutique Hotel in Bournemouth offers tastings at a liquid chocolate fountain and weekend workshops for hand-making Belgian truffles.
With rates nearer four-star than five-star, the newcomers' hope is that novelty will replace glamour and ostentation for those who manage to defy corporate thrift and travel. The hope is that character will help carry their brands.
Signs the boutique segment may be resilient in a downturn came in early January as British boutique hotel and property group MWB Group Plc said trading in 2008 at its Malmaison and Hotel du Vin chains had remained firm compared with 2007.
The two chains, totaling 26 hotels, managed to hold their occupancies and room rates unchanged last year at 2007's level of 79 percent and 115 pounds ($169) despite the slowdown, with consumers drawn to unusual locations such as a converted prison in Oxford.
With rooms starting at around 160 pounds a night, InterContinental's west London Indigo line aims to compete with four-star mainstream hotels, including its own Crowne Plaza.
The group, which operates over 4,000 hotels worldwide under brands including the mainstream Holiday Inn, launched Indigo in Atlanta in October 2004, and said its new 64-room hotel in London was full over the Christmas period.
"In the next couple of years, we would hope to have signed up sites in other European cities as well as more in London," Wagner said.
Marriott International Inc has joined with U.S. style icon Ian Schrager, who pioneered the boutique concept with his Morgans Hotel on Madison Avenue, New York, in 1984, to forge a boutique brand.
Schrager saw a market gap in an industry that had hitherto largely ignored style and was focused on concepts it could quickly and cheaply replicate across hundred of outlets.
Marriott's Edition boutique hotel venture with Schrager is set to open its first hotel in 2010 and then hopes to reach more than 100 outlets, with projects including Washington, Chicago and Los Angeles, and Paris and Madrid.
Sheraton-owner Starwood Hotels & Resorts Worldwide Inc was the first big operator to launch a boutique chain with its "W" luxury hotel in New York 10 years ago: it now has 26 and plans to triple its number of rooms by 2011 with a first European hotel in Barcelona this year and two in London in 2010.
Hilton Hotels, taken over by private equity group Blackstone in 2007, hired two executives from Starwood's luxury and boutique hotels in 2008 -- suggesting it may be eyeing the sector -- while Global Hyatt Corp has launched a handful of Andaz hotels and Ritz-Carlton its Reserve brand.
Analyst Nigel Parson at Evolution Securities was among those seeing scope for larger chains to salvage profitability in the smaller-scale upmarket offering. Their marketing muscle and economies of scale may help them beat smaller operations.
"It's useful for these big companies to have a boutique product as part of their portfolio to offer their customers," he said.
But smaller boutique operators are predictably sniffy, especially bearing in mind current capital market constraints.
"I don't think you can be a boutique if you do 100 of anything," said Michael Achenbaum, chief operating officer at Gansevoort Hotel Group, with locations in New York, Miami and, in March, the Caribbean Turks & Caicos Islands.
"The problem for the big guys is you can't roll out 100 unique products."
Editing by Sara Ledwith