Consortia Reinvent Themselves
Technology-driven industry forces the likes of Preferred and Leading to dramatically shift business models to full-service marketers.
By Griffin Miller, Contributing Editor -- HOTELS Magazine, 11/1/2000
With the present economic boom making it possible
for global hotel chains to pump unprecedented millions into information
technology (IT) development and growth, independent hotel consortia
are reinventing themselves to compete in today’s techno-driven
lodging industry. As a result, many of the reservation and referral
systems that once dominated the consortia landscape are morphing
into more full-service companies or are vigorously increasing their
presence in the market through mergers, alliances, joint ventures
and partnerships.
The most expansive of these new plans come
from Preferred Hotels® & Resorts
Worldwide, Inc., which recently announced the creation
of IndeCorp Corporation, a new holding company for the independent
hotel and resort sector, and Leading Hotels of the World, Ltd.,
which has made a dramatic shift in its business model from reservations
to full-service luxury marketing.
Preferred’s Approach: Branded Distribution
Even before Preferred shareholders in September
unanimously approved the formation of IndeCorp, President and Chief
Executive Officer Peter Cass was confident the outcome would be positive. “The
proxy statement was very well written and the timing couldn’t
have been better,” he says. “We’ve never seen
higher occupancies and rates, so now is the time to
take strategic actions that will ensure success over the next 10
to 20 years. In a down market, no one has the time or inclination
to tackle strategic issues.”
The strategy behind the IndeCorp holding company
concentrates on leveling a playing field that’s been long weighted on the side
of chain brands. “IndeCorp will create and support the opportunity
for individual hotels to join forces, while protecting and preserving
their independence. They collectively will be able to share the benefits
provided by scale—a strategy necessary for the independent
to survive,” Cass says.
IndeCorp is the centerpiece of Preferred’s model for “branded
distribution” which allows independent properties to share
their sales, marketing and technology resources. Cass believes that
independents will see the plan as a solid opportunity to improve
their gross operating profits, as well as branding and customer relations.
He is also confident 1.5%—the percentage of annual revenue
Preferred members will pay for a branded distribution link—will
be a good incentive when compared to the 6-11% charged by chains. “Also,
with branded distribution, contracts only cover two to three years,
which puts the focus on performance. We have to produce. If we don’t,
a hotel will simply leave,” he notes.
While Hyatts, Hiltons and Marriotts have been
flexing their leverage muscles for decades, it’s only since the high-tech revolution—particularly
in the areas of reservations, Web sites and e-commerce—that
independents have felt a potentially devastating squeeze,
and Cass is convinced the battle between global management companies
and independent properties will get even more heated over the next
10 years.
“A rule of thumb in the industry says luxury independent hotels
do better than chains in a boom market and not as well in a down
market,” says Cass, who feels branded distribution will provide
a safety net for independents should the market go soft
down the road, a distinct possibility if, as in the past,
overconfidence turns into overbuilding.
To initiate its plan, IndeCorp will invite other
independent brands to join together to add revenues through cost
savings and efficiencies of scale, attract financing,
and aggregate capital for technology acquisition. IndeCorp’s goal is to protect
the independent market and support its brands in the world marketplace.
Preferred’s branded distribution plan, developed with research
from PricewaterhouseCoopers, has its roots in the business model
of global brands like Starwood Hotels & Resorts and Marriott
International, the key difference being IndeCorp affiliates will
not be subject to chain control. Each brand under the IndeCorp umbrella,
including Preferred Hotels & Resorts Worldwide, will retain its
own management, service and facility requirements. IndeCorp will
be the vehicle to provide strategic management, reservations, purchasing,
customer relationship management (CRM) and e-commerce technologies
that an independent brand could never achieve alone. Preferred Hotels & Resorts
Worldwide, which started as a referral service in 1968,
has evolved into a global shareholder-owned hotel marketing and distribution
company with a membership of 120 independent luxury hotels
and resorts in 25 countries.
Leading’s Way: Five-Year Plan
While IndeCorp’s solidarity platform will no doubt attract
interest from a number of luxury hotel consortia, Leading Hotels
will not be among them. While acknowledging that Preferred’s
plan seems to have validity in today’s market, Paul M. McManus,
Leading’s president and chief executive officer says, “We
wouldn’t consider joining Preferred as we have our own holding
company and organizational structure in place.”
Leading, which discarded its not-for-profit
status in 1999, has been making news ever since it began implementing
its aggressive five-year plan to develop the brand through segmentation,
joint ventures and industry alliances. “We have lots of irons on the fire,
and while they may seem disjointed, they are all part of our defined
business plan, focused on the same point: evolving from a reservation
service to a full-service luxury marketing company,” says McManus,
adding that while competition has been a motivator, the biggest driver
in the company’s change of life has been its leveraging of
Leading’s name to give higher recognition of the brand to consumers.
Using a strategic study compiled by Horwath & Horwath in 1997,
Leading’s first iron came off the fire in 1999 when it introduced
brand extensions by debuting Leading Small Hotels of
the World (LSH), a category targeting luxury independents with under
110 rooms. The bottom line advantage to LSH membership is a more
modest initiation fee than those paid by regular Leading Hotel members.
The success of LSH has been encouraging, and a second segment, Leading
Resorts and Spas of the World, is slated to launch mid to late 2001.
To further sharpen its competitive edge, Leading is also moving
forward on four joint venture companies generated by its brand-extension
program:
- Leading Group Sales (group sales leads), with the Chicago-based
David Green Organization, Inc.;
- Leading Marketing Services (marketing,
advertising, and public relations), with Yesawich, Pepperdine & Brown;
- Leading Financial Services, with Pegasus Solutions,
Inc.; and
- Leading Quality Assurance (hotel inspections), with
the U.K. firm of GAP Analysis International.
“We see the joint ventures as an opportunity to work with partners
who can add dimension to our existing business,” says McManus. “It
would be impossible for us to develop all the technology
and expertise on our own, so we need to partner with those who have
the resources.”
Leading, which holds majority shares in each
of its joint ventures, anticipates the system will drive down reservation
costs while providing the company with the best database in the
industry. “We expect
to be able to reallocate assets from reservations to sales and marketing,” McManus
says.
While created to increase the value of Leading membership (members
receive preferential rates), the services provided by the joint ventures
are available to any hospitality concern. To date, the Group Sales
and Marketing arms are up and running, with Quality Assurance expected
to go into effect October, 2000. No definite date has been set as
yet for Financial Services.
Luxury Alliances
Along with segmentation and joint ventures, Leading’s corporate
restructuring has also led the company into more business alliances.
And, while partnering with like-minded suppliers and service providers
is nothing new in the luxury hotel sector, Leading has managed to
take the concept a step further by forming a network of “Luxury
Alliances.” In addition to links with Crystal Cruises, Avis,
and product manufacturers like Louis Vuitton, Hennessy, and Christian
Dior, this past summer Leading aligned itself with the upscale travel
agency, Virtuoso, a move that puts qualifying Leading Hotels members
at the top of Virtuoso’s reservations screens and opens the
door to a series of cooperative marketing efforts.
The most dramatic of Leading’s Luxury Alliances to date, however,
became public record on August 15 when the company announced it had
formed a partnership with another luxury brand, Relais & Chateaux.
Stressing that the coming together of the two
brands is in no way a merger or acquisition, both McManus and Relais & Chateaux President
Regis Bulot call the union a “business-to-business solution.”
According to McManus, the common ground that
attracted the two brands was their geographic proximity, similar
customer base, and commitment to quality. What made the fit even
better was their differences: Leading Hotels are generally larger,
business-oriented properties in major cities; Relais & Chateaux are almost exclusively boutique
countryside hotels catering to leisure travelers. “We envision
our joint marketing efforts targeted at the guest who might stay
at the Hotel de Crillon in Paris, and then travel to Boyer-Les Crayeres
in Champagne,’ says McManus.
The two companies have already linked their Web sites and begun
joint marketing efforts. Shared databases and the opening of an Internet
portal will get underway in 2001.
As to Leading’s future, McManus says, "Our business plan
calls for a 10% annual growth over the next three to five years as
a result of the introduction of expanded business services—two
to three per year—as opposed to adding additional hotels to
our core business.”
Embracing Change
Not surprisingly, Preferred and Leading aren’t the only independent
brands embracing change these days. And clearly, the need to keep
up with technological advancements is the number one impetus for
all of them. “I think the biggest challenge is to develop effective
technology and distribution within the very real constraints of time
and money,” says Zolon A. Wilkins, III, President of Lexington
Services, the largest provider of hotel reservations
in the United States and the second largest in the world. To this
end, Lexington, which was acquired by The Travel Company (Nasdaq
TRVL) in 1998, has set up a tight timeframe to carry out its strategic
mission.
“We are in the technology business, so while we do have long-term
goals, our main concern now is our strategic plans which only stretch
over a couple of years,” says Wilkins, who is convinced the
industry will change significantly over the next 24 months. “Ultimately,
this will be good for hotels and the hospitality industry,
and we will be one of the companies working to make this change happen.”
Much of Lexington’s involvement at the moment centers on taking
existing reservation systems and integrating them to make the company’s
business mode more efficient. “Not just internally, but also
in the way we interface with our clients,” Wilkins says. “We
are definitely taking a more aggressive approach in our
current direction.”
If Lexington is more aggressive today, it is
due in part to its acquisition by The Travel Company. “In the two years since
the change-over, Lexington has virtually doubled in size and profits.
We’ve gone from a couple thousand member hotels to close to
4,000; from 100 to 200 employees. Our revenues and transaction values
have doubled,” says Wilkins, who sees the mega changes taking
place at Preferred and Leading as basically positive. “In terms
of expanding their marketing to a broader range of hotel clients
in particular markets, I believe they’ve made good decisions,
but don’t see any significant impact in what they’re
doing on us.”
For Dallas-based Pegasus Solutions Inc., a
worldwide provider of hotel industry transaction processing and
electronic commerce services, the critical demand for IT has put
the company in an expansion mode so intense that it now holds sway
as one of the dominant players in hotel room distribution. Through
the recent acquisition of Phoenix-based REZsolutions, the company
now boasts a business model that includes everything from independent
hotel consortia (Sterling Hotels & Resorts,
Summit Hotels & Resorts, and Golden Tulip Worldwide), to the
world’s largest hotel representation company (Utell).
“We’ve started down a path that allows us serve the
hospitality business on a variety of fronts,” says Pegasus’ Executive
Vice President, Mark C. Wells, clearly pleased with the company’s
new-found diversity. “We see opportunities across the entire
spectrum of business as the hotel industry continues
to consolidate around a number of larger players.”
Considering the scope of services being offered
by Pegasus, it is not surprising large independent brands like
Leading Hotels of the World are tapping into the company’s expansive technology network. “The
irony is that it’s the technological outlay costs that are
bringing more and more companies—both consortia and chains—to
us. They seek our help because we have the scale at our disposal,” says
Wells.
SLH Keeping It Simple
With most of the lodging industry restructuring
on a grand plane to remain competitive, Small Luxury Hotels
of the World (SLH) has, in its quiet way, taken on the role of rebel. “We
have no plans but to improve our level of service. In short, doing
what we’ve always done, only better,” says Brian Mills,
managing director of Hill Goodridge & Associates Ltd (HGA),
the U.K.-based international management consultancy which acts
for SLH. Mills went on to say, “We’re looking to keep
our brand as clear and simple and clean as possible, because we’ve
found that the world of some hotel brands is confusing.”
To keep up competitively, SLH is focusing on
courting customer loyalty through personalized service. “Major hotel companies do tracking,
but for us, it’s expensive and, in truth, the customer who
stays at SLH probably doesn’t want to be tagged,” Mills
says. Which is not to say the consortium is thumbing its nose at
technology. “Companies like us have to invest carefully and
have clear strategies. And, although we don’t have our technology
at the level we’d like, we’re working on it.”
Since SLH is international (270 hotels in 50
countries), it is dedicating a lion’s share of its resources
to introducing a new e-commerce distribution on its Web site. Scheduled
to premiere during the first quarter of 2001, the system will allow
the customer to communicate his or her needs through the system
for a direct response, including such specifics as type of booking,
including honeymoon, board meeting and family vacation.
Although SLH’s total e-commerce budget
will be spread over several years and refined as IT develops, Mills
says the initial spend for 2001 will be more than US$500,000.
And how does Mills feel about Preferred’s IndeCorp? “The
idea of a holding company adds an interesting dimension, and I find
myself admiring any novel development in the industry. It seems like
there’s potential there for some independents, but I haven’t
been approached and don’t know enough about it as yet.” All
the same, Mills is keeping an open mind: “I’ve not ruled
it in or out. We’ll just wait and see.”
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