Hotel Online  Special Report
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The Global Hospitality Advisor

Outlook 2001: 
A Roundtable Discussion


January 2001 - The editors of The Global Hospitality Advisor recently spoke with several leaders in the hospitality industry, exploring their outlook for the industry in the upcoming year and asking them to share their predictions with our readers. This annual roundtable issue of the Advisor features our discussion with:
 
Jim Brown
Rosewood Hotels & Resorts, LLC President & CEO
Rosewood Hotels & Resorts is an international hotel management company currently operating 12 hotels and resorts with another seven signed management agreements for properties currently under construction, located in 10 different countries around the world.
Jim Butler
Jeffer, Mangels, Butler & Marmaro LLP
Chairman Global Hospitality Group(r)
JMBM has the premier hospitality practice in a full-service law firm, with more than $20 billion of hospitality experience, ranging from individual properties to billion-dollar portfolios. JMBM represents owners, investors, operators and lenders.
Laurence S. Geller
Strategic Hotel Capital, LLC
President & CEO
SHC is a multi-national owner and active asset manager of upscale and luxury hotels subject to management agreements by it's "preferred operators." Currently, SHC has in excess of 30 properties with approximately 13,500 rooms, revenues of approximately $1 billion and asset values of approximately $3.5 billion.
Charles A. Muller
CNL Hospitality Group
President & COO
CNL Hospitality Group is the manager and advisor for hotel investment and development activities to CNL Financial Group, a national real estate investment, development and finance company. CNL currently owns 31 hotels worth more than $850 million, five hotels that are pending acquisition at the completion of development, plus three hotels under development.
Jay Witzel
Radisson Hotels Worldwide
President & COO
Radisson Hotels & Resorts, one of the world's leading full service hotel companies, operates, manages and franchises more than 416 hotels, representing nearly 100,000 guest rooms in 56 countries.

Global Hospitality Advisor: What do you see as the greatest business opportunities in the hospitality industry today?

Jim Brown: Some of the biggest opportunities are in newly developing areas of the world. At the ultra-luxury level, opportunities abound for hotels and resorts where services can be provided at a very high level and the destinations are unique enough to create a "sense of place." These are not flagged hotels but rather properties that have the character to create their own brand value and therefore equity in the owner's interest.

Charlie Muller: Continued opportunity for hotel owners lies in creating increased value for existing properties through partnerships with hotel operating companies where an increase in both revenues and expenses enhances both the operators' and the owners' interests in the short and long term. Although the hotel industry's increased efficiencies have served both interests with profits climbing every year, with softening growth, owners and operators will have to work harder in cooperation to maintain current investment return levels while protecting long term value.

Jay Witzel: I'd say that there are three key opportunities today: First, taking leadership in the new e-commerce frontier to market directly to our customers and other businesses and foster communications among key customer groups ("B2C," "B2B," and "C2C"); Second, using database technology to manage business and customize services to recognize and reward best guests, as we are doing with our Radisson Gold Rewards loyalty program; and, third, buying existing hotels which have been under-marketed or under-branded that are now for sale because of industry consolidation.

Laurence Geller: There are no "greatest opportunities," no easy "home runs." For the time being, this will be a period of consistently "hitting singles." Significant opportunities include sophisticated data-based, focused direct target marketing and quality-controlled labor management systems with emphasis on cross utilization of personnel. Other opportunities lie with increased levels of consumer marketing at the hotel and corporate levels. Growth opportunities are few in the U.S. Only those markets that are (a) undersupplied and (b) have significant barriers to entry should be considered. Europe presents significant opportunities. 

Jim Butler: The party is definitely not over, but many will find it a lot less fun. More effort will be required to find and capture opportunities. I agree with Laurence, for example, that anyone contemplating new development will need some aspirin, but the very difficulty of successful development today provides protection against oversupply in the future.

And so it will be with many opportunities - the opportunities for lenders to get a fair reward for modest risk, with dramatically tougher underwriting standards protecting the lenders who understand the industry (or hire people who do). It will be similar for buyers of portfolios and one-off properties - acquiring crown jewels as they become available, filling in holes in a distribution system, expanding into select foreign markets (I happen to like what I see in Latin American business destinations) and helping chains and REITs reorder their priorities.

We also believe that some of the more aggressive hotel loans of the mid- to late-1990s will now go through a workout process, creating interesting opportunities for asset managers, consultants, bankruptcy and workout lawyers, and opportunistic investors.

Global Hospitality Advisor: Charlie, your situation is a little different as a REIT, with some capital strategies you've pursued. What particular opportunity is there for CNL? 

Muller: With hotel REIT stock values improved to the point that stock buy-back programs might be slowing down, opportunities to increase income are likely to come through internal growth from improved operations and buying back leases. CNL's greatest business opportunity as an investor and developer will result from its growing relationships with capital sources. The company raised more than $300 million in capital during 1999 and anticipates accessing in excess of $400 million for 2000. In an environment where capital is scarce, this creates a distinct current competitive advantage for our company. 

Global Hospitality Advisor: The other side of the coin for each of you: What are the biggest pitfalls in the hospitality industry? Who will be best positioned to avoid them?

Muller: We see cyclicality and oversupply as continuing issues affecting hotel investments. The company with a strong balance sheet and low leverage will have a hedge against a downturn, and the company with capital (or access to capital) during an expansion period will be better positioned to take advantage of the up cycles. Over supply, though largely being kept in check today, will continue to be a challenge to hotel properties that are not properly aligned with skillful operators with top-performing brand affiliations and management/sales focus.

Diversification will be another tool that our company uses to manage cyclicality and oversupply, and to maintain investor interest in our programs. As a long-term investor, we believe that a diverse portfolio of premium limited-service properties and full-service hotels and resorts with a good geographic mix, plus relationships with several strong and capable operating/tenant partners are key. 

Geller: The biggest pitfalls are generally decisions based on inadequate research and intuitive, experiential, instinctive or "copycat" thinking rather than logic-based empirical processes and systems. We also get into trouble listening to too many short-term, often headline-grabbing, prognostications of the industry pundits, consultants and analysts rather than thinking deeply for ourselves.

The major chains are not building up the sophisticated infrastructure to lead the industry. Such infrastructure could include economists, consumer researchers (for both macro- and hotel-specific areas) and expertise in areas where the hoteliers of today have limited experience - namely outsourcing or sophisticated restaurant-experienced food and beverage, retailing, merchandising, parking and data mining. 

It is also dangerous to allow stock market analysts to dictate policies to the public companies based on short-term earnings growth needs. It is just as bad to create artificially induced supply to satisfy the analysts' insatiable growth appetites. Such supply can be induced by the chains' financial contributions (by myriad devices) to induce owners to develop and build. Such contributions could be cynically construed to be based not on a "ringing endorsement" for the project, but simply on the value to the chain of the fees derived from long-term agreements. 

Butler: I think Charlie is right on the mark, and Laurence has some deep philosophical insight - even if a little tongue in cheek ... and you never know with Laurence. But even more fundamentally for those coming to the hospitality industry from other real estate or business disciplines is the basic rule we all learn at the beginning - "Hotels are different." Hotels are not "just" real estate - they are the unique operating business intimately associated with a single purpose real estate asset. 

Investors, lenders, and others who would take advantage of opportunities in our industry need to team up with industry players or get them on their team if they are to avoid failure. Unless you work in the area every day, how do you know what "market" terms are for a hotel management or franchise agreement that might add or take away millions of dollars of value? How do you know how to document a hotel loan and what to do with management subordination, liquor license collateral, and "rents vs. accounts" issues? How do you do your acquisition due diligence on the operating business as well as the real estate asset?

Global Hospitality Advisor: Jim and Jay, do you see things differently at your privately held companies? 

Brown: The biggest pitfalls have not changed in decades. If you overbuild in a segment or area, there will eventually be a downturn. The best position against this are those properties where the barriers to entry are very high either 
by lack of opportunity or price.

Witzel: The revolution caused by a shift to e-commerce will leave behind those who fail to adapt to this new environment. E-commerce is forcing the commoditization of the hotel industry and is challenging the value of brands. Survival will require substantial and continuing investment in new technology to become a proficient and adept player in the emerging channels of distribution.

Global Hospitality Advisor: Jay, your response seems unique. What is Radisson doing about the revolution?

Witzel: A key focus of Radisson's growth and success has been its industry - leading business delivery systems, which embrace all of the opportunities of marketing with technology. The next generation of success will be driven by expanding the reach of the brand throughout the world of e-commerce and the Internet. The company is also focused on developing industry-leading customer relationship programs and the cornerstone of this strategy is the Radisson Gold Points Rewards program. Gold Points is part of a larger Carlson Companies initiative, which is integrated into a new Web site called 24k.com. The connectivity offers unprecedented flexibility and ability to earn and redeem points on- or off-line in real time. Radisson also offers a "new generation" customer-focused, web site. We provide one of the highest levels of field support for our hotels and we help our franchisees maximize results through all the major distribution channels.

Global Hospitality Advisor: Where are we in the "hotel cycle"? What defensive or offensive steps are you taking? What is happening with hotel development?

Witzel: We've come off some of the strongest years in the hotel industry but forecasts show a tightening trend. Funding sources for hotel development are tightening. Access to capital is a critical element of future success. Franchising continues to be viable growth option when you can demonstrate your system's success in generating revenues and profits. 

Geller: The U.S. hotel cycle has clearly peaked. There will be a gradual slowdown in revenue growth and a decline in inflation-adjusted profits as increased selling, labor, energy, insurance and benefits costs erode margins. However, scrutiny of every cost is essential. Far more data-based, focused marketing is key. Increased focus by the brands on the marketing of the individual hotel is needed. Increased scrutiny of room revenue-driving costs is essential. For example, are travel agent costs, direct selling costs, frequent guest program costs artificially driving revenues without analyzing the net positive or negative impact to profitability.

Muller:  We are having a "soft landing" in the industry with 2000 turning out to be a better year in RevPAR growth than what was anticipated. I believe that the industry is nearing the end of a minor downturn. The fundamentals have not been severely impaired, and, as a long-term investor, we will follow the overall industry trends but, by paying attention to our investor base, we will maintain a steady access to capital to take advantage of available opportunities.

Butler: There is no single hotel cycle for the U.S. Each hotel has its own cycle - by product segment, geographic market and other factors. But what would otherwise be a hotel's cycle can be dramatically affected by the overall economy. Sure, watch key indicators like supply and demand growth, ADR and RevPAR, but watch GDP too. Tell me where the economy is going, and I'll tell you where we will be in the hotel cycle. That being said, I think the long-term or strategic investor knows there is no bad time to buy the right property in the right location with significant barriers to entry. 

Brown: What cycle? This sounds like "old rules" to me! If typical cycles still prevailed, we should be on the way down now. We see no signs of this and, although there will likely be some minor adjustments in some markets, a general downturn is not on our horizon. We are continuing to seek both development opportunities (currently working on 17 real projects) and existing properties that fit our collection. The only issue that we see currently is a shortage of construction financing and we believe that there are solutions for that.

Global Hospitality Advisor: How do you optimize your profits from here?

Brown: Clearly technology will be a key element but generally the cost savings involved are "back-of-house" elements. Technology in the guest areas should relate to services to the customer and not "cost saving" devices. Changing and updating amenities along with innovative interior design will also drive profits overall. Of course, especially in the ultra luxury markets, customer relation-ships are the absolute highest priority.

Witzel: RevPAR is the key to greater profitability - and you must have the whole organization focused on maximizing this result in all they do. The days of "saving our way to prosperity" are long gone.

Butler: Profitability for whom? Operator? Owner? Lender? Investor? All of your answers are good ones, but they ignore the tension between Operator and Owner, or Lender and Borrower. The key is balance and fairness that lets each of the parties have a fair return. A return by operators to the arrogance of the 1980s, or refusal of owners recognize legitimate concerns of operators will be counterproductive.

Muller: I think that one of the best ways to optimize profits in hotel operations today is to maintain your current customer and employee base. Winning over that new customer or managing through high employee turnover are both costly propositions to hotel owners and operators. 

Geller: Clearly, our attitude is to work harder collaboratively with our operators to: install and execute the most sophisticated profit making systems and processes; 
understand our own hotels' consumers better; and to maximize the yields derived from each square foot of commercial space and from each customer in the hotel in general and in the room in particular. We do not believe in being seduced by technology as an end. It is merely a means to an end and simply a constantly changing enabling tool. We will continue our focused policy of acquisitions and dispositions of those assets that are at the lower quality (market or physical) end of our portfolio and those assets that have, for the most part, maximized (other than 
market growth) their profit potential.

Global Hospitality Advisor: None of you mentioned consolidation as a means to optimize profits, gaining economies of scale. What is your view on "consolidation" in the hospitality industry? Who does consolidation help and who does it hinder? Who are the survivors?

Witzel: Consolidation continues to be an important force in shaping the hotel industry. It is a trend that enhances the position of the strong brands and challenges the survival of independents. The survivors are global brands who are technologically savvy, strong managers and invest in key assets.

Brown: Consolidation essentially helps those who are in the real estate business as opposed to the management business. There is considerable upside in consolidation for brands, especially those in the public markets and most certainly for publicly-traded management companies. The customer is generally hindered by the recent changes in structures since many of the new owners are not especially customer-oriented. The survivors will be the pure management companies and the hotel owners who have chosen to stay with privately-held management companies and retained ownership of the own brands.

Butler: Consolidation in our industry is not unlike consolidation in banking - it is inevitable, and it continually creates opportunity for small, agile, responsive, entrepreneurial players. 

Muller: Consolidation in any industry is an effect of the cycle of capital availability to that industry. The structure required by the capital markets, be it public or private, will generally dictate what consolidation or de-consolidation occurs in an industry. I believe that the hotel industry will continue to see further consolidation, as companies are easier to understand with an operating or ownership focus. Those chain-operating companies with strong balance sheets will look for significant growth through mergers or acquisitions with brands that provide segment diversification or can be absorbed into a current brand without significant territorial challenges. 

Geller: Further and ongoing consolidation is inevitable as the major organizations continue on the path toward oligopolism in order to dominate markets on a global basis. Consolidation helps the most professional, flexible, well-financed, long term, growth oriented, consumer marketing driven organizations and hurts the weak, inflexible, self-satisfied owners. There will be a mere handful (at best) of global companies that will own multiple brands (often competing with themselves). There will always be smaller brands, niche players and the like. However, their influence and importance will rightly decline. An inevitable result of the consolidation will be the need for a fundamental redefinition of the roles of the individual owners and the major lodging organizations as scale, technology, legal precedent, branding and above all, greed, drive disagreements over: (1) who owns the guest?; (2) who owns the hotel's data?; and (3) are the chains' fees "gross" or "net"?

The basic issues to be redefined are two. What services should these mega - companies provide for the fees they earn? What rights do the "megas" have to earn profits  from any services they provide or by selling to guests in the owners' hotels?
It is important not to forget that the prerogatives of consolidation and scale are not limited to the branded franchising and/or operating companies, but also to the 
real estate owning companies. Therefore, there are not only mega-branded operators/franchisers, but also mega-real estate companies. Thus, the dynamics of our industry are changing from the days of passive, single asset owners to professional lodging multi-asset owners who are active, research oriented and sophisticated. Clearly, the relationship between the branded mega-fee for services organizations and the mega-professional owners and capital providers must change to ensure that adequate consideration and respect are given to the critical mutually symbiotic roles of both types of companies.

Global Hospitality Advisor: Knowing what you know, if you were advising another CEO, what advice would you give?

Butler: Build and maintain your team like your life depends on it. It does!

Geller: I would say:

  • Stay focused on your strengths and the philosophy that made your company successful.
  • Don't look for quick fixes or instant panaceas.
  • Pick the best consumer companies, analyze why they are the best and try to synthesize those concepts into your business.
  • If you're thinking about new development, take two aspirin, lie down and wait for the moment to pass.
  • If you've personally given your best, stand down and let the brightest and freshest person you can find run the company. Remember, it is not about you. It is about the shareholders.
Muller: Focus on the short-term income improvements, but do not take your eye off of long-term value gains. Use this current time of limited access to capital as a period in which you strengthen your relationships with operating partners or capital partners. There are still gains to be made in hotel specific and industry profitability through revenue enhancements and expense controls.

Witzel: Embrace and become a master of the new world of e-commerce and all its complexities. We have entered into a "networked economy," which operates differently than the industrial economy.

Brown: Know your own business, surround yourself with professionals who you trust, give them the authority and tools to succeed, let them make some mistakes, delegate everything you can to them ... then follow-up regularly to test the vision. Enjoy yourself!

The Global Hospitality Group(r) is a registered servicemark of Jeffer, Mangels, Butler & Marmaro LLP

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For more information:
Jeffer, Mangels, Butler & Marmaro LLP
web site: http://www.jmbm.com
Email Jim Butler at [email protected]
Or contact 
Jim Butler at the Firm
 Jeffer, Mangels, Butler & Marmaro LLP
  2121 Avenue of the Stars
 Los Angeles, CA 90067
     Phone: 310-201-3526 
The premier hospitality practice
in a full-service law firm
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Also See: Outlook 2000 - A Roundtable Discussion  / Also: '90s Trends That Didn't Make It - JMBM / December 1999 
Annual Review of the Mexican Lodging Market / JMBM / March 2000 
Kleisner on the  New Wyndham /  Jim Butler Q & A / JMBM / Oct 1999
Robert J. Morse: Millenniumís New President / Interview with GHG Chairman Jim Butler / Nov 2000 
Straight Talk from KPMG's Nardozza / JMBM / Dec 1998 
Special Reports / Jeffer, Mangels, Butler & Marmaro LLP

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