A year ago in this newsletter, we wrote that these were the new deal years for the lodging industry. One of the events that signaled that shift was the merger between Doubletree Hotels and Guest Quarters Suite Hotels Today, the combined entity of Doubletree Hotels Corporation exists as one of the largest, full-service hotel companies in the United States. Nearly 18 months after the merger. The Real Estate Report checked in with Rick Kelleher, formerly the President and CEO of Guest Quarters Suite Hotels, now leading the combined corporation.

Real Estate Report: Doubletree Hotels Corporation was recently formed when Doubletree Hotels and Guest Quarters Suite Hotels combined. Could you provide a brief history of these two companies prior to the merger?

Rick Kelleher: Founded in 1969, Doubletree Hotels was a first-class, full-service hotel chain with a strong regional presence primarily west of the Mississippi. Guest Quarters Suites, founded in 1983, was a first-class, all-suite chain with properties geographically concentrated in the East. Today, following the merger Doubletree Hotels Corporation is a single national hotel brand, whose product offerings include Doubletree Hotels, Doubletree Guest Suites, and Doubletree Club Hotels, a "three-star" limited-service property. Using year-end statistics, the company owns, manages, or franchises a total of 104 hotels with more than 26,500 rooms in 31 states and the District of Columbia. There are 58 first-class, full-service Doubletree Hotels and Doubletree Clubs. With 33 first-class, full-service all-suite hotels in the system. Doubletree Guest Suites is the nations second largest all-suite brand. Doubletree Hotels Corporation also manages 13 other hotels under independent or franchise names.

RER: What were the circumstances or motivations that led to the merger?

Kelleher: The successful partnering of Doubletree Hotels and Guest Quarters is literally a case of the new whole being greater than the sum of the individual parts. The geographic synergy is the first thing that strikes you about the joining of these two companies. The merger immediately gave Doubletree Hotels Corporation a nationwide presence. Doubletree hotels and the former Guest Quarters properties served essentially the same guest profiles with first-class, full-service products. Both had strong management-oriented operators and both were owned by large companies with money to invest in future development.

RER: To what extent have the business operations of the two companies been integrated?

Kelleher: In early 1994. we fully integrated the two companies in Phoenix. Since then, we have knitted the two cultures into one seamless operation. We now have one national sales organization and a single 800-number. and we have consolidated all other operations, which reduced corporate overhead 16 percent in 1994.

RER: Have the two brand names been repositioned?

Kelleher: In February we launched a new branding strategy supported by a $31 million marketing program. Guest Quarters hotels were renamed Doubletree Guest Suites. We also introduced a new logo. If you look closely at the crowns of the two trees, you will see a “G" and a ”Q”, a subtle reference to our Guest Quarters heritage. The response to our new marketing program has been quite positive from our guests, our owners, and our employees.

RER: What new markets is Doubletree currently targeting for growth and expansion? Is international expansion under consideration?

Kelleher: Unlike virtually all of our competitors,. Doubletree’s growth is not generally constrained by proximity issues. In the arena of obtaining hotel management contracts, we are concentrating on the top 50 SMSAs [Sales and Marketing Statistical Areas]. This will assist us in gaining higher visibility with our primary guest, the frequent business traveler. By targeting these major markets, we also can increase the confidence of our guests in the nationwide consistency of our product. Franchising will focus more on secondary markets with proven, quality operators. For the immediate future, Doubletree Hotels Corporation will concentrate its development efforts in the domestic market. Doubletree will approach the international market first by introducing its brands to in-bound international travelers. The company intends to concentrate on expansion within the U.S. and North America before seeking broader international opportunities.

RER: It appears that Doubletree is continuing to franchise and, at the same time, aggressively sign up independent management contracts. .Are these two business directions integral parts of an overall growth strategy for Doubletree? Which direction offers the greatest growth potential for the company?

Kelleher: Actually, both offer excellent potential. On the hotel management side, we have established strategic alliances with three major capital sources that are actively seeking to acquire hotels. We have stepped up our franchising efforts with the recent addition of Gus Boss, one of the industry's most well-regarded experts, to our senior management team. Over the next few years. we anticipate franchises will account for about 30 to 35 percent of the Doubletree system, compared to the current 20 to 25 percent range.

RER: What about owning hotels? Doubletree is frequently talked about as being buyers of hotels. Is it Doubletree's intent to own hotels directly, or is ownership mainly through strategic alliances with financial partners? Under what circumstances will Doubletree make a direct capital investment in hotels?

Kelleher: Doubletree's strategy does not include hotel real estate ownership. As I mentioned, we have formed strategic alliances with three capital groups that have $300 million for hotel acquisitions. Doubletree will make minority investments, primarily for refurbishment, in order to acquire new management contracts. It may, from time to time, acquire a hotel if the economies are very positive for us.

RER: With Wall Street activities slowing down in recent months, is access to fresh investment capital and financing once again a problem for hotel companies?

Kelleher: For Doubletree, access to capital is not a problem. In addition to capital available from our strategic alliances, Doubletree has several million in cash and a $30 million line of credit available. In addition, we think Wall Street remains bullish about the hotel industry, and will continue to be active investors.

RER: The field of luxury, full-service hotel companies in the United States is pretty crowded right now. Along with Doubletree there are many others, such as Hyatt, Marriott, Westin, Omni, Renaissance, Hilton, and Sheraton, all wanting a slice of the pie. Where do you see Doubletree fitting into this group and what is it that differentiates Doubletree from the others?

Kelleher: One of our primary differentiators is our relatively low market penetration. For example, in the greater Chicago market. there are 17 Marriotts, compared to only two Doubletree properties. Supported by our new marketing and franchising programs, Doubletree is the "up and coming" player in this segment. A second differentiation is our people. Doubletree has added significant depth and experience in key senior management positions, and our line employees earn some of the highest guest preference ratings in the industry. A recent consumer magazine ranked our two products alongside our primary competitors, Marriott and Embassy Suites, and ahead of all other competitors in those two segments. Yet another differentiator is our trademarked chocolate chip cookie. When we conducted focus group interviews, we found that participants could not articulate very well the difference between most first-class, full-service brands. The adjectives used to describe them were essentially interchangeable. But, when asked to describe Doubletree, the response overwhelmingly was, "Doubletree is the cookie hotel company." To our guests, the cookie represents the special service given by our employees and creates a reservoir of goodwill and top-of-mind awareness which builds repeat business.

RER: What competitive market forces are most influencing Doubletree's present business plans?

Kelleher: We see continued change in hotel ownership. Some 800 properties changed brand affiliations last year. The primary result is a much more informed and demanding hotel owner who wants to forge new hotel management relationships and earn higher profitability for their hotels. The day of the 20-year no-cut contract is over. Our contracts are heavily slanted toward incentive fees; thus, we are focused on improving owner profits. Over the last four years, we increased our owners' bottom lines by a compound average of 24 percent, one of the best rates in the industry. It’s a win-win situation. If our owner makes money, we profit, too. We think this is healthy for hotel owners and good for management companies. We are a leader in this trend and plan to continue to exploit our advantage of being a low-cost provider of a high, quality product.

RER: What key challenges will Doubletree face over the next few years?

Kelleher: These are exciting times to be a hotelier, especially for Doubletree. We’ve merged two great companies and brands, become a publicly-held company and added depth to our management team. We have an aggressive appetite for growth. When you're on a roll, perhaps the most difficult thing is to stay focused. I'm confident that our co-chairmen, Pete Ueberroth and Dick Ferris, aren't about to take their eyes off the ball.

RER: So much re-engineering rhetoric has been bantered about the lodging industry in recent months. And yet it seems that there really hasn't been any evidence of a hotel company coming up with a truly "breakthrough" strategy that will reshape the future of the industry. What is your vision of the successful, leading-edge hotel company in the year 2000?

Kelleher: We currently see the trend of more strategic relationships between capital sources and hotel management companies. This will have a tremendous impact on hotel management companies and result in considerable consolidation. The breakthrough strategy we have found to be most successful is operating hotels with an owner’s mind-set, attending to his profitability first. Making owners our primary customer has led to higher owner profits and consequently more management contracts for Doubletree, which in turn enhances our long-term profitability. Establishing that “owner - profit - first" culture throughout a company is not as simple as it appears. We believe this unique vision will keep us at the forefront of our industry well beyond the year 2000.

The Real Estate Report is published by KPMG's National Real Estate, Hospitality, and Construction Practice. © 1996 by KPMG Peat Marwick LLP All rights reserved. For additional information email KPMG.

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