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Upscale Hotel Brands Headed for Smaller Towns

Can it be that the future of the Westin and Sheraton brands is in places like Normal, Ill.? It might sound unlikely, but Starwood Hotels & Resorts Worldwide (NYSE:HOT) considers markets like Normal — population 45,386 — ideal for growing the two upscale brands.

The White Plains, N.Y.-based hotel owner and operator has identified secondary and tertiary markets as the next frontier for expanding market share for its Westin and Sheraton brands, which are now more commonly found in big cities. Starwood executives say many smaller markets offer the same attractive demographics — affluent business and leisure travelers, and a concentration of high-end residential and retail areas — needed to sustain upscale hotels.

More importantly, say executives, these markets are virtually without upscale hotels. To win over those travelers looking for a fancier place to stay, the company has developed new prototypes — a 207-room Westin hotel and 150-room and 250-room prototypes for the Sheraton brand. The first on the drawing boards is a 150-room Sheraton prototype in Normal, which will be owned and developed by Atlanta-based Stormont Hospitality Group. These plans do not include the glitzy W brand, which has become a trendy destination in many gateway cities.

“We've tackled an age-old challenge in the secondary and tertiary markets. That challenge is how to make a premium product and be able to bring this type of upscale hotel into markets that are forced by nature to sometimes be overbuilt with midscale brands,” says Ted Darnall, president of the Starwood Real Estate Group. Darnall says the prototypes are ideal for these markets because they have fewer rooms and less meeting space — about 1,500 sq. ft. to 3,000 sq. ft. — compared with the 20,000 sq. ft. of conference space typical at its larger properties.

By opening hotels in smaller markets, Darnall predicts the company will grab its fair share of customers who now stay in its rivals' midscale properties. “They're [customers] staying in Courtyard By Marriott and Hilton Garden Inns because upscale options do not exist in these marketplaces.”

Starwood plans to own about 50% of the prototypes and franchise the rest. The company's goal is to open 20 of the new Westin hotels and 40 of the Sheraton prototypes over the next four years. Starwood — which also owns the St. Regis and Four Points brands — has a portfolio of 760 properties, including 387 Sheraton and 117 Westin hotels.

Starwood executives say that the new strategy looks beyond the current hotel slump. Nationwide, revenue per available room (RevPAR) was down by 11.7% at mid-year, from $68.03 in mid-2001 to $60.09. By the time the new hotels open in 18 to 24 months, Starwood expects significant improvement in the economy and the hotel market “We choose to continue to refine and grow our business, and be better prepared for the upturn,” says Bill Linehan, vice president of product development for Starwood Hotels.

Adds Darnall, “We think the scaleable premium hotel is the next product for the next cycle. And if you believe that, our timing is absolutely perfect.”

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