Chains To Watch
Who has the potential to make the next significant mark on the hotel industry landscape? And we are not talking about Hilton, Marriot, Accor, Starwood, or Six Continents. HOTELS looks at up-and-comers who have parlayed everything from strategic deal making to creating a charismatic identity in order to build a business plan that has earned buy-in from investors, staff and guests.
By Mary Scoviak, Features Editor -- Hotels, 4/30/2002 11:00:00 PM
HOTELS’ annual feature on “Chains To Watch” is about potential. While industry giants such as Accor, Hilton, Marriott, Six Continents and Starwood are perennially worth “watching,” this profile focuses on hotel companies poised to make a significant mark. These are the chains that have parlayed everything from strategic deal-making skills to charismatic identities into a business plan that has earned buy-in from investors, staff and guests.
Some, like Fairmont Hotels & Resorts, have achieved this by pairing a long history of hotel expertise with a newly developed knack for consolidation. Armed with a ready supply of capital and a proven ability to drive RevPAR, Fairmont looms as a competitive threat at the 4- and 5-star levels. Orient-Express Hotels is one of the true pioneers of niche strategy. Travelers and shareholders alike are drawn to Orient-Express’ ability to find and acquire unique, under-performing luxury hotels and manage them into profitability.
TUI Beteiligungsgesellschaft and Six Senses signal new directions for the resort sector. An example of the benefits of vertical integration, TUI has proven the potential of effectively marrying a hotel company with a tour operator, pushing occupancies to annual averages in the high 80s. Young and aggressive, Six Senses is tapping pent-up demand for boutique resorts backed by the comforting infrastructure of chain-enforced service standards.
With the notable exception of Fairmont, none of these companies looks likely to take on the multi-brand powerhouses who dominate by sheer size and distribution. Yet, their impact in the travel market makes them hard to ignore. Their influence is, generally, much bigger than their portfolios. It is their strategy and their ability to implement it that will make, or break, these growing brands.
Fairmont: Rich, Hungry And Ready To Move
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Everyone in the 4- and 5-star market is looking over their shoulder at Fairmont,” says Paul Keung, analyst, CIBC World Markets, New York City. It is not just acquisitions like the Princess chain or the smooth execution of the Canadian Pacific Hotels/Fairmont Hotels & Resorts deal that has competitors worried. Toronto-based Fairmont comes to the table with one of the strongest balance sheets in the business and “unusual” access to capital thanks to last year’s innovative restructuring of parent Canadian Pacific Ltd. It also has a 34% shareholding in Canada’s largest real estate investment trust, Legacy, and powerful partnerships with Prince Alwaleed’s Kingdom Holding and Maritz-Wolff, which each hold a 16.5% stake in Fairmont.
If Fairmont is to capitalize on its potential, it needs to put its balance sheet to work while sustaining unit-level profitability. With only 38 hotels, there is ample room for expansion. The immediate need is to fill obvious holes in the U.S. market as Fairmont is present in just 10 of the top 25 markets. The challenge is finding deals that match up with Fairmont’s core 500-plus-room luxury profile, especially at a time when there is little hotel real estate on the market and owners are standing pat on pricing.
Acknowledging that Fairmont has “a pretty tight bandwidth on our product,” Chris J. Cahill, president and COO, says single-asset acquisition will be the most likely avenue for growth. “The new build pipeline is virtually dry in the United States, and not many portfolios fit our infrastructure,” he adds. Dallas-based Wyndham Hotels & Resorts could be the exception. Although Cahill “cannot speak specifically” to acquisition rumors regarding the 130-hotel upscale chain, Fairmont CEO William Fatt’s recent speeches indicate he sees buying opportunities in the current U.S. market and that Wyndham might be among them.
Fairmont is not just in the deal business; it is brand building. Its 50/50 mix of business and resort hotels, plus its upscale Delta brand in Canada, expand its horizons to accommodate deals as diverse as last year’s addition of the 450-suite/villa Fairmont Kea Lani resort on Maui and Fairmont’s first hotel in Dubai, which opened in February. Looking to drive incremental revenue, Fairmont rolled out a spa division, branded as Willow Stream, and is contemplating the revenue-generating power of a golf division as well.
Cahill’s goal is to raise RevPAR 4% this year. New e-commerce initiatives, centered on a redesigned Web site with a guest portal, should help. Online bookings increased 300% year-over-year, reflecting the dramatic growth possible in a still embryonic vehicle. Extensive renovations just completed at seven properties and a tower addition to the Fairmont in San Jose, California, should also deliver better yields with upgraded facilities and full inventories.
The cost side of the revenue equation is under review. “Some cuts introduced in the third quarter of 2001 are not sustainable if we want to remain credible,” says Cahill. “We have spent a lot of time looking at what is important to our customers. We are trying to build a brand, so we have to be selective about cost controls. This is still a tight operating environment.”
Fairmont’s 20,000 employees dig deep to cut costs in ways guests never see. A cooperative effort between corporate and property management cut annual employee turnover more than 20% in one year at the Fairmont Scottsdale Princess in Arizona. A new orientation toward building “backyard business” improved the bottom lines of hotels throughout the chain. While corporate creates the matrix that sets the targets for each hotel, Cahill says it is the managers and staff who use these plans to maximize the assets. A rigid hiring process at every level has been integral to building a team that can align ownership-management interests, Cahill adds.
This combination of ready cash and operational track record makes Fairmont an attractive alternative for owners looking for a manager, says Keung—especially in the case of larger hotels and resorts that would benefit from high-end group business. “Fairmont has some of the best urban assets in the United States and Canada, as well as some of the best resorts,” says Keung. The biggest near-term challenge is convincing investors with a “show me” attitude that this brand building has legs.
TUI Takes Big Bite Out Of Europe’s Leisure Market
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Vertical integration is one of the hot topics at hotel industry conferences this year. TUI Beteiligungsgesellschaft, based in Hanover, Germany, shows why. This 285-hotel group with distribution in 30 countries consistently drives occupancies into the high 80s thanks to the “value creation process” engineered by the synergies of Preussag AG’s TUI Hotels & Resorts and the World of TUI, the umbrella brand for tourism activities.
Though not the first or only vertically integrated enterprise, TUI has become the largest leisure hotelier in Europe by offering the diversity of brands, hotel concepts and destinations that serve the prolific demand of the company’s core German market. Each brand remains distinct in its character and its image.
TUI’s travel agents and tour operators can offer a menu of products and locations that match travelers’ leisure demand in much of the world: Riu Hotels & Resorts, Grupotel and Gran Resorts in Spain; Nordotel in Spain and Turkey; Iberotel in Turkey and Egypt; Swiss Inn in Egypt; Grecotel’s complexes in Greece; Atlantica, with its presence in Greece and Cyprus; Dorfhotel’s family-oriented hotels in Austria, Germany and Hungary; and Paladien Hotels, among others, in exotic locations such as Martinique and Guadeloupe. ROBINSON and Magic Life provide a club holiday alternative while Renthotels specializes in sunny, long-haul destinations. TUI micro-manages not only the range of brand families but the offerings within the brands. Each has different room categories in all complexes, including some meeting a “suite” standard, to broaden the business base as much as possible for every resort.
Timeshare figures as a key element in current corporate strategy. Two years’ experience gained via a partnership with Anfi del Mar on Gran Canaria, plus the double-digit annual growth potential of the sector, convinced TUI to earmark US$6 billion worth of capital for yearly investment in the timeshare sector. Part of that will go toward buying a 51% stake in Anfi del Mar, which now ranks as one of the most popular year-round destinations for TUI, according to Manfred Schönleben, head of the new timeshare business sector. At the same time, TUI is growing its hotel portfolio by opening 12 new hotels this year and rolling out cross-branded complexes such as Land Fleesensee in Mecklenburg-Vorpommern, Germany, which combines the concepts of ROBINSON Club and Dorfhotel. “The development of hotel products flows from discussions with the group’s tour operators,” says TUI Chairman Peter Seeger. “We put hotels where they will satisfy our tour operators and guests.” Acquisition in “high revenue” destinations is still on the agenda, as is renovation of the existing portfolio.
TUI takes a flexible approach to assimilating its acquisitions. Corporate help comes in the form of state-of-the-art technology, systems upgrading, financial planning and controlling, implementation of service, quality and safety standards, strategic planning and sales/marketing initiatives. Seeger views corporate management’s modus operandi as working with “partners” rather than running subsidiaries. Acknowledging the expertise that made its acquisitions attractive, TUI lets each group manage its own brand. “Corporate coordinates the planning and management of the entire hotel portfolio with the respective hotel companies,” says Seeger. “But, the operating activities are left up to the individual brands. This gives them the flexibility to respond to the needs and opportunities of their markets.” Maximization of yield management achieved through co-operation with World of TUI, plus strong revenue/cost control programs at the unit level, pushed turnover to US$1.1 billion (e1.3 billion) last year.
Six Senses Deconstructs Resort Experience
There is already a mystique gathering around Bangkok-based Six Senses Hotels, Resorts & Spas. Its sensory message of “intelligent luxury” is striking a major chord with high-spend travelers to and within Asia. The near-term payoff for its design-conscious style and highly personalized service is public relations power disproportionate with its eight-hotel portfolio and such prestigious honors as Soneva Gili’s “Best Leisure Resort in the World” and “Best of the Best” rating from Conde Nast Traveler. More important for the long term are the bottom-line benefits of differentiation. Both Soneva Fushi in the Maldives, the first of the Soneva brand, and Ana Mandara in Vietnam outpace their competitive sets in terms of RevPAR. Market share analysis indicates Evason Hua Hin in Thailand and Soneva Gili in the Maldives should turn in similar performances beginning in 2003.
“I often say that what a guest is looking for from a resort is totally different from what he or she requires in a city hotel,” says Sonu Shivdasani, Six Senses’ owner and executive chairman. “Things that make big, ‘recognized brands’ so successful in the corporate markets might work against them in resort settings. Would you stay at a US$1,000 a night resort with a name such as the Sheraton Grand, the St. Regis or even Ritz-Carlton rather than Soneva Gili, which has been called the best of the best?” Seeking to remain at the sharp end, Six Senses employs a five-person “creative team” to ensure that its concepts and operations continue to deliver beyond expectation.
Seamless integration of memorable design and highly personalized style define both the “beyond the stars” Soneva brand and the 5-star Evason flag. “In a city hotel, a guest wants to check-in in two minutes while having a mobile phone conversation, order a drink in the middle of a conversation with a colleague and get every request executed as quickly as possible,” says Shivdasani. “A client spends much more time interacting with staff at a resort. Every staff member has to behave like a host.”
Each guest is “allocated” the same waiter and same guest relations officer throughout his or her stay. At Soneva Fushi, where package offers verge on US$1,400 (per person, twin share) for four nights, the general manager, standing barefoot and clad in resort wear, personally greets and says farewell to guests after their arrival or before their departure via seaplane. “A military approach to human resources management may be relevant for a city hotel operator whose focus is on achieving efficiencies by standardization. With a resort, we have to focus on personalizing service,” Shivdasani adds. It is hardly surprising that empowerment is an essential ingredient in staff training.
Six Senses knows what it takes to operate a city center hotel. Management of the D’MA Pavilion hotel in Bangkok is a “one-off” contract from the company’s origins in 1992. “We do not plan to have any more Pavilions,” says Shivdasani. “Our focus is on high-end Soneva and Evason brand resorts in Asia.” This resort-only emphasis changes Six Senses’ approach to building the company and increasing visibility. Shivdasani terms “marketing with public relations much more important than advertising with sales” for resorts. Given the narrow slice of the market it serves, Six Senses has little waste in efforts to reach its target leisure clients.
Although some consultants say the boutique hotel market may be stalling in urban markets, leisure travelers continue to seek exotic, unique resort experiences. “This plays right into the hands of players like Six Senses,” says Robert Stiles, managing director, Sonnenblick-Goldman Co., San Francisco, and regional managing director of Asian operations. Although there is growing competition in the high-boutique market, Stiles says owners may be willing “to overlook” Six Senses’ newness and small size to access its creativity. Scott Hetherington, executive vice president, Asia, for Jones Lang LaSalle Hotels, adds that Six Senses’ willingness to take a financial stake in every property and the presence of a strong capital partner such as Deutsche Bank should also raise owners’ confidence level.
Going forward, Six Senses needs to continue to show discipline in the deals it accepts—both on the investment and management sides. It also needs to refine systems if it hopes to retain tight control over service delivery and property style.
Orient-Express Hotels Maximizes Niche Strategy
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The fact that Orient-Express Hotels’ (OEH) president Simon M.C. Sherwood sees 2001 as a “fascinating year” says a lot about the man and the company. On one side was a 25% net earnings decline attributable primarily to the after-effects of the September 11 terrorist attacks and, to a lesser extent, to currency devaluations in South Africa and Brazil and the dollar’s stronger-than-expected value against European currencies. On the other, there was the momentum that led to the early 2002 acquisitions of Le Manoir aux Quat’ Saisons, La Residencia and a half interest in the Petit Blanc UK restaurant chain from Virgin Hotels for US$40 million, as well as acquisition of a 75% interest in Mexico’s Maroma Resort and Spa for US$7.5 million. It was a learning experience, says Sherwood, that taught OEH a great deal about resilience and the strengths of its luxury 30-hotel portfolio.
Acquiring unique, under-performing assets at “reasonable” prices and turning them around quickly has become London-based OEH’s stock in trade. “OEH knows how to put in an aggressive sales and marketing team and ramp up performance for its recently expanded and acquired properties,” says Paul Keung, analyst, CIBC World Markets, New York City. Merrill Lynch’s David Anders cites OEH for its demonstrated ability in uncovering opportunities and its discipline in doing deals that can be accretive in the near term. These strengths translate to a target of 20% or more unleveraged return on the US$150 million being used to expand existing hotels, an investment priority to grow OEH at sound multiples, and return on investment at or above 20% for many of its acquisitions.
OEH may keep playing its hot hand for acquisitions with some cherry picking in Starwood’s Ciga chain. Constrained from commenting on acquisition rumors, Sherwood will say only that it is “natural” for OEH to look at a deal that would intensify its presence in Italy but that it definitely would not be interested in the entire group. Neither is it likely OEH would be interested in hotels encumbered by management contracts. Sherwood says no place in the world is “off limits” for deal making, as long as deals fit the company’s profile in terms of a one-of-a-kind guest experience and value-for-money pricing. He feels no pressure to build a gateway network, preferring an opportunistic strategy that weighs the asset within the context of its market.
Fast growth via acquisition would address some analysts’ concern that four hotels currently generate 45% of OEH’s income. While acknowledging that a bigger portfolio would dilute that risk, Sherwood sees this largely as a non-issue. “Many businesses are reliant on sales of a core product. Should I criticize the manager of the Cipriani if he continues to increase profitability year after year? I see that as a reason to re-invest,” Sherwood says. “Still, our dependence on certain properties will obviously lessen as we grow.”
OEH’s general managers play a large role in its operational success. Decentralized in its approach, OEH has only 20 to 25 staff at its corporate headquarters who oversee corporate planning and serve as resources for property managers. “Corporate staff is there to help, not to look over anyone’s shoulder. I respect the general managers as business people and give them the autonomy to manage their hotels. But that does not mean prevent me from jumping on a plane if I see a problem,” says Sherwood. A case-in-point was OEH’s handling of the post-September 11 downturn. Despite its public company status, corporate gave its managers time to evaluate the impact of new booking patterns and demand levels. Although some pricing cuts were made as necessary, the fact that few OEH hotels have head-to-head competition prevented profit-draining price wars. It also revealed a surprising trend that showed corporate travel being cut faster and deeper than leisure travel—previously thought to be more discretionary.
Questions also remain as to whether former parent Sea Containers will spin off its 16.9 million Class A shares and 20.5 million Class B shares by early July. Both Anders and Keung have set US$25 as the targeted share price, representing a 20% return. Generally, OEH’s track record, combined with its potential for further acquisitions, its cross-selling power and long-term potential for integration of its resorts, trains and cruise lines into a one-stop luxury travel company add to up “buy” ratings for a company a long way from market maturity.
Also Noteworthy
NH Hoteles, Madrid
Two significant deals in the first quarter of this year put NH closer to its goal of becoming a pan-European business hotel chain. The sell-off of Golden Tulip Worldwide’s franchise business via a management buyout clears the way for NH to focus on its core brand. Proceeds from the sale, along with US$80.1 million realized from the sale/leaseback of four hotels, helped fund the acquisition of Astron, Germany’s third largest chain. Astron’s 53-hotel portfolio gives NH a much-needed critical mass in the strategic German market as well as toeholds in Austria and Switzerland. This added distribution complements NH’s decision to retain the 27 Golden Tulip properties it owns and manages and rebrand them as NH hotels. A move to expand its 20-plus% shareholding to a majority stake in Italy’s Jolly Hotels is expected later this year. That leaves only two major gaps: the UK and France.
NH has already proven it can operate its 208 hotels. Its highly centralized systems approach is one reason for below average staffing costs and efficient management. Now, it has to demonstrate it can smoothly integrate not only a Dutch but a German company, says Coré Martin Holgueras, director of valuation and consulting, Jones Lang LaSalle Hotels, Madrid. NH’s US$6.9 million (e8 million) rebranding campaign should have all of its hotels under the core banner by the end of 2002—a scalding pace considering Sol Meliá has yet to finish rebranding its Tryp hotels after two years. However, NH Hoteles is determined to tighten its focus to one brand serving one, well-defined market: business travelers. “NH has really mastered this (the business hotel) product. They know how to satisfy their clients’ needs,” says Martin Holgueras. The flipside is the ever-present risk of having no diversification except a 94% holding in Sotogrande, which operates the most exclusive tourist complex on the Costa del Sol.
APA Hotel Group, Tokyo
In just eight years, style-setting dynamo Fumiko Motoya transformed an unprofitable regional hotel group into a muscular up-and-comer with 26 hotels open in Japan, three more in the pipeline and 2001 pre-tax profits of US$7 million.
“Japan is our target. But we would launch APA in the United States, Europe and other parts of Asia if we find good foreign partners,” says President Motoya. Her near-term goal of 10,000 rooms may require a change in APA’s basic strategy to own and manage its hotels. Motoya says a franchise program is under study. Plans to take the company public would add considerable seed money for fast-track expansion.
APA is building its balance sheet with a new Internet reservations program and a decision to outsource some of its restaurant and bar operations to companies such as Starbucks Japan.
Ishin Hospitality Group, Tokyo
Spawned by Soros Real Estate Partners (SREP) and Westmont Hospitality Group, Ishin is laying the groundwork for a significant operation in Japan.
Ishin closed two deals worth US$100 million in less than a year and reportedly is working on further acquisitions.
It is doubtful Richard Georgi, managing partner of Soros Real Estate Investors (SREI), will let those opportunities pass by. An experienced bottom fisher, he likes the potential of large, distressed economies like Japan’s. As proof, he directed 25% of SREI’s investments into Japan.
In addition to deal shopping, Ishin and its local partners have been hard at work building the operating base and structuring a headquarters staff capable of pursuing deals, working on transactions and repositioning assets. It took 13 months to reposition the Kyoto Royal from a 3-star to a 4-star and rebrand the Rihga at Narita Airport to the Hilton brand. Now that Ishin has its feet wet, watch for it to continue to overlay international brands on Westmont’s savvy management as it expands.
Six Continents, London
Although speculation linked this multi-brand giant’s name with nearly every large portfolio deal done in 2001, it chose to move only on the relatively modest 79-hotel Posthouse chain and acquisition of the legendary Regent Hong Kong, which it rebranded as its flagship Inter-Continental in Asia. Under the radar, Six Continents managed to add 23,600 rooms last year, put 69,000 more in the pipeline and carry with a major overhaul of the “big 10” Inter-Continentals it owns.
US$882 million (£600 million) is on the table this year for brand-strengthening new builds and acquisitions. The company line is that its strategy focuses on “investing hard” in upscale hotels in gateway cities and resort destinations worldwide; mid-scale distribution in western Europe and expansion of mid-scale in North America. Analysts—and at least some shareholders—would like to see Six Continents from the Bass brewing business to work sooner rather than later. Adamant in its discipline, Six Continents is finishing plans for Holiday Inn’s 50th anniversary celebration this year, reshaping the Inter-Continental brand and launching a new priority club rewards program.
Rezidor SAS HOSPITALITY, Brussels
Last October, Radisson SAS rebranded itself as Rezidor Hospitality, signaling its intent to become a major corporate player in its own right. While some question whether Rezidor has the cash to do big corporate deals without a deep-pocketed financial partner, Kurt Ritter, president and CEO, should have no trouble equaling 2001’s totals of 10 hotels opened and management or licensing agreements signed for another 21 properties. Saturation may become an issue for this fast-growing 160-hotel portfolio. Mid-tier Malmaison offers a vehicle but, with partner MWB facing tough times, the brand may not see significant growth for several years.
Still, development remains a key strength. “Some say Rezidor SAS offers terms that expose them to too much risk. That’s not particularly the case. Expansion is largely through structured leases and management contracts, not through the use of capital. Bahram Sadr-Hashemi (senior vice president business development) is a creative dealmaker who makes deals work,” says Charles Human, director, HVS International, London.
Some sources see room for improvement in RevPAR and cost containment. Rezidor showed its operational commitment with moves such as the 15,000-call sales blitz launched in the two weeks following September 11. Ongoing refurbishments, new service programs such as “One Touch Service,” a “100% Guest Satisfaction Guarantee” and a streamlined bookings process look likely to boost the top line. Cost controls put in place in the third quarter of 2001 should help Rezidor SAS top 2001’s 5.3% groupwide revenue gains.
Grupo Posadas, Mexico City
This could be one of the few home-grown Latin American chains with break-out potential. Already the largest owner and operator of hotels in Latin America, Grupo Posadas has shown its flexibility in recent years with moves like the roll-out of concepts such as Fiesta Americana Grand, a new service category within its core “casual/luxury” Fiesta Americana brand. Now, it will be under scrutiny to see how nimble it is in weathering 2002.
Mid-priced Fiesta Inn remains the primary growth driver for Posadas’ 13,000-plus-room portfolio. Its steady growth is filling distribution gaps at a time of increasing demand for business hotels in urban settings. “The domestic business traveler is the fastest growing segment in Latin America—and the most under-served,” says Christian Charre of Jones Lang LaSalle Hotels, Miami. “Grupo Posadas understands how to address this pent-up demand and looked for ways to capitalize on the brand by expanding their product lines.”
Increased business travel within Brazil should benefit Grupo Posadas’ Brazilian hotels. Growth is on the agenda. However, a US$105 million deal signed in 1999 with Inpar Construcoes e Empreendimientos Imobiliarios LTDA to build 1,200 additional rooms in Brazil has yet to bear much fruit. Two hotels are planned for São Paulo, one at Guaruhols International Airport and another in the exclusive Vila Olimpia business/residential area. Rio de Janeiro and Minas Gerais are the other near-term targets.
KSL Recreation, La Quinta, California
Last year’s acquisition of the La Costa Resort & Spa is one more reason KSL can claim to be “one of America’s leading owner-operators of resorts and recreational facilities.”
KSL, whose US$2 billion portfolio includes eight hotels with more than 4,249 rooms, is diversifying its customer and profit base by expanding golf into “a multi-faceted entertainment experience.” Improvements such as a new water recreation venue for Miami’s Doral Resort and Spa, an 11,000 sq.ft. (990 sq.m) treatment facility at Michigan’s Grand Traverse Resort and Spa and a Greg Norman-designed course at California’s PGA West broaden KSL’s reach to high-end leisure and meetings business. More than 390,000 sq ft. (35,000 sq.m) of meeting space make KSL’s properties a prime contender for the incentive/group market, as well.
An affiliation between former Vail Associates CEO Michael S. Shannon, COO Larry Lichliter and investment firm Kohlberg Kravis Roberts & Co., KSL plans to grow through acquisition and enhancement of its properties. Key targets include under-performing properties with saleable identities.
Hotel Distribution Systems, Dallas
Marriott, Hilton, Hyatt, Starwood and Six Continents have formed a joint venture with Pegasus Solutions to collect inventory and distribute rooms through Pegasus’ technology platform to affiliate sites such as Orbitz and TravelWeb.com, which Pegasus contributed to HDS. This warehouse gives chains more control over the sale and distribution of franchisees’ inventory.
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