Dare To Be Different - Investment Outlook - March 2005

Before you sell, you sometimes have to enhance. That is the decision MWB made when it decided to operate Malmaison itself, acquire Hotel du Vin and fund growth that will double its presence in the lifestyle sector within five years.

By Staff -- HOTELS Magazine, 3/1/2005

Malmaison, MWB tag team of Cook (l.) and Cave.

Business cards are not usually memorable. Robert Cook’s is the exception. On the front, it is all business in black and white with name, rank and address—effortlessly cool, as befits the chief executive of the smoothly modern London-based Malmaison brand. The first clue that the unexpected is ahead lies in the white-framed type tucked in the corner: “Depuis (not since) 1994.” Turn the card over, and there is no doubt this is a brand that intends to break the rules. Where other cards list hotels, regional offices or ranks of contacts, Malmaison markets itself. The image of a couple’s legs under a table, the woman’s with one shoe kicked off, and the message, “A table is often more reserved than its diners” not only sum up Malmaison’s quirky style, they also drive home the message that both rooms and restaurants promise a seductively new experience.

“Hotels that dare to be different” is more than a tagline on Malmaison’s cards—it is a business model for the brand and for its owner, London’s Marylebone Warwick Balfour (MWB) Group PLC. It took more than a little daring for Bruce Cave (a director of MWB since 1998) and Joe Shashou (one of the founding directors of MWB) to convince one of the UK’s leading property groups that it should enter the lifestyle hotel sector in the late 1990s. It took longer—two years to persuade Wyndham International (which had acquired Malmaison from its founder, Ken McCullough) to do the deal. Even then, Cave was swimming upstream. “The lenders felt we needed to joint venture with a brand—someone who would carry out the day-to-day running of the hotels while we did the asset management and development,” says Cave. He may have disagreed, but the lenders won the day. Brussels-based Rezidor SAS Hospitality got the nod as MWB’s operational alter ego.

Two years later, MWB surprised more than a few experts by breaking out of its own “sell” orientation and buying out Rezidor. “By that time, we had gained experience with large hotels we had developed or acquired as real estate plays: the Howard, the Park Lane and the Radisson SAS Argyle Street,” Cave says with obvious satisfaction. “We had new bankers who we convinced that we could operate hotels; based on the results from these properties, we proved that we could.” It helped that Cave was telling his story to the Bank of Scotland, which is not only well versed in hotels, but also an aggressive force on both the debt and equity side of hotel deals. “Bank of Scotland understood that you could not overlay a corporate structure onto Malmaison without destroying the essence of the brand,” adds Cave, who also serves as director of MWB’s hotel activities under the Malmaison Holdings Ltd. umbrella.

MWB worked with a seasoned hotel team for 12 months diagnosing what Malmaison needed from its newly single parent, where it had lost a step, what systems had to be developed and where its upside lay. With those issues defined, the team began its search for “an out-of-the-box managing director.” A fair number of big names were jobless late in 2003. No one from the mainstream needed to have bothered apply. Cave wanted someone as individual as Malmaison. What more obvious choice than Cook? The son of an Aberdeen hotel owner, Cook literally grew up learning what worked and what did not. What he had not gleaned from his father’s hands-on operation and posts with various major brands, he learned from the entrepreneurial McCullough as part of the team that developed and launched Malmaison. Uncomfortable with corporate constraint, Cook moved on with McCullough when he broke with Wyndham and began work on his new Columbus brand. But, he could not resist the challenge of managing the future of Malmaison. “The Malmaison brand started the lifestyle sector (in Europe) 10 years ago. It has been well maintained, but it has not taken a step up. The job definitely is not finished,” says Cook.

A Stylish Sister
MWB gave Cook a “macro plan” and the authority to carry it out. “We told Robert there are no rules; you make the rules. The attitude here is to have a lot of fun, but to know that these hotels are businesses and they have to perform,” Cave says. The immediate goal is to take MWB hotel holdings to between 25 and 30 hotels within five years. To accomplish that, MWB expanded Cook’s firepower in its surprise move to acquire the stylish Hotel du Vin (HdV) in September 2004. Both brands will now be under a single management team headed by Cook.

The deal marked a new maturity for lifestyle hotels. It was not a major brand scooping up a niche play; it was one lifestyle brand buying out a tough competitor. It also signaled MWB’s conviction that lifestyle hotels are a viable play. MWB’s board told its shareholders in its June report that its stated aims were to reduce debt, claw back gearing from 311% and slash overhead by 50% within 12 months. That is not the message of a group that is shopping for hotel chains. But it was hard to say no to a US$122 million (£66 million) deal that would add six operating hotels and one under development and increase EBITDA by US$1.1 billion (£600 million).

HdV, a deal that has been on Cave’s radar since 2001, balances Malmaison’s portfolio and opens up new development prospects. It is a logical geographical fit: Malmaison is strong in the northern UK; Hotel du Vin’s strength is in the south. The only overlap currently is in Birmingham. Both brands have good development opportunities in the planning stages. Malmaison can work as easily in the gateways of London, Paris and New York as in cities the size of Oxford. Hotel du Vin can tap opportunities in university towns, cathedral cities and other urban centers where few buildings make the numbers work for major hotels. On the operating side, Cook and his team are pursuing immediate cross-selling opportunities. Both brands are highly visible as lifestyle brands, strong on design and very successful with their food and beverage concepts.

While more aggressive sales and marketing and yield management grow the revenue figures, realizing synergies from the combined operation could save 6% to 7% on the bottom line without impacting the guest experience. Cave sees most of those savings coming “in the engine room on everything from electricity to paper towels.”

Malmaison Belfast.

Guests will see no changes in the character of the brands, just improvements from “refreshing” design to the addition of broadband. “MWB bought the fantastic foundation of a brand with Hotel du Vin. We plan to keep the formula as simple as it is and to retain its individuality,” Cook says.

Managing Growth
Charles Human, managing director, HVS Hodges Ward Elliott International, London, agrees that Malmaison and Hotel du Vin “are strong products that can exist side by side.” In his view, the challenge will be delivering on the growth promise. Both brands easily have growth potential, but they will need consistent backing and capital to optimize their upside. “MWB has grown Mal to some extent, but not nearly as much as they said they would at the time of purchase. It will be interesting to see if they grow HdV.” Malmaison’s sister may also require more capital to get it on the growth track. “It will be difficult to grow HdV through management contracts because of the uniqueness of the product,” Human says.

Bucking the UK trend toward the separation of “bricks and brains,” Cave and Cook are not out to shift their lifestyle brands to an exclusive management or leaseback footing, despite what they say is a backlog of interest from hotel owners and investors. In fact, Cave estimates only 10% to 15% of the flags could be leased without diluting the portfolio. Cave, a self-admitted believer in the owner-operator model, is loathe to relinquish the appreciation potential and the certainty that ownership imply. Where leases are an option, as they will be in Oxford, Malmaison’s first leased hotel, they will be carefully structured to avoid the spiraling terms that sunk larger chains post 9/11. Minimum performance guarantees are likely to be in the low 20s in the provinces, more like 27% in London, and they are unlikely to reach above expected first year net operating profit.

By necessity, most of the growth for both brands will be organic. Cave charges that portfolio deals are hard to do. “They have some good hotels and some mediocre hotels,” he says. Human agrees. “There are not too many more deals like this to be had. The UK and European boutique sectors are very fragmented. Growth of the two brands will have to be organic if the integrity is to be maintained,” he says. The good news, in Human’s view, is that the boutique sector remains under-exploited. “Many boutique developers got it wrong. Mal and HdV are two that definitely got it right. As such, there is tremendous scope to develop further if MWB puts the capital and effort behind it,” he says.

Hotel du Vin & Bistro, Winchester.

Cave and Cook are intent on making that happen. They followed up this interview with a bank meeting seeking to raise the equity that could beef up Malmaison with a hoped-for second flag in London and a presence in Dublin, while taking HdV to UK cities such as Chester, Cambridge and Canterbury. “There is no saying that Malmaison cannot spread its wings beyond the UK. It was designed to be an international chain from day one. We would like to be in Paris, providing we could get the right deal. We would also consider a hotel in a major U.S. city,” says Cook.

Slow and steady should win the day. “Mal and Hotel du Vin are super concepts,” says Christopher Rouse, director, CB Richard Ellis Hotels, London. “Mal finally appears to be back in the tender care of people who understand it. They deserve to succeed. But, the key will be in consolidating their position in the UK before they take on the logistics and expense of cross-European expansion.”

Building For The Future
Adding hotels is just part of Cook’s assignment. The rest is to retain and expand the integrity of Malmaison and Hotel du Vin. “I am not building brands. I am creating labels,” says Cook. Creating labels starts with delivery—to the investors as well as to staff and guests. Having worked in the back of the bar and the back of the house, at the front desk and now in the front office, Cook has the expected credentials to review, refine and re-invent the operational foundation for creating a label. He wants F&B to make a major contribution to every hotel to increase its revenue stream and drive more rooms business. He is strong on promoting from within and insistent that “we grow our staff at the same speed we grow our portfolio.” He has definite views about top management being visible to the hotel staffs with regular visits, and hotel management being visible to guests. “If I do not see a manager within 10 minutes of entering the hotel, I go crazy,” he admits.

But Cook also understands the power of marketing and public relations. He studied “labels” such as Gap and Diesel (jeans) to unravel the elements of what it takes to attract the kind of trendsetting image that crosses age, income and social class demographics. Cook works the PR circuit hard to make sure his photogenic hotels appear on the pages of Condé Nast Traveler, sharing the halo of brands from Donna Karan to BMW. “You cannot wholesale hotels. You have to retail them,” says Cook. That means ensuring that celebrities and international travel editors attend opening parties for hotels. “Too many hotels just have their own executives. Opening a hotel is not a company party. It should be a social event, with the rich and famous, the important people on the local scene, the international press and the local press. I am proud to say I have never had to cut a ribbon,” says Cook.

It is this energy seamlessly flowing through the marketing, design and operations that is convincing jetsetters to forego the pomp and opulence of 5-star hotels to see and be seen at Malmaison and Hotel du Vin. Fortunately for both brands, it is also attracting the 4- and even 3-star travelers who want to experience the cutting edge. The appeal of strong brands has put 145,000 people on the database in a short time—not bad for a group that does attend travel trade shows nor succumb to mass marketing.

Malmaison bistro in Brighton.

Cave and Cook are aware that the group needs a solid foundation. They point to problems of boutique hotel owners who sacrificed substance for style, and eventually lost their edge and their market. Capital reserves are put in place from day one. “You have to have the reserve when the hotel opens, even if it is unlikely the it will be needed for four years. You cannot just go get it when you need it. You would be too late,” says Cave. Roughly 3.5% to 4% of gross revenues is set aside for maintaining and upgrading each hotel. Anticipated interest rate rises are built into return calculations “to make sure the hotels can fully weather any storms,” Cave adds.

Those calculations put returns in the 20%-plus range for MWB. As enamored as Cave and Cook clearly are with the lifestyle sector in general, and Malmaison and Hotel du Vin in particular, it is also clear that they know there will have to be an exit story. Cave says MWB usually holds assets for four to seven years; businesses for 10. That would put the sale/demerger of MWB’s lifestyle brands two to three years in the future. Would MWB consider a public offer? No option is being written off, says Cave. “Including a management buy-out,” quips Cook.