Bigger & Stronger

Fairmont Raffles Hotels International brands combine to create growing powerhouse.

Contributed by Jennifer Duell -- Hotels, 9/1/2008

It might be cliché, but in the case of Fairmont Raffles Hotels International Inc. (FRHI), it is true: the whole is greater than the sum of its parts. Alone, the Fairmont, Raffles and Swissôtel brands were relatively small players on the global hotel scene—despite the fact that they operate some of the best known and most beloved hotel properties in the world, such as The Savoy in London. Together, they are a powerhouse upscale and luxury brand operator with the considerable weight of their owners behind them. FRHI also has one of the most active global expansion programs in the industry, particularly in Asia and the Middle East where, to date, the global credit crunch has had minimal impact.

The three brands with more than 90 properties in 25 countries have been part of FRHI since mid-2006 when Los Angeles-based Colony Capital and Riyadh-based Kingdom Holding Company (KHC) acquired Fairmont Hotels & Resorts Inc., took it private in a US$3.9 billion deal and combined it with Raffles Hotels & Resorts. KHC, which is the largest company in Saudi Arabia and controlled by Prince Alwaleed Bin Talal Bin Abdulaziz, is a majority owner of FRHI.

Tom Storey, president, Fairmont Hotels & Resorts

In the two years since the three brands have come together, leadership has focused on identifying unique elements of each brand and enhancing that differentiation, according to Tom Storey, president of Fairmont Hotels & Resorts. “We surveyed our guests to really define what makes the brands what they are and what makes them different from each other and competing brands,” he says.

Raffles, with its smaller properties, luxurious and unique rooms, and service-focused culture, is considered to be a 5-star brand. “Each property is unique and meant to be a residential sanctuary,” says Diana Ee-Tan, president of Raffles Hotels & Resorts, Singapore.

Fairmont, on the other hand, has larger landmark properties than Raffles, yet they are not “cookie-cutter” properties. Instead, Storey describes them as “authentically local.” “Our hotels are meant to evoke the feeling of the destination in which they are located,” he says. Both the Raffles and Fairmont brands are located in city centers and resort areas.

In contrast, Swissôtels are found primarily in city centers and represent “everything Swiss,” says Meinhard Huck, president of Swissôtels, Zürich. The brand is articulated with edgy design, Swiss efficiency and friendly service. Most Swissôtels are rated as 4-star.

Together, FRHI has a more complete portfolio of brands to offer to hotel developers and owners, Storey says. “All of the brands had relationships in their respective regions, which has helped the other brands with their expansion efforts and to penetrate new markets,” he explains.

FRHI’s centralized development group is responsible for growing all three brands, which now have more reach and resources. Previously, the three brands did roughly 10 deals per year; now, they are closing 25 to 30 deals annually, Storey says. “Against a base of 90 hotels, that is a fairly substantial rate of growth,” he contends.

A rendering of the 235-room Fairmont Bejing.

Chris Cahill, president and COO of FRHI, says that although the company still owns several hotels, its primary focus is growing its management business, either through straight management contracts or through joint ventures where FRHI throws in a bit of equity. However, most of the growth the company is experiencing today requires no equity participation from FRHI.

Of the three brands, Fairmont has the most aggressive expansion goals. Over the next three to five years, the brand expects to increase the number of rooms in its portfolio by 50% to 60%—both through new development and re-flagging existing assets. “We think that Fairmont could have a global footprint of 200 to 250 properties, but it will probably take a good 10 years,” Storey says.

Today, Fairmont has more than 50 hotels across the globe and more than 20 currently in the development pipeline. Over the past several years, the brand has transitioned from an owner-operator to a branded management company. Since 2000, the company has sold about 80% of its hotels and retained management. In late 2006, for example, the company sold several assets, including seven Canada Fairmont hotels to Oxford Properties, Toronto.

Storey says Fairmont is focused on Asia and the Middle East for its growth. “It’s kind of hard not to, given the growth the regions are experiencing,” he says. “It’s one of the reasons why the merger [between Raffles and Fairmont] made so much sense. Raffles’ presence in Asia helps jumpstart Fairmont’s ability to grow the brand there.”

Fairmont’s first deal in Asia is the renovation and re-branding of The Peace Hotel in Shanghai. Partnering with Jin Jiang International Group, Shanghai, Fairmont is giving the 12-story hotel a US$80 million makeover. The hotel, which has been a Shanghai landmark for more than a century, will reopen in 2010.

And in Beijing, Fairmont has partnered with Thailand-based Reignwood Group to develop the 25-story Fairmont Beijing. The 235-room hotel is scheduled to open this year. Additionally, the brand is developing 1,200 rooms in Macau in partnership with Raffles and Las Vegas Sands Corp. The Macau project, scheduled to open in 2010, includes 300,000 sq. ft. (2,871 sq. m) for a Raffles-branded residential units.

Eventually, Storey would like to bring the Fairmont brand to Hong Kong, Tokyo, Bangkok and Jakarta, but these markets are tough to enter, he says. Fairmont also is interested in expanding into select markets in Southeast Asia, such as Korea and Vietnam, and will likely develop four or five projects in India over the next few years, the first in Hyderabad.

“With Colony Capital and Kingdom, we have access to many more transactions and access to much more capital,” Storey says. “Prince Alwaleed considers himself our chief development officer, and through his involvement with Four Seasons and his own hotel portfolio, he gets approached on just about every significant transaction and brings us opportunities.”

Although Fairmont’s first non-North American property happened to be developed in Dubai, Colony Capital and KHC also have helped Fairmont expand significantly in the Middle East, Storey says. In fact, KHC’s hotel subsidiary, Kingdom Hotel Investments (KHI), is a partner with Fairmont on several deals in the region.

“We have established and long-standing commercial relationships with a number of the world’s leading hotel management companies, including FRHI,” says Sarmad Zok, president of KHI. “FRHI is a leading global, luxury hotel company and has a brand portfolio which fits with KHI’s strategy to develop and operate first-class, luxury hotel assets in high growth markets and distinctive locations.”

In Dubai, for example, Fairmont has partnered with KHI and IFA Hotels & Resorts to develop Fairmont Palm Island and the Fairmont Palm Residences on The Palm Jumeirah. The project, which will consist of a 400-room luxury resort with 460 vacation ownership residences, is scheduled to open next year.

Another project, Fairmont Kingdom of Sheba, located on the Crescent of The Palm Jumeirah, will feature 510 hotel rooms, 50 Fairmont Heritage Place homes and 100 residences. Fairmont has partnered with IFA Hotels & Resorts for the project scheduled to open in 2011.

Fairmont has two projects under development in Abu Dhabi, one in Oman and one in Manila. “The credit crunch has slowed down development in North America, but it really has yet to affect the Middle East and Asia,” Storey says. “The investors from these regions have very deep resources and the credit crunch isn’t limiting them. They are using debt, but it is not coming from the traditional sources.” He adds that most developers come to Fairmont with 75% of the capital structure in place.

While the Fairmont brand is expanding rapidly, the Raffles brand is actually growing faster as a percentage of existing rooms. “Today, we have a collection of landmark iconic hotels, and with what we have in the pipeline, we have the opportunity to create a truly (enviable) portfolio of hotels,” Ee-Tan says. “We have the opportunity to become one of the most coveted hotels brands within the next two years.”

Raffles expanded to the Middle East this year, opening in Dubai.

Since its integration with Fairmont, Raffles has opened 15 new properties—more than doubling its portfolio from 10 hotels. To put that in perspective, only 10 Raffles hotels were developed from 1996 to 2006. “Prior to the integration, we drove all the expansion from Singapore,” Ee-Tan recalls. “Now we can leverage a broader set of resources and respond with speed to the market.”

Ee-Tan says Raffles is focused on expanding in Asia Pacific; at least 60% of pipeline properties are there. For example, the brand recently announced its first project in Indonesia, Raffles Jakarta, developed by PT Ciputra Property Tbk. Located in the heart of the city’s central business district, the new property will feature 180 rooms and suites, along with 80 Raffles Residences for ownership. It is scheduled to open in 2011.

Within Asia, India is a key market for Raffles, Ee-Tan says, and the brand hopes to expand into cities such as Delhi and Mumbai. Additionally, she expects to grow the brand in Hong Kong, Shanghai and Tokyo.

However, Ee-Tan is quick to point out that Raffles’ expansion is not confined to one specific region. “There are several gateway cities around the world where we are not yet present,” she says. “Because we’re a young brand associated with great style and great luxury, we have the opportunity to be in great gateway cities such as San Francisco and New York City. Raffles would be well received in these cities.”

Additionally, Raffles is selectively expanding in Europe. With one property in Paris, the brand is looking to expand in large international cities and recently announced a new project in Moscow. Raffles Moscow will feature 130 rooms in the Kitay-Gorod district. Scheduled to open in 2011, Raffles Moscow is a heritage building originally built as a private residence in the mid-17th century.

“Our brand is 17 years old. It has come of age and is on the radar of investors and developers,” Ee-Tan says. “It’s a young debutante and every suitor wants to have a dance with Raffles.” In fact, the biggest challenge for the Raffles brand has not been the credit crunch or finding developments, she says, but making sure the company has the talent it needs to maintain its culture and service across its entire portfolio.

“The rapid pace of hotel development in Asia has created a crunch on manpower,” Ee-Tan notes. “By the time we reach 2012, we will have to triple our staff strength.”

The Swissôtel brand also is focused on global expansion and has opened six hotels in the past four months. Despite rumblings in the industry that suggest that the Swissôtel brand should be rolled into another brand portfolio, Huck says that FRHI is impressed with the brand’s historic performance and convinced of its future success.

“Swissôtel has a great opportunity to grow because it has demonstrated success but is still a fresh brand,” Huck says. In fact, he believes that Swissôtel has the opportunity to be FRHI’s fastest growing brand in the future. “Because Swissôtels are city-center business hotels, it’s much easier to convert existing hotels to the Swissôtel brand than it is to convert them to Raffles or Fairmont,” he explains.

Swissôtel sees opportunities expanding to Asia, evidenced in the new Swissôtel Grand Shanghai.

Swissôtel has approximately 35 deals in the pipeline, including deals under discussions and those with letters of intent and signed contracts. Those deals represent about 10,000 rooms, but not all will likely come to fruition.

Huck says China, where Swissôtel already has four hotels, is of particular interest to the brand, as is India. Earlier this year it opened two properties in China—Swissôtel Foshan in the Guangdong Province and Swissôtel Grand in Shanghai.

While most of Swissôtels’ opportunities in Asia are development oriented, the brand also is looking for development and conversion opportunities in Europe, specifically Eastern Europe. “Because of the neutrality of Switzerland, people across Europe like our brand,” Huck says.

So far this year, Swissôtel has opened the 230-room Swissôtel Bremen in the Free Hanseatic City of Bremen, Germany, and the 402-room Swissôtel Grand Efes in Izmir, Turkey. Huck says the company plans to continue its growth strategy in Germany and recently signed a management contract with Baywobau Dresden GmbH, a property developer with numerous ongoing projects in Dresden, for the Swissôtel Dresden. The hotel is scheduled to open in spring 2010.

Additionally, Swissôtel signed a management deal with Sibacademinvest for the Swissôtel Novosibirsk in Russia. Scheduled to open in 2009, the new Swissôtel Novosibirsk marks the company’s further expansion into Russia, Huck notes, adding that it has successfully operated the Swissôtel Krasnye Holmy in Moscow since summer 2005. The new hotel will be located directly in Novosibirsk’s financial district and will feature 200 guestrooms and suites.

Beyond Asia and Europe, Swissôtel is searching out conversion opportunities and is very interested in growing its footprint in North America with the help of Fairmont, Huck says. Today, there’s only one Swissôtel in North America, located in Chicago.

Huck acknowledges the credit crisis and the economic downturn in the United States, but says challenging times might actually help Swissôtel. “There are probably a lot of hotel owners in the U.S. who are thinking now might be the time to do something different—to bring a new and unique brand to their market,” he explains. “Swissôtel is a fresh brand that is exciting and that is exactly what owners want.”

Huck contends that Swissôtel, along with Fairmont and Raffles, are well positioned for global expansion because the brands have maintained their own identity and separate headquarters. “We have the ability to represent our three brands globally, and there aren’t many companies that have that,” he says. “A lot of companies develop brands across geographies, but don’t have the local presence. We do.”