Measure For Measure - Investment Outlook - March 2003

An avid proponent of benchmarking and measurability, William Heinecke is looking beyond Thailand to expand his Minor Group’s success in the hotel industry.

By Staff -- HOTELS Magazine, 3/1/2003

While the rest of the world is contemplating the prospect of war, William E. Heinecke is considering what structure the ensuing peace might take. An entrepreneur since his teens in the late 1960s, Heinecke is used to thinking and acting ahead of the market. He is actively analyzing growth opportunities throughout Southeast Asia for his publicly listed Royal Garden Resorts (RGR) at a time when all but a few hardy private investors are sitting firmly on the fence. Next year, by this time, Heinecke fully expects to count a 10th hotel in his portfolio, have another property close to completion and be well on his way to growing profits 30%—whatever happens in the Middle East.

“If we are going to drive up profits 30%, we have to keep growing and developing,” says Heinecke, chairman and CEO of the Bangkok-based Minor Group, the parent of RGR and 29 other companies. Uncertainty is a factor in the growth equation, but not one large enough to grind development to a halt. “We had one of our best years ever in 2002, even though we were still suffering from a couple of million dollars in losses at the JW Marriott Phuket after the Bali bombing. We have had experience operating hotels through deep down cycles like the Gulf War and after September 11. What we saw is that the local market remains buoyant and that our largest foreign market, Europe, is less impacted by the aftermath of terrorism events than the United States,” adds Heinecke, the son of an American-born war correspondent stationed in Bangkok and a nationalized Thai citizen since 1991.

For Heinecke, that means market opportunities that invite an aggressive approach rather than caution. He is rebranding his two Regent properties under the Four Seasons flag, adding new hotels in Koh Samui and Phuket and expanding his start-up small luxury resort brand, Anantara. Thailand remains a development focus for RGR, but “cash positive” status for Royal Garden’s Harbour View Hotel & Office Tower in Haiphong is likely to encourage further expansion in Vietnam. “Thailand will keep us occupied for the next couple of years,” Heinecke says. “With Marriott, Four Seasons and Anantara, we have the best chance of riding Thailand’s tourism wave. After that, it would be hard to beat Vietnam for many reasons. Its hotels are showing good numbers. It has a great history. Things are reasonably priced. And, the infrastructure is coming, including the new airport planned for Hanoi.”

Joint ventures to introduce the Mandara Spa brand to hotels in China and India will give his team a better read on opportunities in those key markets. Under the radar, he is exploring the potential of Indonesia as it tries for a comeback and, longer term, “out of favor markets” such as Sri Lanka. Burma is on his list, and everyone else’s. Question marks surrounding stability put any real investment activity on hold for the near term, even for a man who admits to liking adventure, ranging from car racing to flying and scuba diving.

Growth amidst uncertainty is no pipe dream. Regional experts such as Horwath Asia Pacific’s Robert Hecker cite Heinecke’s solid relations with both domestic and international sources of financing. According to Hecker, Heinecke’s track record makes RGR “a real competitor for any hotel acquisition or development deal.” It will need to be both. While it is still cheaper to build than buy in many parts of Thailand, acquisition and rebranding might provide more cost-effective entry into other countries where overbuilding could force product onto the market within a year or two.

Nor is the financial community nervous about investing in hotels at this point. Last November, RGR privately placed 24 million new ordinary shares to leading institutional investors such as Thai Farmers Asset Management, the Government Pension Fund and Bangkok Insurance—all of which rate as leading institutional investors in Thailand. “There is a lot of liquidity looking for a good home. We have proven that we can deliver. We weathered the Gulf War, 9/11 and the Bali bombings without more than a hiccough and without losing our A- credit rating,” says Heinecke.

Heinecke points not only to the nimbleness of company in adjusting to market opportunities but to the stability of Thailand itself as part of the rationale for RGR’s appeal for investors. The cash infusion from an unsecured bond issue last August and the share sale will be used to pay down higher interest debentures, some of which mature this year. The current lower interest rates will make capital look cheaper if any good deals emerge.

By The Numbers

Bearded and casual, Heinecke’s style belies his reputation as a tough manager and a shrewd businessman—shrewd enough find the loopholes that provided an exit from a troublesome Pizza Hut master franchise and gain enough leeway to launch his own Pizza Company (whose market share went from 0% of the Thai market to 75% in two years, while Pizza Hut’s fell from 95% to 25%.)

His business mantra is about the numbers. Like racing, he sees business as a quantifiable commodity. Everything is benchmarked and measured, from operational performance to individual productivity. With guesswork taken out of the mix, Heinecke has gained a reputation for finding ways to make the bottom line work. He says it is all in the preparation. In his view, nearly half of business failures stem from “not doing your homework.” His strategy, like his workdays, is mapped out with clearly defined, written goals he can use to track his progress and that of his company.

He holds staff to the same level of accountability. From hiring, he makes clear what he requires. “Mr. Heinecke is extremely accurate on operational issues. Each item of capitalization is pressed in terms of return on investment,” says Edward Thompson, food and beverage director at the Hua Hin Marriott Resort & Spa, Hua Hin, Thailand. “Each implementation requires evaluation. He has a distinct, pure passion for the industry and for success.”

Detractors contend that Heinecke’s passion is for perfection and that it leads to high turnover among his managers. Thompson has a different view. He contends that, while Heinecke does have high standards, he makes the necessary investments in product quality, technology and training that give staff members the tools they need to get the job done. Cross-cultural training techniques and a wide variety of management training programs are aimed at keeping the best of the company’s 12,000 employees in the system. RGR also made what Thompson terms “a huge investment” in information technology. “It really spearheaded the industry here,” he says.

Heinecke admits he is demanding, but he insists being demanding is better than being out of business. He credits his hard-working staff for RGR’s ability to ride through the tough points in the business cycle. The worst-case scenario for Heinecke is not “redirecting” an employee or two who cannot meet his standards, but having to close operations that would make hundreds if not thousands of people redundant.

Quality Control

Acknowledging that he has to “force” himself to make time for his interests and his environmental causes, Heinecke never leaves his business for long. He is constantly tweaking the product and the concept. All of the properties have been recently refurbished. In addition to opening new hotels with more sophisticated design and amenities, he will continue to refine the Anantara brand, a showcase of Thai village style within the context of a small, 5-star resort.

Better facilities mean better profit margins. RGR aggressively promotes its spas on property, a factor that helped boost spa revenues 105% year over year from the third quarter of 2001. “We purpose-build pampering spas. People are not going pay for converted gyms; they want to get away from it all,” says Heinecke. During his world travels, he noted the popularity of Thai cuisine and of cooking schools. “We looked at all the cooking schools with the landscape/interior design Bill Bensley. We decided it is something that would enhance the hotel experience, but only if it were a world-class school. If you want to drive the synergies, you have to make that kind of investment,” he adds.

First-rate facilities continue to give his properties a competitive edge, he reasons. But, in return, he expects better yields. That will mean more aggressive marketing within Thailand and in Europe—and a move upmarket. RGR worked to reduce its dependence on wholesalers, eliminating some of the low-yielding, mass-market business. In the last three to four years, wholesalers’ contribution to occupancy has been reduced from 70-80% to about 40%. High-yielding FIT business delivered through its brands’ reservation systems and affiliations such as Anantara’s membership in Small Luxury Hotels continue to expand market reach to the upper end of the travel community. “We expect hotels to continue to increase their overall contribution,” says Heinecke. If they do not, he has less vulnerable fast-food restaurant concepts, retail distribution and shopping centers to fall back on while he waits for the hotel industry to find its stride.

How Business Grows

His growth strategy still favors an opportunistic approach.

Franchising, management contracts and expansion of the Anantara brand all figure into his plans. Heinecke looks at all the options. He says franchising remains a viable alternative for further expansion. “The Marriott franchises were signed long before the “Pizza Wars.” We have three Marriott hotels that are franchises and one Marriott-managed hotel, the JW Marriott Phuket. We are very pleased with both,” says Heinecke.

General managers, like developers and staff, are aware that Heinecke and his team will never be silent business partners. “We are a very hands-on organization, but we are hands-off enough to let the general managers get on with their jobs,” Heinecke says. Hiring self-motivated people and giving them the decision-making power to do whatever needs to be done “keeps the fat out of the organization.”

Utilizing various brands and management structures gives Heinecke the flexibility to go into markets his competitors may be forced to overlook. He is comfortable with Marriott and Four Seasons as international brands. They, like the U.S.-based brands in the Minor Food Group portfolio, seem an odd choice for companies that purportedly cater more to a domestic and European customer base. There is no xenophobia at work, nor nostalgia for a Western business connection. Despite the Horatio Alger overtones to Heinecke’s career, it was the numbers that dictated the choice of brand.

France’s Accor would have been the obvious choice, not only because of its high visibility in its local market but also for its staying power in Asia. However, it was too well established. Heinecke was able to open Thailand’s first Marriott, tapping a new and different market.

Marriott’s powerful reservation system was one of the deciding factors. “We will definitely do more with Marriott,” he says. Four Seasons’ consistency made it the right solution for higher end properties. The ability to adapt the brand to an exotic, 5-star resort or as the 15-room centerpiece of an elephant camp in northern Thailand made it a valuable addition to Heinecke’s growth strategy.

Anantara offers a solution that will be equally at home as new construction or conversion. Properites such as a former Le Meridien would not have morphed easily into Marriott’s or Four Seasons’ models.

“We wanted to create something that was uniquely Thai, with the feeling of Thai architecture and landscape,” Heinecke points out. As in other phases of his business, he tends to rely on the people who have proven themselves. Well-known architect Lek Bunnag and Bensley, best known internationally for landscape design, created a new kind of destination. At 197 rooms, Anantara is larger than more ultra-luxury hideaways but still small enough to achieve the intimacy that commands premium room rates. Dublin-based interior designer Kathleen Heinecke revamped the guestrooms with a look that blends contemporary and classical Thai influences.

“I do not see our investment pattern being interrupted,” says Heinecke. As long as his operational teams can maintain their ability to manage their markets and operations, he contends the company will be able to rationalize its growth plans.

Resorts will remain the prime focus. “Resorts are more profitable and require less intensive development. You can find great opportunities at great prices. That is really where our special expertise lies,” Heinecke adds. “It is a lot more difficult to get into Singapore or Hong Kong than to find something that works in northern Thailand or Vietnam.”

Heinecke seems to make things work. “He has built an impressive portfolio of hotels in nearly all of the key markets in Thailand,” says Hecker. “He successfully went head to head with Goldman Sachs in the Regent deal, brought pizza to the masses in Thailand and introduced both franchising and a number of Western brands. He chose the franchises he knew he could introduce successfully and those that would benefit from his connections. His companies have made their mark as listed companies.”