AN EXAMINATION OF HOTEL REPOSITIONING STRATEGIES:
THREE CASE STUDIES
By
Lily K. Ng
B.S. Hotel and Restaurant Management
University of Houston, 1989
Submitted to the Department of Urban Studies and Planning
in Partial Fulfillment of the Requirements for the Degree of
Master of Science
In Real Estate Development
At the
Massachusetts Institute of Technology
September 1998
0 1998 Lily K. Ng
All rights reserved
The author hereby grants to MIT permission to reproduce and to distribute publicly paper
and electronic copies of this the is document in whole or in part
Signature of Author
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Departmen\of Ur
n)Studies and Planning
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--
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1998
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- 2---- -- --. ---..
Lawrence S. Bacow
Lee and Geraldine Martin Professor of Environmental Studies
Thesis Supervisor
Certified by
...............................
Accepted by
....................-.
S-
-...................................--
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-
-
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William C. Wheaton
Chairman
Development
Estate
Interdepartmental Program in Real
MASSACHUSETTS INSTITUTE
OF TECHNOLOGY
OCT 2 3 1998
LIBRARIES
AN EXAMINATION OF HOTEL REPOSITIONING STRATEGIES:
THREE CASE STUDIES
By
Lily K. Ng
SUBMITTED TO THE DEPARTMENT OF URBAN STUDIES AND PLANNING ON
AUGUST 1, 1998 IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR
THE DEGREE OF MASTER OF SCIENCE IN REAL ESTATE DEVELOPMENT
Abstract
Hotels differ from ordinary commercial real estate in that lodgings require extensive
management to maintain daily operations to generate revenue and cash flow. Also, hotels
do not have defined income streams, such as long-term tenant leases that are typical in
other types of real estate. A fluctuation of income reflects both daily room rental
characteristics and the timing of economic cycles. A hotel's assets encompass its
locational and physical attributes, as well as the business value generated by the hotel's
cash flow, which relies heavily on the management's expertise and marketing abilities.
When a hotel's image and product quality no longer match its desired position, the owner
has the option to reposition the property. Repositioning is often triggered when a
property is under-performing, suffering from financial distress and/or experiencing
changes in ownership. The primary objective of repositioning is to improve the
property's performance.
The objective of this thesis is to explore the core issues and areas of concern which
owners should be aware of when repositioning a hotel property. Specifically, Chapter
One of this thesis sets up the parameters by which repositioning strategies can be
evaluated. The chapter establishes the framework of the "resource-based" view of
strategies, suggesting that the basis of a sound strategy starts with an entity's resources.
Building on this view, this thesis will discuss the role that economic life cycles, branding,
segmentation and externalities play on repositioning. The underlying strategies,
applications and results of each case are discussed and examined. Finally, Chapter Five
presents the implications of the cases and the main lessons learned from them.
Thesis Advisor:
Title:
Lawrence S. Bacow
Lee and Geralding Martin Professor of Environmental Studies
Table of Contents
ABSTRACT
2
PREFACE
5
10
CHAPTER ONE - RESPOSITIONING STRATEGY
1.1
INTRODUCTION
10
1.2
1.3
1.4
1.5
OWNERSHIP AND OPERATION STRUCTURE
ECONOMIC LIFE CYCLE
RENOVATIONS
EXTERNALITIES
BRANDING
SEGMENTATION
VERTICAL AND LATERAL POSITIONING
MEASURING SUCCESS
CONCLUSIONS
14
16
19
20
21
27
28
29
1.6
1.7
1.8
1.9
1.10
CHAPTER
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
32
Two - CASE STUDY: THE FAIRMONT COPLEY PLAZA
BACKGROUND
REPOSITIONING STRATEGY
FAIRMONT HOTELS
PURCHASING THE COPLEY PLAZA HOTEL
RENOVATIONS
ESTABLISHING PRESENCE IN BOSTON
IMPROVE SERVICE QUALITY - STAFFING
LOCAL MARKET PERFORMANCE
PERFORMANCE ESTIMATES
ESTIMATED RETURN ON INVESTMENTS
CONCLUSIONS
CHAPTER THREE - CASE STUDY: THE
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
30
32
33
34
37
38
40
41
42
45
48
50
54
D/FW LAKEs HILTON
BACKGROUND
REPOSITIONING STRATEGY
MARKET NICHE - CONFERENCE CENTERS
EXPERT MANAGEMENT - DOLCE INTERNATIONAL
D/FW LAKES HILTON HOTEL FACILITIES
MARKET PENETRATION
BRAND AFFILIATION
PERFORMANCE ETIMATES
ESTIMATED RETURN ON INVESTMENTS
CONCLUSIONS
54
54
55
60
63
65
66
67
69
70
73
CHAPTER FOUR - CASE STUDY: FAIRFIELD INN SCOTTSDALE
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
BACKGROUND
PERFORMANCE ESTIMATES
ESTIMATED RETURN ON INVESTMENTS
73
73
73
75
79
82
83
85
87
4.10
CONCLUSIONS
88
BRISTOL HOTEL COMPANY
REPOSITIONING STRATEGY
COMPETITIVE MARKET PROFILE
FAIRFIELD INN COMPETITIVE POSITION
RENOVATIONS
BRANDING
90
CHAPTER FIVE - CONCLUSIONS
5.1
5.2
5.3
5.4
5.5
5.6
5.7
INTRODUCTION
HOW DOES OWNERSHIP TYPE AFFECT A REPOSITIONING STRATEGY?
HOW DOES BRANDING AFFECT A REPOSITIONING STRATEGY?
HOW DO MARKET FORCES IMPACT A REPOSITIONING STRATEGY?
HOW DOES MANAGEMENT AFFECT A REPOSITIONING STRATEGY?
PRODUCT KNOWLEDGE
WHAT IS THE RIGHT PRICE AND HOW MUCH TO RENOVATE?
90
91
93
95
98
99
100
5.8
CONCLUSIONS
103
APPENDIX: REECNT PERFORMANCE OF THE US HOTEL MARKET
105
REFERENCES
107
Preface
Hotels differ from ordinary commercial real estate in that lodging properties require
extensive management to maintain daily operations and generate revenue and cash flow.
Hotels also do not have defined income streams, such as long-term tenant leases, that are
typical in other types of real estate. A fluctuation of income reflects both daily room rental
characteristics and the timing of economic cycles. A hotel's assets encompass its locational
and physical attributes, as well as the business value generated by the hotel's cash flow,
which relies heavily on the management's expertise and marketing abilities. In addition,
the going-concern value that a brand or flag contributes to the hotel is a part of the overall
valuation. The unique brand qualities of a hotel, which influence customers' decisions to
choose one hotel over another, is known as market positioning. Owners should be aware
of, and concerned about, their hotel's market position, as it establishes the property's
marketing strategy, which directly influences the performance and value of the real asset.
In addition to the physical life cycle of a building, a hotel, as a business entity, is
subject to business cycles, including development, growth, stabilization and deterioration
(or rejuvenation), that are affected by economic and management factors. A product or
brand that works well at one time may become unattractive or obsolete when it no longer
meets market demand.
Coupled with ongoing changes in hotel ownership and
management, market positioning is an evolving process, which requires constant
monitoring and evaluation.
When a hotel's image and product quality no longer match its desired market
position, the owner has the option to reposition the property.
Repositioning is often
triggered when a property is under-performing, suffering from financial distress and/or
experiencing changes in ownership. The primary objective of repositioning is to improve
the property's performance. According to Kamer and DeMyer, there are four alternatives
that owners can consider for turning around troubled hotels: (1) additional equity
investment; (2) repositioning the hotel property, either with the existing hotel management
or in conjunction with the replacement of the existing hotel operator; (3) the sale of the
property; or (4) a loan workout or the refinancing of the existing debt.
Repositioning represents a plan or action that will assist an under-performing hotel
to be more responsive to market dynamics and regain its competitiveness in the market,
and thus maximize financial returns to its owners1 . The goal of repositioning is to create
competitive advantages, thus allowing the property to expand its market share by either
increasing penetration in the existing customer base or venturing into new markets.
Repositioning implies the re-doing or improving of an existing condition. The crucial idea
is to create differences in the customers' perception of the repositioned property.
If
customers are unable to disassociate their impression of the pre-repositioned property, the
strategy will likely fail to achieve the results it desires. To achieve differences, whether
they are actual or perceived, repositioning often involves drastic changes in the property's
tangible and/or intangible assets.
The changes may include the changing of facilities,
1Bohan, Gregory T. Bohan and Cahill, Michael, 1992. "Determining the Feasibility of Hotel Market
Positioning." Real Estate Review Volume 22, No.1 / Spring 1992
furniture, fixtures, brand affiliation, management, pricing strategy, and market orientation.
The initial outlay of capital to achieve these changes can be substantial.
Repositioning is not only an important decision; sometimes it is the last viable
option for a property in distress. Therefore, it is in the owner's interest to ensure that
proper repositioning strategies are planned, executed and implemented. However, many
institution and independent owners do not have the knowledge or expertise in hotel
operations to make the best repositioning decision. Additionally, today's hotel market is
flooded with many lodging products and brands that all claim to have a unique market
niche, which makes repositioning a difficult, and often confusing, task.
The objective of this thesis is to explore the core issues and areas of concerns
which owners should be aware of when repositioning a hotel property.
Specifically,
Chapter one of the thesis sets up the parameters by repositioning strategies can be
evaluated.
The chapter establishes the frameworks of the "resource-based" view 2 of
strategies, suggesting that the basis of a sound strategy starts with an entity's resources.
Building on this view, the thesis will discuss the role that economic life cycles, branding,
segmentation and externalities play in repositioning. Chapters two, three, and four include
case studies of hotels that went through various degrees of repositioning. The underlying
strategies, applications and results of each case are discussed and examined.
Finally,
Chapter five presents the implications of the cases and the main lessons learnt from them.
2 Collis,
Davis J. and Montgomery, Cynthia A., 1998. "Corporate Strategy: A Resource-Based Approach."
Irwin/McGraw-Hill Inc. 1998
Data for the thesis was collected through literature reviews and through interviews with
hotel asset managers, management companies, owners, operators and consultants.
Case Studies
The first case illustrates how a new owner converted the business orientation of a
historic property from the mid-price market to an upscale segment by capitalizing on a
well-established brand name. Although the hotel was not in financial distress prior to
acquisition, the new owner improved the property's facilities and service quality. Two
years after the acquisition, the hotel has improved its overall revenue, although it is trailing
the competitive luxury hotels in room rate. More importantly, the hotel has achieved a
significant entry into the Northeast market, which aligns with the brand's expansion
strategy.
The second case is an example of how a hotel transformed from a transient property
to a conference center by focusing on a market niche and the hotel's location and unique
conference facilities. The hotel was not in financial distress prior to repositioning. In fact,
the hotel was performing well in its class, given the property's condition and market
potentials. The repositioning plan allowed the hotel to capture a fast-growing conference
market. The property's RevPAR (revenue per available room) increased over 30 percent
after the repositioning.
purchase price.
The hotel was sold three years later at over twice its original
The third case contains analysis of the impact and penetration of a limited-service
property located in a market pressured by an influx of new competition. A repositioning
and renovation plan was necessary before new products came online and the property's
market share completely eroded.
The hotel's renovation budget and its projected
performance were evaluated and measured against the actual operating results.
Acknowledgments
I would like to express my sincere thanks to Faimont Hotel Management, Jones
Lang Wootton Realty Advisors, Dolce International and Bristol Hotel Company for
contributing information to the case studies. Special thanks to Florida Booth and John
Keeling of PKF Consulting, from whom I learned valuable consulting skills and gained the
good experience needed to complete this thesis.
I also want to thank all the hotel
professionals, most of them good friends, who openly shared with me their knowledge and
experience. Finally, I owe the deepest gratitude to Professor Lawrence Bacow for his
untiring advice and patience that has guided me through this thesis.
Chapter One: Repositioning Strategies
1.1
Introduction
This thesis will examine the fundamentals of repositioning strategies, borrowing
concepts from the resource-based approach. Although the approach primarily addresses a
firm's competitive advantage in a single business unit, and corporate advantages across
various businesses, the approach provides a basic framework for identifying the core
elements that define a sound strategy.
The premise behind hotel properties needing to be repositioned is that the market is
imperfect: for instance, the products are heterogeneous (i.e., there are many types of hotels,
differentiated by service levels and product quality); asymmetric information is held by
each competitor in the market; and there is limited demand. Repositioning is a means for
properties that have lost, or are losing, their competitive edge, to regain a competitive
advantage. A well-defined repositioning strategy should allow a property to explore market
inefficiencies and thus maximize profit. According to Learned, Chistensen and Andrews
(1965), a strategy fulfills two important purposes: the external positioning of a firm in
relation to its competitors, and the internal alignment of the firm's activities and
investments. The first case study, of the Fairmont hotel purchasing a mid-priced property
and converting it into an upscale hotel, is an example of a company investing in a property
that is aligned with the company's product orientation, thus providing advantages for the
overall company.
The resource-based view3 assumes that each firm (within the context of this thesis,
this also includes the property and operator) is different from others because each firm has
a unique bundle of resources. "Resources, (therefore), are the substance of strategy, the
very essence of sustainable competitive advantage." Some resources can be seen and
touched, such as the building's location and furnishings, while other resources exist as
concepts and ideas, like talents and brand reputation. Some resources have a terminal life,
some require an accumulation over time, and some can cross borders and cultures.
Resources can be grouped into three general categories: tangible assets, intangible assets
and organizational capabilities.
Tangible assets, in the context of a hotel, include all physical resources, such as the
hotel, meeting facilities, kitchen equipment, sleeping rooms and swimming pools.
Not all tangible assets are sources of competitive advantage. Standard furnishings
in a hotel room, such as a bed, a writing desk and chair, are expected in all hotels.
It is the quality of the furnishings and added features, that distinguishes one hotel
from another. For instance, a hotel that has a large ballroom will be able to host
larger events than a hotel which has a small ballroom.
ballroom gives that hotel a competitive advantage.
The larger size of the
A hotel's location is also
considered a tangible asset. A hotel that is adjacent to a convention center, for
example, has an advantage over its competitor five blocks away. Some tangible
3 Discussions on "resource-based view" of strategy are drawn heavily from works by Collis, Davis J. and
Montgomery, Cynthia A., 1998. "Corporate Strategy: A Resource-Based Approach." Irwin/McGraw-Hill
Inc. 1998. Quotes are direct translations from the same work unless otherwise noted.
assets are consumable, and need to be replaced or replenished periodically, hence,
the need for hotel renovations.
Intangible assets of a hotel include such things as the hotel's reputation, brand
recognition and management expertise. Internationally recognized brands, such as
Hilton, Marriott and Sheraton, typically have the ability to attract a larger customer
base than a local, independently operated hotel.
Certain companies are able to
appeal to some travel groups more than to others. Intangible assets are flexible and
change over time. Although they cannot be consumed when used, intangible assets
can grow, improve or diminish.
Organizational capabilities are "complex combinations of assets, people, and
processes that organizations use to transform inputs and outputs." Organizational
capabilities refer to the efficiency and effectiveness of an organization, which allow
the organization to perform better and faster and be more responsive.
A hotel
company that has fewer divisions and reporting channels may have an advantage
over another company that has a bureaucratic structure. Similarly, if a hotel has an
empowerment policy, which allows front-line staff to resolve guests' problems
without going through layers of supervisors and approvals, the hotel can be more
responsive to customers' complaints.
advantage.
This would give the hotel a competitive
However, a hotel must have the appropriate resources, such as the
budget for staff training, to implement such a policy.
A good strategy starts with a thorough understanding of the resources existing in
the hotel, operator and owning entity. However, since not all resources contribute to a
strategy, the owner should pinpoint those resources that are valuable, and invest in them,
upgrade and leverage them, to formulate a sound strategy. What constitutes a resource to
be valuable depends on three factors that exist between the firm and the competitive
environment: demand, scarcity and appropriability (Exhibit 1).
As Brandenburger and
Stuart (1996) explained, "value is created in the intersection of three sets: when a resource
is demanded by customers, when it cannot be replicated by competitors and when the
profits it generates are captured by the firm."
Exhibit 1: What makes a resource valuable?
The dynamic interplay of three fundamental market forces.
Source: Collis, Davis J. and Montgomery, CynthiaA, 1995. "Competing on Resources: Strategy in the 1990s." Harvard
Business Review: July-August 1995.
The concept of valuable resources, when applied to a hotel's repositioning strategy,
forces the property to not only look inwardly into what resources the entity possesses, but
also take into consideration the competition and market dynamics.
For repositioning
strategies, the owner has to decide which of the existing resources should be retained and
which should be eliminated or altered, and which of the resources would provide the
property with future competitive advantages.
For instance, a property planning to
reposition from a limited-service hotel into an extended-stay property may decide to
change the plan if several new extended-stay products are slated to open. New competition
entering the market signifies that scarcity of supply will diminish. Unless demand is
increasing at the same rate as supply, and offsets the impact of increasing competition, an
additional product targeting the same market segment may not generate the results to
justify any repositioning plan.
In summary, the purpose of a strategy is to fulfill the goals of externally positioning
a firm in relation to its competitors, and internally aligning the firm's activities and
investments. A sound resource-based strategy that will fulfill these two purposes requires
owners to identify, invest in, upgrade and leverage the valuable resources available and
surrounding the property, owner and operator. However, it is almost impossible to identify
all resources.
This thesis will focus on six issues that are pertinent and commonly
considered in a hotel-repositioning situation.
1.2
Ownership and Operation Structure
Hotels, unlike other real estate, often involve separate ownership and management.
With the exceptions of small properties, such as a bed-and-breakfast, most hotels employ
managers to run the property. (Many hotel companies also own hotels; however, the actual
owners are usually shareholders, who are not involved in the daily operations of the hotel).
The arrangements between the owning and managing entities give rise to different kinds of
resources that need to be considered in a repositioning plan. However, the structure may
not have a direct impact on the success or failure of the plan. For instance, if a property is
targeting a market that is deteriorating, the hotel is going to perform poorly regardless of
the ownership/management structure. On the other hand, a hotel owned and operated by
the same entity can implement a plan more directly, and avoid unnecessary procedures of
approvals and authorization.
Since the operator has full control to make the changes
necessary to achieve the desired position, results can be measured more readily and the
owner can make decisions quickly and be responsive to customers' needs. To the extent
the structure can provide competitive advantages, such as reduced management and
franchise fees, it is a resource that should be accounted for when forming a repositioning
strategy.
Separate ownership and management may give rise to conflicting ideas about the
property's new identity. Owners may have pre-conceived ideas of the kind of hotel they
want, which could be different from what the operator can deliver or what the operator sees
as the market niche. Owners can also have chain preferences that are not appropriate for
the property or target market. These conflicts tend to be minimized if the hotel owner and
operator are the same entity.
1.3
Economic Life Cycle
The economic life cycle of a hotel, an important aspect of a tangible asset, goes
through four stages: Youth (1-5 years), Maturity (3-10 years), Middle Age (8-17 years) and
Senior Citizen (15-35 years), according to Gregory and Cahill. The chart in Exhibit 2
illustrates the characteristics and repositioning strategies at each stage of the hotel's life
cycle.
At each stage, a hotel's physical and business characteristics give rise to a different
repositioning strategy. At an early age, since a hotel's facilities and still in good condition,
the property's challenge is usually related to management. However, there could also have
been a mismatching of market and improvements since the hotel's inception. A hotel can
be built too lavishly for a market that does not support high-end products, or a hotel's
facilities can be inferior in quality, which gives the property a competitive disadvantage.
In either scenario, there is a mismatch of product and market demand which requires some
retooling. At this stage, owners are less inclined to put additional capital into changing the
facility; repositioning typically takes place by changing management or through market
and sales efforts. The owner should be aware that it takes a few years, typically between
two to four, for a new property to stabilize operations. Repositioning can prolong the
stabilization period.
When a hotel reaches a more mature stage, repositioning almost always includes
renovations. Approximately five years after a hotel has opened, some of the soft goods,
such as furnishings and carpeting, require replacement. Depending on how the property
has been maintained, it displays various degrees of deterioration.
As the property
continues to age, its market position becomes increasingly vulnerable to the condition of
its facilities, in addition to market and economic factors. Owners neglecting reinvestment
in the hotel may eventually find their property less competitive and losing market share.
Exhibit 2: Economic Life Cycle of A Hotel
Considerations and Possible Problems
Typical
Identify Characteristics of
Repositioning
Possible Repositioning
Strategies
Candidate
Should management spend uneconomic
None
Hotel may be over-improved
dollars to maintain an overimprovement
Phase of
Economic
Life
Youth
(1 to 5
years)
Hotel may have built with
inappropriate market orientation
Shift hotel's
marketing strategy
May have to restaff entire marketing
department
Inexperienced management of
inefficient marketing
Change management
company
New management must be able to operate
more efficiently. There may be costly
buyout provisions in the existing
management contract
Maturity
Precedingcharacteristics,PLUS
(3 to 10
years)
Facilities showing minor to
substantial wear and tear
Renovate property
Check adequacy of Reserve for
Replacement amounts and capital
expenditures
External obsolescence
Often limited
alternatives
Property may be helpless victim of forces
beyond its control
Middle Age
Precedingcharacteristics,PLUS
(8 to 17
years)
Extensive physical deterioration
Extensive renovation
or complete
rehabilitation
program
Will the renovation be cost effective?
Functional obsolescence
Renovate or
downgrade property
Newer hotels may be coming into market
with modern, better designed facilities
Declining market shares and
average room rates
Downgrade property
to lower ADR niche
What should be done with in-needed
facilities (eg restaurants, lounges, and
meeting space)?
Senior
Precedingcharacteristics,PLUS
Citizens
(15 to 35
years)
Extensive deferred maintenance
and physical deterioration
Completely renovate
property
May not have economic justification
Rapid loss of market
penetration;
External obsolescence
Complete
repositioning
program
External factors usually cannot be
controlled by management
Blatant and overwhelming
functional obsolescence
Downgrading
property or convert to
alternative use (eg
retirement center)
Lower ADR market segments overbuilt;
conversion alternative limited or
nonexistent
Value of the land, as if vacant,
exceeds value of property as
improved (after demolition
costs)
Demolition of hotel
to make way for
better use
Realization that the property is worth only
the value of the land
~,ure:lohn,(reo~ TI
Source: Bohan, Gregory
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Cahl,
Michae, 1992.
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1.4
Renovations
Renovation is one of the main considerations in a repositioning plan.
It is
sometimes the most crucial factor in giving a hotel competitive advantage and determining
the property's capability to penetrate the targeted markets.
The biggest question that
owners always have is "How much to spend?" Sometimes it is not the size of the capital
budget that determines the success of a repositioning plan, but how effective the use of the
budget is.
The amount spent on renovations should be evaluated against the hotel's
estimated improved performance.
For instance, a property can measure the per-room
EBITDA (earnings before interest, taxes, depreciation and amortization) before and after
renovations to compare the incremental value contributed by renovations.
A word of
advice from an industry expert: "Do not commit more than you can spend."
In addition to a well thought-out renovation plan, the owner should be prepared for
budget contingencies occurring during renovations.
Hidden costs, such as asbestos
removal (typical for hotels built in the 70s), are common and substantially inflate the total
renovation budget. If the owner is depending on tax credits, such as those available to
historic restorations, the owner should be aware of the restrictions, qualifications and cost
overrun common when renovating older buildings.
In the case of the Fairmont Copley
Plaza, for example, management decided not to register the hotel with the Historic Registry
after comparing the mild economic benefits with high on-going maintenance costs.
Most importantly, the owner should have a realistic idea about what he is getting
with the planned budget. If a hotel's repositioning objective is to compete with luxury
properties, the renovation plan and budget should reflect that goal. If the owner's ability to
fund a renovation plan does not support the repositioning strategy, the owner should revise
the strategy. A half-executed renovation plan will hinder the property from achieving the
targeted results.
1.5
Externalities
A hotel is subject to external factors that may force the property out of its
competitive position. Factors such as economic downturn, increasing supply, decreasing
demand, and growing pressure from competitors negatively affect the property's
performance.
These factors are typically unforeseeable and beyond the control of the
owner and/or operator. When there are fundamental shifts in the economic and market
dynamics, repositioning may not be effective. This has been evident in the last decade of
the U.S. hotel market. The hotel development boom in the mid 80s, followed by the
economic downturn in the early 90s, forced many hotels into financial distress.
(See
Appendix A for a brief discussion of the recent performance of the hotel industry) While
some hotels were able to reposition and remain in business, many closed because there was
insufficient demand to support the level of supply, and marginal reserves did not cover the
costs of operations.
Ironically, the U.S. hotel market's conditions during the last decade created
excellent repositioning opportunities in the mid 90s. Investors took the opportunities of an
improved economy and management efficiencies to devise repositioning plans for existing
and closed properties.
Adding to the fact that many hotels were purchased at deep
discounts in the early 90s, investors could afford to invest in improving facilities to
complement the appropriate repositioning strategies.
Eager to improve a property's performance during bad economic times, investors
often commit the common mistake of "throwing good money after bad money." Many
investors are led to believe that, by renovating the property, changing brand affiliation, or
targeting a niche market, the hotel's occupancy will turn around and revenue will improve.
Investors must understand the macro economic conditions, such as the employment trends
and disposable income levels, and recognize the sources and depth of hotel demand before
justifying a repositioning plan. Repositioning does not answer all performance problems.
1.6
Branding
Branding encompasses studies of consumer behaviors that are key to understanding
consumer goods marketing. A hotels in many ways is a consumer product, in that each
guestroom is "consumed" upon sale, and a customer purchases the product for immediate
(or near-term) enjoyment. The commodity, a hotel room night, is exhaustible, i.e., a room
night that is not used today will be gone tomorrow.
A hotel as a business entity has a name and/or brand affiliation. Hotels that are
independent, or non-chain affiliated, have created brands of their own, only that the brands
are unique to the specific properties. As such, all hotels face the issues of branding to
varying degrees.
Although a hotel's market position constitutes more than its brand or
chain affiliation, the brand's marketing abilities, and the perception of customers, have a
direct impact on the hotel's overall repositioning strategy.
Smith Travel Research suggests that the hotel industry averages about 1,500 brandchanges annually, which is a ten-fold increase over 1987.
This reflects increasing
competition among the brands, as more brands are available on the market; each brand
promises something different to the customers, a unique market niche, and each brand is
competitive in its fees. To the extent that owners and franchisees associate a property with
a brand is to take advantage of the brand's marketing abilities to generate and increase
business. Owners should ask these questions concerning branding in a repositioning
strategy: How will the property benefit from brand "X"? What are the costs and benefits
of selecting a particular brand? All else being equal, which brand is the most appropriate
for the property?
Before an owner or franchisee selects a brand, he should have an understanding of
the basic concepts of branding strategy. Dr. Nykiel (1998) suggested seven basic concepts,
and the roles they play in the overall branding strategy.
These include: brand equity,
loyalty, awareness, perceived awareness, association, position and name/symbol.
Brand equity is the "net result of all the positives and negatives linked to the
brand." Brand equity can increase or decrease over a short-or long-term period,
depending activities the brand is involved in. A brand's value can be derived from
the price premium, the impact of the name on customer preference, the replacement
cost of the brand and the stock price.
Brand loyalty refers to the level, or degree, that customers are committed to a
brand. Marketing programs, such as those that promote frequent use, are a good
way to boost brand loyalty. For instance, business travelers tend to select hotels
that offer "points" or "credits" for each hotel stay. This incentive often influences a
customer's decision. A solid base of loyal customers is a valuable resource and
provides positive marketing and brand awareness.
Brand awareness is typically built over time. Marketing campaigns, advertising
and slogans can increase brand awareness.
Brand awareness can be a result of
positive and negative publicity. Brands that tend to have higher exposure and
extensions are easily recognized and have a higher awareness among customers. If
a property has a small target market, general public awareness of the brand may
only have a small impact on generating business.
Perceived quality is the expectation of the customers based on their subjective
experiences, and is derived from the tangible and intangible qualities such as hotel
facilities and service. Perceived quality is often what customers rely on to make
purchasing decisions. Perceived quality is often tied to price/value.
Brand associations refer to anything that "mentally links" to the brand.
It is the
trigger-point to which guests refer when making a purchase decision. For instance,
customers recalling having a good time, or with good memories of an event at a
certain hotel, have positive associations with the property, and are likely to use the
hotel again. Consumers generate many associations with a property even in one
visit. The more memorable the experience, the easier the customer is persuaded to
use the hotel again.
Brandposition reflects the appropriate "place" which one brand differentiates from
the other. Studies on brand positioning suggest that a position consists of a "bundle
of attributes."
There are two perspectives on brand positioning: the brand's
management and the guests' impressions. These can be viewed as the internal and
external factors of branding. A brand's position reflects how it is managed, and
vice versa. If the management of an upscale brand is unable to deliver services to
support the intended brand image, the brand's reputation will be downgraded.
This brings up the second factor, which is the perception of the customers.
Customers' perceptions are often based on their expectations. Consumer behavior
theory states that customers' perception of, and preference for, a brand or business
is what influences their consumption decisions. It was found that consumers of
hospitality services tend to include a range of emotional and functional attributes of
the product (or service) they consume. Similar to the resource-based view of
strategy discussed earlier in this thesis, attributes that shape the position of a brand
are either tangible (the physical property) or intangible (services offered). It has
been suggested that a successful position comprises three elements: it differentiates
the brand; it locates the brand's specific benefit dimensions and it creates an image.
A successful brand position should align the property's actual qualities with the
image it tries to attain. It should also provide associations that add value and/or
persuade customers to make purchasing decisions.
Brand name and symbol are the tangible assets that give associations to the brand.
A proper name or symbol can communicate the product's type and quality. For
instance, extended-stay hotels, such as Residence Inns, or Homestead Village,
typically select names that convey the idea of home comfort and convenience.
Properties that include "suites" intends to promote the suite product, and target
customers who use suites. Some brands venture out different products, but have
these products maintain association with the same brand in order to capitalize on
the positive perceptions of the main brand.
For instance, Hilton rolled out the
Garden Inns and Hilton Suites brands, and Marriott has Residence Inn by Marriott,
Courtyard by Marriott and Fairfield Inn by Marriott.
While some of the brand
extensions are successful in identifying product differences, others created
confusion with the main brand and product. Therefore, hotel owners should be
careful when selecting a brand name that can best represent the product.
Based on these branding concepts, owners can conduct a simple analysis, such as
the "Brand Strategy Rating" developed by Dr. Nykiel (see Exhibit 3), to evaluate how the
brand is performing in a hotel. A low rating suggests that the brand is not providing full
value to the hotel, and owners should consider changing to another brand.
Exhibit 3: Brand Strategy Rating
Components
____
_ _ __ _
___
Poor
_
__
_
__
_
_
1
Fair
2
Average
Good
Outstanding
3
4
5
Loyalty
Awareness
Perceived Quality/Value *
Positive Position Within Category
Differentiating Characteristics
Name Recognition
Brand Symbol
Recognizable Slogan
Marketing Programs Compatibility
Relative to Your Competitive Segment
I
* Relative to your competitive segment
Add up the score and multiply by two to see how your brand performs on 100% scale.
Source: Dr. Ronald Nykiel
In the context of repositioning, owners, in order to create a "new" image may
consider switching to another brand that offers comparable value, even if the existing
brand has a high rating. If customers' predisposed perceptions are too deep or have been
formed for a long time, it may be too costly and time consuming to re-educate the market
about the advantages of the new property.
Sometimes it is better to start fresh by
introducing a new brand. As such, in addition to rating the effectiveness of the existing
brand, the owner should also consider the positive and negative attributes of the brand after
repositioning. Owners should also be aware of all costs associated with changing brands.
In addition to the actual management and franchise fees and one-time initiation fees,
terminating an existing franchise or management contract can be costly. If these contracts
prove too expensive to terminate, the owner may have no choice but to retain them, which
may impact the overall outcome of the repositioning strategy.
1.7
Segmentation
Segmentation in the lodging industry has proliferated in the last ten to twenty years
with new products and brands entering the market. Each product assumes that it markets
to and captures a particular segment, thus making it different than others. Segmentation, in
many ways, is a marketing concept. Segmentation is typically achieved through product
differences, such as limited service vs. full service vs. resort properties. Segmentation can
also be achieved through brand associations. For instance, Ritz Carlton hotels are known
to be luxury, full-service properties that have at least a formal dining room and a lounge,
and a Motel Six is recognized as an economy motor-hotel that has external entrances and
no on-site food facilities. The client base and market mixes for these two brands can be
very different.
A study conducted by PKF Consulting in 1997 compared the trends of market mix
for five major lodging product segments between 1990 and 1996. (See Exhibit 4) With the
exceptions of limited service and resort properties, there was no significant change in
market mix in any segment. The report concluded that economic factors have a larger
influence on travelers' choice of hotels than other attributes such as facilities and
management efficiency. In 1990 and in the early 90s, many companies reduced travel
budgets, which forced many business travelers to switch to the less expensive limitedservice hotels.
When the economy improved, more business travelers returned to full-
service properties, and companies returned to staying at resorts to conduct meetings.
The
report suggested that "niche products tend to show their strengths not in times of
prosperity, but in times of recession." During times of rising occupancy and room rate,
there are fewer choices for consumers. Customers are likely to stay at any hotel that is
available. In this regard, segmentation has little impact. However, during a depressed
market and when competition is tight, properties accentuate their competitive strengths,
and product differentiation play a larger role in influencing consumers' purchase decisions.
Exhibit 4: Mix Of Demand
Business
1990
1996
Leisure
1990
1996
Small Meetings
1990
1996
Full Service
45.0%
41.0%
26.0%
26.7%
13.0%
Limited Service
58.0%
46.9%
34.0%
50.0%
2.0%
Resort
All-Suite
Convention
All Hotels
7.0%
47.0%
24.0%
39.5%
11.5%
49.7%
23.0%
39.3%
62.0%
27.0%
22.0%
30.4%
55.8%
28.2%
21.2%
34.1%
11.0%
10.0%
24.0%
12.8%
Conventions
1990
1996
Other
1990
1996
12.1%
10.0%
15.4%
6.0%
4.8%
1.6%
1.0%
0.5%
5.0%
1.0%
12.2%
10.1%
12.4%
9.6%
15.0%
9.0%
25.1%
11.8%
17.2%
9.7%
40.6%
13.7%
5.0%
7.0%
5.0%
5.5%
3.3%
2.3%
2.8%
3.4%
Source: PKF Consulting
1.8
Vertical and Lateral Repositioning
Perceptual maps are graphical representations of the attributes on how customers
perceive a brand. By plotting along coordinate axes, hotels can compare a brand's position
in relation to its competitors and illustrate the change of the brand over time. Using a
similar approach, we can assess a property's market position by plotting the product
segment against price categories. The "position grid" (Exhibit 5) can be used as a gauge to
identify a repositioning strategy, and for budget planning purposes. The grid can also be
used after repositioning takes place for evaluating and comparing the property's achieved
market position.
The horizontal axis of the grid reflects the product segment based on facilities, such
as limited-service hotel, full-service hotel and resort. The vertical axis indicates the quality
level based on price points, such as economy, mid-priced or upscale. Vertical positioning
implies that the property remains in the same product category, but moves up or down
along the price scale and becomes more or less expensive. Horizontal positioning means
that a property moves from one product category to another. For instance, when a midpriced, full-service Holiday Inn converts into a limited-service Courtyard by Marriott,
although the hotel remains in the same price category (or the same vertical position) the
property has shifted laterally from one product category to another. Positioning can cross
several categories, diagonally, or take place in several stages. As a property moves across
more categories, typically, more capital investments and marketing efforts are required.
Exhibit 5: Position Grid
Luxury
Upscale
Mid-priced
Upper-end
Economy
-
a
Increase magnitude of facilities changes, marketing efforts, and
market mix
Low-end
Economy
Limited
Service
1.9
All
Suite
Extended
Stay
Full
Service
Conference
Center
Convention
Hotel
Resort
Measuring Success
A good strategy is the right start towards a successful strategy, which is commonly
measured by financial success. However, a good strategy, as discussed earlier in the thesis,
is to achieve an external positioning of a firm in relation to its competitors, and an internal
alignment of the firm's activities and investments.
In that essence, a good strategy
encompasses more than financial success. Benchmarks of success for a repositioning
strategy include an improved market share, penetration, rate-premium and brand
recognition. It depends on the firm to define what the short-and long-term intent of the
strategy is and what the strategy should accomplish. A good strategy should also draw on
the trends and changes in the competitive environment and prepare for the future
competitive landscape.
The success of a repositioning strategy is ultimately measured by the return on the
investment, or ROI. Although each investor has a different investment objectives, level of
return and tolerance of risks, a properly repositioned property should provide positive
returns that justify the costs of investment. A good strategy may not generate the highest
returns. An investor's ROI should be measured against the circumstances surrounding the
timing and environment when the repositioning takes place, and his short-and long-term
investment objectives. For instance, a hotel company (which is also the owner) may take
advantage of a repositioning opportunity to build presence in a market. In this case, the
owner may be willing to accept lower returns in exchange for the ability to penetrate a
market that has strategic value to the overall company.
However, very rarely would
owners be willing to take a loss leader.
1.10
Conclusions
This chapter described the anatomy of a good strategy that is pertinent to
repositioning a hotel. A hotel as a business entity relies on management and marketing
efforts to generate operation cash flows and profits; whereas a hotel as a real estate asset
benefits from proper acquisition and disposition decisions to capitalize on market
economic cycles.
These qualities of hotels give rise to complex decision making by
owners to execute and deliver successful repositioning strategies. The following chapters
will discuss examples of hotel repositioning strategies and the extent of success in each
case.
Chapter Two - Case Study: The Fairmont Copley Plaza
2.1
Background
The Fairmont Copley Plaza has 379 rooms, including 53 suites, two full-service
restaurants and 19,000 square feet of meeting space. The hotel offers a range of facilities
and amenities commensurate with an upscale, full-service hotel. The hotel is seven stories
and has a stone and brick fagade.
The hotel building was constructed in 1912 on the
original site of the Museum of Fine Arts. The hotel was designed by Henry Janeway
Hardenberg, and is considered one of the landmarks in Boston. Between 1912 and 1996,
the hotel went through a number of owners, including ITT Sheraton, John Hancock Mutual
Life Insurance Company and Harvard University. Management changes were prevalent.
The hotel was managed under the Sheraton flag for some time, then became an
independently managed property with no brand affiliation, followed by management by
Wyndham Hotels. The hotel became a Fairmont hotel when it was purchased in mid-1996
by a partnership including Prince al-Waleed bin Talal bin Abdulaziz al Saud of Saudi
Arabia, who also has a 50 percent ownership of the Fairmont Hotel Management
Company. The unconfirmed purchase price of the hotel, according to Travel Weekly, was
estimated to be $60 million. As part of the purchase agreement, the new owner was
responsible for implementing a $10 million renovation program for the hotel.
Under Wyndham's management, the property's marketing focus targeted midpriced businesses, including discounted groups and volume transient demand. Although
the hotel was achieving reasonable occupancy levels and RevPAR, the hotel was achieving
low average daily rates (ADR). The hotel also suffered from deferred maintenance.
2.2
Repositioning Strategy
Fairmont Copley Plaza's repositioning strategy involved vertically positioning the
property from the lower to higher price categories, while remaining in the same full-service
product group. In order to accomplish this, the hotel needed to upgrade the hotel's image,
which is conveyed through the quality of its facilities and service.
customers'
perception
that ultimately positions
a product,
Since it is the
Fairmont's
primary
repositioning challenge was to change local perceptions of the hotel after many years of
neglect. The property's was, and is, to compete with the top luxury hotels in Boston. The
focus of the repositioning strategy was to accentuate the brand's strong equity and
recognition, and the property's historic significance, while improving the real asset's
conditions.
2.3
Fairmont Hotels
Fairmont Copley Place's repositioning strategy relied heavily on Fairmont's
investment initiatives and corporate culture. The hotel was purchased with the intent to be
managed by Fairmont, and no third-party management company or brand was considered.
In order to evaluate the repositioning strategy, it is important to first understand the history
of Fairmont Hotels.
The first Fairmont Hotel opened in 1907 in San Francisco.
The hotel has a
celebrated history and has hosted many royalties as well as foreign dignitaries. The hotel
and the Fairmont name have gained international recognition and reputation as a first class
hotel of prestige and quality. The San Francisco Fairmont was bought by Benjamin Swig
in the mid 1940s. Leveraging the strong brand recognition, the Swig family added two
properties in New Orleans and Dallas in the 60s and opened two more properties in 1987.
Not unlike other hotels in the late 80s/early 90s, several Fairmont Hotels suffered negative
performances during the downturn of the hotel market. The new properties opened in 1987
added substantial debt liabilities to the company. Fairmont Hotels Management Company,
the owning and management entity, was in financial difficulty by 1989.
Recognizing difficult times ahead, Fairmont Hotels went through an overall
reorganization, including improving its cash flow by laying off excess staff at both the
corporate and property levels, and increasing top-line revenue by implementing more
efficient marketing and management approaches. The reorganization was spearheaded by
the newly hired CEO, Robert Small.
While Small was credited with bringing more
professionalism to the organization, he was criticized for his aggressive price reduction to
attract business. Small's primary objectives included: (1) immediately improvement of
occupancy (i.e., increase top-line revenues); (2) to outpace the market in occupancy
growth; (3) to build a brand; and (4) to enhance shareholder value by attracting outside
investors.
Under Small's directions, Fairmont overcame its arrogant reputation and
became more client-friendly and was creative in working with corporate clients to attract
business. The company also redefined its market niche by capitalizing on the hotels' grand
architecture, rich history and superior level of service. The company wanted to set itself
apart from its competitors, primarily Four Seasons and Ritz Carlton, by offering added
amenities and services. The company defined a grand hotel niche, by providing services
similar to luxury hotels, while at the same time offering a wider variety of restaurant
choices, meeting room configurations and entertainment. The hotels' target market mix
consists of 50 percent corporate and association groups and 50 percent individual corporate
and leisure travelers.
Fairmont defines grand heritage niche as follows:
(1)
Heritage - The hotel shows a sense of history, stories, famous events, visitors and
long-term colleagues that create a unique experience even if the property itself is
fairly new.
(2)
Center of activities - The excitement of the community is felt in a microcosm of
the hotel. Local people and guests enjoy themselves; activities are observed in all
areas of the hotel; and people are celebrating events, "spilling" their celebrations
into the overall picture of activity.
(3)
Large, dramatic lobbies - People are awed by the lobby's grandeur, creating an
"invitation" to become involved in experiencing the services available.
(4)
Hospitality in the American Tradition - Guests are excited not only by their stay,
but by the genuine sincere warmth they receive from colleagues who are proud to
be an integral part of the guest's experience.
(5)
Varieties ofservices and experience - Each "grand" hotel has a large number and a
wide variety of services available to meet guest needs, which not only vary with
different guests but also with the same guest, depending on the purpose of his or
her stay.
(6)
A sense of theater,flair andpanache - Combining the heritage with a flair for the
dramatic, the hotel is essentially a dramatic event, a play, in which the guest is an
involved participant and part of the "grand experience."
Chefs prepare food with
an eye for presentation, and the waitstaff serves the presentation with a flair.
Under the reorganization plan, the company survived the early 90s and
performance improved, including occupancy and RevPAR. In 1994, Prince al-Waleed bin
Talal bin Abdulaziz al Saud of Saudi Arabia became a major shareholder of Fairmont
Hotel Management L.P. The new shareholder added much needed capital for renovations
and expansion. In 1998, there are seven Fairmont Hotels in the United States, as listed in
Exhibit 6.
The
The
The
The
The
The
The
Exhibit 6: List of Fairmont Hotels
Fairmont Copley Plaza in Boston
379 Rooms
Fairmont Hotel in Chicago
692 Rooms
Fairmont Hotel in Dallas
550 Rooms
Fairmont Hotel in New Orleans
700 Rooms
Plaza Hotel in New York
806 Rooms
Fairmont Hotel in San Francisco
596 Rooms
Fairmont Hotel in San Jose
541 Rooms
Source: Fairmont Hotel Management LP
The company's portfolio consists of historic hotels as well as "new" properties that
are less than fifteen years old. With the exception of the Fairmont Copley Plaza, all the
properties are over 500 rooms. This is important to note, as Fairmont believes that part of
their market niche is to focus on hotels that are larger than what are typically perceived as
luxury hotels (between 250 and 450 rooms). The smaller-sized Fairmont Copley Plaza
might require different sales and marketing strategies than its sister properties. Limited by
size, the hotel has difficulties attracting larger groups, which suggests why it is considered
an overflow property for conventions, and trailing occupancy.
2.4
Purchasing the Copley Plaza Hotel
The purchase of the Copley Plaza hotel was part of Fairmont's expansion plan,
after new capital was injected into the company in 1994. Prior to the purchase, Fairmont
also purchased the Plaza Hotel in New York, establishing its presence in the Northeastern
market. Hotels that Fairmont targets must fit the company's grand heritage niche profile.
The company was searching for hotels with a rich history, turnaround potential and
location in gateway cities. Boston was one of the targeted cities.
In 1995, Fairmont
approached Harvard University, expressing interest in purchasing the hotel. The hotel was
not for sale at the time. Fairmont also considered other properties including The Tremont
House Hotel, Hotel Meridien and Park Plaza.
Fairmont had to convince Harvard
University that Fairmont was a more appropriate operator, and that it had long-term
strategic objectives to operate and maintain an equity position in the property. As part of
the sales package, Fairmont committed $10 million to renovating the hotel. The process
from property selection to finalizing the purchase of Copley Plaza took approximately 12
months.
At an estimated $188,000 per room ($60 million purchase price plus $10 million
renovations), the hotel was not exactly a bargain. The price reflected the circumstances of
the purchase. The company had considered building a new hotel. However, in the mid
90s, the hotel market was just beginning to improve, and adding a new property to the
market could be risky. In addition, a new property at the level of quality required by
Fairmont would be very expensive, and would take approximately two years to complete.
The company could have missed the window of opportunity. Purchasing an existing hotel
provided instant access to the market. Fairmont is pleased with the purchase.
More
importantly, the addition of the Boston property has strengthened the company's presence
in the Northeast market.
2.5
Renovations
After many years of neglect, the Copley Plaza hotel was in poor condition and
suffered from deferred maintenance. Previous operators, in order to reduce maintenance
costs, boarded up much of the hotel's fine art work and architectural details, such as cherry
wood columns and decorated vaulted ceilings. The first order of renovations was to return
the hotel to its original grandeur. Renovations were implemented in a two-phase program,
which took place during the winters of 1996 and 1997. In order to bring the hotel up to
Fairmont standards, the hotel replaced soft goods, such as carpeting and bedspreads, and
installed a modern infrastructure, including new computer systems and electronic locks.
Most of the original architecture and artwork are back in their original condition and are on
full display at the hotel.
Despite extensive renovations, much work is still needed at the hotel. The building
was constructed over 80 years ago and parts of it are structurally obsolete. For example,
the hotel was originally built with 500 rooms, including some small service quarters
without bathrooms. Although some of the rooms were reconfigured prior to Fairmont's
ownership, a majority of them are small by today's standards, which is a marketing
disadvantage. Additionally, the hotel lacks modem amenities to effectively compete with
the newer properties.
Management at the hotel commented that the hotel is "after all, an old hotel" and
there are ongoing system issues which require additional capital expenditure. However,
for the money spent, management felt that the renovation was on the target. The
renovation's highlight was restoring the hotel's historic past and returning the hotel to its
original glamour, which aligned with the goals of the repositioning. The renovations also
focused on public areas and guestrooms, which have the most impact on guests'
perceptions of the hotel. If customers have to pay more for the same hotel, they have to
"feel" that there is a good price/value. The hotel has achieved reasonable success in this
regard.
From the management and sales perspectives, the decision to conduct renovations
in two phases was most challenging. Ideally, it would have been best to present a "new
product" in its entirety, for example by closing down the property completely during
renovations. However, Fairmont decided to conduct renovations during the slow winter
seasons in order to capture the growing hotel demand and maximize revenue during peak
seasons. This approach has its pros and cons and the effectiveness in this case is yet to be
determined. Because renovations took place during operations, there were inconveniences
to guests as well as to hotel staff. Additionally, since not all rooms were ready after the
first phase of renovations, the hotel had trouble increasing the room rate on unrenovated
rooms. This was reflected in the hotel's overall room revenue in the first year.
2.6
Establishing Presence in Boston
In order to establish the Fairmont as the "center of activities," one of the grand
heritage qualities, the hotel put out an aggressive sales, marketing and public relations
campaign targeting local business, political and social elite communities. The hotel made
a clear objective and commitment to being a responsible corporate citizen, providing a
good environment for employees and the business community. Fairmont needed to change
local perceptions of the property after years of it being an under-priced volume house. In
order to penetrate the local social and political circles, the hotel hired new sales associates
who were networked and familiar with the local environment. Their efforts paid off. The
hotel began hosting political events, which brought the Fairmont name to the press.
Capitalizing on the reputation of the Fairmont brand and the hotel's dramatic setting, the
hotel also targeted social events, such as weddings and charitable balls. Although these
events do not always bring in room demand, they were good for public relations and added
mystique and prestige to the hotel.
The hotel is pleased with the accomplishments of the sales and marketing efforts in
such a short time. The decision to add new staff to target local social and political markets
was crucial. The new staff was effective in generating and promoting the hotel's upscale
image. Guests staying at upscale properties are willing to pay more for image, indulgence
and an elegant appeal. Fairmont created these qualities at the early stage after purchase,
which set the tone for the property.
2.7
Improve Service Qualities - Staffing
Having the same owner and operator, there were few misunderstandings between
the owners' investment objectives and the operators' management approach. Their
interests were aligned - both wanted to increase market share and generate positive
operating results. A key to the hotel's repositioning success was an efficiently managed
hotel, which would deliver a product that consistent with the hotel's intended position.
When Fairmont took over the property, it replaced almost all of the management staff,
including the General Manager.
However, most of the line employees from previous
management remained due to union contracts. One of the challenges of working with an
existing staff was to put inplace Fairmont standards of quality and service, which require
paying attention to details. Since employees were used to the previous operation as an
mid-priced property, the hotel took on extensive orientation and training programs to retain
all line employees. Most of these programs are ongoing. Those who were unwilling or
unable to be retrained were replaced.
Some of the department heads, including the
Director of Human Resources, Comptroller and Director of Engineering were retained
from management.
They were familiar with the employees, the hotel and the local
environment, which assisted in the transition.
However, they had to adapt to new
management and systems, which was challenging at times.
Hotel management attributed the success of the repositioning to the full
commitment of the staff at the corporate and property levels. During the initial period after
the take-over, Small was on site to oversee the transition, which conveyed a sense of
urgency and dedication. This was effective as employees understood the commitment to
succeed. Employees were clear about the hotel's identity and the quality level the hotel
desired to achieve.
Hotel management commented that taking an aggressive approach at
the beginning of the repositioning was critical. It would have been difficult to sell the
Fairmont to the upper-segment if the hotel could not deliver the service.
2.8
Local Market Performance
Boston's hotel market is one of the few in the nation that has both strong business
and leisure demand.
On the weekdays, Monday through Thursday, hotel demand is
primarily generated by transient business travelers and groups such as corporate meetings
and conventions.
Leisure travelers, both local residents and tourists, fill up many hotel
rooms on the weekends and holidays. Although hotels in Boston suffer from seasonal
demand (low occupancy during the winter), the market experiences annual occupancy
levels close to stabilization, indicating capacity constraints during peak seasons. With few
new hotels entering the market, Boston's hotel market has experienced positive growth in
occupancy and room rate during the past five years. PKF Consulting's data indicates that
greater Boston hotel demand and room rate levels have been increasing steadily since
1993, making Boston one of the top hotel markets in the United States.
The trend is
estimated to continue in 1998. Exhibit 7 illustrates hotel performance in the greater Boston
area.
Exhibit 7: Greater Boston Hotel Performance
1994
1995
1996
1997
1998 (est.)
Occupancy
77.0%
78.0%
78.3%
79.3%
80.0%
ADR
$127.50
$135.00
$147.00
$163.00
$172.50
RevPAR
$ 98.18
$ 105.30
$ 115.10
$ 129.26
$ 138.00
Source: PKF Consulting
In addition to a generally healthy market, Fairmont saw an opportunity in the
Boston market in the social and upper-segment of hotel demand.
Management saw a
Fairmont hotel, with the grandheritage niche to be an ideal product for the market place.
Prior to Fairmont's ownership, the Copley Plaza competed primarily with mid-range
properties in the Boston Back Bay area. Fairmont's repositioning strategy was to redirect
market orientation away from volume discount business toward upper-end transient
business, group and leisure travelers. Fairmont believed that Boston has a strong demand
for upscale properties, but not enough quality products in the market to meet the needs.
In the luxury segment, the Fairmont considers the Ritz Carlton and Four Seasons
Hotel, both located in the Boston Common area downtown, as competitive.
Fairmont
believed that the hotel's location, historic appeal and positive brand reputation would allow
the hotel to penetrate the upscale market and compete with these two properties. However,
constrained by facility inefficiencies, Fairmont has had difficulties competing directly with
these properties. This is reflected in the hotel's average room rate, which is $50 to $100
less than these hotels.
The Fairmont also competes with four hotels in the Back Bay area for group and
transient business. These hotels include Boston Marriott Copley Place, Sheraton Boston
Hotel and Towers, Westin - Copley Place, and Boston Back Bay Hilton. The Fairmont
considers the absence of a frequent traveler program and other amenities that business
travelers typically enjoy as a disadvantage. The hotel absorbs much of the overflow group
demand from these properties, which suggests the lower occupancy.
However, the
Fairmont is able to capture a larger share of weekend leisure demand, which makes up for
the hotel's occupancy discrepancies between the weekdays and the weekend. After the
repositioning, the Fairmont has a market mix of approximately 50 percent group business
related to the Hynes Convention Center and 50 percent from a mixture of transient
business and leisure travelers.
When compared to the overall competitive set (which
includes the Ritz Carlton, Four Seasons, Marriott, Hilton, Sheraton and Westin),
Fairmont's average rate as of May 1998 was approximately $2.00 ahead, but one to two
points behind in occupancy.
Part of the repositioning plan was to gradually replace the existing discount clientbase with less price-sensitive customers. Fairmont continued to honor contracts committed
to by the previous management.
However, the hotel also shifted marketing efforts to
groups that were willing to pay higher rates for better service and facilities, as well as to
transient business and leisure travelers who were familiar with the Fairmont brand. One
obstacle, commented on by the company, was that since renovations were conducted in a
two-phase process, some of the rooms were not up to Fairmont standards during the first
year. Without upgraded facilities, the hotel had difficulties demanding higher room rates.
The problem was gradually resolved as renovated rooms became available. The hotel
reported a 20 percent increase in room rate in May 1998, when compared to 1997's results.
2.9
Performance Estimates
The following comparisons were constructed based on interviews with Fairmont,
and on the author's estimates.
Since actual figures were not available, the figures
presented are percentage differences between pre-reposition and mid-1998 performances.
Exhibit 8: Performance Estimates - Fairmont Hotel
Percentage
Difference
Occupancy
5 -10%
decrease
ADR
20 -25%
increase
RevPAR
10 -20%
increase
Market Mix
Group:
20-25% increase
Transient:
10-15% decrease
Leisure:
5 % increase
The difference in market mix is not as important as the sources of business for
Fairmont's repositioning strategy. Although transient demand is estimated to have gone
down 10 to 15 percent, the volume of discounted demand was replaced by higher-priced
business. Hence, the overall RevPAR reflected increases.
Examining room revenue reveals only part of the picture. With more expensive
restaurants, the hotel is estimated to generate higher food and beverage revenue under
Fairmont's management.
On the other hand, a full-service hotel tends to be more
expensive to operate, which would negatively impact the bottom line.
A general investment assessment was conducted based on information collected
during interviews with Fairmont personnel, projections based on market trends and
estimates according to industry averages.
The results are not necessarily representative of
the actual investment results and/or objectives of Fairmont hotels. This exercise presents
only one possible result of the hotel's repositioning strategy.
Performance Assumptions
(The assumptions presented following are based on Trends in the Hotel Industry USA
Edition, 1997 published by PKF Consulting. Each year PKF Consulting surveys over
2,800 hotels concerning operation and financial results.
In addition, some of the
assumptions draw upon information provided by the hotel and reasonable estimates
accordingto market trends.)
(1)
Estimates for 1996 reflect only half-year results, since the hotel was purchased
during the middle of 1996. The hotel is estimated to stabilize operations in 1999.
(2)
The average daily rate for the hotel is estimated to be $140.00, $165.00 and
$173.00 for the years 1996, 1997 and 1998, respectively. These estimates are in
line with the performance of hotels in the Boston area during the same period.
(Refer to Exhibit 7). The room rate in 1999 is estimated to increase 4 percent, and
3 percent thereafter, to reflect market conditions with potential new hotels opening.
(3)
Occupancy for the hotel is estimated to stabilize at 78 percent in 1998 and
throughout the projection period. The hotel is estimated to have experienced lower
occupancies during the start-up period in 1996 and 1997.
(4)
PKF Consulting indicated that its sample set of full-service hotels belonging to the
rate group above $100.00 experienced an average room rate of $148.36 in 1996.
This same group indicated an income before other fixed charges (including
management fees, insurance and property taxes), or EBITDA, to be 24.9% of the
total revenue.
EBITDA for the Fairmont is estimated to be scaled, starting at 5
percent in 1996, 12 percent in 1997, 20 percent in 1998 and 23 percent in 1999 and
thereafter.
The lower stabilized percent reflects the higher cost of operation in
Boston, and the added amenities offered by the hotel.
(5)
Additionally, the same sample group indicated that room revenue made up 60.6
percent of total revenues. For the Fairmont hotel, room revenue is estimated to be
60 percent of total revenue due to the market's overall high room rate level.
Investment Assumptions
(The primary source for investment assumptions is the Hotel Investment Outlook 1998 a
biannual investment survey published by LandauerHospitality Group.)
(1)
Landauer Hospitality Group's survey indicated that equity participants in luxury
hotels have an average holding period of 6.25 years and a terminal capitalization
rate of 9.5 percent. The yield rate for this group was 12 percent.
(2)
Parameters for discounted cash flow for the surveyed indicated an inflation rate
averaging 3.1 percent, with a range between three and five percent.
Other Assumptions
(1)
The hotel's $10 million renovation was estimated to have been spent evenly over
the two year, 1996 and 1997. No major capital expenditure would be spent on the
hotel during the projection period.
(2)
Cash flow is forecasted from 1996 to 2002, six and a half years after purchase,
reflecting the average holding period for luxury hotels.
Estimated Return on Investments
2.10
The aforementioned assumptions generate an internal rate of return of 12.5 percent,
which is comparable to the industry average. Detailed calculations are presented in the
following exhibit.
Exhibit 9: Fairmont Hotel Investment Analysis
Est. Occupancy
1996
1997
1998
1999
2000
2001
2002
74%
76%
78%
78%
78%
78%
78%
$140
Est. ADR
$ 165
$173
$180
$ 186
$191
Est. % of Room
Revenue
Est. Total Revenue
60%
60%
60%
60%
$ 11,942,922
$ 28,947,060
$ 31,194,266
$ 32,442,036
Est. % of EBITDA
5.0%
12.0%
20.0%
23.0%
23.0%
23.0%
$5,97,146
$3,473,647
$6,238,853
$7,461,668
$7,685,518
$7,916,084
$ (65,000,000)
$ (5,000,000)
--
--
--
Est. EBITDA
Initial Investment
60%
$ 197
60%
60%
$ 33,415,298 $ 34,417,756
$ 35,450,289
23.0%
$8,153,567
--
-
Terminal Value
$ 85,827,016
(9.5% Cap Rate)
Est. Total Cash
Flow
$(64,402,854)
Investment Return in Nominal
Term
$(1,526,353)
$6,238,853
$7,461,668
$7,685,518
$7,916,084
$93,980,582
12.5%
However, if market conditions were less than expected, as the hotel's occupancy is
negatively impacted due to pressure from new properties entering the market and/or a
slow-down of the economy, returns on investment would be lower. Additionally, if the
hotel is not evaluated as a true luxury product, but as an upscale full-service hotel, the
capitalization rate would increase (Landauer's average for full-service hotels was 10.16
percent) A sensitive analysis (Exhibit 10) based on these assumptions yields an internal
rate of return of 11.8 percent, which is marginally comparable to the industry average.
Exhibit 10: Fairmont Hotel Investment Sensitivity Analysis
Est. Occupancy
Est. ADR
Est. % of Room
Revenue
Est. Total Revenue
Est. % of NOL
After Fixed
Est. Net Income
after Fixed
Charges
Initial Investment
1996
1997
1998
1999
2000
2001
2002
74%
76%
78%
77%
77%
77%
77%
$ 140
$ 165
$ 173
$ 180
$ 186
$ 191
$ 197
60%
60%
60%
60%
60%
60%
60%
$32,986,896
$33,976,503
$34,995,798
23.0%
23.0%
$32,026,113
$11,942,922
$28,947,060
$31,194,266
5.0%
12.0%
20.0%
23.0%
23.0%
$597,146
$3,473,647
$6,238,853
$7,366,006
$7,586,986
$ (65,000,000)
$ (5,000,000)
$7,814,596
Terminal Value
(9.8% Cap Rate)
Total Cash Flow
$8,049,034
$82,132,996
$ (64,402,854)
Investment Return in Nominal
Terms
$ (1,526,353)
$6,238,853
$7,366,006
$7,586,986
$7,814,596
$90,182,030
11.8%
Since most of the information is based on reasonable estimates, no actual figures being
available, the resulting returns only provide a framework to evaluate the Fairmont
investment. The results in both scenarios appear to indicate that the repositioning strategy
is feasible. However, the sensitivity analysis suggests that the property is susceptible to
pressure from competition. This could also reflect the hotel's high acquisition cost and/or
the low room rate due to property condition. Since the owners have long-term interests in
the hotel, they may not be pressured, like many institutional owners, to sell the hotel in a
depressed market. This would allow the owners the option to wait until a high resale price
is reached, enabling them to generate higher investment yields.
2.11
Conclusions
The purchase of the Copley Plaza was a long-term strategic positioning for the
company, Fairmont Hotels. It is difficult to assess the financial success of the strategy
since the hotel has been managed by Fairmont for less than 24 months. Hotel management
commented that the hotel will take another year to stabilize operations.
Therefore,
evaluating the Fairmont repositioning strategy requires examining a number of issues
beyond return on investment, such as market entry, branding strategy and plan execution.
Fairmont's repositioning strategy has its strength and weaknesses. The hotel was
purchased at a time when the Boston hotel market was on the road to recovery from the
economic downturn in the early 90s. Market occupancy was on the rise and no new
property was entering the market, particularly in the upscale segment; this created entry
opportunities.
The buyer frenzy was also not as heated as it is today, which provided
certain leverage to the Fairmont.
The depth of the business and leisure markets also
provided the hotel with flexibility, and options for changing its market orientation. Under
these market conditions, almost any repositioning plan would work. Fairmont chose the
right time to enter the market.
However, under the circumstances that led to the hotel's purchase, it is not
unreasonable to suspect that the purchase price reflected more favorable terms to the seller.
The Copley Plaza was purchased as part of Fairmont's expansion plan. Fairmont wanted
presence in Boston for the company's overall positioning strategy. There were not too
many properties in Boston that met Fairmont's grand heritage profile.
Fairmont
handpicked the Copley Plaza and conducted a silent sale. At an estimated $188,000 per
room ($60 million purchase price plus $10 million renovations), the hotel is considered
expensive when compared to a newly constructed, full-service hotel. However, the cost is
at the low end for building a new luxury product. Fairmont opted to acquire an existing
property because it was less risky than building a new one, and because there would be no
waiting time to enter the market.
Despite these advantages, working with an old property has many drawbacks, most
of which come from the property's physical condition.
The hotel has to change any
predisposed negative perceptions of the hotel. From the perspective of improving public
relations and increasing visibility, the hotel was very successful. In a short time, the hotel
has gain substantial recognition in local communities, and gained a presence in the
Northeast market. The hotel was also successful in handling service quality issues and
introducing a product that was consistent with the Fairmont brand. However, the hotel
suffered from aged facilities and interiors that were difficult to rectify without a complete
makeover. Although $10 million was spent on the property, the hotel could use more
capital expenditure to bring the property up to modem standards.
Some of the
inefficiencies at the hotel remain, such as small rooms, and continue to be a competitive
disadvantage for the property.
Another repositioning challenge was to deliver a product that was not complete.
Renovations took place during two winters, which added pressure to selling rooms at
higher rates. As a result, the room rate did not increase significantly in the first year. An
alternative to the phased renovation was to close down the hotel completely.
However,
this would have meant missing the prime business season. Renovating during the winter
was the best use of the hotel's production time. The period between the time of purchase
and the completion of the first phase of renovation provided the property a warm-up
period. However, operating a hotel that was under its prime condition ultimately had a toll
on performance.
Some customers might not have perceived the changes and been
discouraged from using the hotel again.
The hotel was purchased with the intent to be managed by Fairmont, and no thirdparty management company was considered. The unique ownership arrangement of the
hotel and Fairmont Hotels Management L.P. provided a depth of resources for the hotel's
overall repositioning strategy. Another strength of the repositioning strategy lay in the
plan's execution. Right from the inception, there were full cooperation and commitment
from all levels of the company, both corporate and property. This sent a strong message to
local communities and customers, and made a positive and persuasive introduction for the
hotel.
Although the hotel is still lagging behind the luxury properties in rate, it is gradually
building a strong customer base, and increasing the room rate. The hotel is about 12 to 18
months away from stabilized operations. The hotel's RevPAR in mid-1998 ranks tenth
among hotels in the Boston area.
The hotel's goal is to be in fourth place.
While
optimistic, management commented that the gap between the hotel and a "true luxury"
product remains a challenge because of the age of the hotel and the potential competition
of new properties coming on line in the near future.
At an estimated investment return of 12.5 percent, the repositioning strategy appears to
be feasible. In addition, given other intangible benefits generated by the hotel, the overall
market strategy is a good deployment of resources. The acquisition and repositioning of
the property has increased the chain's overall competitive strength.
Furthermore, the
addition is aligned with Fairmont's internal investment objective and brand expansion.
Chapter Three - Case Study: The D/FW Lakes Hilton
3.1
Background
Located in Grapevine, Texas, the D/FW Hilton Lakes hotel is situated on a 40-acre
land in the heart of the Dallas/Fort Worth (D/FW) Metroplex. The hotel is located one and
a half miles from the D/FW Airport's northern boundary and four miles north of the main
terminals. The hotel has 395 rooms and was built in 1983. Several facilities additions and
upgrades have taken place between 1990 and 1998, including the addition of conference
dining facilities. The hotel was owned and managed by Metro Hotels at its opening. Prior
to the hotel's purchase by ERE Yarmouth (then The Yarmouth Group) in 1995, Jones Lang
Wootton Pension Fund Advisory was an equity partner in the property. The hotel was sold
for $44 million and went through a $8 million renovation program after it was purchased.
The hotel has been a Hilton franchise since its opening.
The franchise remains after the
purchase; however, Dolce International was brought in to manage the property. The hotel
was recently sold to Hilton Hotels Corporation for an unconfirmed amount of $103
million, 2.3 times over its original purchase price.
3.2
Repositioning Strategy
D/FW Lakes Hilton's repositioning encompasses a lateral transition of property
types (from a transient full-service hotel to a conference center), and a vertical climb in
rate range to reflect improved quality. Since the property was already improved with
sufficient meeting space, no new meeting facility was added. The core strategies of the
repositioning involved identifying a market niche, focusing on the property's unique
facilities and location, and hiring a competent management team to create competitive
advantages.
The following paragraphs discuss each of these factors, which collectively
formulated a strategy that not only was considered a financial success, but also expanded
the property's marketability and economic longevity.
3.3
Market Niche - Conference Centers
In order to examine the rationale of the repositioning strategy, it is necessary to
understand the unique market characteristics of conference demand and facilities.
Conference centers are considered "purpose built" hotels. According to the International
Association of Conference Centers (IACC), a conference center is defined as "a facility
whose primary purpose is to accommodate small-to-medium-sized meetings."
A
conference center differs from other hotel types with regards to meeting space in that the
primary purpose of a conference center is to satisfy and accommodate groups by offering a
self-contained, full-service meeting environment. The average size of conference centers
is about 300 sleeping rooms. Conference centers should create an intimate setting and be
serviced by operators who are experienced in coordinating meetings. Group meetings,
either generated by corporations or associations, make up at least 60 percent of conference
centers' overall demand. Due to their dedication to meetings, conference centers tailor
their facilities and services primarily to the needs of meeting planners and attendees. For
instance, meeting rooms are designed for the comfort of attendees who typically spend
nearly eight hours a day in a conference room. There is a high demand for state-of-the-art
audio/visual equipment for presentations. With set meeting schedules, meal and recreation
times are usually predetermined. Conference centers require facilities that can handle large
volumes during peak demand hours. Dining room configuration at conference centers is
usually different than that of a typical hotel. It is not uncommon for conference centers to
set up separate dining facilities and special conference meal packages for meeting
attendees. Meetings are typically charged per person on a package basis, often referred to
as a CMP, Complete Meeting Package. A CMP usually includes lodging, meals, breaks,
meeting services and equipment fees.
The IACC defines six types of conference centers, distinguished by the following
characteristics:
Executive Conference Center - groups are typically composed of corporations,
associations, and other organizations that emphasize the quality of accommodations
and services over price. This type of facility was developed primarily to satisfy
upper-level management meetings and education/training seminars.
Facilities
usually include sophisticated equipment and are staffed with professional
conference coordinators.
Corporate-Owned Conference Center - an increasing number of corporations are
designing their own conference centers for in-house use. Size and facilities vary
according to the corporation's need for meeting and lodging rooms.
Resort Conference Center - meetings held here are similar to those held at
executive or corporate-owned conference centers but with a greater emphasis on
recreation and social activities for conferees, located in a resort environment.
Resort conference centers include a major recreation component, most frequently
golf.
Not-for-Profit/Educational Conference Center-these facilities are developed by
and/or associated with a major educational institution or nonprofit organization.
Meetings held at centers owned by a University are held primarily by organizations
that are technically oriented, or academic or university-related. These groups are
typically more price-sensitive than those in the executive, corporate or resort
markets.
Nonresidential Conference Center - this category was recently added to the
IACC's classification to describe conference centers that may have the attributes of
executive and resort centers, but do not have sleeping accommodations.
Ancillary Conference Center - this type of conference center does not have its
own sleeping rooms and is usually adjacent to a hotel, which offers sleeping
facilities. Like conference centers with overnight accommodations, these facilities
offer a complete package of room and services.
The special-niche quality of conference centers requires different sales and
marketing approaches and skills to attract business.
Unlike transient hotels, it is not
necessary for conference centers to be affiliated with a franchise.
Business is usually
booked directly by meeting planners, or through group marketing. The relationship and
confidence built between the meeting planners and the conference center's sales staff is
what drives business. Conference centers also do not require high visibility, or location, in
a downtown business district. However, a well-located conference center should be easily
accessible via auto transportation and have good regional access, such as the convenience
of an airline-hub.
The follow exhibit lists the selection criteria considered important to corporate and
association meeting planners when choosing a meeting facility.
Exhibit 11: Facility selection criteria considered very important for
corporate and association meeting planners
Selection Factors Considered Very Important
Cost of facility/hotel
Number, size and quality of meeting rooms
Quality of food service
Negotiable food, beverage and room rates
Efficiency of billing procedures
Number, size and quality of sleeping rooms
Meeting support services and equipment
Efficiency of check-in and check-out procedures
Previous experience in dealing with faculty and staff
Assignment of one staff person to handle meetings
Convenience to modes to transportation
Availability of exhibit space
Proximity of shopping, restaurant, off-site entertainment
Number, size and quality of suites
On-site recreational facilities, i.e. Swimming, tennis
Special meeting service such as pre-registration
On-site golf course
Proximity to airport
Source: 1996 Meeting Market Study
Corporate
Meetings
73%
72%
71%
66%
56%
55%
53%
52%
41%
38%
34%
21%
19%
18%
15%
12%
9%
N/A
Association
Meetings
75%
62%
66%
72%
52%
41%
44%
40%
38%
37%
23%
12%
16%
9%
6%
6%
3%
22%
Another unique quality of conference centers is that they attract business from three
levels - local, regional and national. At the local level, conference centers compete with
other like properties, whether they are conference centers or full service properties, in
almost all segments. As the market area expands, conference centers are likely to compete
with conference centers in different regions for groups that use multiple sites.
For
instance, a national professional group may decide to rotate their meetings around the
country in order to attract members from different locations to attend. Since the survey
indicates that one of the top meeting-site selection criteria for groups, including corporate,
association and conventions, is the size and type of facilities available, conference facilities
compete with properties having similar facilities across regions. The size of the market
area depends on the property's facilities, location and accessibility.
One of the most
valuable resources of D/FW Lakes Hilton is its location. The property is within minutes of
the international hub for American Airlines, which provides great accessibility for
conference attendees.
Although a typical full-service hotel would benefit from this
locational advantage, transient travelers usually prefer staying at a hotel close to where
they conduct business, such as downtown business districts, and value the airport-hub
attribute less than conference attendees.
According to IACC's classification, D/FW Lakes Hilton is an executive conference
center. This sector experienced the fastest growing demand among all types of conference
centers in the last 10 years.
Executive conference centers, overall, experienced an
occupancy increase from 50 percent in 1985 to 65.3 percent inn 1995. Annualized average
rates for executive centers during the same period indicate a 4.3 percent compounded
growth from $79.33 to $121.39. Daily revenue per occupied room (RevPOR), a measure of
total revenue which includes day-meeting revenue and CMPs, for executive centers more
than doubled from $152.00 in 1985 to $315.00 in 1995. While demand and revenue were
increasing, supply was lagging. This was the result of the hotel industry's downturn in the
early 90s and the expensive construction costs of new conference centers. These market
dynamics indicated the opportunities and strength of the executive conference center
market. D/FW Lakes Hilton's repositioning strategy was to capture these growing trends
with a product that was most appropriate for the target market.
3.4
Expert Management - Dolce International
Different from the Fairmont case, The Yarmouth Group is an institutional owner
and does not operate any hotel. Yarmouth intended to maintain a third-party management
company to operate the hotel. The owner realized that for the hotel to penetrate the
conference market, it needed an experienced management team with a solid track record.
The existing management, Metro Hotels, was competent; however, it did not specialize in
conference centers. In addition to Metro Hotels, the owner considered two conference
center management companies: Dolce International and International Conference and
Resort (ICR). These two companies have solid conference center management experience
and have their respective strengths and weaknesses in capturing demand. Yarmouth finally
selected Dolce International as part of Yarmouth's potential expansion plan.
Dolce
International also manages a conference center in Austin, Texas (approximately 150 miles
southwest of Dallas).
Having a sister property in the same state provides many
competitive advantages for Dolce International and the properties, as it can gain economies
of scale and offer alternative property choices to meeting planners.
Established in 1981
and headquartered in Montvale, New Jersey, Dolce
International is a global conference center and resort management company. The company
was started by Andy Dolce, who serves as the Chairman and Chief Executive Office. In
late 1997, Dolce International formed an alliance with AEW Partners L.P., which funded
an estimated $200 million in investment capital for acquisitions and development. The
partnership, Dolce/AEW, wants to increase equity participation in properties that are
already managed by Dolce, and expands its management and ownership portfolio in
conference centers in the United States and Europe. The intent of the partnership is to
allow Dolce International to move away from strictly managing hotels and increase equity
participation, thus allowing more long-term planning. This strategy, according to Andy
Dolce, will give the company and its clients more continuity and provide a firmer foothold
for managing business.
Dolce International currently manages 11 properties, eight of
which are in the United States and three overseas. Three of the 11 conference centers are
private properties, for which Dolce International holds a third-party management contract.
In addition, Dolce International is also in a strategic alliance with Scanticon Comwell
Properties to manage overseas properties owned by Scanticon.
The following exhibit
provides a list of all the properties managed and/or owned by Dolce International.
Exhibit 12: Conference Centers Managed (and/or Owned) by Dolce International
Hamilton Park
Tarrytown House
The Heritage
Lakeway Inn
D/FW Lakes Hilton
Salishan Lodge
Skamanian Lodge
Hotel de Fregate
Spencer Hall *
Bank of Montreal Institute of Learning *
GE Crotonville Learning Center *Ossining,
Scanticon Kolding
Florham Park, NJ
Tarrytown, NY
Southbury, CT
Austin, TX
Grapevine, TX
Gleneden Beach, OR
Stevenson, WA
Cote D'Azur, France
London, Ontario
Scarborough, Ontario
NY
Kolding Denmark
219 Rooms
148 Rooms
163 Rooms
240 Rooms
395 Rooms
205 Rooms
195 Rooms
100 Rooms
125 Rooms
160 Rooms
Not disclosed
160 Rooms
Scanticon Elsinore
Properties
Alliance with Scanticon Kolding
Helsingor, Denmark
G
vPrivate
eStrategic
149 Rooms
Source: Dolce International
Dolce International is considered one of the premium companies specializing in
managing conference centers. Conference centers are niche-type meeting facilities and
require in-depth knowledge and networking to build up a customer base. The company has
a substantial presence in the lodging, hospitality and meetings industries, and properties
under its management have earned numerous prestige awards.
Dolce International is
organized into five major divisions, which include North American Operations, Europe
Operations, Sales and Marketing, Finance and Administration and Acquisitions and
Development. The company's culture is embodied in the Acronym TASTES, which stands
for:
*
That we expect Truthful communications with each other;
*
That each associate is Accountable for individual and team success;
*
That we Support each other in achieving our goals;
*
That we Trust each other;
*
That every associate is Empowered to do whatever is necessary to serve our clients;
and
*
That we make a decision or take action with Speed.
When Dolce International took over management, they replaced the General
Manager and Director of Marketing, but retained most of the management and line staff.
Dolce International saw the need for an upper management team that was familiar with
Dolce's management philosophies and experience, and a hotel staff which was
knowledgeable about the local environment. Selecting a strong operator for the property
was one of the key and early decisions of the repositioning plan. As indicated by the
improved operating results and the effectiveness in gaining penetration in the conference
market, the strategy paid off.
3.5
D/FW Lakes Hilton Hotel Facilities
The quality and layout of meeting facilities at the D/FW Lakes Hilton played a key
role in the repositioning. As discussed previously, special amenities and the facilities'
layout are important for attracting conference business. For instance, meeting attendees
prefer an auditorium setting over regular meeting rooms. Additionally, facilities such as
rear-screen projectors, a dedicated business center and a separate conference dining room,
are preferred by meeting planners and attendees. Meeting rooms that are concentrated in
one part of the building, as opposed to being spread all over the campus, make it easy for
companies to conduct meetings and manage attendees.
These subtle attributes are
examples of what set conference centers apart from regular full-service hotels. The D/FW
Lakes Hilton was built as a conference center and the hotel already possessed conferencequality facilities when purchased, which was important in the repositioning strategy.
The D/FW Lakes Hilton consists of two rectangular, nine-story guestroom towers,
with an attached, three-level facility containing the main lobby, five food and beverage
outlets, meeting rooms, an indoor pool and recreational facilities. Conference facilities
include 45,000 square feet of meeting space, including three tiered amphitheaters, a 9,300
square foot ballroom, six conference suites, an executive boardroom, several outdoor
terraces and two indoor tennis courts which can be transformed into 14,400 square feet of
exhibition space. There is also a fitness center, which includes indoor racquetball courts,
two indoor and six outdoor tennis courts, a fully equipped health club with Nautilus
equipment and pro shop, and indoor and outdoor swimming pools. The property offers a
specialty restaurant, an all-day restaurant, an entertainment lounge, an informal lounge and
a dining room for the exclusive use of conferees. The hotel's three restaurants, state-ofthe-art conference technology and full service business center all cater to conference
attendees.
Most of the facilities were in place prior to Yarmouth's purchase. The owner did
not want to spend more than the budgeted $8 million on renovations.
As such, the
renovation covered most of the soft goods, including carpeting, wallpaper and drapes, to
create a fresh look for the property. These were areas which would provide a high return
on a renovation dollar spent. The only major new construction was to design the dining
room. Dolce's experience indicated that in order to be an efficient conference center, the
hotel needed to separate regular hotel guests and conference attendees into different dining
facilities. As a result, the hotel configured a dining room with retractable walls that can be
used to partition the dining room to meet the needs of the hotel. The design has proved
successful and was effective in servicing both conference and transient guests. According
to the operator, redesigning the dining room was a priority in the renovation and proved to
be a wise use of investment.
The hotel plans to add an 18-hole golf course on the property's 40-arce vacant land.
Golf facilities are popular among conference attendees, and one here would allow the hotel
to expand its marketability. According to the 1996 Meeting Market Study conducted by
Meetings and Conventions magazine, 13 percent of corporate meetings and seven percent
of association meetings used golf resorts for their meetings. Golf resorts have the ability to
draw business with higher room rates. Yarmouth conducted feasibility studies for the golf
course, but did not follow through with the plan. It is rumored that the new owner will add
golf facilities, which would support a higher room rate and generate revenue from
concession sales.
3.6
Market Penetration
In the north D/FW airport area, there are a number of full-service and limited-
service hotels. Most of these hotels are performing well and experience occupancies in the
high 70/low 80-percentage range.
The main driving force of demand in the market is
access to the D/FW airport. Transient business travelers, as well as groups, enjoy staying
in these hotels because of their convenient access to the D/FW airport.
There is also
demand generated by airlines, such as crew and delayed-flight travelers. This demand
typically generates a stable, high volume but at deeply discounted room rates.
Prior to repositioning, the D/FW Lakes Hilton was competing with a number of
full-service hotels in the area for a similar demand base.
Although the hotel was
performing at a low 80 percent occupancy rate, the hotel's room rate was in the low $90s
due to airline crews. At such high occupancy, which indicated capacity constraints and
sold-out evenings, the way to improve income was to increase the room rate. The first
objective of the repositioning plan was to reduce the airline crew demand. New capital for
renovations improved the hotel's overall quality and provided a selling tool to market the
more lucrative transient and group businesses. The transition faced low resistance since
Dallas's hotel market has been booming since the mid 90s. Hotels are often sold out and
the overall outlook of the D/FW airport hotel market is positive.
3.7
Brand Affiliation
The hotel remained a Hilton franchise after the acquisition. The owner kept the
franchise due to contractual reasons. Conference centers are unique in that they do not
require brand names to attract business. In fact, sometimes having a brand can be negative
for conference centers, since some meeting planners like to select properties that are less
"commercial."
While it is difficult to quantify the amount of business generated by the
brand verse that generated by Dolce, the Hilton affiliation has been a positive to the
property's overall marketability. The affiliation allows the hotel to capture demand during
low conference seasons, which is during the summer and the winter.
According to
management, transient travelers make up about 30 percent of the hotel's overall demand.
This is the hotel's second largest market segment, one that enjoys conveniences and
amenities offered by a brand such as Hilton, which is well known to business travelers.
3.8
Performance Estimates
The
following
comparisons were
constructed
based
management of the property, and on the author's estimates.
on interviews
with
Actual figures were not
released. The figures presented reflect reasonable estimates based on the D/FW Airport
market and conference center performances. Post-reposition figures refer to 1998 year-end
estimates.
Exhibit 13: Estimated Performance - D/FW Lakes Hilton
Occupancy
ADR
RevPAR
Market Mix
Pre-reposition
Low 80%
$80 -$100
$65-$80
Group:
Transient*:
Leisure:
25-30%
60%
10-15%
Post-reposition
Low 80%
$120 - $140
$100
Group:
50%;
*
-
$125
Transient:
30%,
Leisure:
20%
Included low-rated airline crew demand
In addition to an improved room rate and improved RevPAR, the hotel's overall
revenue also increased. Since most of the conference attendees participated in CMPs, the
hotel's food and beverage and conference revenues went up as well.
The hotel also
catered to day-meeting guests, who do not stay overnight at the hotel. Revenue generated
by these guests is not allocated to the food and beverage and conference departments, and
is not reflected in the room rate or occupancy.
A general investment assessment was conducted based on information collected
during interviews with Fairmont personnel, projections based on market trends and
estimates according to industry averages. The results are not necessarily representative of
the actual investment results of The Yarmouth Group. This exercise presents only one
possible result of the hotel's repositioning strategy with respect to recent transactions.
Performance Assumptions
(The following assumptions are based on Trends in the Hotel Industry USA Edition, 1997
published by PKF Consulting. Each year PKF Consulting surveys over 2,800 hotels
concerning operation and financial results.
Data from several private studies on
conference centers is also used to establish operation parameters.
Some of the
assumptions draw upon informationprovided by the hotel, and upon reasonable estimates
accordingto market trends.)
(1)
Estimates for 1995 reflect only quarter-year results, since the hotel was purchased
during the middle of 1995 and rooms were removed from availability for the
rehabilitation program.
(2)
The average daily rate for the hotel is estimated to be $95.00, $125.00 $130.00 and
$135.00 for the years 1995, 1996, 1997 and 1998, respectively. These estimates
are based on performances of full-service hotels in the D/FW Airport area and
conference centers during the same period.
(3)
Occupancy for the hotel is estimated to be 82 percent in 1995, and it stabilized at
81 percent from 1996 to 1998. The small decline in occupancy reflected capacity
constraints during peak seasons and conference travel tendencies.
(4)
Properties managed by Dolce International indicated room revenue to be between
40 and 50 percent of total revenues.
A sample set of conference centers with
occupancy and average room rate similar to the D/FW Lakes Hilton experienced
approximately 56 percent of room revenue to total income.
These two groups
indicated income before fixed charges, or EBITDA, to be between 20 and 30
percent of total revenue. Using these ranges, the D/FW Lakes Hilton's projection
is 24 percent in 1998. Room revenue is estimated to be 48 percent of the total
revenue, reflecting the efficiency of Dolce's management.
Other Assumptions
(1)
The hotel was reported sold at an unconfirmed price of $103 million in mid-1998.
This price was used as the terminal value to calculate the return rate.
(2)
$8 million renovation was estimated spent in 1995.
No other major capital
expenditure took place between 1996 and 1998.
(3)
Cash flow is forecasted from 1996 to mid-1998, the reported time of sales. Income
projections for 1998 reflect only six months of operations.
3.9
Estimated Return on Investments
The aforementioned assumptions generate an internal rate of return of 34.5 percent,
which well exceeds industry averages. Detailed calculations are presented in the following
exhibit.
Exhibit 14: D/FW Lakes Hilton Investment Analysis
1995
1996
1997
Est. Occupancy
Est. ADR
82%
$95
81%
$120
81%
$ 130
1998
81%
$ 135
Est. % of Room Revenue
60%
50%
48%
48%
$27,957,551
$31,743,469
$16,325,843
10.0%
18.0%
22.0%
24.0%
$ 467,968
$5,032,359
$6,983,563
$3,918,202
$ (52,000,000)
---
---
---
Est. Total Revenue
Est. % of EBITDA
Est. EBITDA
Initial Investment
$4,679,680
$ 103,000,000
Terminal Value
Total Cash Flow
$ (51,532,032)
Internal Rate of Return In Nominal Terms
$5032359
$6,983,563
$10,6918,202
34.5%
Unlike Fairmont Hotels, The Yarmouth Group is an institutional owner and did not
intend to own the hotel for a long period. The property was sold in the mid-1998, at a time
when the market and hotel's fundamentals were strong. The holding period for the D/FW
Lakes Hilton was approximately three years, which was below the industry average.
Judging from the return on investment, the repositioning strategy was a financial success.
3.10
Conclusions
D/FW Lakes Hilton's repositioning plan was considered an overall success,
financially and strategically. The property's good position in the conference market is
likely to continue to be recognized and capitalized on by the new owner. The new owner
has the option to develop an 18-hole golf course, which would add to the hotel's amenity
and its ability to attract the more lucrative golf-related meetings. Dolce International has a
five-year management contract on the property. It is unclear whether it will continue to
operate the hotel, or whether Hilton will take over management of the property when the
contract expires.
The success of the repositioning plan can be attributed to the following facts and
conditions:
-
Market timing - At the time of purchase, there were not too many buyers, thus
Yarmouth was able to purchase the hotel at a reasonable price. At approximately
$130,000 per room ($44 million purchase price plus $8 million renovations), it was
less expensive to acquire than constructing a new property. Yarmouth also chose a
peak of the hotel market at which to dispose of the property. These timing factors,
combined, created a favorable economic environment for the investment.
-
Demand and supply - This also relates to market timing. When the property was
purchased in June 1995, the hotel market was recovering and there was a disparity
between supply and demand for conference centers. Increasing demand coupled
with limited new supply (due to the high project cost for new conference centers)
created
an unsatisfied
market
demand,
and
therefore
opportunities
for
repositioning.
-
Dolce International - An experienced operator who is able to attract and run
conferences efficiently. These business qualities gave the property "instant" access
to the market and a provided competitive advantage to the property.
-
Execution of renovation program - The owner was committed to the renovation
budget and adhered to the budget and process closely. The owner prioritized areas
that had the most and direct impact on room rates improving.
-
Location - There are no comparable conference centers in the near market area;
however, there are a number of hotels - full-and limited-service, competing for
similar business. Close and easy access to the D/FW airport provides tremendous
advantages to the property.
-
Facilities and setting - The D/FW Lakes Hilton has one of the best meeting
facilities and layouts among conference centers.
Although the hotel is a few
minutes from the airport, it is surrounded by 40 acres of open space and has a
campus-like atmosphere. The only drawback is that the hotel does not have an onsite golf course, but the new owner has an option to develop one.
In addition to these factors, The Yarmouth Group was credited for recognizing
market fundamentals and understanding the operation characteristics of conference centers.
The financial success of the repositioning strategy illustrated Yarmouth's keen ability to
capture favorable investment timing and opportunities. From a broader perspective, the
D/FW Lakes Hilton repositioning strategy was aligned with Yarmouth's overall
investment strategy and increased the company's external competitive position.
Chapter Four - Case Study: Fairfield Inn Scottsdale
4.1
Background
The 218-room Fairfield Inn was acquired by Bristol Hotel Company in late 1994 as
part of a portfolio purchase of United Inn Inc. The purchase, which closed in January 1995,
included more than 10,000 rooms in properties located in Texas, Georgia, Mississippi,
Arizona, California and Colorado. The purchase price for the portfolio was $67 million.
The Fairfield Inn is approximately 25 years old.
Prior to Bristol's purchase, it went
through two franchises: Holiday Inn followed by Howard Johnson. The hotel is located in
downtown Scottsdale, Arizona.
The property had suffered from severe deferred
maintenance and operation neglect, and had performed poorly. After Bristol took over
ownership, it conducted a $4.7 million (approximately $21,000 per room) overhaul of the
hotel. The renovations took place in 1996 between June and August, and the hotel was
closed during that period.
4.2
Bristol Hotel Company
Bristol Hotel Company, formerly known as Harvey Hotel Company, owns and
operates over 120 mid-priced to upscale hotels throughout the continental United States.
The company gained most of its portfolio through acquisitions.
In mid 1990, Bristol
acquired 60 company-owned and managed Holiday Inn hotels from Bass PLC of the
United Kingdom for $665 million. Bristol also acquired Omaha Hotels, Inc. (transaction
pending to complete by the second quarter of 1998), which owns and operates 89 Crowne
Plaza and Holiday Inn properties. Bristol is the largest franchisee of Holiday Hospitality,
and specializes in redeveloping older properties.
By the year 2000, Bristol will have
invested over $400 million in hotel redevelopment.
In March 1998, Bristol Hotel Company announced a merger with FelCor Suite
Hotels, a real estate investment trust (REIT) focusing on upscale, full-service hotels and
suites. The merger calls for all real estate assets owned by Bristol to be acquired by
FelCor and for the creation of a new operating company, Bristol Hotel Resorts, Inc. ("New
Bristol"), to manage properties owned by FelCor.
The agreement, which is pending
approval, would create the largest non-paired hotel REIT and the largest independent hotel
operating company.
As the owner and operator, Bristol brought a tremendous amount of operation
expertise to the Fairfield Inn and improved the property's performance in a short time.
Bristol also provided substantial capital to support the level of renovations required for the
property's desired market position. These resources are valuable to the hotel and critical to
enhancing the property's competitiveness and economic life.
4.3
Repositioning Strategy
The Fairfield Inn transformed from a low-end economy, full-service hotel to a
upper-end, limited-service property with extended facilities. Due to the property's poor
condition prior to repositioning, the hotel was performing well below market. With new
properties entering the market, the erosion of market share at the Fairfield Inn was
expected to continue and the hotel would eventually be displaced.
The repositioning
opportunity was to improve the hotel's condition and change its affiliate with a brand that
is well received in the upper-economy market.
This case study will examine the feasibility of the strategy, based on the Fairfield
Inn's market share and competitive position in respect to the market's historic and future
conditions, such as hotel demand and supply. The analysis will focus on a quantitative
evaluation of the strategy for the period between 1992 and 2000. Data prior to 1997
reflects actual figures provided by Bristol Hotel. Data after 1997 includes projections
based on Bristol's estimations and on market trends.
4.4
Competitive Market Profile
The Fairfield Inn is located in downtown Scottsdale.
Scottsdale has been
undergoing tremendous growth in the past few years and is projected to become one the
largest suburban markets in the greater Phoenix area.
Scottsdale attracts commercial
businesses, as well as tourists, due to the warm weather and vacation facilities.
There are 12 hotels considered competitive to the Fairfield Inn, three of which did
not open until November 1997. With the exception of a Holiday Inn, all of the hotels are
limited service properties, i.e., without meeting space and no on-site food and beverage
facilities. These 12 hotels are considered competitive due to their location, property type,
room rate and brand affiliation. This market captures economy to mid-priced properties
that typically attract price-conscious transient business and leisure travelers. The market is
seasonal, with the highest occupancies reaching the upper 90-percent between late winter
and early spring, and the lowest occupancies during the hot summer months. A list of
competitive properties is illustrated in Exhibit 15.
Exhibit 15: Competitive Set
218 Rooms
Subject Fairfield Inn Scottsdale
289
Ramada Valley Ho
206
Holiday Inn Scottsdale Mall
167
Days Inn Fashion Square
188
Safari Resort
133
Fairfield Inn Scottsdale
132
Hampton Inn Scottsdale
60
Scottsdale
Comfort Inn Suites
124
Hampton Inn Old Town
126
Homewood Suites
150
Sierra Suites (opened Nov 1997)
150
Fairfield Suites (opened Nov 1997)
172
Quality Inn (opened Nov 1997)
2,115
Source: Bristol Hotel Company
From 1992 to 1997, the competitive set experienced a 7.5 percent (annually
compounded) increase in room supply; most of the additions took place between 1995 and
1997. By the end of 1998, the market is expected to have experienced a 22.8 percent
growth in room supply. No additional competitive supply is expected thereafter.
Hotel demand from 1992 to 1997 increased at an annually compounded 9.4
percent.
For 1998, hotel demand is expected to increase 16.0 percent, as a result of
induced demand generated by new supply.
With occupancies during peak seasons
reaching over 90 percent, demand is likely to be turned away. New supply would capture
this demand and expand the market size. Additionally, demand that was previously not
marketed, such as families requiring suites, would be attracted to the market by the new
products. On a percentage basis, hotel demand increased at a rate faster than supply from
1992 to 1997, but it is expected to slow down in 1998, reflecting the market's expanded
supply base. Concern about new supply entering the market is estimated to pressure
demand growth at between 3.8 and 2.5 percent in 1999 and 2000, respectively.
The competitive set experienced steady increases in room rate from 1992 to 1997,
reflecting a growing market, and new suite and renovated products in the market. Room
rate is expected to continue to increase in 1998 and through year 2000. However, again,
the concern about new supply is expected to pressure market room rate. As such, growth in
room rate is estimated to reduce to between one and two percent in 1999 and 2000.
Revenue per available room for the competitive market, according to the
competitive set's occupancy and room rate, yielded an annual compounded growth rate of
9.5 percent, from $31.05 in 1992 to $48.85 in 1997. The impact of slower growth in
occupancy is expected to pressure RevPAR to decline to an annual 1.0 percent increase in
1998.
However, as new properties are absorbed and occupancy stabilizes, RevPAR is
projected to regain growth at rates between 4.0 and 5.0 percent in 1999 and 2000. A
summary of the competitive set's performance is illustrated in Exhibit 16.
Exhibit 16: Competitive Set Performance
Occupancy
%
% Change
($)
($)
% Change
$31.05
$35.24
$38.22
$43.03
$46.12
$48.85
$48.36
$50.81
$52.95
--13.5%
8.4%
12.6%
7.2%
5.9%
-1.0%
5.1%
4.2%
% Change
--$49.06
--63.3%
1992
1.8%
$49.97
7.3%
70.5%
1993
6.9%
$53.43
1.0%
71.5%
1994
12.7%
$60.24
-0.1%
71.4%
1995
11.6%
$67.20
-2.8%
68.6%
1996
5.0%
$70.54
0.6%
69.3%
1997 (est.) *
4.9%
$73.97
-3.9%
65.4%
1998 (est.) **
1.2%
$74.84
2.5%
67.9%
1999 (est.)
2.0%
$76.31
1.5%
69.4%
2000 (est.)
Reflects 472 rooms of new properties opened in November 1997
**
RevPAR
Average Daily Rate
Reflects full opening of new hotels
Source: BristolHotel Company
The data suggests that the market has experienced strong growth since 1993. The
competitive set experienced the highest annualized occupancy of 71.4 percent in 1995.
Due to capacity constraints during peak seasons, the market's occupancy appeared to have
reached its cap at that level. Although new supply has caused a downward pressure on
market occupancy, which has reached an estimated low level of 65.4 percent in 1998, the
actual hotel demand increased from 339,243 to an estimated 504,726 room nights during
the same period.
As new supply entered the market in 1997, the market was able to
capture demand that was previously turned away or not marketed.
As the size of the
market expands, demand keeps up at a similar growth rate. This suggests a market with
has growth potential. Another indication of the market's strength is the rate of absorption.
By the year 2000, market occupancy is projected to stabilize at 69.4 percent, a level similar
to 1997's.
The most significant increase in the competitive market's ADR took place in 1995
and 1996.
This was due to pressured hotel demand during peak seasons and the
availability of improved properties. For instance, the subject Fairfield Inn almost doubled
its room rate after renovations in 1995. Several hotels in the competitive set were also
upgraded during that period. The improvement of hotel conditions, in addition to the
increasing hotel demand, supported a double-digit growth of average room rates. This
growth is not expected to continue as new supply mitigates the impact of rate inflation.
The room rate growth is projected to stabilize to between 1.0 and 2.0 percent in 1999 and
2000.
4.5
Fairfield Inn Competitive Position
A property's competitiveness can be measured by the penetration rate with respect
to the property's fair market share. Fair market share is the proportion of a given hotel's
room count to the total available rooms on the market.
For example, the subject Fairfield
Inn has 218 rooms. This represents a fair market share of 10.3 percent (218 divided by
2,115 rooms).
All factors being equal, the hotel should capture 10.3 percent of the
market's total hotel demand.
Penetration rate is the percentage of a given hotel's captured room nights compared
to its fair share. For instance, the hotel's occupancy in 1996 was 42.4 percent, or 33,700
room nights. The competitive market captured 376,473 room nights in the same year. If
the hotel were performing at its fair market share (at 100%), it would capture 38,776 room
nights (376,473 multiplied by 10.3 percent). However, the hotel's inferior condition and
management put it in a less competitive position, and the hotel only captured 33,700 room
nights. This represents a penetration rate of 86.9 percent.
The following exhibit summarizes the Fairfield Inn's occupancy and penetration
from 1992 to 1997, and projections through the year 2000.
Exhibit 17: Fairfield Inn Occupancy and Penetration
Occupancy Penetration
Occupied
Available
Rooms
Rooms
77.8%
49.3%
39,298
79,788
1992
71.2%
50.2%
39,953
79,570
1993
62.8%
44.9%
35,732
79,570
1994
66.4%
47.5%
37,422
78,840
1995
61.8%
42.4%
33,700
79,484
1996*
98.5%
68.2%
54,292
79,570
1997
100.5%
65.7%
52,303
79,570
1998 (est.)
100.0%
67.9%
54,028
79,570
1999 (est.)
99.0%
68.9%
54,824
79,570
2000 (est.)
* Renovation took place from June to August 1996.
Source: Bristol Hotel Company
It is clear that the property performed well below its fair share until 1997, the first
full year after renovation. Despite the impact of new supply, the repositioned Fairfield Inn
is expected to continue to improve its penetration in 1998.
According to hotel
management, the property's competitive advantages lie in its facilities and location. The
property offers over 2,000 square feet of meeting space and a 150-seat restaurant. Most of
the hotels in the competitive set do not have these facilities. Additionally, the Fairfield Inn
is in close proximity to downtown Scottsdale, which is the center of activities and
attractions for leisure travelers. These resources differentiate the Fairfield Inn from its
competitors. The value created by these resources is reflected positively in the hotel's
occupancy.
Prior to 1997, the Fairfield Inn experienced an average rate higher than the market.
However, when two suite products opened in late 1997, market room rate exceeded the
hotel's, and that trend is expected to continue. The annual rate increase for the market is
expected to be 5.7 percent from 1992 to 2000, and the Fairfield Inn is projected to
experience a slower growth of 2.4 percent. This does not necessarily indicate that the
property is less competitive in room rate.
It only suggests that the market's ADR is
inflated by more expensive suite products. Examining the Fairfield Inn's RevPAR, the
hotel has actually improved (and is expected to continue to improve) its revenue. The
hotel's RevPAR is level with the market after repositioning.
The following exhibit
illustrates the trend of the hotel's average room rate and RevPAR.
Exhibit 18: Fairfield Inn ADR and RevPAR
RevPAR
Hotel
ADR
Hotel
Penetration
RevPAR
Penetration
ADR
93.2%
$29.94
119.8%
$58.75
1992
86.9%
$30.62
122.1%
$60.99
1993
75.7%
$28.95
120.8%
$64.55
1994
70.7%
$30.11
105.3%
$63.43
1995
65.1%
$30.04
105.4%
$70.86
1996 *
92.3%
$45.08
93.7%
$66.07
1997
92.7%
$44.82
92.2%
$68.19
1998 (est.)
92.6%
$47.07
92.6%
$69.33
1999 (est.)
92.3%
$48.88
92.9%
$70.93
2000 (est.)
Source: Bristol Hotel Company
The data presented in the previous paragraphs
suggests that the hotel's
repositioning strategy has been effective in improving the hotel's overall performance.
However, new properties are expected to put pressure on the property and the market.
These market conditions explain the leveling penetration as the property reaches
stabilization.
4.6
Renovations
The Fairfield Inn went through a complete overhaul. At approximately $21,000 per
room, the hotel was "gutted." With the exception of the building structure, every detail
was improved. The hotel maintained the restaurant and meeting space, but replaced the
interior and all soft goods. The hotel did not intend to operate the restaurant, and leased it
to a third-party operator.
The extent of renovations required the hotel to close for
operations. According to Bristol, it was a good decision, and it took advantage of the slow
summer months. The closing also helped the property to re-enter the market with a fresh
identity.
The Fairfield Inn was purchased with the intention of being redeveloped and
renovated. Even so, Bristol conducted projections for an unrenovated property, in order to
compare the impact of the improvements. Bristol projected that if the property remained
unrenovated, its occupancy in 1998 would decline to 51.2 percent (78.2 percent
penetration), its ADR would decrease to $55.22 (74.6 percent penetration), and its
RevPAR to $28.27.
The following exhibit illustrates the impact of the planned
renovations at the Fairfield Inn.
Exhibit 19: Estimated Impact of Renovations at the Fairfield Inn Scottsdale
Unrenovated
ADR
Occupancy
1996
1997
1998 (est.)
42.4%
63.1%
51.2%
RevPAR
$70.86
$61.83
$55.22
$30.04
$38.99
$28.25
Occupancy
42.4%
68.2%
65.7%
Renovated
ADR
RevPAR
$70.86
$66.07
$68.19
$30.04
$45.08
$44.82
Source: Bristol Hotel Company
The effectiveness of the improvement can be evaluated by the return rate of
renovation cost. At a total cost of $4.7 million, the internal rate of return on the renovation
was -32.5 percent in January 1997, and -13.6 percent in December 1997. The negative
returns reflect a short build-up period. The difference of returns in 12 months actually
reflects an increment of 18.9 points. By extending the operation period to 1999, the return
on renovation is estimated to reach 5.0 percent. These results suggest the renovation was a
positive placement of investment capital.
4.7
Branding
Fairfield Inn by Marriott is a limited-service product developed by Marriott Hotels
that targets the price-sensitive leisure and transient markets. Fairfield Inns are positioned
in the upper-segment of economy products and differentiate themselves from other brands
by providing quality facilities and strong marketing and management support from
Marriott.
Other economy brands such as Hampton Inn, La Quinta Inn and Holiday Inn
Express, are considered direct competitor to the Fairfield brand. Standard room rates at a
Fairfield Inn range from $45.00 to $65.00. Most of the Fairfield Inns are built according to
prototypes, which reduces the cost of new construction to between $29,000 and $36,000
per room. Fairfield Inns expand primarily through franchise. Marriott plans to expand the
brand to 500 properties by the early 21"t century. There are over 200 Fairfield Inns in the
United States, which provide strong presence and recognition to the brand.
These
marketing qualities are important for the economy segment, since most of the hotel room
nights are booked through a central reservation system (such as a toll free number) and
through walk-ins. Hotels in the economy segment often benefit from high visibility and
easy access from major highways.
Location to area attractions is also an important
marketing factor for most economy hotels.
Prior to being a Fairfield Inn franchise, the subject hotel was affiliated with the
Howard Johnson brand. Howard Johnsons were popular in the 70s, but the brand has since
declined in value. A lack of investment by the company and loose quality control has
caused the brand to deteriorate. The number of Howard Johnson hotels has reduced in the
last ten years and the brand has lost its competitiveness in the market place. All these
factors contribute to Bristol's decision to replace the Howard Johnson brand with a
Fairfield Inn.
Bristol considered other comparable economy brands, but chose Fairfield Inn
because Bristol has a greater familiarity with the Fairfield franchise and operation than
with other brands. The selection process involved assessing all brands that are already
represented in the market and their performances. Typically, an owner would select a
brand that does not have presence in the market to avoid market infringement and
performance impact. However, after evaluating the size of the market and the location of
other Fairfield Inns, Bristol believed the impact would be insignificant.
Bristol also
believed that Fairfield Inns' performance is a strong indication of the chain's ability to
achieve premiums in the market.
Similar to the Fairmont case, the subject Fairfield Inn relied on the brand's clear
market position to establish its own identity. By affiliating with a brand that has high
equity and marketing value, the Fairfield Inn was able to increase its competitiveness,
enhancing the repositioning results.
4.8
Performance Estimates
The following table summarizes the before and after repositioning performance of
the Fairfield Inn, based on information provided by Bristol Hotel.
Exhibit 20: Estimated Performance - Fairfield Inn
Pre-reposition
(1995)
Post-reposition
(1997)
Occupancy
47%
ADR
$63.43
RevPAR
$30.11
68%
$66.07
$45.08
Market Mix
Leisure:
Transient:
Other
Leisure:
Transient:
Other
60 -70%
25-35%
5%
65 -75%
15-25%
10%
The market mix and source of demand did not change significantly as a result of
repositioning.
The hotel was able to command higher rates from the same demand
sources; this suggests that the market is relatively rate insensitive. This is not unusual for
seasonal markets.
During peak seasons, hotels can typically increase rates with little
resistance. This also explains the overall market's annual rate increase of 7.5 percent in
the past five years.
A general investment assessment was conducted based on information collected
during interviews with Bristol personnel, projections based on market trends and estimates
according to industry averages. The results are not necessarily representative of the actual
investment results and/or the objectives of Bristol Hotel. This exercise presents only one
possible result of the hotel's repositioning strategy.
Performance Assumptions
(The assumptions presentedfollowing are based on Trends in the Hotel Industry USA
Edition, 1997 published by PKF Consulting. Each year PKF Consulting surveys over
2,800 hotels concerning operation and financial results.
In addition, some of the
assumptions draw upon information provided by the hotel, and upon reasonable estimates
accordingto market trends.)
(1)
Data from 1995 to 1997 reflects actual operating results.
Data for 1998 and
thereafter are projections.
(2)
PKF Consulting indicated that in its sample set of limited-service hotels belonging
to the rate group over $60.00 experienced an average room rate of $74.13 in 1996.
This same group indicated an EBITDA of 44.5 percent of the total revenue, or
approximately 47 percent of room revenue.
(3)
The Fairfield Inn's EBITDA was 32 percent, 31 percent and 43 percent of room
revenue for 1995, 1996 and 1997, respectively. It is reasonable to assume that the
hotel will improve its profit margin to 45 percent as operation stabilizes.
Investment Assumptions
(The primary source for investment assumptions is the Hotel Investment Outlook 1998, a
biannualinvestment survey published by Landauer Hospitality Group.)
(1)
Landauer Hospitality Group's survey indicated that equity participants in limitedservice hotels have an average holding period of 7.0 years and a terminal
capitalization rate of 11.63 percent. The yield rate for this group is 13.63 percent.
Considering a growing concern about the overbuilding of limited-service hotels, the
capitalization rate for the analysis will be 12.5 percent.
(2)
The hotel was acquired as part of a portfolio, which leads one to believe that the
purchase price per hotel would be lower than what would be purchased
individually. At $67 million for 10,000 rooms, each room costs $6,700. With 218
rooms, the purchase price for the Fairfield Inn was estimated to be $1.46 million
(218 multiplied by $6,700).
Other Assumptions
(1)
The hotel's $4.7 million renovation was spent in 1996.
No major capital
expenditure will be spent on the hotel during the projection period.
(2)
Cash flow is forecasted from 1995 to 2001, seven years after purchase, reflecting
the average holding period for limited-service hotels.
4.9
Estimated Return on Investments
The aforementioned assumptions generate an internal rate of return of 44.4 percent,
which exceeds the industry's average of 13.63 percent. Detailed calculations are presented
in the following exhibit.
Exhibit 21: Fairfield Inn Scottsdale Investment Analysis
Est. Occupancy
Est. ADR
Est. Rooms
Revenue
Est. EBITDA /32%
Rooms Revenue
Est. EBITDA
Initial Investment
1995
1996
1997
1998
1999
2000
2001
47%
42%
68%
66%
68%
69%
69%
$ 63.43
$ 70.86
$ 66.07
$ 68.19
$ 69.33
$ 70.93
$ 72.57
$ 2,373,677
$ 2,387,982
$ 3,587,072
$ 3,566,542
$ 3,745,761
$ 3,888,666
$ 3,978,409
31%
43%
45%
45%
45%
45%
$751,512
$325,113
$ 1,537,292
$ 1,604,944
$ 1,685,593
$ 1,749,900
$ 1,790,284
$ (1,460,600)
$ (4,668,737)
--
--
--
Terminal Value
-
--
--
$ 1,685,593
$ 1,749,900
(12.5% Cap Rate)
Est. Total Cash
Flow
$ (709,088)
Investment Return in Nominal
Term
$ (4,343,624)
$ 1,537,292
$ 1,604,944
$
14,322,273
$ 16,112.557
44.4%
Based on the estimated investment return, the repositioning strategy was financially
feasible. Bristol is a public company, whose company value is assessed by the public
market with a forward-looking mentality. The company's ability to grow is an important
factor in the company's capitalization. As such, in addition to generating positive financial
returns, the repositioning strategy has allowed Bristol to enter a growing market, expand its
portfolio of managed properties and demonstrate its redevelopment abilities. The intrinsic
value created by the Fairfield Inn's repositioning success adds to the company's equity.
Furthermore, the repositioning strategy was aligned with the company's internal and
external investment objectives.
4.10
Conclusions
This case illustrated another successful repositioning strategy that utilized internal
resources and external market forces to create value. This case strongly demonstrated the
impact of renovations and brand association in the repositioning plan.
Although the
market fundamentals were sound, there were concerns of new properties pressuring
occupancy and room rate. With respect to the targeted leisure and transient markets, the
property needed a strong national brand to enhance its marketing appeal.
As the
management at Bristol put it, "...these travelers want a safe, clean and new property..."
Bristol identified the crucial qualities of the market and product, and executed a focused
repositioning plan that was most suitable for the property and competitive environment.
This is another example of the owner capitalizing on his knowledge of the market segment,
as well as of hotel demand and supply trends. The overall financial success of the property
also relied upon the owner/operator's ability to deliver a quality product that recaptured
market share, and making incisive investment decisions in order to enter the market at the
appropriate time.
Chapter Five - Conclusions
5.1
Introduction
A good repositioning strategy addresses a property's strengths and weaknesses, as
well as identifies market opportunities, to create competitive advantage and generate
desirable results. Repositioning is intended to provide a second chance for properties that
are either in distress or stand to lose market share, and to increase their economic and
physical life. Repositioning has a unique quality in that its objective is to "re-do," or start
over. The challenge is to identify the key resources to focus, change and/or improve that
will maximize value, given the constraints of time, budget, market conditions, operator's
abilities, and owners' expectations.
A sound strategy involves executing a number of actions and decisions. It is the
aggregate of these actions that contributes to the overall improvement of a property's
competitiveness.
However, a sound strategy may steer a property to the desired market
position, yet not yield the highest financial return. The owner must prioritize investment
objectives and evaluate how these objectives affect the overall direction and results of the
repositioning strategy.
All of the cases studied in this thesis took place in the mid-1990s. The hotel market
during this period was on the road to recovery, which provided good economic
fundamentals to support even marginal repositioning strategies. As such, it was not easy to
isolate the real impact of the strategy from the impact induced by economic factors. One
way to measure a hotel's repositioned success is to compare its performance with the
competitive market. In all three cases, the hotel performed at least at a par with the market.
This suggests that each repositioning strategy was successful, although to various degrees.
Despite the fact that the studied properties differed in location, product type,
pricing and market orientation, they share common characteristics in their repositioning
plans. This section highlights and compares the effectiveness of each strategy. It will also
revisit some of the issues raised in the first chapter, and examine any validation to the
general theory of strategy as relates to the cases.
5.2
How does ownership type affect a repositioning strategy?
Whether a hotel is owned by a hotel chain or a private investor, the primary
objective of repositioning is to generate positive investment returns and extend the hotel's
economic life. To the extent that the type of ownership affects the owner's approach,
ability and execution of a strategy to meet his investment objectives, the owner should
examine and exploit the assets and limitations that are inherent in the ownership.
In the Fairmont case, the hotel is owned by a private partnership whose intention is
to own and operate luxury hotels. The owner has long-term and extended objectives to
build and manage the Fairmont brand as well as the hotel. The owner was interested in
changing the property's entire culture so that was consistent with the owner's overall
business strategy. The repositioning and investment strategy of the Fairmont Copley Plaza
carried duel objectives. As a private hotel owner and operator, Fairmont had flexibility in
executing the management plans, renovation programs and disposition decisions.
At the time of repositioning, the Fairfield Inn was owned by a publicly-held hotel
owner/operator, whose intention was to retain long-term management and ownership of the
property as well. As a public company, Bristol had easier access to capital than most
privately-held entities, which provided valuable resources for quality renovations. In turn,
the company's performance was closely monitored and evaluated by public investors.
Since Bristol was building a reputation as a hotel operator, but not a brand like the
Fairmont, Bristol had the option of selecting the most suitable brand for the hotel. The
repositioning strategy of the Fairfield Inn clearly indicated Bristol's focus on generating
positive results in a timely manner.
The D/FW Lakes Hilton was owned by a private pension fund that did not operate
hotels. Like many institutional owners, Yarmouth focused on maximizing financial returns
by turning the property around and disposing of it at an optimal market price. It also had a
shorter holding period than the other two types of owners.
Yarmouth's repositioning
strategy, such as executing renovations immediately after purchase, reflected these
objectives.
As suggested in Chapter one, although ownership structures may not affect the
effectiveness of a repositioning strategy, ownership structures appear to impact the owner's
approach and objectives. The type of ownership also offers a number of options that, if
exercised, can add value to the outcome of the strategy. For instance, institutional owners
have the option of hiring third-party operators who bring in expertise that does not exist in
an owner/operator arrangement. An owner/operator who does not have a specific brand
affiliation also has the option of selecting the most appropriate franchise to enhance the
property's marketability.
The relationship between the type of ownership and these
options is summarized in Exhibit 22. Owners should examine their options and the
options' values when deciding on a repositioning approach.
Exhibit 22
Private Hotel
Company
(Same Owner/
Operator/Brand)
Fairmont Hotel
Company
(Fairmont
Copley Plaza)
Public Hotel
Company
(Same Owner/
Operator/Brand)
Private Hotel
Owner and
Operator
Public Hotel
Owner and
Operator
Bristol Hotel
Company
(Fairfield Inn
Scottsdale)
Least Options
5.3
Private or Public
Hotel Owner
The Yarmouth
Group
(D/FW Lakes
Hilton)
Most Options
How does branding affect a repositioning strategy?
A brand that represents a clear product image, price category, and customer
recognition can not only facilitate a property's positioning, but also serve as the focal point
of the strategy. As seen in the Fairmont case, the repositioning strategy was based on the
Fairmont's upscale brand recognition, which gave the property instant recognition in the
community. Hotels associated with the brand are known to be historic properties or to
have an upscale appeal. Customers visiting the Fairmont in Boston expect the same level
of service and quality of facilities as they do at other Fairmont properties. The brand name
made an easy entry for the hotel into the upscale market. On the other hand, it also created
expectations from customers that the hotel had to fulfill. If the hotel lagged in providing
the level of quality consistent with its sister properties, the chain would risk its reputation.
The brand's equity can be enhanced or damaged by every hotel in operation. If the brand
is part of the owner's assets, he should evaluate the possible risks and benefits that a
repositioning strategy can generate to a brand.
In the Fairfield case, the hotel needed a strong brand to compete and penetrate the
limited-service upper economy segment. A non-branded facility for this segment is often
viewed negatively as an independent property. The Fairfield Inn by Marriott brand creates
immediate recognition for the property and access to a national reservation network and
quality marketing and management support. These factors add to the value of the property
and enable it to gain advantages over its competitors.
In this case, branding was essential
to the repositioning strategy.
However, brand recognition is only important if the target market values this
attribute. In the D/FW Lakes Hilton case, for instance, since most conference businesses
are booked through direct sale, branding did not play an important role in the repositioning
strategy. The owner had considered operating the hotel with no brand affiliation, which is
consistent with other Dolce-managed hotels.
franchise because of contractual reasons.
However, the owner kept the Hilton
Using brands to position a property should be used with caution. Branding is not
effective in all market segments. In addition, brand recognition and expectations from
customers associated with brands can work for and against a property's image and
marketing.
Owners should first decide if the targeted markets require branding to be
competitive. A hotel that has few unique characteristics is likely to benefit from branding
to increase marketability. This explains why many limited-service properties are chainaffiliated.
If branding is determined to be necessary, the owner should assess the
effectiveness and the cost/value relationship of each brand before signing up. Owners can
obtain reports that provide ratings and market share analysis to compare the efficiency of
each hotel brand.
Owners can also request booking reports to determine if central
reservations and sales efforts generate sufficient business to justify the cost of chain
affiliation.
5.4
How do market forces impact a repositioning strategy?
Market dynamics are crucial to the success of a repositioning plan. At the macro
and micro levels, economic factors, hotel supply and room-night demand provide the
fundamentals for hotels' performances.
Owners must recognize what is driving hotel
demand and the outlook for the market. As one operator commented, "... sometimes,
owners are too ego-driven ... they think they can make a difference and overlook the
market's performance."
More importantly, owners must recognize where the opportunities are in a growing
market.
Some industry experts believe that it is easier to identity potential in a down
cycle. Disparity between supply and demand is one indication of market opportunities.
The Yarmouth Group saw the potential for a conference hotel based on a overbuilt
transient market in North Dallas and an under-served conference market in Texas. By
repositioning the D/FW Lake Hilton as a conference center, the property differentiated
itself from the transient competitors. It also created and captured new market segments.
Since the hotel's occupancy was already reaching capacity, the hotel's opportunity was to
increase overall revenue by improving room rate and operations. The hotel was successful
in these ventures.
On the other hand, the Fairfield Inn entered a market that was experiencing
pressure from growing limited-service products, as indicated in the projected RevPAR
growth rate. The opportunity in that market was to provide a quality product that allowed
it to compete effectively.
While the repositioned Fairfield Inn was able to attract new
demand to the market, it was competing at all levels with the existing and new supply. As
opposed to expanding the market, the Fairfield Inn focused its repositioning strategy on
recapturing its deteriorating market share.
The Fairmont case was similar to the Fairfield Inn. The luxury market already
existed and demand was exceeding supply by a large margin as assessed by Fairmont. The
Fairmont hotel did not create new demand. Market statistics suggested steady demand in
the luxury segment, which presented a window of opportunity for Fairmont.
New
properties entering the market are likely to pressure the full-service market. If the
property's penetration to the upper-segment was not secure, its performance could be
threatened in the coming years.
It is without dispute that economic fundamentals are crucial to the success of a
repositioning strategy.
Although good economic times provides certain levels of hotel
demand, it does not guarantee repositioning success. Each hotel segment reacts to market
cycles differently. As such, before repositioning, the owner should assess the viability of
the product by examining the sources and depth of demand. If the market is overbuilt or if
demand is slowing down, any repositioning strategy should proceed with caution. If the
Fairmont were located in a city that could not support three luxury properties, i.e., if the
luxury market were saturated, the hotel would have difficulties improving its performance,
regardless of a strong brand and management. Sometimes the best decision is to wait until
the market shows signs of growth.
Owners should ask: What is driving demand? More importantly, owners should
ask: What is driving demand for the segment that the new hotel is targeting? For example,
improved local employment does not directly translate into increased local tourist demand.
If the repositioning strategy of a leisure hotel focuses only on commercial or business
growth, it may overestimate the market's tourist potentials. Owners should conduct two
market studies: one for the hotel in the "as is" state without repositioning; and the other in
the "as repositioned" state. In addition to considering market conditions for the existing
hotel, performances of the "new" competitive market should also be studied. Quantitative
analyses of historic and projected market performance, similar to the one discussed in the
Fairfield Inn case, should be compared.
The hotel's estimated performance based on
market share and penetration in both scenarios would provide good indications of the
market trend, and aid in decision making.
In addition to economic factors, a property's repositioning strategy should also take
into consideration the hotel's competitive strengths and weaknesses, such as location and
facilities. If the D/FW Lakes Hilton had less meeting space, positioning it as a conference
center might not have been an optimal decision. Its highest and best use might be to
remain as a transient hotel.
5.5
How does management affect a repositioning strategy?
For any good strategy to generate desirable results, it needs good execution and
delivery.
Competent management is essential. More crucial is competent management
that is appropriate for the targeted market segment. Fairmont's management illustrated
good understanding of the upscale market, and it was able to devise proper action plans,
involving all levels, that would promote a product for the market. Similarly, the Fairfield
Inn example displayed Bristol's efficient management and knowledge of the mid-priced
market. The D/FW Lakes Hilton clearly demonstrated Dolce's strength in the conference
market, which was the main driving force of the property's operation success.
All these
cases suggest that good management was a pertinent part of the repositioning strategies.
Identifying the right match of product and management is often a daunting task.
Owners should decide if the existing management is proper for the "new" hotel. Is the
existing management able to deliver the "new" product and capture its market share? A
skilled economy-hotel operator may be unable to manage upscale properties.
Owners
should isolate the causes of problems experienced by the property, and determine if
management was a part of the problem. If management was incompetent, it is necessary to
replace the management staff. Once an owner decides to change management, he needs to
determine how much management should be replaced.
A complete turnover of
management staff can be disruptive to operations and can generate negative results. Local
expertise can be valuable during transitional times.
Owners who are also operators should be cautioned not to manage based on the
status quo. If in-house management is not appropriate for the repositioned property, it is
necessary to hire third-party operators or make management adjustments. These decisions
encompass broad operation issues and the owner's overall business strategy, which should
be addressed prior to finalizing an acquisition.
5.6
Product Knowledge
The three cases demonstrated that owners and operators' keen knowledge of the
product and market abilities is crucial in the repositioning strategy. In the Fairmont case,
the owner/operator made a priority of upgrading the public's perception of the hotel by
targeting local elite circles and hosting social events. Although these marketing efforts
did not generate substantial room sales, they helped create a posh image for the hotel,
which is important for penetrating the upscale market. The Fairfield Inn, on the other
hand, is a limited-service property, which promotes value. The owner focused on the
economy brand's marketability to attract business. Fairmont's extensive public relations
campaign would have been inappropriate for the Fairfield Inn.
For the D/FW Lakes
Hilton, the owner did not focus on branding, knowing it was not the best approach to
capture conference demand.
Instead, the owner selected an experienced conference
operator. All of these strategies exemplified the owners and operators' understanding of
the respective products and market segments. If any of these strategies had exchanged
places, the outcome would likely have been less optimal.
5.7
What is the right price and how much to renovate?
What should the purchase price of a property reflect? The "as is" condition or "as
repositioned" value? There is no consistent practice in the industry. Even the Dictionary
of Real Estate Appraisal suggests two definitions of value: "(1)The monetary worth of a
property, good, or service to buyers and sellers at a given time; (2)The present worth of the
future benefits that accrue to real property ownership."
In essence, the value of the
property reflects what it is worth to the buyer and seller, and the circumstances of the sale.
At $174,000 per room, the Fairmont hotel was acquired close to the "as repositioned" price
of an upscale hotel.
On the other hand, the D/FW Lakes Hilton's purchase price of
$111,000 suggested a value closer to its pre-repositioned condition. (The Fairfield Inn was
purchased as part of a portfolio. Therefore, it is difficult to compare.) Purchase price is
only an investor's cost of entry, and it does not predict the prospect of the investment or
the overall return. However, the purchase price often has implications for the renovation
budget. A lower purchase price often allows the owner to spend more on renovations,
which may have a bigger impact on repositioning results.
100
Renovation is often an integral part of repositioning.
increases with the property's age.
The need for renovations
The Fairmont spent approximately $10 million to
upgrade the hotel, the D/FW Lakes Hilton spent about $8 million, and the Fairfield Inn
invested $4.7 million. At a per room basis, the renovation budgets for these properties
were very similar, at $26,000, $20,000, and $21,000 per room, respectively.
One may
suspect that, since the Fairmont was the oldest property, it would require a larger budget
for improvement. If the renovation budget is adjusted to the property's age, it appears that
the Fairfield Inn spent the most on renovations and the Fairmont spent the least.
More important than the size of the renovation budget is the effectiveness of the
money spent in achieving desirable repositioning results. In two of the cases, the property
moved away from the original market position and property type to some degrees (the
exception was the Fairfield Inn). One way to measure the effectiveness is to compare the
property's pre-and post-renovation value to the cost of renovations.
A summary of
assumptions for estimating the value and returns on renovations is illustrated in Exhibit 23.
101
Exhibit 23: Summary of Renovation Returns
Fairmont Copley Plaza
D/FW Lakes Hilton
1996
1995
11.0%
Fairfield Inn
Property As Unrenovated
Capitalized Year
Cap Rate
Unrenovated EBITDA
Value Unrenovated
*
9.5%
$4,136,217
$43,539,121
1996
12.5%
$751,512
$6,012,096
$1,871,872
$17,017,019
Property As Renovated
Stabilized Year
1999
Cap Rate
9.5%
Stabilized EBITDA
Value as renovated
Difference in Value
Renovation Budget
Return on Renovations
*
Annualized EBITDA
**
Sold price
$7,461,668
$78,543,878
$35,004,757
$10,000,000
51.8%
1998
1998
N/A
$6,983,563
$17,010,000
$82,982,981
$8,000,000
$1,604,944
$12,839,550
$6,827,454
$4,668,737
118.0%
20.9%
A higher return rate suggests better investment results.
12.5%
However, examining
renovation returns reveals only partial results of the repositioning effort. As stated earlier,
the renovation budget is typically associated with the purchase price. If an owner pays too
much for the property, he may not be able to afford a renovation budget complementary to
the property's desired position. For instance, the Fairfield Inn spent over $21,000 per
room in renovation. Total construction for a new Fairfield Inn costs between $28,000 and
$35,000 per room. This shows that renovations at the Fairfield Inn were extensive, and the
renovation budget made up a substantial portion of the total acquisition cost. In such an
instance, simply comparing the returns on renovations would be unfair.
As such, a comparison of the total investment returns was conducted. The total
investment return, or ROI, took into consideration the purchase price, renovation costs,
interim cash flow and terminal value. Based on the assumptions detailed in each case, the
102
ROI suggests that the Fairfield Inn would generate the highest returns on capital, followed
by the D/FW Lake Hilton and then the Fairmont Copley Plaza. The following exhibit
summarizes the results.
Exhibit 24: Summary of ROI
Est. Acquisition Cost
Est. Terminal Value
Est. ROI
Fairmont Copley Plaza
D/FW Lakes Hilton
Fairfield Inn
$70,000,000
$85,827,016
12.5%
$52,000,000
$103,000,000
34.5%
$6,129,337
$14,322,273
44.4%
When determining how much to invest, owners should consider the total purchase
price and the cost of renovations. The combined cost should be compared to the cost of
constructing a new hotel that is comparable to the repositioned property. If the cost to
reposition exceeds that of new construction, it says that the owner is overpaying for the
asset.
The analyses presented provide only a few ways to assess the effectiveness of
capital deployment.
The overall financial success should be compared to the owner's
internal investment objectives and risk levels.
5.8
Conclusions
The three cases included in the thesis provide only a small sample of market
repositioning.
From the resource-based view, all these cases were able to construct a
sound strategy and create value based on the entity's tangible and intangible sources and
organizational capabilities. The ultimate degree of success of each strategy remains to be
judged by the respective owners and operators, each strategy fulfilled the important
103
purposes of externally positioning the property and firm in relation to their competitors,
and internally aligning the property and firm's activities and investment.
104
Appendix: Recent Performance of the US Hotel Market
Overbuilding in the mid-late 80s and the U.S. economic downturn in the early
90s contributed to the low occupancy and average daily rate for the US hotel market in
the last decade.
Hotel occupancy reached its lowest level in 1992, but has since
recovered, and reached its peak in 1996. Mirroring the development trend in the 80s,
the momentum of new supply, particularly in the limited hotel sector, is putting
pressure on occupancy.
Although hotel demand has been increasing since 1987,
occupancy did not improve until 1992, when the new supply was absorbed. Data from
Smith Travel Research indicates that industry room supply increased 3.4 percent in
1997, compared to 2.5 percent in demand growth for the same period. As a result, the
U.S. hotel market in 1997 experienced a 0.8 percent decline to 64.5 percent from that
of a year ago. As the development trend continues, new supply will continue to enter
the market in the next five years. Reflecting this trend, U.S. hotel occupancies for
1998 and 1999 are expected to experience a continued decline, as illustrated in the
following exhibit.
STR*
Segment
Budget
Economy
Midprice
Upscale
Luxury
Exhibit 25: US Hotel Occupancy
1998
1997
Occupancy (est.)
Occupancy
58.5%
59.6%
59.1%
60.1%
63.5%
64.4%
66.1%
67.1%
73.4%
73.7%
* Smith Travel Research
Source: Coopersand Lybrand
105
1999
Occupancy (est.)
58.2%
58.0%
62.6%
65.0%
73.1%
Although occupancy is experiencing stagnation, the average daily rate is
continuing to rise. For five consecutive years, ADR in the United States experienced
steady increases. In 1997, the US hotel market's ADR increased 6 percent to $75.16.
Revenue per available room reached $48.50 in 1997, a more than five percent increase
from that of a year ago.
Industry statistics suggest that the U.S. hotel industry has fully recovered from
the last downturn cycle.
With occupancy and ADR increases, new supplies are
attracted to the market. Growth in the limited-service sector has already shown signs
of slowing down due to the development boom that started in the mid 90s.
The
development of full-service hotels has also started to pick up in the since 1997.
Looking forward, new supply is likely to put pressure on hotel performance if the U.S.
economy did sustain its growth levels. This could be create potential problems for less
competitive properties and put them into financial distress.
106
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27, 1997, p 1 8
Bohan, Gregory T. and Cahill, Michael, 1992. "Determining the Feasibility of Hotel
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