Hilton: The Next Chapter
Can new leadership overcome short-term obstacles to make the iconic brand a global powerhouse?
By Jeff Weinstein, Editor in Chief -- Hotels, 11/30/2008 11:00:00 PM
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While parent-company Blackstone Group LP struggles with the burden of US$20 billion in debt used to buy the chain just over a year ago and an almost completely new senior management team labors to transform under its still-new global functionality all under the most difficult economic circumstances since the Great Depression, one thing remains a constant: Hilton is arguably the most powerful brand in the hotel business with its iconic name, dynamic global sales force and great loyalty program. The question that remains is whether the new leadership can maximize and add value to the brands, and can they keep a cohesive team together at a time when pipelines are drying up?
One thing that is clear when talking to Hilton’s affable and well regarded President and CEO Chris Nassetta, now on the job for just over a year, is that he and his enthusiastic team—that some industry insiders consider a little light on global experience—won’t let the required near-term contingencies and the considerable pressures of the economic downturn interfere with their long-term goals and strategies. Sure, today the focus is more on cutting costs, creating efficiencies and doing whatever it takes to drive revenue, but Nassetta and his team are very excited about the long-term prospects—both domestically with a strong franchising engine and two new brands to be introduced in January and March, and even more so globally as the full arsenal of Hilton brands is just being unleashed on the global stage.
“The company is in fabulous shape,” Nassetta says. “We have
a great platform and incredible growth opportunities in front of us. There is no question that over the next year or potentially two we and everyone else in the industry will slow from an opportunity and development point of view, but it doesn’t mean we will stop and, like it always does, things will recover and we will be in an even better position from a competitive point of view to continue our growth.”
Nassetta is quick to try to put things into perspective, pointing to the fact that Hilton will open 302 hotels in 2009 (251 franchised; 33 full-service Hiltons) and close to another 300 in 2010. “We are focused on battening down the hatches and being very disciplined about the current environment,” he says. “But at the same time, we are very focused on long-term growth prospects, what we are doing on the branding side and international growth.”
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The Debt Issue
An early November story in the Wall Street Journal talked about Blackstone’s less-than-perfect timing of its US$26 billion leveraged buyout of Hilton at the top of the market in 2007. It cited the potential long-term risk for Blackstone if the market doesn’t recover in time and five years from now when it faces refinancing tied to the acquisition. It went on to say analysts think a continued slump might hurt Blackstone’s ability to stay current on the US$20 billion debt used to buy the chain and force the sale of Hilton assets or, as others have suggested, one of the brands.
Nassetta bristles at such supposition. He points to a substantial amount of liquidity available as a result of strong operational performance, timeshare receivables of US$800 million by next year that have never been sold and access to additional liquidity, if necessary. “If you read the press, nobody has actually come up with a claim that suggests we have an issue with our balance sheet or liquidity. They have all started out wanting to think that because it is popular right now… But if you really look at it, there is nothing there. We don’t have the problems others have. We don’t have maturity problems short- or intermediate-term. We don’t have any trip wires or covenants that can cause a problem, and we have a significant amount of liquidity (Wall Street Journal points to about US$2 billion in liquidity—mostly cash) and additional ability to access liquidity if we need it.”
With what he considers all the financial flexibility he needs to deal with current challenges and no plans to sell owned assets, Nassetta is quick to add that the company continues to make investments where it is important and based on strategic objectives to revitalize and expand the family of brands. “We have plenty of coverage to pay debt and that is before tapping into existing cash, which puts us into a position that we don’t have to worry about covering debt service or certainly selling assets. We are not breaking up the furniture in any way to deal with this situation.”
Transforming The Culture
If Nassetta has one priority, it is combining the multiple cultures of the old Hilton (Hilton, Promus and Hilton International) into one common culture with one vision and strategy for the 135,000 Hilton team members. “It’s about innovation, an entrepreneurial spirit and being dynamic as an organization. We have to be faster moving—all driven by a common understanding of where we are going and through a massive amount of communication… It is the most important thing I am focused on because it lays the foundation for everything we do short- and long-term.”
The change in culture has started at the top with senior management changes that include Ian Carter running operations and Steve Goldman in charge of global development from the Beverly Hills, California, headquarters. Some industry observers wonder if the significant change in senior management will negatively impact the overall corporate culture—the Hilton “way.”
At the most senior level, the changes have been more dramatic—some changes based on people’s desire to move on, says Nassetta. “I have been trying to build a team with the best experience and qualifications that could help us achieve our vision in the most expeditious way. We have been successful at having people stay or move up, and we have also brought in the best in class talent to supplement the people we have.”
Hilton is also in the process of moving from a geographic-oriented business spread out around the world mostly due to the two Hilton companies operating autonomously until the merger in 2006 to a company more based on functionality. As a result, top management is grouping people together in the best way to be effective and efficient. Beverly Hills is ground zero for the reorganization.
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Even Nassetta admits he is very hands-on in the day-to-day operations, especially these days, where everyone, especially Ian Carter, is focusing more on managing rate and cutting costs to drive margins. “I like to make sure I am connected to what is going on in the front lines to better run the business and make the best strategic decisions,” Nassetta says.
Maintaining The Bottom Line
In fact, managing day-to-day operations of Hilton’s brands is eating up a lot of the executive team’s time these days as they battle to maintain Hilton’s value proposition and look for ways to grow market share in a down market, taking advantage of Hilton’s size and scope on the sales side.
From a marketing perspective, the approach is very tactical, including very aggressive sales efforts going on at the property level. As for discounting, Nassetta is more likely to push for value-added offers on the amenities and F&B side as opposed to giving away rooms with two-for-one deals. He expects group business from associations and government agencies to hold up best in the near term and currently points to the Middle East followed by Asia Pacific as the geographic regions with the most resilience.
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Chris Nassetta |
“We want to drive profitability and whatever will allow us to do that is where we will focus,” Nassetta says. “It will be a balance of rate and occupancy taking a hit next year. In markets where we can, we will hold rate because it has the best flow-through. In the end, it will be driven by market conditions and what the competition does.”
On the cost side, Nassetta says everything is being scrutinized, from staffing to F&B hours of operations, purchasing efficiencies and complexing operations in major markets with multiple hotels.
When asked to project performance going forward, Nassetta expects the fourth quarter to be very weak, particularly in the United States, the UK and Europe. “The first and second quarters of 2009 will be very weak and maybe even weaker than people think today. As you get to the third and fourth quarters of next year—depending on at least achieving some level of stability in the economy—you will start to see some stabilization because the comparisons will get easier.”
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Nassetta is optimistic for some growth by the fourth quarter of next year and as we head into 2010, depending on demand side driven by renewed economic growth, the comparisons will get even easier. Going forward, the outlook should look even better, especially if you factor in limited supply growth for 2010 and 2011. “So to me, 2010 is when you start to see the turnaround with some signs of life in the fourth quarter of next year,” he says.
Capex Considerations
Just about everyone in the hotel business today is taking a second look at capital expenditures on owned, managed and franchised hotels—Hilton being no exception. But as a predominantly franchised business, Hilton has to work closely with its ownership community and show flexibility where possible without destroying brand standards.
“Unlike some of our competitors who have specific time schedules regarding capital replacement requirements, we work with our owners in a different way,” Nassetta says. “We have a quality assurance process that makes sure the hotel is living up to our standards and guest expectations, and is less defined by a fixed schedule when renovations must be completed. If hotels are meeting standards and guest expectations, we are comfortable with that. If they are, there is flexibility within the confines of our system.”
Bill DeForrest, president and CEO of Lane Hospitality, Northbrook, Illinois, owner-operators of five Hilton hotels, says he thinks Hilton’s brand leadership team is focused on the brand business and has a clear vision of where they want their brands to be. “Everything with their brand on it performs for us,” DeForrest says.
When Lane recently wanted to defer some capital expenditures, DeForrest says he received support from Hilton after making his case based on current customer comment scores and market performance. “They are very focused on owners and what they need to be successful in this environment. They want to protect the premium position of their brands,” DeForrest says.
As for owned assets, Nassetta says this year and next, Hilton will continue to invest significant capital—somewhere in the range of 5% of revenue. “We will reduce spending next year from what we might have done in a normal environment, but it is just reflective of the fact that times are tough and we have to be intelligent about liquidity and how we allocate capital,” he says.
Growing Brands Now
Going forward, a big challenge facing Hilton is sourcing deals in an environment that not only challenges the brands domestically, but now globally as the economic downturn spreads around the world. “It is naïve to suggest we won’t see some impact on the development pipeline,” Nassetta says. “It won’t come to a screeching halt, but we will see a slowdown.”
It is especially tough to do the big, full-service deals which create so much more cash flow when compared to the limited-service opportunities—and at this time there is no desire for Hilton to use its own balance sheet to grow at the full-service level. That being said, Nassetta says Hilton still has the biggest pipeline in the United States and says it is 20% to 30% bigger than its closest competitor. “The bulk of our focused-service owners are not REITs, institutions or pension funds—they are guys where this is what they do,” says Goldman, referencing the franchisees who build one to five new hotels every year. “They don’t lever up dramatically. They take their profits, build, take their cash flow and roll that into more properties. This is what they do and will continue to do… Applications for this segment of the business have not fallen off.”
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Steve Goldman |
Another big question at the moment is how low Hilton will dip into the potential conversion pool to fuel growth? “We think conversions are a good opportunity for us because the owners get to plug right into our systems,” Goldman says. “Assuming they are good owners with independent hotels in good condition, there will be less focus on meeting specific brand standards to convert on Waldorf=Astoria Collection and Doubletree hotels due to the wider bandwidth of these brands than there is with the other brands.”
Going forward, Nassetta expects 70% of Hilton’s new deals to be franchised with the percentage of franchised deals internationally growing the fastest in the UK, and within five to 10 years spreading throughout Europe and even to Asia Pacific.
For the moment, it appears the best opportunities for Hilton are conversions. Internally, they are still in the process of converting nine or so of its soft LXR hotels into Waldorf=Astoria Collections and Conrads. The process of converting the hotels is supposed to be complete by the second quarter of next year and is being led by Ross Klein and Amar Lalvani, whom Hilton hired away from Starwood earlier in the year to head luxury and lifestyle brand development. In fact, Hilton is expected to announce two new brands in the first quarter of 2009—one a luxury lifestyle brand and the other rumored to be a mid-market extended-stay product.
This boost to the luxury portfolio will come at a time when virtually no one can finance luxury projects and will help Hilton nearly double its presence in the category, adding distribution and marketing dollars into the system.
Goldman likes the potential of the Waldorf=Astoria Collection outside the United States. “I don’t think it is what we can do to sway them [independent owners], it is what the economy has done. It gets owners to think differently and we have a higher value proposition with a wider reach. You are not losing your independence as much as gaining an identity and plugging into a system.”
To further make his point, Goldman cited developers who want to launch new brands. “I think it is virtually impossible in today’s environment to start and grow a brand because you have no operating infrastructure, distribution or worldwide network. Today there are a small handful of hotel companies that can provide distribution and clout around the world.”
Klein and Lalvani are also far along in the process of developing the DNA of Hilton’s lifestyle brand, internally known as “Global 21.” The brand will be rolled out in the first quarter of 2009 with what Nassetta expects to be a global pipeline. He says Global 21 separates itself from the competitors by its ability to become a conversion opportunity for owners. Goldman adds that this brand will also be used as a franchise vehicle. “Conversion opportunities in a tough environment become very important to people, particularly when you think about being able to convert into a brand that I think will have terrific legs but also because it connects to all of the engines Hilton has to drive revenue and profitability,” Nassetta says.
Goldman says the Global 21 brand will have more bandwidth than existing “lifestyle” brands and won’t be as edgy—less contrived—with a more fun, clever and casual feel that will attract soccer moms in secondary markets as well as business travelers in urban markets. He says it will be more flexible and people-friendly, which should make it a better conversion opportunity compared to other lifestyle brands entering the market.
Big Global Push
Looking outside of North America, the newly formed Hilton is still only a few years into its pursuit of becoming a truly global company and it will probably take a good four to five years to create a well-oiled development machine. Goldman is busy putting people in local markets and, despite market conditions, he says he is not slowing the mentality of development. “We are investing to put people in local markets, establish relationships and promote our brands,” Goldman says.
The region where Goldman is putting his biggest effort is the Middle East. “There is still enormous wealth and looking down the road you are going to have a lot of power in the Middle East, and we have a commitment to be there,” he says.
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| The Cavalieri Hilton in Rome earlier this year was among the hotels to add the Waldorf=Astoria Collection tag to its name. |
For now, the core Hilton brand seems to have the most traction outside of North America. Going forward, however, Nassetta expects the focused-service brands to show huge growth, pointing to the Hampton Inn and Hilton Garden Inn brands, and to a somewhat lesser extent Doubletree and Homewood Suites.
One of the bigger deals of late came in Turkey, where Hilton signed two different strategic development agreements with Turkish property partners for 40 managed hotels (5,500 rooms) over the next five years. Last December, Hilton and Amplio agreed to develop up to 15 hotels. To date, they have signed management contracts for six Hilton Garden Inn properties so far. In addition, Hilton expects to develop 25 new properties with the Kosifler Group, and already has signed deals for a further four Hilton Garden Inn hotels.
Hilton also has big plans with development partner DLF Hotel Holdings Ltd. in India. However, because of the falloff in the equity market, interest rate spikes and inflationary issues, a deal to develop some 75 hotels has been slowed dramatically. However, Nassetta adds, “DLF is a terrific partner with the best sites under its control. We have over 20 hotels in various stages of development… Things will move slower, but I don’t expect in any way either party is abandoning the venture. The goal of 75 hotels will take us longer than anticipated but the development plans are moving forward.”
Despite some slowdown, Nassetta believes Hilton is having success in every global region. “But it is never enough,” he says. “It is my job to accelerate growth, particularly in the international arena. We don’t have a pipeline outside of the U.S. as big as some of the competition and we are not where I want us to be, but we are having reasonable success.”
At the end of the day, just where does Hilton stand, according to Nassetta, a year after taking over the reins? “While I walked in very optimistic about the company’s prospects, I now have an even greater understanding about the strength of the brands, the quality of our people, the opportunities to expand the brands internationally and the opportunity to integrate the organization.”
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