Top hoteliers mull over industry's future

During the recent NYU Hospitality Conference, NREI sat down with 17 movers-and-shakers to get their take on where the hospitality industry is coming from and where it's headed. The ensuing discussion touched on topics ranging from consolidation and globalization to labor and technology.

NREI: If you look back for the last couple of years, most of your companies have changed significantly. What has been the biggest change in your company in the last two years?

Richard Kelleher: Doubletree Promus is the merger between two companies, and it was responding to what we think is going to be a continuing pattern of consolidations driven by the need to have technology infrastructure, a larger customer base and more efficient operating costs. We think that will continue, not only for us but for others in the industry, because unfortunately bigger is better, bigger is stronger, bigger is more efficient, and we think that's the biggest change we have seen and that is the reason we did what we did.

Peter Kline: Just coping with going from 10 to 124 hotels in 3 1/2 years, and really from 38 to 124 in the last 12 months, has been the biggest change. Both on the operating side and on the capital expenditure side, we are managing a half-a-billion dollars worth of redevelopment work that we've already gotten done and that we will do over the next 24 months. That, in and of itself, has been huge. And then just dealing with the operating - bringing together operating companies that really had very little in common originally and rolling that into one organization - has been a huge change for us, but it has been a good one. It's been probably more successful than what we had any right to hope it would be.

David Simon: For us the biggest change has been new construction. We will have developed 90 new hotels from the ground up in the last two years. To do that is a pretty herculean task: from finding sites, getting them permitted, going through construction. And when construction is done, you have to start operating them: worry about hotel staffing, operations and marketing. So building 90 hotels over a two-year period is pretty difficult. In that same time, we've also begun the franchising initiatives to franchise our three proprietary brands. We have been a company in evolution. We are at a point now where we are starting to franchise while we continue to develop.

Peter Krause: What's your reaction to Randy Smith's prognostications about supply and overbuilding?

Simon: I think this year will be the peak, then I think it'll slow down again. I know from our own corporate perspective, we are not going to do as much next year; we are going to slow it down. But we do believe franchisees will build for us, as I am sure Mike [Leven] is hoping and praying that happens.

Mike Leven: I guess for me the big change is starting a company with 22 hotels and five under construction to where we are today with approximately 159 hotels open and a backlog of about 620 hotels in one form of development or another. On a personal basis, this is the first time in my career I haven't had to fix someone else's problems and basically started creating my own problems.

Paul Nussbaum: Our biggest change is growing from a $500 million collection of assets two years ago to a $7 billion dollar-plus fully integrated brand of hotel company that has serious global aspirations.

Don Landry: In two years we spun off Choice from Manorcare, the healthcare company; we created Mainstay Suites, which was the first mid-scale franchise extended-stay product; we switched from the aggressive acquisition program that we started in '92, and we stopped that basically in mid-'96 and switched to a development program. We just opened our 12th Mainstay Suite hotel and, of course, last October we spun off the ownership and management of all the real estate, creating a pure franchise company, Choice, and the operating company, Sunburst Hospitality.

Morris Lasky: We basically are a service company, and we have diversified to kind of support the industry in a variety of activities, plus the Lodging Conference has come into full blossom in its fourth year. We've created a new company, called Accent on Women, to support the industry and developing this very important part of the industry, including a travel boutique and a few other things like that. We are doing a lot of support in terms of litigation support. We are doing underwriting. We are doing acquisition evaluation for companies that are overburdened in their own staff and need another set of eyes.

In terms the long-term picture, we're seeing the crack in the dam at this point, so we are gearing up in terms of takeover. We have down $4 billion worth of turnarounds. I guess, unfortunately, as the cycle turns, we have three receiverships right now, so we are in the very early side of the wave. We see in 2002 another $1 billion worth of turnarounds probably.

Dorothy Jennings: Based on the fact that I am wearing two hats, I will answer the question in regards to HVS. We are called on more often to appraise packages due to consolidation, and we are one of the only consulting firms in the industry that can muster appraisers from all over the country and deliver and handle a package the size of a Patriot or a Harley package and do it in a consistent matter. As far as of my New York University hat, we also try to appeal to customer satisfaction, and I think you will see with this conference we have cut down substantially on advertising. The attendees pay a very substantial fee to come to New York to attend this conference and they don't want commercials, and I think a lot of that is moderator selection.

Randy Smith: Because of what we've heard about the new construction, mergers and acquisitions, the biggest change for us has been the explosion in the demand for information. In the last two years, I guess we've probably doubled in size. We've had to rewrite all of our programs so we can respond a little bit faster to the needs of the industry in terms of wanted information. And we've streamlined a number of things so that we could respond very quickly. And we think we are doing fairly good job.

Lalia Rach: About three years ago we were a start-up. We had 19 undergraduate students and 60+ grads, whereas today we have 103 undergraduate students and 102 graduates. We offer two bachelor's degrees: We added in hotel and tourism management and one in recreation and leisure studies and a concentration in marketing and management. We also have two master's degrees: Hospitality Asset Manager and Tourism & Travel. What we are doing is bringing together all of the diverse segments of tourism and leisure into one educational facility. We are also partnering with four hotel companies in this city to bring a different approach to hospitality education. We will begin in the fall with four teaching hotels so that each year in the education for the undergrad they will experience a different culture and a different reality.

David Dittman: I think our biggest challenge at Cornell has been keeping up with the industry. The last few years the demands of the industry for managerial talent has been tremendous. We have seen that in the growth and number of offers that our students are getting in the job market and the increases in salary. The number of jobs are also most up to four jobs per student graduating from Cornell, about 200 a year graduating at the under graduate level and 60 at the graduate level. We are seeing tremendous increases in the salaries compared to the stagnation in salaries of our undergraduates back in the early '90s - bumps of 10% to 15% this year. We had a master's student in our master's Management and Hospitality program exceed $100,000 in the marketplace.

We see a tremendous demand for the product, that is translated into a tremendous demand in the marketplace for Cornell. Our applications have been increasing in range of 15% a year for the last three years. Last year at this time, we had 300 prospects in a pool which translated to close to about 800 applications for our 167 slots. This year at the same time we have 1,000 prospects in that group. I don't know if that is going to translate the same way, but if there is any indication that is a demand for a product, it can be scary.

The quality of our classes have increased now for the last three years, and the students that are coming into the school are even better than the students we used to get, and that is hard to find.

Internal pressures are that we have to provide programs that are of the quality that such students will demand. We've just recently undergone a large study of the industry to find out how we should retool our undergraduate program. There were three things that came back on how to assure that our students will be able to be leaders in a global hospitality industry, be able to lead with multi-national corporations now with strong financial management skills, strong information technology skills and good managerial communications skills, coupled with our traditional lodging and food service orientation.

Krause: Dean, what is the starting salary of your undergraduates?

Dittman: The last number I saw was in excess of $30,000, somewhere around $33,000, in the hotel segment.

Krause: And what percent goes into operations, as opposed to consultancy or financial-type positions?

Dittman: We have about 65% going into operations.

Matt Hart: I think at Hilton we've had two really big changes in the last two years. One would be on the management side: Of course, Steve Bollenbach took over as president of the company but he also brought in a new head of the gaming operations, a new general counsel, new CFO, new treasurer, new head of construction, new head of development - all the way down to the staff. I think that the most visible change in the company is the change in management. I think another big change in the company has been our transformation of our relationship with Ladbroke, which owns the Hilton brand outside of the United States. For years and years we were fighting with Ladbroke, suing one another, and we changed that to a point now where we've got a strategic alliance in place. We've joined sales and marketing forces so that, from a customer's perspective, Hilton Hotels seems to be one company. In fact Hilton is the largest number of full-service hotels in the world.

Bjorn Hanson: Our firm's merger with Price Waterhouse and the magnitude of putting together several hundred different partnerships around the world in a three- or four-month period to form what will be the 23rd largest employer in the United States, 64th largest employer in the world, is of the magnitude that none of us appreciated. Within the hospitality part of our practice, the biggest change is the need to go outside of hospitality specialists to look for the kind of talent we need to support our clients, specifically in two areas: One is to the international arena to stay ahead of our clients that are looking for international assistance. There just are not enough global hospitality specialists; we are having to take real estate and folks from other industries. And then in our research area, where we now actually recruit not from within hospitality, but are looking for economists and statisticians to support that part of hospitality.

Robert Parsons: I think the biggest change for our company over the last two or three years was a very conscious shift in our strategy about three years ago to focus on quality four- and five-star full-service hotels in airport, downtown and convention locations. Three years ago 50% of our asset were in limited-service and all of our full-service hotels were operated under the Marriott flag. By the end of this year we will have, during that time period, acquired over $6 billion of full-service hotels, sold a $1.5 billion in limited-service properties. Now we will have full-service hotels that are operating at least six different major brands. So we are really are trying to be a portfolio manager, to own quality lodging real estate that's operated by quality operators in quality brands. We feel that will position ourselves for the long term.

A very visible change in our company is decision to elect REIT status, that hopefully what will be effective at the end of this year. We don't believe that internally will significantly change our operations or strategy or the way we do business, but is a very visible change that people are aware of.

NREI: Why do it?

Parsons: There a couple of reason that we did that. Clearly we believe that REIT structure is the best vehicle for owning real estate. If you are the owner of a portfolio real estate, we believe that is the most efficient structure for the shareholders. As we've looked at the market over the years, we've struggled to find very many C corps that primarily own real estate that have performed well in the national capital markets. It's just a difficult situation to be in. That very premise led to the split of Marriott in 1993 into two companies - one focused on real estate ownership and one focused on the management business.

Gary Decatur: As Don mentioned just a moment ago, one of the most significant changes is that we became a pure play franchise company with the spin off of Sunburst. With Bill Floyd coming into the company and taking a look at where we stand collectively as a business, have made some pretty dramatic changes. Things like our development strategy going from opportunistic to strategic. We have been taking a look at exactly where we wanted to go, going into the market that will be a more difficult to market to franchise in. We have restructured the company into market areas and, in essence to get closer to our customers, we broke the company up into five different regions across the United States. In each one of the regions is located both franchise services and franchise sales, so the company is working closer together to get closer to the licensees. I would say that, as well with the relationship with the franchisees, I think over the last 12 months the company as a whole has gotten very close to the franchisees. We've spent a lot of time requesting their input, and the way that we are marketing has changed. We have gone to brand equity marketing; you won't see the suitcase anymore.

Krause: Well, two years ago at this conference I a announced that I was leaving Morgan Stanley after 15 years to set up a new investment bank with Bob Greenhill. That was the big change for Bob and me. It was the two of us and a secretary two years ago. We are now up to five partners in New York, all of whom were former manager directors at Morgan Stanley. We have an M&A boutique covering hotels and real estate, my specialty, but also food and beverage, financial services, a lot of different industries . It's gone from Bob, me and a secretary two years ago to 40 people now and we do sales, mergers and acquisitions for real estate and corporate clients.

Steve Miller: The main change, I think, was going from a private company to being part of a public company. Half of our business, approximately, is outside the United States, so a big part of our challenge is to continue to develop the infrastructure in the business in the industry outside the United States and moving from an exchange company to continue our transformation into a broader array of services offering from technology to consulting sales and marketing to participate and lead the growth of the industry. So that's a huge challenge, and we think that the growth in our sector is going to even increase.

NREI: Is everybody going global? How does it fit into your strategy?

Leven: Since I can say that I'm not very global, I can say that, having done it a couple of times, you can look at global situations in two ways it seems to me. The first is opportunity from an income standpoint for your company to grow and no one will deny that there were compelling opportunities in a variety of countries and some in the United States and some a lot further away . And then you look at it from the other side and that's the marketing side, where the people are coming and going from.

When you look at the global travel numbers, they are really staggering, and they're going to be even more staggering as income gets distributed. When you have products that you can distribute for your brand or brands in these countries, you tend to get them into the distribution system to build business movement for your company ,and that's the other side of it.

So companies can look either from an individual, one hotel, economic opportunity, or they can look at it as a global marketing opportunity to enhance their distribution system that gets them business.

Parsons: Our focus is on trying to acquire and own real estate, so although we believe it is absolutely critical for any hotel company trying to build a brand you have to be international today. For us, though, it is a question of deploying our capital in a way that we can generate the highest returns for our shareholders. Just as we would not focus solely on acquiring hotels in Chicago, for instance, but are looking at the entire United States. We are very focused on looking international but, from the perspective of being able to acquire real estate and generate returns that are satisfactory to our shareholders, that's harder to do than some people might think because of all of the different situations that are occurring throughout the world. Having said that, we do believe that there are opportunities in different world markets to acquire real estate. Everyone right now is obviously focused in Southeast Asia and the opportunities that are there. We're just trying to take advantage of different market opportunities around the world to invest in the real estate side and that's where our focus is as opposed to trying to develop a national or international brand and strengthen it.

Jennings: HVS has an office in London and Vancouver and in both of those offices your profits have increased dramatically over the past two years and we've opened a satellite office in India.

Miller: I think we're a little bit differently positioned in that we're still creating an industry around the world, and the market pays a premium to those who get there first so that's part of our strategy - to get there first. If you take a look at Europe, we're fortunate because we do more exchanges there than is done in the balance of the world by our competitors.

Simon: We're in the infancy stage, obviously, of building our brand. We have less than 100 Amerisuites throughout the United States and we find it difficult to build in the states of New Jersey and Massachusetts. I heard there was a huge amount of new rooms being built overseas. I don't know what the difficulties there are. The currency issues are there, the government issues are there. I probably wouldn't want to own a hotel in Indonesia or Pakistan today. I think, long-term ,if you're going to be in the brand business, if you're going to have a brand presence, you want to look internationally. And we do believe the long-term strategy is to be international. Certainly north/south - Canada, Mexico, South America - first, and then Europe. We're excited about those opportunities but they are a long way away for us.

Rach: The very fact that we do not host 100 million visitors each year in this country is an abomination because of the size and resources that we have, we easily could do double what we have.

In relationship to globalization and NYU, 55% of my graduate students are international, 35% of my undergraduates are international and we will continue to attract large numbers of international students for two reasons: Our curriculum is global and internationally based. Our finance courses, our marketing courses, our economic courses, our entrepreneurship course - they all have a globalized viewpoint. It's not just the American approach.

The other thing that I will say is that while the industry is dealing with becoming globalized, my classrooms already are and so, for the future of the industry, my students are ready and able to assist when they return their home countries to assist companies around this table in gaining a greater foothold.

Just from Hilton's perspective, when you think about globalization, I think the name of the game is to maximize the value of the brand. We all have brands and the key as a hotel manager is to maximize the value of that brand. We did our strategic alliance with _______ or Hiltons Honors guest membership about 20% we saw immediate benefits that came here from european travelers. ________________The other thing I think in terms of using that brand is to do product extensions. We don't see a lot of the limited service hotel product in Europe like we do in the states and I think that's going to come so those are the kinds of things we're looking at from our product types too.

Let me ask around the table. The last 2-3 years there has been a proliferation of brands and as a consumer of hotels more often than sometimes I'd like to be I gravitate to the brands I know. I won't mention them but some of them are sitting in this room. Have we seen a sort of peak in the proliferation of new brand announcements. I know that Paul is announcing a new brand tomorrow with much fanfare but are we slowing down in our brand creation or have we slowed down in the last 6 months or so?

In the last calendar there were 15 brand introductions, there will certainly be a lesser number this year and that's exactly the pattern to be expected based on what's happening in the lodging cycle.

I have a view on that. Brand introductions are a dime a dozen. Brand executions are very few and I will tell you that the consumers understand what a real brand is all about and they speak with their feet in terms of the occupancies and rates that their brands achieve and I think that some of the newer brands are disadvantaged because they don't have the distribution , distribution, they don't share a voice from an advertising standpoint and I think newer brands without the infrastructure to support them are a perilous risk to be acquired by others that may have an ability to generate some real market share.

I think what you're seeing though if you're talking about horsepower and _______ and you're going to see another one tomorrow from ________. Paul do you want to ______

I think sometimes we confuse brands with products. _______ we don't view ________ as a brand, we view it as a Wyndam product in the same way that we are acquiring Summerfield this week. Summerfield is going to be a Wyndam product and I don't know __________ increase or decrease it's becoming part of the product line on the 5 Star side _______ what we're doing is we're combining some names into a cohesive brand and what we're doing is taking and in this case it's going to be a ______ test marketed we're going to combine it with our luxury resorts and with the golden door spa which we just bought and we're going to put a golden door spa in all of our 5 star products be it resort or urban to distinguish it from the other 5-Star. I think part of this is differentiate the difference between products and brands. We see ________ Wyndam is our core much like Marriott for instance we want to have multiple products under that name.

Being the historian I guess because I've been around so long. Historically with segmentation, what will happen going into the future as the business increases to some degree the brands will fold into each other. I think you will see names disappearing as in the case of ________ they're acquiring products and folding them into Wyndam. I think that is absolutely a trend. With 159 brands or whatever it is they won't exist and very frankly the consumer's don't recognize them and if you ask "the experts in the field" most of us don't know what most of them are anyhow. So they really are not relevant. I think you've find that number in the next 5 years will reduce significantly and folded into the bigger products.

When we look at the new Brands that are coming into the market clearly it is a sign of innovation and creativity and it's through the new brand introductions is how we got limited service started, extended stay started, and to us it is a very healthy sign to see the industry constantly become _______ I think there's entirely too many me too type of introductions, one concept comes out and another guy comes out with one just like it. I think there's too many of those but I think what the industry should really address and I know it's a difficult issue is to figure out a way of eliminating the old ________ they don't support, they don't and there are a lot of brands that are essentially dead ________

Do we have a few examples for the tape?

Clearly we are very good about bringing out new ones we need to give some thought to eliminating some of the old

You don't care to be more explicit than that though do you:?

I think a lot of times product are developer driven rather than customer driven. A guy has a non compete area a trade restriction but he knows this area and they are going to invent something to put in there.

Give us the rationale. Not to play devil's advocate but about the _________ that's a new brand that you created.

That's not really a brand. That's a brand extension. The Hilton is a brand. That's my whole point.

If I'm a customer, to me is it a Hilton or is it a Garden Inn.

It'll be a Hilton and they're giving them points I think.

The advantage to that is that Hilton really has been asleep at the switch for 15 years while all of this segmentation. One advantage that we have is we have I think the most well known hotel branch in the world without distribution.

The problem is that you don't

That's true.

We have to take advantage with that brand name recognition without property so that it's become a very very effective franchising deal.

It is not easy building a brand. We're taking it from scratch. We've built the Amerisuites chain to I think we will be a brand or are a brand today and will be a successful brand because our product is different, it's unique, it's a suite but it's not an Embassy suite for Mr. Keller here I know he's concerned about it but we are larger than a typical standard guest room so we've put ourselves in a niche that we think distinguishes us from the rest. More importantly we've invested our own capital to make it successful. I don't know how much Milton is investing in their Hilton Garden Inn but Zero.

Brand proliferation I think is a problem in terms of line extension. Some companies have chosen to go in that direction. Promise has chosen not too. Embassy is not a Promise brand. Embassy is a brand. Hampton is a brand. Doubletree is a brand. I think in order to really gain a brand status, you want to ______ has to have hotels distributed in the top 100 traveled markets. Until one gets that distribution with very consistent product execution one doesn't get a high level of awareness among the business travelers or the leisure travelers. _________ reservation out there and I think it creates confusion in many cases in the traveler's mind until there is a critical mass met under a brand or association.

Back to your comment about acquisitions a few moments ago, I think that acquisitions are being looked at a bit differently now too. I think it's more than just the price of the entity that's for sale. I think that it has to bring more to the table than that. It may be a new market, it may be a different opportunity for the franchise but just growing brand I would agree with these gentlemen. You can grow brand with what you have.'

Anybody else want to add to that.

I mentioned that quite a bit of our business is related to packages portfolios and we've noticed that a lender will call on us and there will be three or four brands within one acquisition. And of course you have all of the proliferation of the brands.

I think it's interesting too that part of the host strategy has been to not limit yourself to the Marriott brand in terms of your ownership also.

That's correct but that's a very different issue.

Take Marriott for an example. You can't just say there's a Marriott customer and that Marriott customer is the same for Fairfield, Courtyard for full service hotels and for Ritz Carlton. Those are very different customers and I think that it is very confusing to the customer today and there is no question that even within this room if we listed all of the different products or brands or whatever you want to call it on a piece of paper and ask people to put a price point by them most of us couldn't do it and we're the experts in the industry. The customer is confused and don't think you can keep putting product extensions in and say well it's all part of the brand and therefore it doesn't really matter, it's the same customer base. They are all very different. You have to market different to them. They have different needs and they want different products. I think we have to be very careful. I think that when you're in a strong market, a strong part of the cycle. There's tremendous pressure on everybody to grow. It's the natural thing to do to do product extensions, we can do brands whatever we want to call it but over time that's going to change and I think it will significantly consolidate into a few stronger products or brands or whatever you want to refer to it as.

I believe what Bob is basically saying. We're going back to consolidation. It's just like what's happen in the ownership. The same thing will happen with the franchises. They'll go into a phase of pulling back together.

I haven't seen _________ What brands have collapsed into one another?

They will. This is the future.

They have to.

It's capitalist driven. It's too easy to go downstream. Nobody goes upstream successfully. Holiday Inn didn't do it. Crown Plaza, Ramada, Renaissance, Marriott didn't do it with J.W. Marriott. Nobody goes upstream. But going downstream is real damn profitable. If you put a Hilton name on a mid priced product the franchisees will but it all day long because they 're giving a Hilton price image to the customer and they're only spending _________ and will keep doing it in this industry because it's a profitable sale. Holiday Inn _____ with Holiday Inn Express beautifully. It's too much profit not to keep doing it.

Fairfield is a perfect example of what Don is saying. Fairfield by Marriott was the idea of using Marriott halo on a budget but what came out originally as a budget product was a $29-35 product when it first got filled now it's a $60 product.

It wasn't targeted for the Marriott customer.

____ but it built it's own independent customer base.

But still Marriott makes a decision to tie in their frequent user program to all the brands. That denies the fact that the customer is different. They're saying they're going to get some cross fertilization because at some Fairfield's some Courtyards and some Marriotts the levels of service or the levels of differentiation are not significant.

I think Don's point is very well taken. This business is very entrepreneurally oriented. If people take advantage of he opportunities and they 've always done that historically in spite of being big corporations or small corporations and when there is an opportunistic situation someone is going to take advantage of it.

The only change is the regional brands will be gobbled up. The small regional brands will go away.

I think we'll see some international situations as co-branding will take over. For example Camino Real is on the block right now that's going to be Wyndom Camino Real, Westin Camino Real, it's going to be something co-branded and then Camino Real is going t disappear.

It was Westin at one time.

The last published research that I saw suggested that brand was not a particularly important factor in how people pick their hotels it's location. 2/3 of the people named location as the number one reason ______ and maybe there's some confusion about what brands are and what they look like but once the customer is in the market particularly in corporate markets where the same people are coming back over and over again. They figure out what the product is and regardless of the name _____. We don't consider ourselves a brand even though we had 6 Harvey's in Dallas but the people who travel for business to Dallas knew about u

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