Lifestyles of the Rich and Almost Famous: The Boutique Hotel ...
Lifestyles of the Rich and Almost Famous: The Boutique Hotel ...
Lifestyles of the Rich and Almost Famous: The Boutique Hotel ...
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<strong>Lifestyles</strong> <strong>of</strong> <strong>the</strong> <strong>Rich</strong> <strong>and</strong> <strong>Almost</strong> <strong>Famous</strong>:<br />
<strong>The</strong> <strong>Boutique</strong> <strong>Hotel</strong> Phenomenon in <strong>the</strong><br />
United States<br />
High Tech Entrepreneurship <strong>and</strong> Strategy Group Project<br />
Pr<strong>of</strong>essor Ron Adner<br />
Alec Albazzaz<br />
Beth Birnbaum<br />
Daniel Brachfeld<br />
Max Danilov<br />
Oriane Kets de Vries<br />
James Moed
Table <strong>of</strong> Contents<br />
Executive summary.................................................................................................................... 4<br />
Background on <strong>the</strong> hotel industry.............................................................................................. 6<br />
<strong>Hotel</strong> industry economic factors ............................................................................................ 6<br />
<strong>Hotel</strong> industry trends .............................................................................................................. 7<br />
Segmentation <strong>of</strong> <strong>the</strong> market.................................................................................................... 8<br />
Growth <strong>of</strong> br<strong>and</strong>ed hotel chains ........................................................................................... 10<br />
Major players ........................................................................................................................ 10<br />
Chain hotels <strong>and</strong> independents............................................................................................. 10<br />
<strong>Boutique</strong> <strong>Hotel</strong>s: a definition ............................................................................................... 11<br />
<strong>The</strong> evolution <strong>of</strong> <strong>the</strong> boutique hotel..................................................................................... 12<br />
Strategy Analysis <strong>of</strong> <strong>Boutique</strong> <strong>Hotel</strong>s ...................................................................................... 13<br />
Ian Schrager <strong>Hotel</strong>s (ISH) ........................................................................................................ 16<br />
<strong>Hotel</strong> as <strong>The</strong>ater ................................................................................................................... 16<br />
Location............................................................................................................................ 16<br />
Design............................................................................................................................... 16<br />
Experience........................................................................................................................ 17<br />
Restaurants ....................................................................................................................... 18<br />
Marketing ......................................................................................................................... 18<br />
Targeting / Pricing............................................................................................................ 18<br />
Growth Strategy ............................................................................................................... 19<br />
Reaction to Competition....................................................................................................... 19<br />
Starwood/W <strong>Hotel</strong>s .................................................................................................................. 21<br />
Starwood’s Timing <strong>and</strong> Approach <strong>of</strong> Entry......................................................................... 21<br />
Timing .............................................................................................................................. 21<br />
Value Proposition............................................................................................................. 21<br />
Starwood/W’s Financial Structure, Support <strong>and</strong> Ownership ............................................... 22<br />
Economics <strong>of</strong> construction <strong>and</strong> operations ....................................................................... 22<br />
Does Size Matter? ............................................................................................................ 23<br />
W <strong>Hotel</strong>s Financial Review .............................................................................................. 23<br />
<strong>The</strong> W Experience................................................................................................................ 24<br />
Amenities ......................................................................................................................... 24<br />
Restaurants <strong>and</strong> bars......................................................................................................... 24<br />
Meeting rooms .................................................................................................................. 25<br />
Catalogue <strong>and</strong> <strong>the</strong> W Store ............................................................................................... 25<br />
Starwood’s Competitive Advantages ................................................................................... 25<br />
Corporate Structure .......................................................................................................... 25<br />
Cost Savings Through Economies <strong>of</strong> Scale <strong>and</strong> Scope.................................................... 26<br />
Quality <strong>of</strong> Service............................................................................................................. 27<br />
Locations .......................................................................................................................... 27<br />
Willingness To Pay .......................................................................................................... 27<br />
E-strategy ......................................................................................................................... 28<br />
Marketing <strong>and</strong> Public Relations ....................................................................................... 28<br />
Growth Strategy <strong>and</strong> opportunities .................................................................................. 28<br />
Long term strategy ........................................................................................................... 29<br />
<strong>Boutique</strong> Growing Pains .......................................................................................................... 29<br />
Conclusion: Is Ian Schrager’s approach to hotels sustainable? Will W outperform ISH? ..... 30<br />
Pictures..................................................................................................................................... 32<br />
W <strong>Hotel</strong>s............................................................................................................................... 32<br />
Ian Schrager <strong>Hotel</strong>s .............................................................................................................. 35<br />
2
Exhibits..................................................................................................................................... 37<br />
References: ............................................................................................................................... 48<br />
3
Executive summary<br />
<strong>The</strong> US hotel industry has traditionally been extremely fragmented. Many small players initially<br />
entered <strong>the</strong> market by acquiring <strong>and</strong> renovating a local property, <strong>and</strong> maintaining it as a small business<br />
or building it into a small regional chain over time. As US consumers became more mobile <strong>and</strong> a<br />
growing cohort <strong>of</strong> frequent business travelers emerged, many travelers developed a higher willingness<br />
to pay for a br<strong>and</strong>ed hotel’s comfort, cleanliness, quiet, reputable service, <strong>and</strong> provision <strong>of</strong> a good<br />
night’s sleep.<br />
<strong>Hotel</strong> br<strong>and</strong>s are traditionally segmented by quality, generally falling into one <strong>of</strong> <strong>the</strong> following<br />
category types: economy, midscale, upscale, upper -upscale, <strong>and</strong> luxury. Specific hotels can segment<br />
fur<strong>the</strong>r based on location, desired customer type (business vs. leisure), <strong>and</strong> hotel size. Luxury <strong>and</strong><br />
upper upscale hotels traditionally feature a wide range <strong>of</strong> fine services <strong>and</strong> amenities (multiple<br />
restaurants <strong>and</strong> bars, spa services, concierge services, toiletries), large rooms, <strong>and</strong> premier urban <strong>and</strong><br />
resort locations. Upscale properties tend to cater more specifically to business travelers <strong>and</strong> groups,<br />
while retaining an emphasis on quality <strong>and</strong> comfort. Midscale <strong>and</strong> economy hotels are generally<br />
geared for short-term transient business <strong>and</strong> <strong>of</strong>fer stripped-down features at a lower price point. <strong>The</strong><br />
major US players in hotel ownership <strong>and</strong> management, namely Marriott, Hilton, 6 Continents, <strong>and</strong><br />
Starwood, all maintain a wide portfolio <strong>of</strong> hotel br<strong>and</strong>s (please note that we have considered <strong>the</strong> purely<br />
franchised hotel business as outside <strong>the</strong> scope <strong>of</strong> this paper).<br />
In <strong>the</strong> 1980s <strong>and</strong> 1990s, extensive consolidation took place in <strong>the</strong> US hotel industry, producing several<br />
large chains that now control a large portion <strong>of</strong> US lodging capacity, especially in <strong>the</strong> midscale <strong>and</strong><br />
higher segments. <strong>The</strong>se large, relatively stable companies can obtain financing to develop many<br />
properties simultaneously <strong>and</strong> can develop more cost-effectively than smaller players. Chains also<br />
benefit from economies <strong>of</strong> scale in operations, a centralized reservation system that allows <strong>the</strong>m to<br />
yield-manage more effectively than independent hotels, <strong>and</strong> a well-developed sales <strong>and</strong> marketing<br />
organization that can attract group business. <strong>The</strong> major players have also diversified <strong>the</strong>ir activity from<br />
pure hotel operations. In addition to owning, manag ing, <strong>and</strong> franchising properties under <strong>the</strong> flags <strong>of</strong><br />
<strong>the</strong>ir br<strong>and</strong>s, <strong>the</strong>ir businesses now include real estate, time-shares/vacation ownership, car leases, <strong>and</strong><br />
food distribution.<br />
In <strong>the</strong> past 20 years, a small but growing contingent <strong>of</strong> travelers, grown tired <strong>of</strong> staying in large,<br />
personality-free hotels geared towards a mass audience, has begun to migrate towards a new, more<br />
intimate breed <strong>of</strong> hotel. <strong>The</strong>se travelers purposefully seek out “properties that are noticeably different<br />
in look <strong>and</strong> feel from br<strong>and</strong>ed hotels,” choosing an element <strong>of</strong> ‘surprise’ over <strong>the</strong> more straightforward<br />
values <strong>of</strong> consistency, comfort <strong>and</strong> convenience. A formal definition <strong>of</strong> <strong>the</strong> ‘boutique’ or lifestyle hotel<br />
concept remains elusive, though pundits agree on <strong>the</strong> following criteria: a <strong>the</strong>matic , architecturally<br />
4
notable design <strong>of</strong>fering warmth <strong>and</strong> intimacy, a relatively small number <strong>of</strong> rooms, <strong>and</strong> a target <strong>of</strong> up-<br />
market 20-55 year olds.<br />
<strong>The</strong> innovation <strong>of</strong> <strong>the</strong> boutique hotel is most <strong>of</strong>ten credited to Ian Schrager. <strong>Famous</strong> for co-founding<br />
<strong>the</strong> legendary nightclub Studio 54, Schrager saw an opportunity to sell an alternative to <strong>the</strong> mass-<br />
market hotel experience. <strong>The</strong> 1984 launch <strong>of</strong> Morgans in New York was Schrager’s attempt to market<br />
a hip, unusual hotel experience by telling image-conscious customers ‘you are where you sleep.’<br />
Schrager had purchased a rundown hotel previously frequented by derelicts, <strong>and</strong> with <strong>the</strong> help <strong>of</strong> a<br />
well-known French interior designer, created a dramatic nightclub-like environment populated by a<br />
staff <strong>of</strong> part-time models <strong>and</strong> actors. Over <strong>the</strong> next two decades, <strong>the</strong> Schrager formula—distressed<br />
property, powerful <strong>the</strong>matic design, <strong>and</strong> limited amenities —was recreated in ten more locations from<br />
London to Miami. Each property’s centerpiece is a hip restaurant or bar leased to a famous chef or<br />
restaurateur. <strong>The</strong>se hotspots attract celebrities <strong>and</strong> a sophisticated local clientele—generating ‘buzz’<br />
<strong>and</strong> pr<strong>of</strong>its.<br />
O<strong>the</strong>r entrepreneurs quickly followed Schrager’s lead, <strong>and</strong> independent hotels across <strong>the</strong> US rushed to<br />
re-br<strong>and</strong> <strong>the</strong>mselves as ‘boutiques.’ Major players in <strong>the</strong> industry also took notice <strong>and</strong> quickly tried to<br />
exploit this growing market: Starwood <strong>Hotel</strong>s <strong>and</strong> Resorts opened <strong>the</strong> first W <strong>Hotel</strong> in Midtown New<br />
York in December 1998. Closely following <strong>the</strong> Schrager model, each property “<strong>of</strong>fers signat ure<br />
restaurant <strong>and</strong> bar areas that attract not only <strong>the</strong> hotel guests, but in-<strong>the</strong>-know local residents as well,”<br />
according to <strong>the</strong> W <strong>Hotel</strong>s website. However, W rejects <strong>the</strong> ‘boutique’ label, preferring to call itself a<br />
‘lifestyle br<strong>and</strong>,’ <strong>and</strong> now (in <strong>the</strong> wake <strong>of</strong> <strong>the</strong> effects <strong>of</strong> September 11), emphasizes its customer<br />
service aspects. Although <strong>the</strong> W br<strong>and</strong> had to overcome initial industry doubts that no chain hotel<br />
could successfully emulate <strong>the</strong> boutique experience, Starwood claims that W is <strong>the</strong> most successful<br />
hotel launch in history <strong>and</strong> has opened 17 locations since 1998. Being a Starwood br<strong>and</strong> provides<br />
each W hotel economies <strong>of</strong> scale in purchasing <strong>and</strong> maintenance, synergies through Starwood’s guest<br />
reward program, <strong>the</strong> Starlink central reservations system, <strong>and</strong> access to Starwood’s group <strong>and</strong><br />
meetings sales force.<br />
Our analysis aims to uncover <strong>the</strong> extent to which <strong>the</strong> boutique hotel concept is truly an innovation over<br />
<strong>the</strong> traditional luxury hotel. By introducing a powerful new aes<strong>the</strong>tic <strong>and</strong> eliminating amenities<br />
previously considered de rigueur, boutiques, led by Schrager, appear to have distinctly altered <strong>the</strong><br />
industry’s value proposition. We hope to determine if <strong>the</strong>se advantages are value creating, <strong>and</strong> more<br />
importantly, sustainable in <strong>the</strong> face <strong>of</strong> increased competition <strong>and</strong> an uncertain economy. <strong>Boutique</strong><br />
hotels are highly leveraged, meaning that <strong>the</strong>y attract <strong>the</strong> highest-revenue customers during times <strong>of</strong><br />
peak business travel. By keeping costs low <strong>and</strong> maintaining high dem<strong>and</strong> with an aura <strong>of</strong> style <strong>and</strong><br />
exclusivity, Ian Schrager <strong>Hotel</strong>s have been able to achieve operating margins as high as 45%.<br />
However, <strong>the</strong>ir leverage makes <strong>the</strong>m especially vulnerable in times <strong>of</strong> decline; because boutique hotels<br />
5
<strong>of</strong>fer limited or nonexistent meeting space, <strong>the</strong>y cannot fall back on group sales to fill rooms when<br />
individual business travel declines, <strong>and</strong> thus must let <strong>the</strong>m go empty or sell <strong>the</strong>m at distressed rates<br />
through potentially br<strong>and</strong>-diluting wholesalers. <strong>Boutique</strong> hotels experienced tremendous growth<br />
during <strong>the</strong> economic boom <strong>of</strong> <strong>the</strong> late 1990s, but can <strong>the</strong>y survive now that <strong>the</strong> bubble has popped?<br />
Background on <strong>the</strong> hotel industry<br />
<strong>Hotel</strong> industry economic factors<br />
<strong>The</strong> development <strong>of</strong> <strong>the</strong> hotel industry has been linked with <strong>the</strong> international <strong>and</strong> domestic tourism <strong>and</strong><br />
travel sector in general. <strong>The</strong> economic growth <strong>of</strong> <strong>the</strong> ‘90s <strong>and</strong> <strong>the</strong> accelerated globalization <strong>of</strong> <strong>the</strong><br />
world economy significantly increased business <strong>and</strong> leisure travel. <strong>The</strong> development <strong>of</strong> travel<br />
infrastructure <strong>and</strong> <strong>the</strong> decreasing cost <strong>of</strong> air <strong>and</strong> o<strong>the</strong>r forms <strong>of</strong> transportation have also driven growth.<br />
Today, tourism is <strong>the</strong> third largest retail industry in <strong>the</strong> United States. Total US hotel industry revenue<br />
rose from $62.8 billion in 1990 to $103.5 billion in 2001, while <strong>the</strong> average daily room rate (ADR)<br />
grew from $58.08 in 1990 to $88.27 in 2001 (See Exhibit 1). i Much <strong>of</strong> this rapid growth has been<br />
spurred by <strong>the</strong> middle <strong>and</strong> low end, while increased consolidation within <strong>the</strong> industry has put pressure<br />
on <strong>the</strong> independent hotels to innovate at <strong>the</strong> risk being bought out.<br />
Historically, dem<strong>and</strong> for lodging has been highly correlated with GDP growth. According to<br />
PriceWaterhouseCoopers, dem<strong>and</strong> elasticity to GDP is normally 1.0. Exogenous shocks such as <strong>the</strong><br />
Gulf war <strong>of</strong> 1990-1991, <strong>the</strong> Asian financial debacle in 1998, <strong>and</strong> <strong>the</strong> terrorist attacks <strong>of</strong> September 11,<br />
2001, have distorted this relationship. Additional factors that affect lodging dem<strong>and</strong> include consumer<br />
confidence, interest rates, cost <strong>of</strong> transportation (fuel prices, indirect taxation), <strong>and</strong> foreign exchange<br />
rates. (See Exhibit 2)<br />
Supply for lodging tends to lag well behind dem<strong>and</strong>, since it takes several years to bring new capacity<br />
onto <strong>the</strong> market. In addition, market segments influence supply, as upscale <strong>and</strong> better hotels take<br />
longer to complete than lower -range properties. Fur<strong>the</strong>rmore, deve lopers have limited flexibility to<br />
defer or accelerate projects. In 3Q 2002, total lodging supply stood at 4.2 million rooms, while 2002<br />
total turnover in <strong>the</strong> hotel industry worldwide was estimated at around $280 billion. (See Exhibit 3)<br />
At a microeconomic level, <strong>the</strong> main factors <strong>of</strong> industry pr<strong>of</strong>itability are:<br />
• Occupancy rate (OCC) <strong>and</strong> ADR are both driven by <strong>the</strong> dem<strong>and</strong>-supply relationship. <strong>The</strong>re<br />
are stark differences in <strong>the</strong> performance <strong>of</strong> hotels according to location <strong>and</strong> type <strong>of</strong> customers.<br />
<strong>Hotel</strong>s relying on international travelers have been most affected by current slump in dem<strong>and</strong>.<br />
Market segmentation is also a key factor; economy hotels are more resilient during dem<strong>and</strong><br />
downturns than upscale properties. A hotel’s ADR <strong>and</strong> OCC determine its main revenue<br />
indicator: its Revenue per Available Room, or RevPAR.<br />
6
• Operational leverage. <strong>The</strong> ownership structure <strong>of</strong> its hotels has a significant effect on a hotel<br />
chain’s pr<strong>of</strong>itability. <strong>Hotel</strong> ownership is a more leveraged structure than franchising; it is<br />
difficult for properties to adjust operating costs when occupancy rates drop during market<br />
downturns, but franchise <strong>and</strong> o<strong>the</strong>r fees are a more consistent source <strong>of</strong> revenues. Similarly,<br />
in good market conditions, owned hotels perform better than franchises for <strong>the</strong> parent<br />
company. ii<br />
<strong>Hotel</strong> industry trends<br />
Several trends characterize <strong>the</strong> state <strong>of</strong> <strong>the</strong> international hotel industry over <strong>the</strong> past decade (See<br />
Exhibit 4 for a more detailed history).<br />
Consolidation: A number <strong>of</strong> large deals serve as examples <strong>of</strong> this important trend, such as <strong>the</strong><br />
Starwood acquisitions <strong>of</strong> Westin <strong>and</strong> Sheraton, <strong>the</strong> Doubletree <strong>and</strong> Promus merger deal, <strong>the</strong> Marriott<br />
acquisition <strong>of</strong> <strong>the</strong> Renaissance <strong>Hotel</strong> Group, <strong>and</strong> <strong>the</strong> merger <strong>of</strong> Hilton <strong>and</strong> Hilton International. This<br />
consolidation has created hotel companies with greater br<strong>and</strong> portfolios <strong>and</strong> greater global reach.<br />
Increased globalization: Industry consolidation has encouraged overseas investment, increasing <strong>the</strong><br />
reach <strong>of</strong> many hotel companies. One example is <strong>the</strong> Marriott International, who recently purchased <strong>the</strong><br />
Hong-Kong based Renaissance <strong>Hotel</strong>s. In addition to global growth through acquisition, many US-<br />
based hotel companies are exp<strong>and</strong>ing <strong>the</strong>ir br<strong>and</strong>s worldwide. In 1996, <strong>the</strong>re was a rapid international<br />
spread <strong>of</strong> US-based economy <strong>and</strong> mid-priced franchised hotel chains.<br />
Increasing importance <strong>of</strong> finance: Financiers are increasingly driving <strong>the</strong> hotel industry. <strong>Hotel</strong>iers<br />
have traditionally focused on internal operations, while financiers concentrate on earnings <strong>and</strong><br />
company growth. Although some say that this shift forecasts a more difficult negotiating environment<br />
for travel buyers, o<strong>the</strong>rs herald <strong>the</strong> transition as a positive step towards a stronger <strong>and</strong> more successful<br />
industry. Wall Street has only recently developed an interest in <strong>the</strong> lodging industry, which it long<br />
considered too risky <strong>and</strong> unstable.<br />
<strong>The</strong> role <strong>of</strong> information technology: In 1996, it was estimated that hotel companies in <strong>the</strong> US <strong>and</strong><br />
Europe spent an average <strong>of</strong> 2.5% <strong>of</strong> <strong>the</strong>ir revenue on information technology. Slightly less than $2<br />
billion was spent in <strong>the</strong> US <strong>and</strong> $2.5 billion in Europe. In <strong>the</strong> 1980s <strong>and</strong> early 1990s, <strong>the</strong> hotel<br />
industry spent several billion dollars on technology, but most <strong>of</strong> that spending was kept in-house.<br />
Many hotel companies now feel <strong>the</strong>ir proprietary technology is a key point <strong>of</strong> differentiation. Industry<br />
consolidation has driven an increased appetite for spending with outside systems integrators,<br />
outsourcers, <strong>and</strong> s<strong>of</strong>tware developers. Many technology innovations have been driven by <strong>the</strong><br />
industry's need to enhance <strong>the</strong> customer experience. Smart cards, check-in kiosks, <strong>and</strong> <strong>the</strong><br />
proliferation <strong>of</strong> loyalty programs are all examples <strong>of</strong> hotel companies trying to get closer to <strong>the</strong>ir<br />
7
customers. Because many hotel companies internally developed <strong>and</strong> purchased disparate systems, <strong>the</strong>y<br />
now face a need for systems integration as <strong>the</strong> industry consolidates. Distribution costs also continue<br />
to be high. <strong>The</strong> changing role <strong>of</strong> <strong>the</strong> Internet, managed travel, <strong>and</strong> <strong>the</strong> evolution <strong>of</strong> <strong>the</strong> global<br />
distribution systems (GDS) used by travel agents to access air, hotel, <strong>and</strong> rental car inventory, will<br />
likely cause changes in <strong>the</strong> way hotel rooms will be distributed in <strong>the</strong> next several years. iii<br />
Segmentation <strong>of</strong> <strong>the</strong> market<br />
<strong>The</strong>re are many ways in which to segment <strong>the</strong> hotel industry, <strong>the</strong> most relevant ones are highlighted<br />
below:<br />
• Segmentation by scale (level <strong>of</strong> luxury) splits <strong>the</strong> hotel industry into several segments. Industry<br />
practice divides hotels by scale into <strong>the</strong> following broad segments: Economy, Midscale (with <strong>and</strong><br />
without food <strong>and</strong> beverage), Upscale, <strong>and</strong> Upper Upper Scale (including luxury hotels). iv (See<br />
Exhibit 5) Thus Marriott markets its flagship Marriott br<strong>and</strong> to <strong>the</strong> full-service upscale segment,<br />
where it competes with Starwood’s Westin <strong>and</strong> Sheraton, as well as Hilton’s Hilton <strong>and</strong><br />
Doubletree br<strong>and</strong>s, among o<strong>the</strong>rs. Ups cale hotels primarily target business travelers <strong>and</strong> are<br />
generally located in prime locations in urban destinations. [To a lesser extent, upscale hotels can<br />
also be found in resort destinations, where <strong>the</strong>y cater primarily to leisure travelers <strong>and</strong> groups.<br />
Generally speaking, business destination hotels yield-manage with higher price points during <strong>the</strong><br />
week, <strong>and</strong> sometimes struggle to reach desired occupancy rates on weekends, especially during<br />
<strong>of</strong>f-peak periods in seasonal destinations. <strong>The</strong> reverse is true for leisure destinations.] Upscale<br />
hotels will frequently advertise promotions <strong>and</strong> package deals to sell <strong>of</strong>f <strong>the</strong>ir unsold inventory,<br />
<strong>and</strong> frequently sell distressed inventory through Priceline.com <strong>and</strong> o<strong>the</strong>r similar channels.<br />
Luxury br<strong>and</strong>s such as Ritz-Carlton (owned by Marriott) <strong>and</strong> Four Seasons target <strong>the</strong> small but<br />
extremely lucrative Upper Upscale segment. <strong>The</strong>se hotels will <strong>of</strong>fer <strong>the</strong> greatest range <strong>of</strong> luxury<br />
services <strong>and</strong> charge a premium price; large <strong>and</strong> comfortable rooms with elegant appointments <strong>and</strong><br />
fixtures, extensive restaurant <strong>and</strong> bar facilities, high-end shops, spa facilities, <strong>and</strong> premier<br />
locations are all de rigueur. Upper upscale hotels will generally let rooms go unsold ra<strong>the</strong>r than<br />
be shown to <strong>of</strong>fer any sort <strong>of</strong> discount, although <strong>the</strong>y will market packages bundling meals or<br />
services with hotel rooms.<br />
Midscale hotels target traveling businesspeople <strong>and</strong> families unwilling to pay for <strong>the</strong> full range <strong>of</strong><br />
services in an upscale hotel. <strong>The</strong>se properties <strong>of</strong>fer fewer <strong>and</strong> less sophisticated restaurant <strong>and</strong> bar<br />
facilities than upscale hotels (or eliminate <strong>the</strong>m altoge<strong>the</strong>r <strong>and</strong> instead <strong>of</strong>fer a free ‘continental’<br />
breakfast <strong>of</strong> pastries <strong>and</strong> cereal). <strong>The</strong>se hotels are generally located in urban areas, but unlike <strong>the</strong><br />
upscale hotels located in prime downtown locations, midscale hotels will generally be found in<br />
suburban <strong>and</strong> highway locations. Holiday Inn Express, Ramada, Fairfield Inn by Marriott, Four<br />
8
Points by Sheraton, <strong>and</strong> Hampton Inn (a division <strong>of</strong> Hilton) are all examples <strong>of</strong> br<strong>and</strong>ed midscale<br />
hotels.<br />
Economy hotels constitute a large segment <strong>of</strong> <strong>the</strong> market. <strong>Hotel</strong>s carrying <strong>the</strong> flags for br<strong>and</strong>s<br />
such as Days Inn, Travelodge, <strong>and</strong> Super 8 (all franchised by Cendant), Motel 6 (Accor) <strong>and</strong><br />
Prime Hospitality’s AmeriSuites <strong>and</strong> Wellesley Inn <strong>and</strong> Suites are frequent sights along major US<br />
Interstates. <strong>The</strong>se hotels (<strong>of</strong>ten referred to as ‘motels’ in <strong>the</strong> United States) <strong>of</strong>fer a limited range<br />
<strong>of</strong> amenities <strong>and</strong> services. Furnishings are basic, swimming pools are less common than in o<strong>the</strong>r<br />
segments, <strong>and</strong> few toiletries are <strong>of</strong>fered. Many do not have an attached restaurant, for example,<br />
although it is common to see a restaurant located within walking distance <strong>of</strong> an economy hotel.<br />
Many economy hotels are franchises owned <strong>and</strong> managed by small businesspeople; franchisees<br />
are generally not considered to be able to <strong>of</strong>fer <strong>the</strong> same consistency <strong>of</strong> quality <strong>of</strong> service as hotels<br />
owned or managed by <strong>the</strong> parent company.<br />
• Segmentation by location: Location can be used to attract a targeted customer segment. Airport<br />
hotels are for example focused on <strong>the</strong> transit travelers in <strong>the</strong> same way as resort hotels are<br />
targeting <strong>the</strong> leisure segment. (See Exhibit 6)<br />
• Segmentation by size: <strong>Hotel</strong>s <strong>of</strong> more than 300 rooms account for only 21% <strong>of</strong> existing capacity.<br />
Larger hotels are an urban <strong>and</strong> resort phenomenon, whereas small hotels dominate in smaller cities<br />
<strong>and</strong> along highways. (See Exhibit 6)<br />
• Segmentation by type <strong>of</strong> customer: <strong>The</strong> key split is between leisure <strong>and</strong> business travel.<br />
According to <strong>the</strong> WTO, business travel is expected to grow faster than leisure (95% accumulated<br />
growth rate for <strong>the</strong> 2002- 2012 period vs. 90%), but business travel traffic tends to be more<br />
volatile than leisure, which makes it more highly leveraged to <strong>the</strong> business economy.<br />
O<strong>the</strong>r criteria for segmenting by customer type could include booking source (such as Internet site,<br />
managed travel, telephone or travel agent), demographics <strong>and</strong> lifestyle, customer responsiveness<br />
to br<strong>and</strong> or price, etc. <strong>Boutique</strong> hotels target <strong>the</strong>ir customers by a combination <strong>of</strong> lifestyle <strong>and</strong><br />
demographics, an innovative targeting mix in <strong>the</strong> hotel industry.<br />
• Segmentation by style : Designer hotels present a different customer proposition than mass-market<br />
hotels. Large hotels (especially those part <strong>of</strong> a chain) have found it difficult to avoid a<br />
depersonalization <strong>of</strong> <strong>the</strong> service <strong>and</strong> a resulting trend towards commoditization.<br />
Over time, <strong>the</strong> largest players (including Hilton, Marriott <strong>and</strong> Sheraton) began to segment <strong>the</strong> market<br />
fur<strong>the</strong>r by <strong>of</strong>fering a range <strong>of</strong> hotel types <strong>and</strong> services. Through br<strong>and</strong>ing, companies can pinpoint<br />
locations, price points, <strong>and</strong> level <strong>of</strong> service to attract <strong>the</strong> desired mix <strong>of</strong> business <strong>and</strong> leisure travelers.<br />
9
To broadcast a consistent image <strong>of</strong> <strong>the</strong> level <strong>of</strong> quality <strong>and</strong> service customers could expect, <strong>the</strong> largest<br />
hotel companies now market br<strong>and</strong>s specifically to each segment <strong>of</strong> traveler.<br />
Growth <strong>of</strong> br<strong>and</strong>ed hotel chains<br />
Traditionally, <strong>the</strong> US hotel industry was extremely fragmented. Many small players entered <strong>the</strong><br />
market by acquiring <strong>and</strong> renovating a local property, <strong>and</strong> maintaining it as a small business or building<br />
up a small regional chain over time. Consolidation began in 1943, when Hilton became <strong>the</strong> first ‘coast<br />
to coast’ hotel chain in <strong>the</strong> United States. v In <strong>the</strong> late 1950s, JW Marriott, <strong>the</strong>n a successful operator<br />
<strong>of</strong> ‘Hot Shoppe’ cafeterias in <strong>the</strong> Washington, DC area, exp<strong>and</strong>ed into <strong>the</strong> hotel industry with a Motor<br />
<strong>Hotel</strong> in Arlington, VA <strong>and</strong> subsequently began a rapid geographic expansion. vi An increasingly<br />
mobile population appreciated <strong>the</strong> consistency <strong>and</strong> quality <strong>of</strong> service <strong>and</strong> co0mfort <strong>the</strong>y found at<br />
br<strong>and</strong>ed hotels, <strong>and</strong> as <strong>the</strong>y grew, <strong>the</strong>se larger companies also began to benefit from significant<br />
economies <strong>of</strong> scale <strong>and</strong> scope.<br />
<strong>The</strong> consolidation that took place in <strong>the</strong> hotel industry in <strong>the</strong> past twenty years produced several large<br />
chains that control a large proportion <strong>of</strong> US lodging capacity, especially in <strong>the</strong> middle <strong>and</strong> upper<br />
segments. As <strong>of</strong> 2002, <strong>the</strong> four largest hotel companies in <strong>the</strong> US controlled 35% <strong>of</strong> <strong>the</strong> total room<br />
supply. All <strong>the</strong> big players have also diversified <strong>the</strong>ir activity away from pure hotel operations, but<br />
Cendant may have taken this diversification strategy to an extreme. In addition to hotels, Cendant’s<br />
many business lines include real estate, rental cars, travel technology, <strong>and</strong> financial services.<br />
Major players<br />
In <strong>the</strong> United States, a few major players have traditionally dominated <strong>the</strong> hotel industry. Marriott is<br />
<strong>the</strong> world’s largest hotel chain, with over 2,200 units worldwide; its br<strong>and</strong>s include Marriott,<br />
Renaissance, Courtyard by Marriott, Residence Inn by Marriott, Fairfield Inn by Marriott, TownePlace<br />
Suites by Marriott, SpringHill Suites by Marriott, Ritz Carlton <strong>Hotel</strong>s <strong>and</strong> Resorts, <strong>and</strong> Ramada<br />
International. Hilton owns, manages <strong>and</strong> franchises 499 hotels worldwide under <strong>the</strong> br<strong>and</strong>s Conrad,<br />
Doubletree, Embassy Suites, Hampton Inn, Hilton, Hilton Garden, <strong>and</strong> Homewood Suites by Hilton.<br />
Starwood owns, manages, <strong>and</strong> franchises nearly 750 hotels under <strong>the</strong> br<strong>and</strong>s St. Regis, Luxury<br />
Collection, W, Westin, Sheraton, Four Points by Sheraton, <strong>and</strong> Starwood Vacation Ownership. O<strong>the</strong>r<br />
major players include 6 Continents, which controls <strong>the</strong> Holiday Inn, Crowne Plaza, <strong>and</strong> Inter -<br />
Continental br<strong>and</strong>s, <strong>and</strong> Cendant, a major franchiser <strong>of</strong> economy hotels. (See Exhibit 7)<br />
Chain hotels <strong>and</strong> independents<br />
Chain hotels dominate <strong>the</strong> US hotel market for a number <strong>of</strong> reasons. Chains are able to lower costs<br />
significantly by benefiting from economies <strong>of</strong> scale. As large, relatively stable companies, <strong>the</strong>y can<br />
10
make real estate investments at a lower cost <strong>and</strong> develop properties more cost-effectively. <strong>The</strong>y also<br />
benefit from economies <strong>of</strong> scale in purchasing <strong>and</strong> maintenance for existing properties, <strong>and</strong> can invest<br />
in a centralized reservation system that allows <strong>the</strong>m to yield-manage more effectively than<br />
independent hotels. At <strong>the</strong> same time, many consumers have a higher willingness to pa y for a known<br />
quantity—a br<strong>and</strong>ed hotel’s comfort, cleanliness, quiet, reputable service, <strong>and</strong> provision <strong>of</strong> a good<br />
night’s sleep, <strong>of</strong>ten backed up by a guarantee—than for an unknown quantity.<br />
<strong>Boutique</strong> <strong>Hotel</strong>s: a definition<br />
In <strong>the</strong> past 20 years, a growing contingent <strong>of</strong> travelers grown tired <strong>of</strong> staying in large, personality-free<br />
hotels geared towards a mass audience, has begun to migrate towards a new, more intimate breed <strong>of</strong><br />
hotel. <strong>The</strong>se travelers purposefully seek out “properties that are noticeably different in look <strong>and</strong> feel<br />
from br<strong>and</strong>ed hotels,” choosing an element <strong>of</strong> ‘surprise’ over <strong>the</strong> more straightforward values <strong>of</strong><br />
consistency, comfort <strong>and</strong> convenience. vii <strong>The</strong>se ‘boutique’ hotels, <strong>of</strong>ten located in renovated urban<br />
structures such as run-down single-room-occupancy hotels, small <strong>of</strong>fice buildings, or older hotels,<br />
attempt to replace <strong>the</strong> ‘cookie-cutter’ uniformity <strong>of</strong> a br<strong>and</strong>ed hotel’s décor, food, <strong>and</strong> service with<br />
more individualistic <strong>of</strong>ferings.<br />
A formal definition <strong>of</strong> <strong>the</strong> boutique or lifestyle hotel concept remains elusive. However, pundits agree<br />
on <strong>the</strong> following criteria: a <strong>the</strong>matic, architecturally notable design <strong>of</strong>fering warmth <strong>and</strong> intimacy, a<br />
smaller size than <strong>the</strong> typical business hotel (many in <strong>the</strong> industry believe hotels larger than 150 rooms<br />
cannot be called true ‘boutiques’) <strong>and</strong> a target market <strong>of</strong> up market 20-55 year olds. viii Most boutique<br />
hotels can be found in trendy neighborhoods <strong>of</strong> sophisticated urban destinations, <strong>and</strong> many <strong>of</strong>fer<br />
customers high-tech amenities such as high-speed Internet access, cordless phones <strong>and</strong> CD players<br />
with a library <strong>of</strong> music (available for purchase, <strong>of</strong> course). However, a subset <strong>of</strong> boutique hotels<br />
located in resort destinations try to achieve <strong>the</strong> opposite effect: <strong>of</strong>ten located in secluded areas, <strong>the</strong>se<br />
hotels focus on a higher level <strong>of</strong> service than <strong>the</strong>ir urban counterparts <strong>and</strong> <strong>of</strong>fer low -tech amenities<br />
such as spa facilities, privacy, <strong>and</strong> even <strong>the</strong> absence <strong>of</strong> communications facilities as pro<strong>of</strong> guests<br />
staying at <strong>the</strong> hotel will truly be able to ‘get away from it all.’ ix<br />
Eliminating some features <strong>and</strong> services, such as spacious rooms <strong>and</strong> expansive lobbies, <strong>and</strong> replacing<br />
luxurious fittings with cheaper, but architecturally more interesting, replacements (such as Vermont<br />
slate for $1 a foot instead <strong>of</strong> imported marble at $8), allows <strong>the</strong>se hotels to charge customers a similar<br />
or slightly lower price point than upscale br<strong>and</strong>ed hotels, while lowering costs significantly from <strong>the</strong><br />
typical upscale independent hotel. x Architectural design compensates for smaller rooms whenever<br />
possible (<strong>of</strong>ten permitting <strong>the</strong> hotel to pack more guests into a smaller space <strong>and</strong>/or renovate an<br />
existing SRO or o<strong>the</strong>r nontraditional hotel building less extensively <strong>and</strong> thus save money). For<br />
example, in <strong>the</strong> W New York-Times Square, where rooms average only 280 square feet, <strong>the</strong><br />
11
architecture firm “Yabu Pushelberg designed a translucent floor-to-ceiling panel <strong>of</strong> white<br />
polycarbonate plastic to replace <strong>the</strong> solid wall between <strong>the</strong> bedroom <strong>and</strong> bathroom.” xi Ano<strong>the</strong>r<br />
significant cost savings for independent boutique hotels is <strong>the</strong> fact that <strong>the</strong>y do not have to pay a<br />
franchise fee to attract customers. xii Centering <strong>the</strong> hotel around a br<strong>and</strong>-name chef’s restaurant (<strong>and</strong><br />
<strong>of</strong>ten a trendy bar) in space leased from <strong>the</strong> restaurant also allows <strong>the</strong>se hotels a significant revenue<br />
stream in comparison to <strong>the</strong> typical br<strong>and</strong>ed hotel, for whom <strong>the</strong>se services are generally not revenue<br />
drivers. As a result, some analysts calculate that boutique hotels earn margins 30% higher than those<br />
<strong>of</strong> st<strong>and</strong>ard luxury hotels. xiii<br />
By building a <strong>the</strong>matic image “powerfully conveyed throughout <strong>the</strong> property” <strong>and</strong> relying heavily on<br />
celebrity guests <strong>and</strong> public relations ra<strong>the</strong>r than mass advertising <strong>and</strong> a sales force to convey a hip<br />
image, boutique hotels can successfully enter markets with high barriers by converting buildings not<br />
normally suitable for hotel use. xiv Customers who want <strong>the</strong> experience <strong>of</strong> staying in a boutique hotel<br />
are willing to trade <strong>of</strong>f less-traditional locations <strong>and</strong> room designs that do not meet st<strong>and</strong>ard<br />
definitions <strong>of</strong> comfort—such as <strong>the</strong> rooms in Ian Schrager’s Royalton <strong>Hotel</strong> in New York, which run<br />
parallel to <strong>the</strong> hotel’s hallways ra<strong>the</strong>r than perpendicular. xv Generally, rooms are smaller than normal<br />
<strong>and</strong> <strong>of</strong>ten relatively dark. <strong>The</strong> hotel compensates for <strong>the</strong>se flaws by providing a comfortable lobby<br />
space that provides a “Home Away From Home” outside <strong>the</strong> bedroom itself <strong>and</strong> is a “social hub…<strong>and</strong><br />
new kind <strong>of</strong> ga<strong>the</strong>ring space for guests <strong>and</strong> locals alike.” xvi Ideally, <strong>the</strong> guest spends so much time in<br />
<strong>the</strong> lobby, restaurant, <strong>and</strong> later <strong>the</strong> bar, that he or she barely notices <strong>the</strong> relatively small size <strong>of</strong> <strong>the</strong><br />
room. Despite all <strong>the</strong> distractions, <strong>the</strong> typical lifestyle hotel guest is traveling on business ra<strong>the</strong>r than<br />
pleasure: according to PwC, 68% <strong>of</strong> guests are corporate travelers. xvii<br />
<strong>The</strong> evolution <strong>of</strong> <strong>the</strong> boutique hotel<br />
A number <strong>of</strong> market dynamics accelerated <strong>the</strong> acceptance <strong>and</strong> <strong>the</strong> dem<strong>and</strong> for boutique hotels. <strong>The</strong>se<br />
include: Eroding br<strong>and</strong> loyalty among franchises; customer access to <strong>the</strong> GDS via travel websites (<strong>and</strong><br />
<strong>the</strong>ir subsequently reduced dependence on travel agents); <strong>the</strong> emerging trend <strong>of</strong> ‘experience’ or<br />
‘adventure’ travel; an increase in disposable income in conjunction with <strong>the</strong> largest sustained period <strong>of</strong><br />
economic growth in U.S. history; <strong>and</strong> <strong>the</strong> desire for more personalized service (particularly on <strong>the</strong> part<br />
<strong>of</strong> discriminating business travelers).<br />
<strong>The</strong> innovation <strong>of</strong> <strong>the</strong> boutique hotel is generally credited to Ian Schrager. <strong>Famous</strong> for founding <strong>the</strong><br />
legendary nightclub Studio 54, Schrager saw an opportunity to sell an alternative to <strong>the</strong> mass-market<br />
hotel experience. <strong>The</strong> 1984 launch <strong>of</strong> Morgans in New York was Schrager’s attempt to market a hip,<br />
alternative hotel experience by telling image-conscious customers ‘you are where you sleep.’ While<br />
Andrée Putnam, <strong>the</strong> French stylist, designed that hotel, Schrager has maintained a design partnership<br />
with noted designer Philippe Starck since 1987, <strong>and</strong> has only recently begun working with o<strong>the</strong>r noted<br />
12
architects <strong>and</strong> designers, including <strong>the</strong> Canadian Bruce Mau. xviii Schrager has created a new breed <strong>of</strong><br />
urban hotels that <strong>of</strong>fer guests high style at prices lower than those <strong>of</strong> traditional luxury hotels. By<br />
building <strong>the</strong> hotel around an A-level restaurant <strong>and</strong> bar designed to attract a sophisticated local<br />
clientele in addition to <strong>the</strong> hotel’s guests, Schrager successfully gives each <strong>of</strong> his hotels a unique<br />
identity that also reflects <strong>the</strong> spirit <strong>of</strong> <strong>the</strong> hotel’s local urban environment.<br />
As many <strong>of</strong> <strong>the</strong> traditional franchised product developers recognized this powerful <strong>and</strong> pr<strong>of</strong>itable<br />
market segment, <strong>the</strong>y too began to consider <strong>the</strong> compelling factors: <strong>the</strong> restrictive nature <strong>of</strong> most<br />
franchise agreements, <strong>the</strong> considerable franchiser costs (royalty, reservation, marketing, application<br />
fee, etc.), which range up to 12 percent <strong>of</strong> gross income, <strong>the</strong> inconsistency between franchised<br />
products, <strong>the</strong> premium revenue per available room <strong>of</strong> boutique hotels vs. luxury hotels <strong>and</strong>, finally, <strong>the</strong><br />
barriers to entry in <strong>the</strong> traditional boutique hotel marketplace.<br />
As a result, o<strong>the</strong>r entrepreneurs quickly followed Schrager’s lead, <strong>and</strong> independent hotels across <strong>the</strong><br />
US tried to re-br<strong>and</strong> <strong>the</strong>mselves as ‘boutiques.’ Major players in <strong>the</strong> industry also took notice <strong>and</strong><br />
quickly tried to exploit this growing market: Starwood <strong>Hotel</strong>s <strong>and</strong> Resorts opened <strong>the</strong> first W <strong>Hotel</strong> in<br />
Midtown New York in December 1988. Closely following <strong>the</strong> Schrager model, each property “<strong>of</strong>fers<br />
signature restaurant <strong>and</strong> bar areas that attract not only <strong>the</strong> hotel guests, but in-<strong>the</strong>-know local residents<br />
as well,” according to <strong>the</strong> W <strong>Hotel</strong>s website. xix In fact, Starwood even hired R<strong>and</strong>e Gerber, designer<br />
<strong>and</strong> operator <strong>of</strong> Schrager’s bars (<strong>and</strong> a celebrity himself, married to supermodel Cindy Crawford, able<br />
to tap into a network <strong>of</strong> VIPs as his clientele) away from Schrager to design <strong>and</strong> manage <strong>the</strong> W hotel<br />
bars, prompting a series <strong>of</strong> escalating lawsuits that are still unresolved.<br />
Strategy Analysis <strong>of</strong> <strong>Boutique</strong> <strong>Hotel</strong>s<br />
<strong>The</strong> phenomenon <strong>of</strong> boutique hotels can be examined using various strategy frameworks, which can<br />
explain <strong>the</strong> fast <strong>and</strong> furious rise <strong>of</strong> <strong>the</strong>se hotels in <strong>the</strong> United States.<br />
To begin, we have conducted a hotel industry analysis (See Exhibits 8 & 9). Although <strong>the</strong> exhibits<br />
concentrate on Porter’s five forces on each <strong>of</strong> <strong>the</strong> Ian Schrager <strong>and</strong> W br<strong>and</strong>s, <strong>the</strong>y are mostly similar<br />
<strong>and</strong> can be used to look at boutique hotels versus previously existing hotel types. <strong>The</strong> main message<br />
to glean from <strong>the</strong> industry analysis is to notice how buyers <strong>and</strong> suppliers do not have bargaining<br />
power. This means that <strong>the</strong> hotel industry itself can capture most <strong>of</strong> <strong>the</strong> economic benefits <strong>of</strong> <strong>the</strong><br />
hospitality category. Yet, within <strong>the</strong> hotel industry, it is worth noting that <strong>the</strong> internal rivalry is<br />
intense. In addition, new entry is relatively easy <strong>and</strong> <strong>the</strong> many different types <strong>of</strong> hotels guarantee that<br />
<strong>the</strong>re is a large substitution effect.<br />
13
It is in this environment that boutique hotels appeared, yet ano<strong>the</strong>r in a long list <strong>of</strong> ways that hotels<br />
have tried to differentiate <strong>the</strong>mselves. <strong>The</strong> innovation <strong>of</strong> boutique hotels was not a radical change<br />
from current <strong>of</strong>ferings. It was clear that <strong>the</strong> concept <strong>of</strong> boutique hotels enhanced <strong>the</strong> competence <strong>of</strong><br />
hotel operators. Many <strong>of</strong> <strong>the</strong> current practices in <strong>the</strong> industry were kept <strong>and</strong> sometimes enhanced or<br />
lessened, but <strong>the</strong> new hotels did not represent a disruptive technology to <strong>the</strong> core concept <strong>of</strong> hotels.<br />
By combining <strong>the</strong>ir existing market knowledge with new ideas <strong>of</strong> what a new <strong>and</strong> different segment <strong>of</strong><br />
customers desired, Ian Schrager <strong>and</strong> later Starwood were able to create (in Schrager’s case) or enhance<br />
(in Starwood’s case) current <strong>of</strong>ferings (see Exhibit 10: What Type <strong>of</strong> Innovation is <strong>the</strong> <strong>Boutique</strong><br />
<strong>Hotel</strong>?). Although <strong>the</strong> concept <strong>of</strong> boutique hotels did not destroy <strong>the</strong> existing market knowledge, it did<br />
disrupt what hoteliers believed was <strong>the</strong> correct combination <strong>of</strong> product <strong>of</strong>ferings to target <strong>the</strong> lucrative<br />
segment <strong>of</strong> young <strong>and</strong> upscale consumers (it is important to note that boutique hotels <strong>the</strong>mselves are<br />
not a disruptive technology, ra<strong>the</strong>r a more targeted <strong>of</strong>fering to a particular segment that was ei<strong>the</strong>r<br />
ignored or underserved). <strong>The</strong> ultimate list <strong>of</strong> attributes combined in a boutique hotel is narrowly<br />
aimed at this segment, <strong>and</strong> <strong>the</strong>refore <strong>the</strong> innovation <strong>of</strong> boutique hotels can be described as niche<br />
creation (see Exhibit 11: How Disruptive Are <strong>Boutique</strong> <strong>Hotel</strong>s?).<br />
One <strong>of</strong> Ian Schrager’s highest-impact innovations within <strong>the</strong> boutique hotel category was <strong>the</strong> creation<br />
<strong>of</strong> über-hip restaurants <strong>and</strong> bars, which became city destinations (ra<strong>the</strong>r than <strong>the</strong> traditional model <strong>of</strong><br />
pushing hotel guests into its restaurants <strong>and</strong> bars). <strong>Hotel</strong>iers shrewdly realized that <strong>the</strong>ir expertise lay<br />
in <strong>the</strong> hospitality industry, <strong>and</strong> not <strong>the</strong> entertainment industry (where <strong>the</strong>se restaurants <strong>and</strong> bars reside).<br />
By using alliances with well-known chefs <strong>and</strong> bar <strong>and</strong> restaurant owners ra<strong>the</strong>r than trying to create<br />
<strong>the</strong>se on <strong>the</strong>ir own, boutique hotels were able to create products that <strong>the</strong>ir target segment actually<br />
desired <strong>and</strong> valued very highly (see Exhibit 12: Building <strong>of</strong> Alliances Between <strong>Hotel</strong>s <strong>and</strong><br />
Bars/Restaurants). W’s <strong>and</strong> Ian Schrager hotels’ pr<strong>of</strong>it sharing <strong>and</strong> revenue deals with <strong>the</strong>ir alliance<br />
partners will be discussed in <strong>the</strong> next sections.<br />
Apart from restaurants <strong>and</strong> bars, Ian Schrager created o<strong>the</strong>r valuable new factors in his hotels, while<br />
reducing or eliminating o<strong>the</strong>r factors that did not add value to <strong>the</strong> target segment. <strong>The</strong> framework <strong>of</strong><br />
value innovation as it relates to boutique hotels is shown in detail in Exhibit 13 (Actions for Value<br />
Innovation). One <strong>of</strong> boutique hotels’ greatest advantages is <strong>the</strong> ability to <strong>of</strong>fer a customized <strong>of</strong>fering<br />
in a small amount <strong>of</strong> space. This was done by reducing <strong>the</strong> size <strong>of</strong> rooms <strong>and</strong> area used by non-value<br />
added items such as in-hotel shops <strong>and</strong> lobby space. <strong>The</strong> value curve for boutique hotels as compared<br />
to Luxury hotels (Four Seasons) <strong>and</strong> Upscale hotels (Sheraton) is highlighted in Exhibit 14 (Value<br />
Curve for boutique hotels).<br />
Where did boutique hotels’ customers come from? <strong>The</strong>se consumers were previous ly staying in <strong>the</strong><br />
various <strong>of</strong>ferings that targeted upscale travelers. Luxury hotels <strong>of</strong>fer exquisite service <strong>and</strong> a top-end<br />
14
product, but <strong>the</strong>y were increasingly viewed by some as ‘stuffy,’ <strong>and</strong> were mostly frequented by an<br />
upscale, older clientele. Although upscale hotel br<strong>and</strong>s such as Westin <strong>and</strong> Marriott <strong>of</strong>fer a lower<br />
price <strong>and</strong> an adequate service <strong>and</strong> product, <strong>the</strong>se hotels have increasingly been viewed as ‘cookie-<br />
cutter,’ <strong>of</strong>fering a uniform <strong>and</strong> unexciting product. <strong>The</strong>se hotels target <strong>the</strong> average businessman. In<br />
contrast, <strong>the</strong> boutique hotel provides a more targeted luxury, drawing in a younger, but still upscale,<br />
crowd (see Exhibit 15: Preference Structure).<br />
<strong>The</strong>re is a paradox present in <strong>the</strong> model <strong>of</strong> <strong>the</strong> successful boutique hotel. Naturally, given <strong>the</strong> high<br />
fixed costs <strong>and</strong> <strong>the</strong> low variable costs in <strong>the</strong> hotel industry, selling as much as possible is preferred.<br />
But one <strong>of</strong> boutique hotels’ value-added <strong>of</strong>ferings is <strong>the</strong> feeling <strong>of</strong> exclusivity <strong>and</strong> being part <strong>of</strong> a<br />
vibrant scene. This cannot be accomplished by allowing too many people to be part <strong>of</strong> <strong>the</strong> boutique<br />
product. In terms <strong>of</strong> <strong>the</strong> innovation diffusion curve, this means that <strong>the</strong>re is a forced <strong>and</strong> desired break<br />
between early adopters <strong>and</strong> <strong>the</strong> majority <strong>of</strong> adopters (see Exhibit 16: Innovation Diffusion for<br />
<strong>Boutique</strong> <strong>Hotel</strong>s). One interesting way to underst<strong>and</strong> boutique hotels is to see it as Ian Schrager’s<br />
attempt to turn a hotel into a fashion item. <strong>The</strong>refore, <strong>the</strong> highest willingness to pay will lie in a new<br />
<strong>and</strong> ‘attractive’ product. <strong>The</strong>re is a way to reconcile <strong>the</strong> issue <strong>of</strong> hotel size with hotel feel: exp<strong>and</strong> into<br />
new boutique hotels. <strong>The</strong> phenomenal growth <strong>of</strong> boutique hotels is currently possible because <strong>of</strong> how<br />
few <strong>of</strong> <strong>the</strong>se hotels currently exist. Instead <strong>of</strong> exp<strong>and</strong>ing <strong>the</strong> hotel itself, <strong>the</strong> way to exp<strong>and</strong> in this<br />
business <strong>and</strong> still keep <strong>the</strong> main value proposition <strong>of</strong> a boutique hotel is by increasing <strong>the</strong> number <strong>of</strong><br />
hotels in currently underserved areas. As cities become saturated with boutique hotels (as New York<br />
might soon be), <strong>the</strong>re will be a decreasing return on guests (<strong>and</strong> <strong>the</strong>refore revenues <strong>and</strong> pr<strong>of</strong>its), not<br />
only because <strong>of</strong> overcapacity, but also because <strong>of</strong> <strong>the</strong> limit <strong>of</strong> upscale <strong>and</strong> young consumers in <strong>the</strong><br />
market.<br />
Using various strategy frameworks, we have shown that <strong>the</strong> <strong>of</strong>ferings <strong>of</strong> boutique hotels have both<br />
increased <strong>the</strong> target segment’s willingness to pay while at <strong>the</strong> same time reducing <strong>the</strong> hotels’ costs.<br />
This gives <strong>the</strong>m a competitive advantage over luxury <strong>and</strong> upscale hotel products (see Exhibit 17:<br />
Competitive Advantage (WTP vs. Cost)). <strong>The</strong> advantage may not be sustainable though. Issues <strong>of</strong><br />
fur<strong>the</strong>r segmentation (more targeted hotels) <strong>and</strong> <strong>the</strong> loss <strong>of</strong> <strong>the</strong> “new” feel as time progresses may<br />
force boutique hotels to rethink <strong>the</strong>ir <strong>of</strong>ferings <strong>and</strong> ei<strong>the</strong>r fur<strong>the</strong>r value innovate to raise willingness to<br />
pay or reduce <strong>the</strong>ir costs through scale.<br />
<strong>The</strong> next sections will highlight each <strong>of</strong> Ian Schrager <strong>and</strong> Starwood’ timings <strong>and</strong> approaches to<br />
boutique hotels.<br />
15
Ian Schrager <strong>Hotel</strong>s (ISH)<br />
<strong>Hotel</strong> as <strong>The</strong>ater<br />
When asked to define <strong>the</strong> term “boutique hotel,” Ian Schrager provides a simple reply: “It’s a hotel<br />
with a point <strong>of</strong> view.” Schrager approached hotel development with <strong>the</strong> belief that customers will pay<br />
as high a premium for attitude, glamour, <strong>and</strong> exclusivity as <strong>the</strong>y will for more traditional amenities <strong>of</strong><br />
a luxury hotel. In 1984, fresh from a 13-month jail term for tax evasion, Schrager <strong>and</strong> Studio 54 co-<br />
founder Steve Rubell turned a rundown former single-room occupancy hotel (SRO) on Madison<br />
Avenue in New York into Morgans. Draped entirely in blacks <strong>and</strong> grays, Morgans boasted provocative<br />
Robert Mappelthorpe photos on <strong>the</strong> walls, impenetrably dark hallways, small guest rooms, part-time<br />
models for staff—<strong>and</strong> a devoted clientele. xx Today, Ian Schrager <strong>Hotel</strong>s (ISH) has exp<strong>and</strong>ed <strong>the</strong><br />
concept <strong>of</strong> ‘hotel as <strong>the</strong>ater’ to 10 locations in New York, London, Miami, Los Angeles <strong>and</strong> San<br />
Francisco. By starting with low cost properties such as SROs, adding powerhouse restaurants <strong>and</strong><br />
bars, <strong>of</strong>fering limited extra services, <strong>and</strong> keeping dem<strong>and</strong> high by staying at <strong>the</strong> edge <strong>of</strong> cool, Ian<br />
Schrager claims to have achieved pr<strong>of</strong>it margins <strong>of</strong> 35% to 45%. xxi And <strong>the</strong> point <strong>of</strong> view? Schrager<br />
directs <strong>the</strong> scene <strong>and</strong> <strong>the</strong> customers willingly play <strong>the</strong>ir parts.<br />
Location<br />
Schrager hotels typically begin as urban properties that have some architectural distinction, but ha ve<br />
fallen into disrepair <strong>and</strong> can be acquired cheaply. <strong>The</strong> Mondrian, which opened in West Hollywood in<br />
1997, (bought out <strong>of</strong> bankruptcy for $17 million), was previously a fifties apartment block built to<br />
evoke <strong>the</strong> work <strong>of</strong> <strong>the</strong> artist <strong>of</strong> <strong>the</strong> same name. xxii Schrager’s 1995 renovation <strong>of</strong> <strong>the</strong> Delano in<br />
Miami’s South Beach marked <strong>the</strong> revival <strong>of</strong> a neighborhood known for its Art Deco design. ISH’s<br />
acquisition <strong>and</strong> turnaround strategy is likely what attracted <strong>the</strong> attention <strong>of</strong> NorthStar Capital, which in<br />
March 1998 paid $255 million for a controlling stake in ISH (reportedly around 70%). xxiii NorthStar’s<br />
portfolio focuses on “undervalued assets [that] possess significant revenue-generating potential [<strong>and</strong>]<br />
are ei<strong>the</strong>r overlooked or out <strong>of</strong> favor in <strong>the</strong> eyes <strong>of</strong> mainstream investors.” xxiv With <strong>the</strong> backing <strong>of</strong><br />
NorthStar, ISH has been able to take on more ambitious investments including a May 1998 purchase<br />
for $177 million <strong>of</strong> <strong>the</strong> Barbizon <strong>and</strong> <strong>the</strong> Empire, New York properties with over 300 rooms each. xxv<br />
Design<br />
Ultimately, <strong>the</strong> Schrager developments that have succeeded prove that <strong>the</strong> value <strong>of</strong> a <strong>the</strong>atrical<br />
production is its ability to cheaply transform an empty space into an emotionally compelling<br />
environment. Beginning with French interior designer Andrée Putnam at Morgans, Schrager recruit ed<br />
visionary interior designers who imbued each property with a powerful <strong>the</strong>me <strong>and</strong> an element <strong>of</strong><br />
fantasy. <strong>The</strong> Royalton’s ‘ocean liner’ décor features portholes in <strong>the</strong> bathrooms, while <strong>the</strong><br />
Paramount’s ‘European’ touches extend to Vermeer reproductions over each headboard. xxvi<br />
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Schrager’s main collaborator <strong>and</strong> ISH partner over <strong>the</strong> past decade has been French designer Philippe<br />
Starck, whose designs combine minimalism <strong>and</strong> extravagance. “For me, a hotel is a stage where I try<br />
to inspire people to open up <strong>the</strong> door in <strong>the</strong>ir brains...to wake <strong>the</strong>m up to realize <strong>the</strong>y can reinvent <strong>the</strong>ir<br />
own lives.” xxvii However, ego-driven design <strong>of</strong>ten takes precedence over practicality (one Starck-<br />
designed shower door is infamous for its dangerously tricky h<strong>and</strong>les). Like a stage set, Schrager<br />
achieves his “look” at a low cost <strong>and</strong> is known for skimping on details that do not add to <strong>the</strong> overall<br />
effect (such as <strong>the</strong> Royalton’s $1 Vermont instead <strong>of</strong> $8 marble). xxviii ISH rooms are also noticeably<br />
smaller that those in hotels <strong>of</strong> equivalent star rating. Without ab<strong>and</strong>oning his penny-pinching<br />
philosophy, Schrager has dramatically increased his renovation budgets, allowing him to build more<br />
spectacular settings for guests—from $4 million at Morgans in 1984, to <strong>the</strong> $125 million refit <strong>of</strong> <strong>the</strong><br />
1000-room Hudson in 2000. xxix As Schrager has taken on higher -pr<strong>of</strong>ile projects, his distinct vision<br />
has occasionally clashed with local sensibilities. After ISH purchased <strong>the</strong> l<strong>and</strong>mark Clift <strong>Hotel</strong> in San<br />
Francisco from <strong>the</strong> Four Seasons Group in 1999, local activists organized protests to prevent him from<br />
destroying <strong>the</strong> famous Redwood Room <strong>of</strong> <strong>the</strong> historic property.<br />
Experience<br />
ISH emphasis on ‘social engineering’ represents a significant departure from <strong>the</strong> path <strong>of</strong> established<br />
hoteliers. While traditional hotel service foc uses on serving <strong>the</strong> needs <strong>of</strong> <strong>the</strong> individual guest,<br />
Schrager views a hotel as he would a nightclub—guests are <strong>the</strong>re not simply to rest <strong>and</strong> eat, but to be<br />
part <strong>of</strong> a group experience, which reinforces <strong>the</strong>ir membership in <strong>the</strong> stylish urban elite.<br />
“I'm more <strong>of</strong> a social scientist than a businessman or a hotelier. When I sit down with<br />
Philippe, we talk about <strong>the</strong> sociology: What are people doing, what are <strong>the</strong>y avoiding, where<br />
are people going, where are <strong>the</strong>y moving—toge<strong>the</strong>r, en masse, or apart? We're not talking<br />
about fabrics or walls or design, but <strong>the</strong> whole idea <strong>of</strong> <strong>the</strong> way people behave.” xxx<br />
From <strong>the</strong> outset, Schrager’s motto for his hotels has been ‘you are where you sleep.’ Driving this<br />
message home even fur<strong>the</strong>r, ISH populates its hotels with a staff vetted for style <strong>and</strong> physical beauty<br />
<strong>and</strong> <strong>of</strong>ten comprised <strong>of</strong> part-time actors <strong>and</strong> models. In 1996, Schrager’s redesign <strong>of</strong> <strong>the</strong> Mondrian<br />
included <strong>the</strong> dismissal <strong>of</strong> a team <strong>of</strong> Latino <strong>and</strong> Asian bellhops, who were described in a famous<br />
Schrager memo as “too ethnic.” (<strong>The</strong> ensuing complaint to <strong>the</strong> EEOC resulted in a million dollar<br />
settlement.) Similarly, <strong>the</strong> utilitarian aspects <strong>of</strong> a hotel (room size, pr<strong>of</strong>essional service) are <strong>of</strong>ten<br />
downplayed in favor <strong>of</strong> spectacular lobbies, gardens <strong>and</strong> public spaces full <strong>of</strong> beautiful people that<br />
serve to remind guests <strong>of</strong> <strong>the</strong> cachet that comes with staying at a Schrager hotel.<br />
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Restaurants<br />
This phenomenon is in greatest evidence at <strong>the</strong> hip restaurants <strong>and</strong> bars that are attached to each<br />
Schrager property <strong>and</strong> defended by various layers <strong>of</strong> doormen, maitre d’s, <strong>and</strong> VIP lists. While hotel<br />
restaurants have typically been loss leaders designed for <strong>the</strong> guest convenience, Schrager’s serve as<br />
<strong>the</strong> main draw <strong>of</strong> each property—Asia de Cuba <strong>and</strong> 44, among o<strong>the</strong>rs, have become local hotspots <strong>and</strong><br />
celebrity hangouts. Created, owned <strong>and</strong> managed by celebrity restaurateurs like Alain Ducasse, <strong>the</strong>y<br />
not only create buzz, but also constitute pr<strong>of</strong>it centers in <strong>the</strong>ir own right. As l<strong>and</strong>lord, Schrager claims<br />
to take 7-10% <strong>of</strong> gross revenues <strong>and</strong> 50% <strong>of</strong> pr<strong>of</strong>its. xxxi For ISH guests, <strong>the</strong> relationship between a<br />
hotel like <strong>the</strong> Mondrian <strong>and</strong> its über -trendy Sky Bar is priceless—a room key is <strong>the</strong> only guaranteed<br />
way to get past <strong>the</strong> bouncers. With <strong>the</strong> bars’ individuality comprising a major source <strong>of</strong> ISH’s<br />
competitive advantage, Schrager actively defends <strong>the</strong>m from imitators. In May 2000, Schrager filed<br />
suit against R<strong>and</strong>e Gerber, who had run three <strong>of</strong> ISH’s most successful bars before leaving <strong>the</strong><br />
organization to join Starwood’s W hotel chain. Claiming that Gerber had recreated ISH bars at W<br />
properties <strong>and</strong> shared secrets with <strong>the</strong> competition, Schrager waged a public battle with <strong>the</strong> bar<br />
operator, eventually buying him out <strong>of</strong> Morgans <strong>and</strong> Skybar for $1million. xxxii<br />
Marketing<br />
Beyond <strong>the</strong>ir contemporary design <strong>and</strong> central locations, ISH hotels are dependent on a steady stream<br />
<strong>of</strong> celebrities to sustain <strong>the</strong> feeling <strong>of</strong> ‘access’ that Schrager provides to guests. <strong>The</strong> aura <strong>of</strong> exclusivity<br />
surrounding each property has, until recently, been backed up purely by shrewd public relations, never<br />
advertising. According to Schrager, “You can get a million dollars <strong>of</strong> free publicity by underwriting a<br />
party for $10,000.” xxxiii Schrager hotels have played host to events for Miramax Films <strong>and</strong> MTV, <strong>and</strong><br />
a team <strong>of</strong> publicists makes sure that <strong>the</strong> properties get mentioned in trendy periodicals <strong>and</strong> celebrity<br />
magazines alike. In addition, Schrager’s website <strong>of</strong>fers, in exchange for an email address, a few dozen<br />
photos <strong>of</strong> celebrities mugging for <strong>the</strong> cameras at his hotels as well as a feature called ‘<strong>The</strong> List,’ which<br />
<strong>of</strong>fers visitors an inside view on what’s hot in each Schrager city.<br />
Targeting / Pricing<br />
Schrager’s investment in ‘cool’ translated into real value in <strong>the</strong> eyes <strong>of</strong> his target market. ISH<br />
clientele has consisted heavily <strong>of</strong> pr<strong>of</strong>essionals from <strong>the</strong> media <strong>and</strong> entertainment industry <strong>and</strong> <strong>the</strong>ir<br />
hangers-on. (Originally Schrager used this fact to justify <strong>the</strong> small sizes <strong>of</strong> his guest rooms, assuming<br />
that his guests would most likely be too busy partying to notice. xxxiv ) More generally, <strong>the</strong> segment<br />
attracted to a Schrager hotel is looking, if not for innovation, than for a non-generic experience. In<br />
providing an environment distinctly different from that <strong>of</strong> <strong>the</strong> predictable luxury hotel chains, Schrager<br />
hotels also excluded <strong>the</strong> features that are more or less irrelevant to its target customers, most notably<br />
meeting <strong>and</strong> conference facilities. This acted as a deterrent to group bookings <strong>and</strong> a draw for those<br />
18
who seek out uniqueness. However, <strong>the</strong> ISH deliberately avoids comparisons to traditional luxury<br />
hotels. By cutting away extraneous <strong>and</strong> costly services <strong>and</strong> focusing on image, Schrager is able to<br />
<strong>of</strong>fer his customers a completely new value proposition he describes as ‘cheap chic.’ ISH room rates<br />
run as high as $5000/night, but are generally priced slightly lower than luxury establishments.<br />
Schrager has also made a point <strong>of</strong> publicizing <strong>the</strong> ‘democratic’ rates <strong>of</strong> <strong>the</strong> Paramount on Times<br />
Square, as well as <strong>the</strong> $95/night rooms at <strong>the</strong> Hudson (though <strong>the</strong>se tiny rooms are in very limited<br />
supply <strong>and</strong> st<strong>and</strong>ard rooms are listed at $175). xxxv According to ‘cheap chic,’ Schrager hotels<br />
discriminate on style but not on spending power —thus manage to be both hip <strong>and</strong> proletarian.<br />
Growth Strategy<br />
During <strong>the</strong> flush economy <strong>of</strong> <strong>the</strong> late 1990’s ISH <strong>and</strong> NorthStar actively sought to replicate <strong>the</strong><br />
Schrager formula in different formats <strong>and</strong> on a larger scale. Schrager opened his largest hotel to date,<br />
<strong>the</strong> 1000-room Hudson in 2000 <strong>and</strong> strayed from ‘cheap chic’ with <strong>the</strong> Clift in San Francisco (rates<br />
start at $260). In addition to <strong>the</strong> 1998 purchase <strong>of</strong> <strong>the</strong> Empire <strong>and</strong> Barbizon in New York for $177<br />
million, ISH (with a loan from CSFB ) acquired <strong>the</strong> lease for <strong>the</strong> iconic St. Moritz, promising to<br />
undertake a $100 million refurbishment. xxxvi Most remarkably, in 2000-2001, ISH acquired at its first<br />
build-from -scratch property on New York’s Astor Place, employing Dutch architect Rem Koolhaas,<br />
saying “<strong>The</strong>re isn't as much financial upside...but this is a chance to have an impact on <strong>the</strong> skyline <strong>of</strong><br />
New York.” xxxvii Three <strong>of</strong> <strong>the</strong> four New York projects have since been ab<strong>and</strong>oned <strong>and</strong> creative<br />
differences with Koolhaas led to a replacement with architect Frank Gehry. None<strong>the</strong>less, Schrager<br />
continues to look for growth opportunities. In <strong>the</strong> US, ISH is exploring sites in Las Vegas <strong>and</strong> is due<br />
to open a beachfront ‘summer camp for adults’ in Santa Barbara, CA. In addition, as <strong>the</strong> only<br />
independent US boutique br<strong>and</strong> with a presence in Europe, ISH is looking to exp<strong>and</strong> fur<strong>the</strong>r into<br />
London as well as Paris. According to Schrager, his strategy is to “go into international, 24-hour,<br />
gateway cities <strong>and</strong> do multiple hotels at various price points.” xxxviii<br />
Reaction to Competition<br />
Schrager’s new focus on market-driven differentiation ultimately reflects deep changes in philosophy<br />
that have gradually taken hold at ISH, particularly in <strong>the</strong> face <strong>of</strong> increasing competition from o<strong>the</strong>r<br />
boutiques, most notably Starwood’s W chain. (In New York, boutiques are so popular that no large<br />
hotels are due to open before 2004 xxxix ) As more hotels adopt a design driven approach over mass-<br />
market architecture, Schrager has found that as a competitive advanta ge, ‘coolness,’ particularly in<br />
trend-obsessed cities is both substitutable <strong>and</strong> difficult to sustain. Additionally, <strong>the</strong> recession had a<br />
particularly negative effect on clients in former ISH strongholds like <strong>the</strong> media <strong>and</strong> tech sectors.<br />
Changes over <strong>the</strong> pas t 2 years include:<br />
19
� Pr<strong>of</strong>essionalization <strong>of</strong> management/staff: With <strong>the</strong> opening <strong>of</strong> <strong>the</strong> Clift, ISH installed its first<br />
human resources department <strong>and</strong> training programs. Similar moves have been taken at o<strong>the</strong>r<br />
properties where waits for room service were known to run into <strong>the</strong> hours. More recently, ISH<br />
hired a new VP for <strong>the</strong> Paramount in New York—<strong>the</strong> former general manager <strong>of</strong> Starwood’s<br />
Phoenix resort in Arizona. xl<br />
� Redesign/Renewal: ISH is believed to be pursuing a $400 million refinancing <strong>of</strong> existing hotels.<br />
<strong>The</strong> Paramount is undergoing renovation, including <strong>the</strong> renaming <strong>of</strong> its once-trendy Whiskey<br />
Bar. xli<br />
� Comfort over coolness: In a 2002 Wall Street Journal article, Schrager said his hotels would<br />
become “more comfortable, not quite so provocative in <strong>the</strong> rooms, [with] more lighting. I'm not<br />
going to rely on having <strong>the</strong> coolest lobby or bar.” Schrager was also said to be distancing himself<br />
from longtime collaborator Philippe Starck. xlii<br />
� Business services: Despite previously being labeled as “<strong>the</strong> media place to stay,” ISH is pursuing<br />
relationships with traditional purchasers <strong>of</strong> business travel accommodation, including Morgan<br />
Stanley. All locations currently feature meeting spaces a. Schrager: “I’m giving access to my<br />
hotels to some segments that I haven’t given access to bef ore.” xliii<br />
� Price Reductions: In 2002, rooms at <strong>the</strong> Paramount were <strong>of</strong>fered for $145, about half previous<br />
rates.<br />
� Advertising/Incentives: ISH launched a billboard campaign <strong>and</strong> sent 500,000 fliers to previous<br />
guests, <strong>of</strong>fering a free night for two paid nights. Additionally, in March 2002, Schrager developed<br />
limited-time incentives for travel agents including 15% commissions <strong>and</strong> cash rewards. xliv<br />
ISH has reacted to increased competition by re-focusing on service <strong>and</strong> individual customer needs,<br />
ironically taking a page from <strong>the</strong> playbook <strong>of</strong> <strong>the</strong> industry it once disrupted. However, as ISH<br />
increases <strong>the</strong> range <strong>of</strong> services <strong>and</strong> guest amenities, it runs <strong>the</strong> risk <strong>of</strong> cutting into <strong>the</strong> cost advantage it<br />
has traditionally held over its rivals. More importantly, efforts to attract a wider clientele threaten <strong>the</strong><br />
delicate formula that gives Schrager hotels <strong>the</strong>ir aura <strong>of</strong> hipness <strong>and</strong> exclusivity, undermining <strong>the</strong> main<br />
pillar <strong>of</strong> Schrager’s value proposition.<br />
20
Starwood/W <strong>Hotel</strong>s<br />
Starwood’s Timing <strong>and</strong> Approach <strong>of</strong> Entry<br />
Timing<br />
Starwood entered <strong>the</strong> lifestyle hotel segment because “Barry Sternlicht [CEO <strong>of</strong> Starwood] wanted to<br />
create a different, cutting edge hotel line…using physically tired assets <strong>and</strong> converting <strong>the</strong>m to cater to<br />
a different type <strong>of</strong> market <strong>and</strong> outsourcing <strong>the</strong> restaurants <strong>and</strong> bars to pr<strong>of</strong>essionals.” xlv Starwood<br />
launched <strong>the</strong> W line in late 1998 with <strong>the</strong> opening <strong>of</strong> <strong>the</strong> W New York in midtown Manhattan.<br />
Designed to appeal to business travelers in <strong>the</strong> 25-49 age bracket, with incomes at or exceeding<br />
$100,000, <strong>the</strong> launch <strong>of</strong> W happily coincided with a major economic boom, helping <strong>the</strong> br<strong>and</strong> find its<br />
niche immediately. xlvi<br />
By late 1998, <strong>the</strong> market for lifestyle or boutique hotels had already been well established by<br />
entrepreneurial hoteliers. <strong>The</strong> Kimpton Group launched its first boutique hotel, <strong>the</strong> Bedford in San<br />
Francisco’s Union Square, in 1981. Ian Schrager’s Morgans <strong>Hotel</strong>, was opened in 1984, Chip Conley<br />
started Joie de Vivre Hospitality with <strong>the</strong> launch <strong>of</strong> <strong>the</strong> rock n’roll-<strong>the</strong>med Phoenix <strong>Hotel</strong> in San<br />
Francisco in 1987, <strong>and</strong> <strong>the</strong> Kimpton <strong>Hotel</strong>s <strong>and</strong> Restaurants Group began “<strong>the</strong> successful renovation<br />
<strong>and</strong> repositioning <strong>of</strong> old buildings into charming hotels paired with popular restaurants” on <strong>the</strong> West<br />
Coast as early as 1982. xlvii <strong>The</strong> popularity <strong>of</strong> <strong>the</strong> concept, <strong>the</strong> potential for significant cost savings, <strong>and</strong><br />
<strong>the</strong> relatively high willingness to pay, despite a more limited range <strong>of</strong> <strong>of</strong>ferings <strong>and</strong> services, had all<br />
been well established. <strong>The</strong> major questions for Starwood were whe<strong>the</strong>r an obviously “corporate” hotel<br />
could draw <strong>the</strong> same stylish clientele that floc ked to <strong>of</strong>fbeat boutique hotels <strong>and</strong> <strong>the</strong>ir popular<br />
restaurants, <strong>and</strong> how far <strong>the</strong> concept could be extended before <strong>the</strong> market for lifestyle hotels reached<br />
saturation.<br />
Value Proposition<br />
Unsurprisingly, <strong>the</strong> W hews to <strong>the</strong> classic boutique formula <strong>of</strong> small rooms <strong>and</strong> high style, charging a<br />
price premium to Starwood’s upscale Westin line. Starwood played up <strong>the</strong> hotel <strong>and</strong> room amenities<br />
while being relatively honest about <strong>the</strong> hotel’s drawbacks. At <strong>the</strong> W New York, <strong>the</strong> first hotel<br />
launched in <strong>the</strong> W line, so-called “Wish Rooms” are advertised at $209 per night, only a small<br />
premium to <strong>the</strong> New York nightly average <strong>of</strong> $203, xlviii but customers are told upfront “Our wish<br />
rooms are small <strong>and</strong> cozy <strong>and</strong> so is <strong>the</strong> rate…get a cozy room with <strong>the</strong> ultimate queen bed,<br />
complimentary movie, <strong>and</strong> all <strong>the</strong> extras —custom formulated Aveda botanical bath products, lush spa-<br />
style cotton pique W bathrobes, W ‘Goodie Box,’ <strong>and</strong> much more.” xlix <strong>The</strong> lobby <strong>of</strong> each W is<br />
decorated with orchids <strong>and</strong> green apples because, according to Sternlicht, “orchids are not expensive<br />
21
<strong>and</strong> will last at least six months. When I first started this business, I put orchids <strong>and</strong> green apples at<br />
<strong>the</strong> front desk <strong>of</strong> a property. Suddenly, <strong>the</strong> hotel looked expensive. It only cost $800 to implement,<br />
but it changed <strong>the</strong> entire price category <strong>of</strong> <strong>the</strong> hotel.” l<br />
<strong>The</strong> website also promises “savvy travelers refuge in a hectic world.” Calling <strong>the</strong> hotel an “oasis” <strong>and</strong><br />
noting that “<strong>the</strong> amenities are unparalleled,” <strong>the</strong> hotel’s web page highlights some <strong>of</strong> <strong>the</strong> name-br<strong>and</strong><br />
talent that gives <strong>the</strong> hotel its stylish edge. “Architectural designer David Rockwell has created a<br />
tranquil sanctuary inspired by nature's elements - earth, wind, fire <strong>and</strong> water. Lose yourself in public<br />
spaces that feel private…Savor a delicious meal at Heartbeat, <strong>the</strong> hot restaurant from Drew<br />
Nieporent—creator <strong>of</strong> Nobu, Tribeca Grill <strong>and</strong> Montrachet—featuring noted chef, Michel<br />
Nischan…Immerse yourself in <strong>the</strong> intimate scene at WHISKEY BLUE—R<strong>and</strong>e Gerber's creation that<br />
redefines nightlife.” li<br />
Perhaps most importantly, Starwood feels that service is what differentiates <strong>the</strong> W from a typical<br />
boutique hotel, <strong>and</strong> hence rejects <strong>the</strong> ‘boutique’ label applied to Schrager’s hotels among o<strong>the</strong>rs.<br />
Schrager admits “I was alone in this market for 13 years. When you are <strong>the</strong> only game in town, you<br />
can get away with certain things. But, you learn that if <strong>the</strong> air conditioning does not work, it is not<br />
good for anyone…I never had a training program or a human resources department.” lii Starwood’s bet<br />
is that it can woo <strong>the</strong> same type <strong>of</strong> customers attracted to boutiques, but retain <strong>the</strong>m through superior<br />
service. To that end, it is <strong>the</strong> first company in <strong>the</strong> hospitality industry to embark on a Six Sigma<br />
initiative, investing $17 million in training costs in 2001 alone. liii Says Sternlicht, “Travelers don’t<br />
want to jump from hotel to hotel. <strong>The</strong>y want to rely on certain amenities like an exciting meeting<br />
place in <strong>the</strong> lobby <strong>of</strong> each W hotel <strong>and</strong> on a certain level <strong>of</strong> service…” liv<br />
Starwood/W’s Financial Structure, Support <strong>and</strong> Ownership<br />
Economics <strong>of</strong> construction <strong>and</strong> operations<br />
Starwood founded <strong>the</strong> W line to fight <strong>the</strong> growing trend towards commoditization in <strong>the</strong> hotel<br />
industry, but it still hews to a low -cost strategy whenever possible. By renovating “physically tired<br />
assets” ra<strong>the</strong>r than engaging in new construction (a notion pioneered by Schrager <strong>and</strong> o<strong>the</strong>r early<br />
entrepreneurs in <strong>the</strong> space), Starwood reaps significant cost savings. lv <strong>The</strong> W New York was financed<br />
for $225,000 a room, in comparison to <strong>the</strong> industry average <strong>of</strong> $400,000 for a new hotel. lvi In<br />
comparison to independents, however, Starwood can benefit from economies <strong>of</strong> scale in construction.<br />
Fur<strong>the</strong>r economies <strong>of</strong> scale can be reaped from Starwood’s large purchasing <strong>and</strong> maintenance<br />
contracts. lvii<br />
22
Does Size Matter?<br />
A W <strong>Hotel</strong> is generally far larger than <strong>the</strong> typical boutique hotel, which has approximately 150<br />
rooms. lviii At 713 rooms, <strong>the</strong> W New York is <strong>the</strong> largest <strong>of</strong> all <strong>the</strong> W hotels controlled by Starwood;<br />
<strong>the</strong> W Chicago Lakeshore (a converted Days Inn motel) runs second with 556 rooms. lix <strong>The</strong> average<br />
W has about 311 rooms. lx While this is far larger than <strong>the</strong> average boutique hotel size <strong>of</strong> 150 rooms, it<br />
is still smaller than a typical Westin, which has over 400 rooms. lxi Starwood <strong>and</strong> Schrager have both<br />
bet, apparently with success, that customers do not highly value intimacy in a lifestyle hotel as much<br />
as design <strong>and</strong> <strong>the</strong>matic elements, warmth, <strong>and</strong> energy. (see exhibit 18 for a list <strong>of</strong> W properties)<br />
W <strong>Hotel</strong>s Financial Review lxii<br />
Despite being a new br<strong>and</strong>, W <strong>Hotel</strong>s generate higher ADR <strong>and</strong> RevPAR than <strong>the</strong> average upper -<br />
upscale properties. W <strong>Hotel</strong>s mainly focus on transient business customers, which constitute 70% <strong>of</strong><br />
<strong>the</strong>ir overall business. <strong>Boutique</strong> hotels are highly leveraged: when <strong>the</strong> market is up, <strong>the</strong>y do<br />
especially well because <strong>the</strong>y attract transient business customers, which generate <strong>the</strong> highest<br />
revenues (groups negotiate discounted rates in exchange for volume). However, in economic<br />
downturns, transient travel declines, so boutique hotels suffer more than mass-market hotels<br />
geared towards group business. Thus W hotels’ high operational leverage serves <strong>the</strong>m well during<br />
good market conditions, but is a burden during bad market conditions, since W hotels have a limited<br />
capacity to increase group sales when <strong>the</strong> transient market is underperforming.<br />
For example, during 2001, RevPAR at Starwood’s W hotels declined 16.4% <strong>and</strong> EBITDA declined<br />
41.1%, whereas Starwood’s overall North American owned portfolio recorded an 11.9% RevPAR<br />
decline <strong>and</strong> a 23.1 EBITDA decline. (See table below). By contrast, in 2000, W hotels were more<br />
pr<strong>of</strong>itable than <strong>the</strong> rest <strong>of</strong> <strong>the</strong> North American portfolio, with an EBITDA margin <strong>of</strong> 34.7% vs. 33.3%<br />
for <strong>the</strong> portfolio. While <strong>the</strong> br<strong>and</strong> is still very new <strong>and</strong> has not yet gone through a full lodging cycle,<br />
early indications are that Starwood was able to exploit <strong>the</strong> br<strong>and</strong>’s leverage during <strong>the</strong> economic<br />
boom: <strong>the</strong> W New York, W San Francisco, <strong>and</strong> W Los Angeles toge<strong>the</strong>r gave a 20% ROI in 2000.<br />
Pr<strong>of</strong>itability comparison <strong>of</strong> W hotels vs. Starwood’s North America, 2001<br />
RevPAR (%) EBITDA (%) Margin Flow -through<br />
W <strong>Hotel</strong> -16.4 -41.4 -930bp 2.5x<br />
NA Owned -11.9 -23.1 -430bp 1.9x<br />
Source: Deutsche Bank, Company Information<br />
23
<strong>The</strong> W Experience<br />
Amenities<br />
Lifestyle hotels compete vigorously on providing first-class amenities to <strong>the</strong>ir guests. A stylish cotton<br />
bathrobe, toiletries from Kiehl’s, Aveda or ano<strong>the</strong>r small, salon-quality firm, <strong>and</strong> plush bedding are<br />
par for <strong>the</strong> course in boutique hotels, capitalizing on one <strong>of</strong> <strong>the</strong> more popular features <strong>of</strong> luxury hotels<br />
(W rooms promise guests 250 thread count sheets, goose down comforters, <strong>and</strong> Aveda bath products).<br />
In contrast to a Ritz Carlton or Four Seasons, which downplay <strong>the</strong>ir extensive business services<br />
beneath a veneer <strong>of</strong> old-world elegance, W <strong>of</strong>fers a more visible, ‘wired’ approach to service <strong>and</strong><br />
intends to extend <strong>the</strong>m fur<strong>the</strong>r through a deal with Cisco Systems to provide extensive broadb<strong>and</strong><br />
services. lxiii Rooms have high-speed Internet access through <strong>the</strong> 27-inch TV’s entertainment system, a<br />
CD player (<strong>and</strong> library <strong>of</strong> CDs available on request), c<strong>of</strong>feemaker with W’s own designer c<strong>of</strong>fee<br />
blend, a high-speed port for guests who have brought <strong>the</strong>ir own laptops, <strong>and</strong> two phones in every<br />
room. Guests who want privacy are <strong>of</strong>fered 24-hour room service from <strong>the</strong> fashionable restaurants<br />
located in <strong>the</strong> hotels, or are given priority access to tables. Because its guests are primarily business<br />
travelers, W <strong>of</strong>fers a full-service business center in most lobbies <strong>and</strong> will arrange meetings <strong>and</strong><br />
functions. lxiv<br />
Restaurants <strong>and</strong> bars<br />
One <strong>of</strong> <strong>the</strong> keystones <strong>of</strong> <strong>the</strong> W concept is to provide trendy restaurants <strong>and</strong> bars that draw in a local<br />
audience as well as hotel guests. This is a complete transformation <strong>of</strong> both <strong>the</strong> traditional upscale<br />
hotel concept <strong>of</strong> a restaurant that provides sustenance to tired guests but does not attempt to serve <strong>the</strong><br />
type <strong>of</strong> food that would attract a clientele not staying in <strong>the</strong> hotel, <strong>and</strong> <strong>of</strong> <strong>the</strong> traditional luxury hotel<br />
concept <strong>of</strong> a formal fine dining venue where a meal will feature extremely refined service <strong>and</strong> <strong>of</strong>ten<br />
last three hours. To attract a stylish crowd interested in eating fashionable food, Starwood has<br />
recruited celebrity chefs to helm <strong>the</strong> restaurants in its hotels, leasing <strong>the</strong> space to boldface names like<br />
Drew Nieporent (Heartbeat in <strong>the</strong> W New York, Earth & Ocean in <strong>the</strong> W Seattle, <strong>and</strong> Icon at <strong>the</strong> W<br />
New York—<strong>The</strong> Court), Todd English (Olives at <strong>the</strong> W New York—Union Square), <strong>and</strong> Gail<br />
Deffarari (XYZ in <strong>the</strong> W San Francisco).<br />
A popular nightlife venue is also a key element <strong>of</strong> <strong>the</strong> image W is trying to portray <strong>and</strong> helps keep <strong>the</strong><br />
hotel occupied with leisure customers on weekends. To build a collection <strong>of</strong> hip bars, W established a<br />
partnership with former model <strong>and</strong> nightlife impresario R<strong>and</strong>e Gerber in 1996, as <strong>the</strong> company<br />
planned its launch <strong>of</strong> <strong>the</strong> W New York, purchasing a 49% interest in Gerber’s company Midnight<br />
Oil. lxv Gerber was leasing commercial real estate at Ian Schrager’s Paramount <strong>Hotel</strong> in New York<br />
when he opened a bar <strong>the</strong>re called <strong>The</strong> Whiskey. His formula <strong>of</strong> tightly controlling <strong>the</strong> guest list by<br />
effectively limiting it to guests <strong>of</strong> <strong>the</strong> hotel, local VIPs, <strong>and</strong> celebrities proved extremely popular, <strong>and</strong><br />
24
Gerber began to operate bars in o<strong>the</strong>r Schrager properties, including <strong>the</strong> Whiskey in <strong>the</strong> Sunset<br />
Marquis <strong>Hotel</strong> in Los Angeles. When Gerber moved to <strong>the</strong> Starwood camp, his relationship with<br />
Schrager soured <strong>and</strong> <strong>the</strong> two have engaged in a near-constant legal battle since, with Schrager buying<br />
Gerber out <strong>of</strong> some properties <strong>and</strong> an agreement that leaves Schrager <strong>the</strong> rights to name his bars “Sky<br />
Bar,” <strong>and</strong> Gerber “Whiskey.” lxvi<br />
Meeting rooms<br />
While many boutique hotels have eliminated meeting spaces as a cost-cutting measure, W uses its<br />
function space as a competitive advantage. This enables it to derive up to 20% <strong>of</strong> its business from<br />
groups. lxvii Although it cannot host <strong>the</strong> large functions many mass-market hotels regularly run, most<br />
W hotels <strong>of</strong>fer several smaller meeting areas <strong>and</strong> market <strong>the</strong>m to executives concerned with form as<br />
well as function. W has innovated <strong>the</strong> concept <strong>of</strong> ‘Sensory Meetings,’ which promise “a new way to<br />
motivate minds <strong>and</strong> get ideas flowing, using <strong>the</strong> five senses as inspiration. Mood music, aroma<strong>the</strong>r apy<br />
scents, retro c<strong>and</strong>ies, <strong>and</strong> many o<strong>the</strong>r special touches help set <strong>the</strong> tone.” lxviii Of course, <strong>the</strong> hotels also<br />
<strong>of</strong>fer <strong>the</strong>ir meeting spaces on weekends for weddings <strong>and</strong> parties.<br />
Catalogue <strong>and</strong> <strong>the</strong> W Store<br />
Because building a returning clientele is a key pr<strong>of</strong>it driver for W, it looks to invade its customers’<br />
lives to <strong>the</strong> greatest extent possible. To that end, it has established an online <strong>and</strong> print catalog that it<br />
places in each guest room, allowing customers to take <strong>the</strong> W experience home with <strong>the</strong>m. In addition<br />
to <strong>the</strong> W signature waffle weave cotton robe, bed linens <strong>and</strong> mattresses, <strong>and</strong> br<strong>and</strong>ed clo<strong>the</strong>s <strong>and</strong><br />
accessories, customers can find in <strong>the</strong> W store catalogue a juicer designed by Philippe Starck, stylish<br />
modern <strong>of</strong>fice accessories, <strong>and</strong> for <strong>the</strong> truly young at hear t, a skateboard. <strong>The</strong> chain also maintains a<br />
physical store in <strong>the</strong> W New York Times Square.<br />
Starwood’s Competitive Advantages<br />
Corporate Structure<br />
W hotels benefit from significant competitive advantages by being part <strong>of</strong> <strong>the</strong> Starwood organization.<br />
<strong>The</strong> br<strong>and</strong> can exploit Starwood’s resources, from website design <strong>and</strong> upkeep to access to Starwood’s<br />
sales <strong>and</strong> marketing network. W also benefits from synergies with Starwood’s loyalty programs: in a<br />
model reliant on repeat business, 80% <strong>of</strong> <strong>the</strong> W customer base is a member <strong>of</strong> <strong>the</strong> Starwood Preferred<br />
Guest (SPG) loyalty program. lxix This helps W retain customers, but it also brings in new customers<br />
who experience <strong>the</strong> W br<strong>and</strong> for <strong>the</strong> first time when <strong>the</strong>y trade in points accrued at o<strong>the</strong>r Starwood<br />
br<strong>and</strong>s or through purchases made with firms that allow customers to earn SPG points; <strong>the</strong> company<br />
does not view cannibalization as a significant risk. Loyalty programs are also considered a value<br />
25
driver for business travelers in <strong>the</strong> upscale segment, although not as important as price, hotel type, or<br />
location. lxx<br />
Because W can leverage <strong>the</strong> existing Starwood corporate structure, it can be run as a relatively lean<br />
operation. Under a VP <strong>of</strong> operations, W has one director <strong>of</strong> sales <strong>and</strong> marketing, a training director,<br />
<strong>and</strong> a team <strong>of</strong> 10 workin g in design <strong>and</strong> development. This team works with various architects to keep<br />
<strong>the</strong> br<strong>and</strong> image consistent across W hotels, while each hotel remains stylistically unique, choosing<br />
upholstery <strong>and</strong> room design elements for each hotel.<br />
Cost Savings Through Economies <strong>of</strong> Scale <strong>and</strong> Scope<br />
<strong>The</strong> size <strong>of</strong> <strong>the</strong> Starwood organization <strong>and</strong> number <strong>of</strong> hotels in <strong>the</strong> chain also lower costs through<br />
significant economies <strong>of</strong> scale. All Starwood hotels share a common property management system<br />
(PMS) connected to a proprietary central reservations system (CRS), Starlink, capable <strong>of</strong> yield<br />
managing room rates across one hotel or an entire market (see Exhibit 19 – <strong>The</strong> hotel business<br />
transactional process – reserving a room). A seamless connection between a hotel’s PMS <strong>and</strong> <strong>the</strong><br />
chain’s CRS <strong>of</strong>fers hotels <strong>the</strong> ability to coordinate <strong>and</strong> yield manage individual <strong>and</strong> group sales<br />
reservations. <strong>The</strong>se reservations can come through travel agents accessing any one <strong>of</strong> <strong>the</strong> four<br />
centralized Global Distribution Systems (GDS), websites (both Starwood’s proprietary website <strong>and</strong><br />
unaffiliated travel websites, which hit Starlink via <strong>the</strong> GDS) <strong>and</strong> telephone. By contrast, independent<br />
hotels cannot afford a customized CRS, while Ian Schrager only implemented a st<strong>and</strong>ardized PMS<br />
across his hotels in early 2003. lxxi Independent hotels <strong>and</strong> small chains must find a way to link <strong>the</strong>ir<br />
PMS (or CRS if <strong>the</strong>y have one) to a switch providing access to <strong>the</strong> four GDS systems; this is <strong>of</strong>ten<br />
accomplished by joining a marketing group or signing up with a GDS representative such as Utell,<br />
Unirez, or Lexington Reservation Systems, all <strong>of</strong> which charge significant fees —on top <strong>of</strong> <strong>the</strong> GDS<br />
fees—for each reservation or sometimes for each night <strong>of</strong> stay. Finally, Starwood benefits from<br />
pricing <strong>and</strong> sales information from its o<strong>the</strong>r hotels in each W’s market, information not available to<br />
independent hotels <strong>and</strong> small chains.<br />
W also benefits from Starwood’s economies <strong>of</strong> scope, gaining advantaged pricing on maintenance<br />
contracts <strong>and</strong> supplies as part <strong>of</strong> a large family <strong>of</strong> br<strong>and</strong>s. In contrast, independent hotels <strong>and</strong> small<br />
chains must purchase in smaller quantities <strong>and</strong> pay higher prices. Starwood is also able to devote<br />
more resources to improving its supply chain management than a small chain or independent hotel,<br />
seeking out <strong>and</strong> achieving cost savings in its purchases <strong>of</strong> items including linens, cleaning supplies,<br />
telecommunications, <strong>and</strong> IT infrastructure.<br />
26
Quality <strong>of</strong> Service<br />
All W <strong>Hotel</strong>s are tightly controlled by Starwood (e.g., owned, leased, part <strong>of</strong> a consolidated joint<br />
venture, or managed by Starwood), lxxii which gives <strong>the</strong> company a far greater ability to control <strong>the</strong><br />
level <strong>and</strong> consistency <strong>of</strong> service than it has for franchised hotels managed by third parties. While<br />
Starwood franchises its Westin, Sheraton <strong>and</strong> Four Points by Sheraton br<strong>and</strong>s, it is not pursuing a<br />
franchise strategy for W. lxxiii Starwood defines <strong>the</strong> service philosophy for <strong>the</strong> W br<strong>and</strong> as follows: W is<br />
“a fresh alternative combining <strong>the</strong> personality <strong>and</strong> style <strong>of</strong> independent hotels with whatever you want,<br />
whenever you want it service.” lxxiv Based on industry reviews, it has apparently succeeded in this<br />
strategy: Business Travel News ranked W <strong>Hotel</strong>s first in <strong>the</strong> upper-upscale category for 2001, rising<br />
from fifth place <strong>the</strong> previous year, <strong>and</strong> beating long-established competition from Loews, Le Meridien,<br />
<strong>and</strong> Inter-Continental. lxxv Condé Nast Traveler Magazine named three W hotels to its 2002 Gold List,<br />
consisting <strong>of</strong> <strong>the</strong> magazine readership’s favorite hotels, resorts <strong>and</strong> cruise lines worldwide. lxxvi<br />
In comparison to independent hotels, W benefits from <strong>the</strong> ability to train its staff using techniques that<br />
have been established <strong>and</strong> rolled out across <strong>the</strong> entire Starwood organization, such as its $17-plus<br />
million Six Sigma initiative. This is especially critical in a segment <strong>of</strong> <strong>the</strong> industry that suffers higher<br />
turnover than industry average; because lifestyle hotels tend to recruit young, trendy, good-looking<br />
staff, <strong>the</strong>re is a high risk <strong>of</strong> losing that staff to more rewarding opportunities in <strong>the</strong> fields <strong>of</strong> modeling<br />
or acting. lxxvii<br />
Locations<br />
<strong>The</strong> W model is to build hotels in major urban destinations. <strong>The</strong>se destinations cement <strong>the</strong> br<strong>and</strong>’s<br />
status as a business hotel; to boost its leisure bookings, <strong>the</strong> line uses a heavy promotional push to<br />
entice out-<strong>of</strong>-town <strong>and</strong> even local guests for weekend stays. Efforts include advertising (including a<br />
major campaign in national magazines <strong>and</strong> <strong>the</strong> Wall Street Journal for late winter/spring 2003) <strong>and</strong><br />
targeted promotions <strong>of</strong>ten bundling added-value services such as spa treatments, meals, parking, spa<br />
discounts, flowers, <strong>and</strong> champagne with rooms at special prices.<br />
Urban locations were hardest-hit by <strong>the</strong> aftermath <strong>of</strong> <strong>the</strong> September 11 th attacks on <strong>the</strong> travel industry.<br />
However, Starwood considers that <strong>the</strong> worst is over on this front <strong>and</strong> that <strong>the</strong> company’s urban focus<br />
leaves it “levered to <strong>the</strong> busines s travel recovery.” lxxviii<br />
Willingness To Pay<br />
<strong>The</strong> W br<strong>and</strong> appears to be a good example <strong>of</strong> value innovation: Starwood has eliminated features <strong>and</strong><br />
services that are not important to customers <strong>and</strong> accentuated or implemented services <strong>and</strong> features that<br />
add value to its base. A specific example might be its popular ‘Wired’ promotion, <strong>of</strong>fering guests<br />
unlimited high speed Internet access, unlimited local, toll free, <strong>and</strong> domestic long distance telephone<br />
27
calls, <strong>and</strong> a keepsake mouse pad, in addition to <strong>the</strong> room, which was based on customer requests. Key<br />
features such as fitness centers <strong>and</strong> <strong>the</strong> W’s signature Away Spa are accentuated, while expensive<br />
elements not highly valued by customers, such as room space, exterior balconies, <strong>and</strong> new<br />
construction, are eliminated. Br<strong>and</strong>ed hotels also <strong>of</strong>fer an enhanced image <strong>of</strong> security in comparison<br />
to independent hotels, for which both business <strong>and</strong> leisure travelers are willing to pay a premium:<br />
10.75% for leisure travelers, <strong>and</strong> 7.73% for business travelers. lxxix<br />
E-strategy<br />
Internet bookings are a significant opportunity for hotels, because <strong>the</strong>y eliminate all fees normally paid<br />
to GDS companies <strong>and</strong> outsourced customer service telephone operators, as well as travel agent<br />
commissions. Thus Starwood has made a significant investment in its hotel websites, as have many <strong>of</strong><br />
its competitors. This effort appears to have begun to pay dividends: <strong>the</strong> company has experienced a<br />
60% increase in web bookings over <strong>the</strong> past year. lxxx While independent hoteliers are also investing in<br />
allowing online bookings, many do not have <strong>the</strong> capability <strong>of</strong> eliminating third parties from <strong>the</strong><br />
transaction, <strong>and</strong> still have to pay GDS fees on any sales booked over <strong>the</strong> Internet. For example, Ian<br />
Schrager’s site is powered by www.tabletbookings.com, <strong>and</strong> uses Pegasus to link to <strong>the</strong> GDS.<br />
Marketing <strong>and</strong> Public Relations<br />
W is able to leverage Starwood’s significant investments in marketing in ways not available to<br />
independent hotels <strong>and</strong> small chains. Starwood has dedicated significant resources to its hotel<br />
websites. W plans to roll out a new web design in mid-March, <strong>and</strong> envisions a “constantly evolving”<br />
web presence. lxxxi However, because W seeks a significantly different image than <strong>the</strong> o<strong>the</strong>r Starwood<br />
br<strong>and</strong>s, <strong>and</strong> relies heavily on PR to maint ain its trendy image, it does not rely on Starwood’s internal<br />
PR department <strong>and</strong> instead pays a fee to an outside company. lxxxii<br />
Growth Strategy <strong>and</strong> opportunities<br />
A new location for a W hotel must meet several criteria. First, <strong>the</strong> location itself must serve <strong>the</strong><br />
br<strong>and</strong>’s image: for example, <strong>the</strong> W Atlanta (in Buckhead) <strong>and</strong> <strong>the</strong> W Suites in Newark, CA (Silicon<br />
Valley) are W’s only suburban locations. If a location is suitably urban <strong>and</strong> hip, <strong>the</strong> market must still<br />
be able to support a hotel at a $50 price point premium to a Westin <strong>and</strong> an even greater premium to a<br />
Sheraton. Starwood will not open a W in a market that it believes cannot sustain greater than a $30<br />
premium to a Westin. lxxxiii<br />
<strong>The</strong> W br<strong>and</strong> accounted for 6% <strong>of</strong> Starwood’s EBITDA in 2001, when it declined more heavily than<br />
o<strong>the</strong>r Starwood br<strong>and</strong>s because its distribution is weighted towards markets pr<strong>of</strong>oundly affected by <strong>the</strong><br />
business downturn in 2001. Starwood intends to grow <strong>the</strong> br<strong>and</strong> aggressively over <strong>the</strong> next five years,<br />
28
increasing <strong>the</strong> total number <strong>of</strong> W hotels to 50 by 2007. lxxxiv Starwood owns 22 properties that do not<br />
fly <strong>the</strong> flag <strong>of</strong> one <strong>of</strong> <strong>the</strong> Starwood br<strong>and</strong>s <strong>and</strong> thus appear to be ripe for conversion into W br<strong>and</strong>ed<br />
hotels. lxxxv<br />
Long term strategy<br />
Starwood views W as a growth vehicle, feeling <strong>the</strong> br<strong>and</strong> strategy has been successful <strong>and</strong> that <strong>the</strong> line<br />
has earned its place in <strong>the</strong> Starwood portfolio. Developers are excited to partner with Starwood in a<br />
time <strong>of</strong> decreasing capital investment in <strong>the</strong> hotel industry. One question mark still to be resolved is<br />
how <strong>the</strong> capital replacement cycle economics will play out for <strong>the</strong> br<strong>and</strong>. While larger Starwood<br />
assets, such as Sheraton hotels, tend to be renovated on a 20-30 year cycle, W's upper upscale<br />
segment, fashion-conscious target market, <strong>and</strong> reliance on design elements will require more frequent<br />
renovations. At this point, <strong>the</strong> existing W hotels are too new to estimate <strong>the</strong> economic impact on <strong>the</strong><br />
life <strong>of</strong> <strong>the</strong> capital invested in <strong>the</strong> br<strong>and</strong>. Of course, this capital replenishment issue would also affect<br />
independent boutique hotels as well as W hotels.<br />
<strong>Boutique</strong> Growing Pains<br />
Sensing a market opportunity, o<strong>the</strong>rs soon jumped onto <strong>the</strong> b<strong>and</strong>wagon. In 2001, Marriott announced<br />
it was repositioning its Renaissance br<strong>and</strong> as a chic boutique chain, stating “We figure 30% <strong>of</strong> <strong>the</strong><br />
market out <strong>the</strong>re is attracted to <strong>the</strong> boutique, sort <strong>of</strong> eclectic, sort <strong>of</strong> different, give-me-a-surprise kind<br />
<strong>of</strong> hotels.” lxxxvi Marriott has also made a combined $140 million investment with Italian jeweler<br />
Bulgari to launch a line <strong>of</strong> boutique hotels in Europe. lxxxvii This gold-rush m entality may have created<br />
a surplus <strong>of</strong> boutique hotels in <strong>the</strong> market. After <strong>the</strong> events <strong>of</strong> September 11 th , 2001, which left <strong>the</strong><br />
travel industry reeling, many boutique hotels were struggling to survive. Still relatively new, <strong>the</strong>y<br />
were not yet as competitiv e as seasoned players, <strong>and</strong> without significant meeting space (a costly use <strong>of</strong><br />
space eliminated in many boutique hotels), <strong>the</strong>y had fewer tools to drive dem<strong>and</strong> during a<br />
downturn. lxxxviii Service also became a differentiator: because staff at a boutique hotel is <strong>of</strong>ten chosen<br />
for looks, style, <strong>and</strong> energy, training can be spotty <strong>and</strong> staff may neglect to maintain a deferential<br />
‘service’ attitude under high-pressured situations. Given <strong>the</strong> “ego-driven” nature <strong>of</strong> <strong>the</strong> typical<br />
boutique hotel client, keeping staff more excited by a dreamed-<strong>of</strong> career in modeling or acting than<br />
<strong>the</strong>ir current job “interested in what <strong>the</strong> hotel is,” is a challenge boutique hotels cannot ignore if <strong>the</strong>y<br />
want to survive. lxxxix<br />
Perhaps because <strong>of</strong> this backlash effect, W <strong>Hotel</strong>s has attempted to categorize <strong>the</strong>ir product as<br />
‘lifestyle hotels’ ra<strong>the</strong>r than ‘boutiques,’ with a stronger emphasis on service as a differentiating factor<br />
as well as <strong>the</strong> now-expected design, chic restaurants <strong>and</strong> bars, <strong>and</strong> individual style. xc Says Lisa Z<strong>and</strong>ee<br />
<strong>of</strong> W, “We have never used <strong>the</strong> term boutique—though o<strong>the</strong>rs have used it <strong>of</strong> us. People in <strong>the</strong> US are<br />
questioning <strong>the</strong> longevity <strong>of</strong> boutique hotels because what happens, after <strong>the</strong>y come into fashion, if a<br />
29
lot more open? We are trying to make our br<strong>and</strong> last by not making it too trendy. We don’t want<br />
design that will be out <strong>of</strong> date tomorrow.” xci<br />
<strong>The</strong> events <strong>of</strong> September 11 hit urban, upscale hotels extremely hard, as business travel declined <strong>and</strong> a<br />
shaken customer base began seeking out comfort <strong>and</strong> solace over a hip, trendy lobby scene. “Given<br />
<strong>the</strong> state <strong>of</strong> <strong>the</strong> economy, [boutique hotels] became not only less appropriate (but excessive),” notes<br />
Bjorn Hanson <strong>of</strong> PwC. xcii Says Chip Conley <strong>of</strong> Joie de Vivre, a 22-hotel chain based in San Francisco,<br />
“We’re in <strong>the</strong> era <strong>of</strong> <strong>the</strong> post-hip boutique hotel. Travelers have had enough <strong>of</strong> hotels that are all about<br />
<strong>the</strong> scene <strong>and</strong> are moving toward those that are stylish, comfortable <strong>and</strong> <strong>of</strong>fer something <strong>the</strong>y can<br />
relate to.” xciii “We have to move away from positioning as a status symbol <strong>and</strong> move to positioning as<br />
a comfortable sanctuary,” agrees Jim Berra, Starwood’s vice president <strong>of</strong> customer loyalty. xciv Despite<br />
<strong>the</strong> volatility <strong>of</strong> <strong>the</strong> segment, Starwood has rushed to open new W hotels (17 are open to date, with<br />
five in New York City alone, <strong>and</strong> launches are planned for Mexico City <strong>and</strong> Seoul later this year),<br />
calling <strong>the</strong> br<strong>and</strong> a “runaway success.” xcv Indeed, <strong>the</strong> line experienced an increase in revenue per<br />
available room night (RevPAR) <strong>of</strong> 30%, from $142 to $182, between fourth quarter 2000 <strong>and</strong> <strong>the</strong> same<br />
period a year before. xcvi However, because <strong>the</strong> hotels are primarily located in cities that suffered major<br />
downturns after September 11, <strong>the</strong> average daily rate for 2001 suffered a 23% decrease from <strong>the</strong> prior<br />
year, from $245.83 to $189.76. xcvii After September 11, urban hotels in general saw occupancy rates<br />
decline from 68.2% in 2000 to 56.2% in early 2002; boutique hotels showed a similar pattern with<br />
rates declining from 73.7% to 55.6% during <strong>the</strong> same period, according to Smith Travel Research.<br />
However, boutiques have been rebounding more slowly than o<strong>the</strong>r segments, <strong>and</strong> “<strong>the</strong>y’re probably<br />
going to face an uphill struggle for <strong>the</strong> foreseeable future,” according to Smith Travel Research analyst<br />
Bobby Bowers. xcviii None<strong>the</strong>less, <strong>the</strong> W br<strong>and</strong> saw 14.2% RevPAR increase in fourth quarter 2002<br />
over <strong>the</strong> same period a year earlier. xcix<br />
Conclusion: Is Ian Schrager’s approach to hotels sustainable? Will W outperform ISH?<br />
Arguably, Ian Schrager <strong>Hotel</strong>s used value innovation to change many contextual elements <strong>of</strong> <strong>the</strong><br />
upscale hotel business model. Primarily, Schrager altered <strong>the</strong> scope <strong>of</strong> competition by <strong>of</strong>fering<br />
unique, design-led customer experiences. Schrager hotels reintroduced creative differentiation to an<br />
industry that was accustomed to competing solely on <strong>the</strong> ability to provide <strong>the</strong> same array <strong>of</strong> st<strong>and</strong>ar d<br />
luxuries at <strong>the</strong> lowest cost. Additionally, he revived an element <strong>of</strong> turn-<strong>of</strong>-<strong>the</strong> century gr<strong>and</strong> hotels by<br />
developing restaurants <strong>and</strong> bars that functioned as local draws <strong>and</strong> pr<strong>of</strong>it centers.<br />
However, <strong>the</strong> entry <strong>of</strong> Starwood’s W proved that a hotel can also be successful by adopting selected<br />
aspects <strong>of</strong> <strong>the</strong> boutique formula while highlighting comfort <strong>and</strong> service. Schrager’s recent move to<br />
embrace traditional elements <strong>of</strong> customer focus (improved customer service, implementing advertising<br />
<strong>and</strong> business services) confirms that service is a key willingness to pay factor for many segments <strong>of</strong><br />
30
<strong>the</strong> increasingly heterogeneous boutique hotel customer base. Industry observers note that Schrager<br />
may be alienating his core clientele by allowing too much <strong>of</strong> <strong>the</strong> mass market behind his velvet rope,<br />
leaving himself ‘stuck in <strong>the</strong> middle.’ <strong>The</strong> tastes <strong>of</strong> this trend-setting group are notoriously fickle,<br />
particularly in <strong>the</strong> face <strong>of</strong> intense competition in cities like New York. By attempting to turn hotels<br />
into fashion items, forgetting that fashion inevitably fades, Schrager may find sustainable pr<strong>of</strong>itability<br />
elusive. Fur<strong>the</strong>rmore, Schrager will be required to invest frequently in renovating his properties if he<br />
intends to keep <strong>the</strong>m ‘fresh’ <strong>and</strong> ‘buzzworthy.’<br />
Ian Schrager’s main opportunity may be to retrench to serving <strong>the</strong> style elite that make up his core<br />
customer base, <strong>and</strong> using his current European footprint to be <strong>the</strong> first mover in cities outside <strong>the</strong> US<br />
with no existing boutique presence. However, his independent status may prevent him from gaining<br />
access to <strong>the</strong> capital he needs to pursue necessary expansion, particularly in a downturn. Starwood, on<br />
<strong>the</strong> o<strong>the</strong>r h<strong>and</strong>, closed a new $1.3 billion senior credit facility in October 2002, leaving it with $600<br />
million <strong>of</strong> capacity after refinancing its existing debt, <strong>and</strong> claims that developers are excited to partner<br />
with <strong>the</strong> company to develop W hotels in a time <strong>of</strong> decreasing capital investment in <strong>the</strong> hotel industry. c<br />
ISH’s global ambitions run a serious risk <strong>of</strong> being preempted by Starwood or by European<br />
entrepreneurs <strong>and</strong> hoteliers with deeper local knowledge <strong>and</strong> pockets.<br />
<strong>The</strong> high leverage <strong>of</strong> lifestyle hotels has led <strong>the</strong>m to suffer heavily from <strong>the</strong> current economy in <strong>the</strong>ir<br />
core urban markets. However, <strong>the</strong> W br<strong>and</strong> is better positioned than most to survive <strong>the</strong> downturn. W<br />
can leverage Starwood’s established sales organization <strong>and</strong> extensive contacts with corporate planners<br />
to stimulate contracted business travel towards W hotels as needed. On <strong>the</strong> o<strong>the</strong>r h<strong>and</strong>, independent<br />
boutique hotels, including Schrager's properties, do not have <strong>the</strong> meeting spaces, sales organizations,<br />
or relationships to attract group business in times <strong>of</strong> economic downturn. As a result, hoteliers such as<br />
Schrager are forced to turn to less-desirable sources <strong>of</strong> transient guests such as Expedia/Travelscape<br />
<strong>and</strong> <strong>Hotel</strong>s.com. <strong>The</strong>se websites provide hotels with large volumes <strong>of</strong> guests, but at a high cost:<br />
hoteliers must set aside blocks <strong>of</strong> rooms at low net rates, pay high distribution costs, <strong>and</strong> potentially<br />
suffer br<strong>and</strong> dilution in <strong>the</strong> case <strong>of</strong> image-sensitive hotels like Schrager's.<br />
While boutique hotels in general must wait for sunnier economic times to thrive again, Starwood<br />
appears to have built a sustainable competitive advantage over first-mover Ian Schrager that holds in<br />
both good times <strong>and</strong> bad. Schrager is rightly credited with popularizing <strong>the</strong> boutique concept, but W<br />
has found a way to bring <strong>the</strong> cachet <strong>of</strong> boutique hotels to a wider audience, without damaging <strong>the</strong><br />
br<strong>and</strong>’s credibility. Schrager may well survive as a niche player, but W is better positioned to succeed<br />
in <strong>the</strong> long run. Thanks to its superior corporate organization, economies <strong>of</strong> scale, <strong>and</strong> quality <strong>of</strong><br />
service, <strong>the</strong> W br<strong>and</strong> is poised to be more than just a passing fad in <strong>the</strong> hotel industry.<br />
31
Pictures<br />
W <strong>Hotel</strong>s<br />
cii<br />
ci<br />
32
ciii<br />
civ<br />
cv<br />
33
cvi<br />
cvii<br />
cviii<br />
34
Ian Schrager <strong>Hotel</strong>s<br />
cix<br />
cx<br />
cxi<br />
35
cxii<br />
36
Exhibits<br />
Exhibit 1:<br />
US <strong>Hotel</strong> Industry – Short History in numbers<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
Sales (US$ billion) - lhs Occupancy (%) - lhs<br />
Average Room Rate (US$) - lhs Total hotel rooms (in thous.) - rhs<br />
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000<br />
Source: American <strong>Hotel</strong> <strong>and</strong> Lodging Association<br />
Exhibit 2:<br />
US Lodging Dem<strong>and</strong> <strong>and</strong> GDP – 1968-2001<br />
Source: PricewaterhouseCoopers, Smith Travel Research, Deutsche Bank<br />
5,000<br />
4,000<br />
3,000<br />
2,000<br />
1,000<br />
0<br />
37
Exhibit 3:<br />
US Rooms under Construction Versus Existing Supply as <strong>of</strong> July 2002<br />
Number <strong>of</strong> Rooms Chain In construction % Existing Room Existing Room Base<br />
Scale<br />
Base<br />
Upper – Upper Scale 26,504 4.4% 605,795<br />
Upscale 22,189 6.9% 323,430<br />
Mid Scale w/F&B 4,364 0.7% 630,162<br />
Mid Scale w/o F&B 18,586 3.2% 577,508<br />
Economy 5,243 0.7% 778,890<br />
Unaffiliated 25,803 2.0% 1,305,034<br />
TOTAL 102,689 2.4% 4,220,819<br />
Source: Smith Travel Research <strong>and</strong> Deutsche Bank Securities Inc., estimates<br />
38
Exhibit 4: Timeline <strong>of</strong> <strong>the</strong> <strong>Hotel</strong> Industry<br />
1900 - A typical first-class hotel <strong>of</strong>fers steam heat, gas burners, electric call bells, baths <strong>and</strong> closets on all floors, billiard <strong>and</strong> sample rooms,<br />
barbershops, <strong>and</strong> liveries. <strong>The</strong> Lenox <strong>Hotel</strong> <strong>of</strong>fered "firepro<strong>of</strong> lodging, unexcelled cuisine, a shower bath, ro<strong>of</strong> garden, <strong>and</strong><br />
American/European lodging plans starting at $2."<br />
1904 - New York City's St. Regis <strong>Hotel</strong> provides individually controlled heating <strong>and</strong> cooling units in each guestroom.<br />
1908 - Gideons International places <strong>the</strong>ir first Bible in <strong>the</strong> Superior <strong>Hotel</strong> in Montana. <strong>The</strong> <strong>Hotel</strong> Statler chain begins in Buffalo. All<br />
guestrooms have private baths, full-length mirrors, telephones, <strong>and</strong> built-in radios, serving as <strong>the</strong> model for hotel construction for <strong>the</strong> next 40<br />
years.<br />
1910 - <strong>The</strong> American <strong>Hotel</strong> Assn. is formed for <strong>the</strong> "apprehension <strong>and</strong> punishment to <strong>the</strong> fullest extent <strong>of</strong> <strong>the</strong> law, <strong>of</strong> pr<strong>of</strong>essional deadbeats,<br />
check forgers, dishonest <strong>and</strong> undesirable employees, crooks <strong>of</strong> all descriptions <strong>and</strong> such o<strong>the</strong>r matters." <strong>The</strong> lodging industry consists almost<br />
entirely <strong>of</strong> hotels situated in urban centers <strong>and</strong> resorts near <strong>the</strong> principal vacation destinations. Electricity is beginning to be installed in new<br />
hotels for cooking purposes, as well as for lighting. However, most hotels place c<strong>and</strong>lesticks, new c<strong>and</strong>les, <strong>and</strong> matches in every room-<br />
electric light bulb or not.<br />
1916 - <strong>The</strong> Federal Road Aid Act spawns a new segment <strong>of</strong> <strong>the</strong> lodging industry.<br />
1919 - Conrad Hilton purchases his first hotel, <strong>The</strong> Mobley, in Cisco, Texas.<br />
1920s - Golden Age<br />
1920 - Prohibition begins.<br />
1922 - <strong>The</strong> Treadway Company has some <strong>of</strong> <strong>the</strong> first management contracts on small college inns. <strong>The</strong> first collegiate program in hotel <strong>and</strong><br />
restaurant management is initiated at Cornell University by <strong>the</strong> American <strong>Hotel</strong> Association.<br />
1925 - <strong>The</strong> first roadside "motel" opens in San Luis Obispo, Calif., for $2.50 a night.<br />
1927 - <strong>The</strong> <strong>Hotel</strong> Statler in Boston becomes <strong>the</strong> first hotel with radio reception; rooms are equipped with individual headsets to receive<br />
broadcasts from a central control room. <strong>The</strong> Huntington <strong>Hotel</strong> in Calif. installs <strong>the</strong> first Olympic-size hotel swimming pool.<br />
1929 - Western <strong>Hotel</strong>s, now Westin, starts with 17 hotels in <strong>the</strong> Pacific Northwest <strong>and</strong> establishes <strong>the</strong> first U.S. hotel management company.<br />
<strong>The</strong> Oakl<strong>and</strong> Airport <strong>Hotel</strong> becomes <strong>the</strong> first <strong>of</strong> its kind in <strong>the</strong> country.<br />
1930s - <strong>The</strong> Great Depression<br />
1930 - Four out <strong>of</strong> five hotels in <strong>the</strong> United States go into receivership. <strong>The</strong> st<strong>and</strong>ard travel agent commission is 10 percent.<br />
1933 - Due to <strong>the</strong> Great Depression, hotels post <strong>the</strong> lowest average occupancy rate on record, 51 percent. Construction grinds to a halt.<br />
1934 - <strong>The</strong> <strong>Hotel</strong> Statler in Detroit is <strong>the</strong> first to have a central system to "air condition" every public room.<br />
1937 - Membership in <strong>the</strong> Waiters <strong>and</strong> Bartenders National Union, which encompasses hotel employees, exceeds 200,000.<br />
1939 - Quality Courts, later Choice <strong>Hotel</strong>s International, is formed by seven motel operators as a nonpr<strong>of</strong>it referral system.<br />
1940s - WWII <strong>and</strong> Recovery<br />
1940 - No materials for expansion; 93% occupancy. After <strong>the</strong> Depression, recovery awaits <strong>the</strong> outcome <strong>of</strong> <strong>the</strong> World War II. Air<br />
conditioning <strong>and</strong> "air cooling" become prevalent.<br />
1945 - Sheraton is <strong>the</strong> first hotel corporation to be listed on <strong>the</strong> New York Stock Exchange. Travelodge becomes <strong>the</strong> first economy-lodging<br />
corporation.<br />
1946 - Recovery at last. Occupancy reaches <strong>the</strong> highest-ever rate, 93 percent. Best Western is founded by M.K. Guertin <strong>and</strong> 54 friends. <strong>The</strong><br />
first casino hotel, <strong>the</strong> Flamingo, debuts in Las Vegas. Westin debuts first guest credit card. Larry <strong>and</strong> Bob Tisch purchase Laurel-in-<strong>the</strong>-<br />
Pines, Lakewood, N.J., which evolved into Loews <strong>Hotel</strong>s.<br />
1947 - Westin establishes <strong>Hotel</strong>type, <strong>the</strong> first hotel reservation system. New York City's Roosevelt <strong>Hotel</strong> installs television sets in all<br />
guestrooms.<br />
1949 - Hilton becomes <strong>the</strong> first international hotel chain with <strong>the</strong> opening <strong>of</strong> <strong>the</strong> Caribe Hilton in San Juan, Puerto Rico.<br />
1950s - <strong>The</strong> Growth <strong>of</strong> Motel Chains<br />
1951 - <strong>The</strong> American <strong>Hotel</strong> Institute, later to be renamed <strong>the</strong> Educational Institute, is launched. Hilton is <strong>the</strong> first chain to install television<br />
sets in all guestrooms.<br />
1952 - Less than a year after Congress approves <strong>the</strong> development <strong>of</strong> an interstate highway system, Kemmons Wilson starts Holiday Inns.<br />
Kemmons Wilson opens his first Holiday Inn in Memphis, Tenn., named after a Bing Crosby movie. <strong>The</strong> far-reaching impact <strong>of</strong> <strong>the</strong><br />
interstate highway system on travel patterns, which meant boom <strong>and</strong> opportunity for many, <strong>and</strong> decline or bust for o<strong>the</strong>rs.<br />
1953 - AHA buys <strong>the</strong> Universal Credit Card. <strong>The</strong> American <strong>Hotel</strong> Foundation, a subsidiary <strong>of</strong> AHA, is founded.<br />
1954 - Howard Dearing Johnson initiates <strong>the</strong> first lodging franchise, a motor lodge in Savannah, Ga. Conrad Hilton's purchase <strong>of</strong> <strong>the</strong> Statler<br />
<strong>Hotel</strong> Company for $111 million is largest real -estate transaction in history. An inn in Flagstaff, Ariz., is <strong>the</strong> first in a series <strong>of</strong> "motor hotels"<br />
forming Ramada, a Spanish word meaning "a shaded resting place."<br />
Mid-1950s - Atlas <strong>Hotel</strong>s develops <strong>the</strong> first in-room c<strong>of</strong>fee concept.<br />
1957 - J.W. Marriott opens his first hotel, <strong>the</strong> Twin Bridges Marriott Motor <strong>Hotel</strong> in Arlington, Va., <strong>and</strong> Jay Pritzker buys his first hotel, <strong>The</strong><br />
Hyatt House, located outside <strong>the</strong> Los Angeles Airport. Hilton <strong>of</strong>fers direct-dial telephone service.<br />
1958 - AHA sells license for <strong>the</strong> Universal Travel Card to American Express. Sheraton introduces Reservatron, <strong>the</strong> industry's first automated<br />
electronic reservations system, <strong>and</strong> <strong>the</strong> first toll-free reservation number. Omni <strong>Hotel</strong>s, originally Dunfey <strong>Hotel</strong>s, is founded.<br />
1960s - <strong>The</strong> Growth <strong>of</strong> <strong>Hotel</strong> Chains<br />
Early 1960s - Siegas introduces <strong>the</strong> first true minibar<br />
1962 - Motel 6, <strong>the</strong> forerunner <strong>of</strong> budget br<strong>and</strong>s opens.<br />
1964 - Travelodge debuts wheelchair-accessible rooms.<br />
1965 - <strong>The</strong> Highway Beautification Act, which ultimately changed highway advertising, an important marketing lifeline for roadside<br />
lodgings. AT&T <strong>of</strong>fers a direct -reservation service featuring raid dialing; 300 hotels sign on with Guaranteed Reservations; Holidex by IBM<br />
is installed in Holiday Inns; Univac' s Teleman Unitel system makes up to 120 reservations per hour.<br />
1966 - Inter-Continental introduces retractable drying lines in guest showers, business lounges, ice <strong>and</strong> vending machines in guest corridors,<br />
<strong>and</strong> street entrances for hotel restaurants.<br />
1967 - <strong>The</strong> Atlanta Hyatt Regency opens, featuring a 21-story atrium <strong>and</strong> changing <strong>the</strong> course <strong>of</strong> upscale hotel design. Hyatt <strong>Hotel</strong>s<br />
Corporation splits into a real -estate holding company.<br />
1969 - Westin is <strong>the</strong> first hotel chai n to implement 24-hour room service.<br />
1970s - <strong>The</strong> Growth <strong>of</strong> Franchising<br />
<strong>The</strong> budget -hotel boom, little more than ano<strong>the</strong>r new idea in 1966, was a full -blown trend by <strong>the</strong> early 1970s. Increased momentum in <strong>the</strong><br />
development <strong>of</strong> chains, which represented less than 10% <strong>of</strong> <strong>the</strong> motel population in 1966, was an estimated 40% by 1975. <strong>The</strong> destabilizing<br />
jolt <strong>of</strong> <strong>the</strong> energy problem --<strong>the</strong>n crisis--<strong>of</strong> <strong>the</strong> early 1970s, left in its wake an erratic economy over most <strong>of</strong> <strong>the</strong> remainder <strong>of</strong> <strong>the</strong> decade.<br />
Tourism industry is hard hit.<br />
39
Tourism industry is hard hit.<br />
1970 - Hilton becomes <strong>the</strong> first billion-dollar lodging <strong>and</strong> food service company <strong>and</strong> <strong>the</strong> first to enter <strong>the</strong> Las Vegas market.<br />
1973 - <strong>The</strong> Sheraton-Anaheim is <strong>the</strong> first to <strong>of</strong>fer free in-room movies.<br />
1974 - <strong>The</strong> energy crisis hits <strong>the</strong> industry - hotels dim exterior signs, cut heat to unoccupied rooms, <strong>and</strong> ask guests to conserve electricity.<br />
1975 - Four Seasons is <strong>the</strong> first hotel company to <strong>of</strong>fer in-room amenities such as name-br<strong>and</strong> shampoo. Hyatt introduces an industry first<br />
when it opens its Regency Club, a concierge club level that provides <strong>the</strong> ultimate in VIP services. Cecil B. Day h<strong>and</strong>s out wooden nickels to<br />
guests over 50, establishing <strong>the</strong> first seniors program.<br />
1976 - Two Florida hotels are <strong>the</strong> first to <strong>of</strong>fer HBO in guestrooms.<br />
1977 - Showtime <strong>and</strong> <strong>The</strong> Movie Channel debut in hotels.<br />
1978 - Best Western has 2,000 affiliates; Holiday Inns, 1,700; Super 8, 71; <strong>and</strong> Budget Host, 25.<br />
1980s - Prosperity <strong>and</strong> Recession<br />
Reagan administration tax law encourages investment in construction as a tax shelter <strong>and</strong> spurs <strong>the</strong> boom <strong>of</strong> <strong>the</strong> century. Expansion <strong>of</strong> Bed<br />
<strong>and</strong> Breakfast concept in North America. Steady advances in computerization <strong>and</strong> systems management that replace more rudimentary<br />
procedures <strong>and</strong> leads to improvements in every area <strong>of</strong> operations, from back-<strong>of</strong>-<strong>the</strong>-house functions to central -reservation systems. Massive<br />
overbuilding <strong>of</strong> hotel accommodations result in a room surplus <strong>and</strong> plunging occupancy rates.<br />
1981 - Two <strong>of</strong> <strong>the</strong> first boutique hotels in <strong>the</strong> world open <strong>the</strong>ir doors to <strong>the</strong> public: <strong>The</strong> Blakes <strong>Hotel</strong> in London <strong>and</strong> <strong>the</strong> Bedford in San<br />
Francisco.<br />
1983 - Westin is <strong>the</strong> first major hotel company to <strong>of</strong>fer reservations <strong>and</strong> checkout using major credit cards. VingCard invents <strong>the</strong> optical<br />
electronic key card.<br />
1984 – Ian Schrager opens his first boutique hotel in New York City: <strong>the</strong> Morgan’s <strong>Hotel</strong>. Holiday Inn is <strong>the</strong> first to <strong>of</strong>fer a centralized<br />
travel agent commission plan. Choice <strong>Hotel</strong>s introduces <strong>the</strong> concept <strong>of</strong> market segmentation. Choice <strong>Hotel</strong>s <strong>of</strong>fers no-smoking rooms.<br />
Hampton Inns is <strong>the</strong> first to <strong>of</strong>fer a set <strong>of</strong> amenities. Holiday Inn debuts Embassy Suites <strong>Hotel</strong>s, <strong>the</strong> first nationwide all-suite hotel chain, in<br />
Overl<strong>and</strong> Park, Kan.<br />
1986 - Teledex Corporation introduces <strong>the</strong> first telephone designed specifically for hotel guestrooms. Days Inn provides an interactive<br />
reservation capability connecting all hotels.<br />
1988 - Extended stay segment introduced with Marriott's Residence Inns <strong>and</strong> Holiday Corporation's Homewood Suites.<br />
1989 - Hyatt introduces a chain wide kids program for ages 3-12 <strong>and</strong> a business center at <strong>the</strong> Hyatt Regency Chicago. Hampton Inns is <strong>the</strong><br />
first hotel chain to introduce <strong>the</strong> 100 percent satisfaction guarantee.<br />
1990s - Recession <strong>and</strong> Recovery<br />
By <strong>the</strong> early 1990s, expansion ends with more changes in <strong>the</strong> US tax code, worldwide recession <strong>and</strong> <strong>the</strong> Persian Gulf War. <strong>The</strong>se events lead<br />
to a 3-year period <strong>of</strong> slumping occupancies <strong>and</strong> rates. New construction virtually stops as financing becomes scarce. <strong>The</strong>se years are<br />
followed by <strong>the</strong> recovery <strong>of</strong> <strong>the</strong> hotel industry. Full-service, city center hotels become <strong>the</strong> linchpin sought by municipal governments for<br />
attracting travelers back to city centers. New industry strategies include: Niche marketing / market segmentation, an increase in central<br />
reservation systems, <strong>and</strong> a stronger emphasis on quality <strong>of</strong> service. Between 1986 <strong>and</strong> 1992, <strong>the</strong> US hotel industry lost approximately $14<br />
billion. Overcapacity plagued <strong>the</strong> industry for most <strong>of</strong> <strong>the</strong> late 1980's <strong>and</strong> early 1990's. Most <strong>of</strong> <strong>the</strong>se operators cite operating cost controls,<br />
higher room rates, <strong>and</strong> restructuring <strong>of</strong> real estate debt as measures taken towards renewed pr<strong>of</strong>itability.<br />
1990 - Loews <strong>Hotel</strong>s' Good Neighbor Policy becomes <strong>the</strong> industry's first <strong>and</strong> most comprehensive community outreach program.<br />
1991 - Westin is <strong>the</strong> first hotel chain to provide in-room voice mail. Industry sees record losses, 61.8 percent.<br />
1992 - Industry breaks even financially after six consecutive years <strong>of</strong> losses. 1993 - Radisson <strong>Hotel</strong>s Worldwide is <strong>the</strong> first to introduce<br />
business-class rooms.<br />
1994 - First online hotel catalog debuts - TravelWeb.com. Promus <strong>and</strong> Hyatt <strong>Hotel</strong>s are <strong>the</strong> first chains to establish a site on <strong>the</strong> Internet.<br />
1995 - Choice <strong>Hotel</strong>s International <strong>and</strong> Promus become <strong>the</strong> first companies to <strong>of</strong>fer guests "real -time" access to its central reservations<br />
system. Choice <strong>and</strong> Holiday Inn are <strong>the</strong> first to introduce online booking capability.<br />
1996 - Best Western celebrates its 50th anniversary, making it <strong>the</strong> oldest continually operating br<strong>and</strong>.<br />
1999 - Choice <strong>Hotel</strong>s International is <strong>the</strong> first chain to test making in-room PCs a st<strong>and</strong>ard amenity for guests. Starwood <strong>Hotel</strong>s & Resorts<br />
takes <strong>the</strong> boutique segment mainstream with <strong>the</strong> opening <strong>of</strong> its W br<strong>and</strong>.<br />
2000s - New Opportunities<br />
Technology, Mergers <strong>and</strong> Acquisitions: International Expansion, Demographic Changes: Age, Cultural Diversity, Eco -Tourism…<br />
2000 - Hilton unveils plans for <strong>the</strong> first luxury hotel in space.<br />
40
Exhibit 5:<br />
US Room Revenue by Chain Scale – 2001<br />
Segment Rooms % Total Room<br />
Revenue<br />
% Total<br />
Upper – Upper Scale 595,658 14.3 20,397 26.6<br />
Upscale 318,497 7.6 7,010 9.2<br />
Mid Scale w/F&B 637,663 15.3 9,692 12.7<br />
Mid Scale w/o F&B 568,039 13.6 8,447 11.0<br />
Economy 777,018 18.6 7,406 9.7<br />
Independent 1,276,551 30.6 23,601 30.8<br />
TOTAL 4,173,426 100.0 76,553 100.0<br />
Source: Smith Travel Resear ch <strong>and</strong> Deutsche Bank Securities Inc., estimates<br />
Exhibit 6:<br />
US hotels by size US hotels by location<br />
75-149<br />
rooms<br />
35%<br />
Exhibit 7:<br />
>70<br />
rooms<br />
23%<br />
150-299<br />
rooms<br />
21%<br />
300-500<br />
rooms<br />
10%<br />
Over 500<br />
rooms<br />
11%<br />
Airport<br />
11%<br />
Highway<br />
32%<br />
Resort<br />
12%<br />
US <strong>Hotel</strong> Industry : Market Share by Major Player as <strong>of</strong> July 02<br />
O<strong>the</strong>rs<br />
61%<br />
Marriott<br />
Int'l<br />
8%<br />
Source: Smith Travel Research, Deutsche Bank<br />
Hilton<br />
<strong>Hotel</strong>s<br />
8%<br />
Starwood<br />
3%<br />
Six<br />
Continent<br />
s<br />
8%<br />
Cendant<br />
12%<br />
Suburban<br />
29%<br />
Urban<br />
16%<br />
41
Exhibit 8:<br />
Ian Schrager<br />
<strong>Hotel</strong>’s Five Forces<br />
Bargaining Power <strong>of</strong> Suppliers:<br />
MEDIUM<br />
• Limited access to GDS - need to use a<br />
marketing group or GDS representative.<br />
Exhibit 9:<br />
W <strong>Hotel</strong>’s Five<br />
Forces<br />
Bargaining Power <strong>of</strong> Suppliers: LOW<br />
• Own reservation system - direct link<br />
(STARLINK - from Starwood)<br />
• Use leverage <strong>of</strong> Starwood for<br />
purchasing<br />
Threat <strong>of</strong> New Entrants: HIGH<br />
• Low variable costs once property is up<br />
<strong>and</strong> running<br />
• Customer heterogeneity can be<br />
addressed by specialty/<strong>the</strong>med hotels<br />
• Low property costs for run-down<br />
buildings that will be renovated<br />
• Large chains can make small “bets” on<br />
a boutique hotel<br />
• Use <strong>of</strong> viral marketing (peer<br />
recommendations)<br />
BUT,<br />
• High property costs for prime location<br />
• High design costs<br />
Rivalry Among Existing Players: HIGH<br />
• Little differentiation within quality<br />
types<br />
• Newness <strong>and</strong> hipness <strong>of</strong> hotel needs to<br />
be constantly maintained<br />
• fewer added services <strong>of</strong>fered<br />
• Some price-based competition<br />
• PR-based competition<br />
BUT,<br />
• Very high growth <strong>of</strong> boutique hotel<br />
market<br />
• Location-specific nature <strong>of</strong> hotels<br />
Threat <strong>of</strong> New Entrants: MEDIUM<br />
• Low variable costs once property is up<br />
<strong>and</strong> running<br />
• Customer heterogeneity can be<br />
addressed by specialty/<strong>the</strong>med hotels<br />
• Low property costs for run-down<br />
buildings that will be renovated<br />
• <strong>Boutique</strong> hotels can be added one by<br />
one - no need for mass expansion before<br />
pr<strong>of</strong>its can be had<br />
BUT,<br />
• High property costs for prime location<br />
• High design costs<br />
• High marketing expenditures<br />
Rivalry Among Existing Players: HIGH<br />
• Little differentiation within quality<br />
types<br />
• Newness <strong>and</strong> hipness <strong>of</strong> hotel needs to<br />
be constantly maintained<br />
• Services <strong>of</strong>fered (business conference<br />
rooms, added 9/11 security)<br />
• Some price-based competition<br />
• Economies <strong>of</strong> scope<br />
BUT,<br />
• Very high growth <strong>of</strong> boutique hotel<br />
market<br />
• Location-specific nature <strong>of</strong> hotels<br />
Bargaining Power <strong>of</strong> Buyers: LOW<br />
• High willingness-to-pay for “in”, hip<br />
hotels<br />
BUT<br />
• No loyalty program<br />
• Low switching costs<br />
Threat <strong>of</strong> Substitute Products: HIGH<br />
• Luxury <strong>Hotel</strong>s<br />
• Resorts<br />
• O<strong>the</strong>r hotels<br />
Bargaining Power <strong>of</strong> Buyers: LOW<br />
• High willingness-to-pay for “in”, hip<br />
hotels<br />
• Loyalty program (Starwood) - lock-in<br />
BUT<br />
• Low switching costs<br />
Threat <strong>of</strong> Substitute Products: HIGH<br />
• Luxury <strong>Hotel</strong>s<br />
• Resorts<br />
• O<strong>the</strong>r hotels<br />
• Potential risk <strong>of</strong> cannibalization from<br />
o<strong>the</strong>r Starwood br<strong>and</strong>s (Westin)<br />
42
Exhibit 10:<br />
Exhibit 11:<br />
What Type <strong>of</strong> Innovation Is <strong>the</strong><br />
<strong>Boutique</strong> <strong>Hotel</strong>?<br />
Enhance<br />
Market Knowledge<br />
Destroy<br />
Market Innovation<br />
Enhance Destroy<br />
<strong>Boutique</strong><br />
<strong>Hotel</strong>s<br />
How Disruptive Are <strong>Boutique</strong><br />
<strong>Hotel</strong>s?<br />
Disrupt<br />
Market Knowledge/<br />
Links<br />
Conserve<br />
Technology Knowledge/Links<br />
Conserve Disrupt<br />
<strong>Boutique</strong> <strong>Hotel</strong>s<br />
(Niche Creation)<br />
43
Exhibit 12:<br />
Exhibit 13:<br />
Building <strong>of</strong> Alliances Between<br />
<strong>Hotel</strong>s <strong>and</strong> Bars/Restaurants<br />
Create<br />
Valuable<br />
New Factors<br />
Competence<br />
Leverage<br />
Competence<br />
Acquisition<br />
Are <strong>the</strong>re entirely new factors<br />
that deliver customers a<br />
quantum leap in value?<br />
Are <strong>the</strong>re factors that <strong>the</strong><br />
industry takes for granted<br />
but which don’t add value?<br />
Eliminate<br />
Tertiary<br />
Factors<br />
Individual<br />
Alliance Networks<br />
<strong>Boutique</strong><br />
<strong>Hotel</strong>s<br />
Actions for Value Innovation<br />
Feel <strong>and</strong> Design (Architecture)<br />
<strong>The</strong>med <strong>Hotel</strong><br />
Fashionable Staff<br />
Inclusion on “<strong>the</strong> list”<br />
Shops in <strong>Hotel</strong><br />
Luxurious fixtures<br />
(Marble)<br />
Multiple Restaurants<br />
Multiple Lobbies<br />
- New buyer<br />
target<br />
- Strong draw from<br />
restaurant <strong>and</strong> bar<br />
Customer Benefit<br />
Cost<br />
Technology in room<br />
Hip restaurant<br />
Hip bar<br />
Intimacy (small hotel)<br />
- Eliminate some Business meeting space<br />
luxury<br />
Size <strong>of</strong> room<br />
- reduce size <strong>of</strong> rooms Size <strong>of</strong> lobby<br />
<strong>and</strong> lobbies (more Depersonalization<br />
rooms in a smaller<br />
area)<br />
Raise on<br />
Primary<br />
Factors<br />
Which factors are key<br />
benefit drivers but <strong>of</strong>ten<br />
compromised?<br />
Which factors are necessary<br />
but not to be overdone?<br />
Reduce<br />
Secondary<br />
Factors<br />
44
Exhibit 14:<br />
High<br />
Relative<br />
Offering<br />
Level<br />
Low<br />
Exhibit 15:<br />
Functional Attribute: Level <strong>of</strong> Targeted Service<br />
<strong>The</strong>me<br />
In -room<br />
Technology<br />
St<strong>and</strong>ard Luxury<br />
<strong>Boutique</strong><br />
<strong>Hotel</strong><br />
Eating<br />
Facilities<br />
Upscale<br />
<strong>and</strong> Older<br />
Value Curve for <strong>Boutique</strong> <strong>Hotel</strong>s<br />
Concierge<br />
Architectural<br />
Aes<strong>the</strong>tics<br />
Room Size<br />
Entertainment<br />
(Bars)<br />
Reception<br />
Area<br />
Amenities<br />
Bed Quality<br />
Key elements <strong>of</strong> product, service <strong>and</strong> delivery<br />
Preference Structure<br />
Luxury <strong>Hotel</strong><br />
Upscale <strong>and</strong><br />
Younger<br />
<strong>Boutique</strong> <strong>Hotel</strong><br />
Functional Attribute: Type <strong>of</strong> Consumer<br />
Price<br />
Luxury <strong>Hotel</strong><br />
Shops<br />
Mass-Market <strong>Hotel</strong><br />
Average <strong>and</strong><br />
All ages<br />
Upscale<br />
<strong>Hotel</strong><br />
(Sheraton)<br />
Location<br />
Service<br />
Meeting<br />
Space<br />
45
Exhibit 16:<br />
Adopters<br />
Exhibit 17:<br />
Innovators<br />
Innovation Diffusion for<br />
<strong>Boutique</strong> <strong>Hotel</strong>s<br />
Early<br />
Adopters<br />
Time<br />
Early <strong>and</strong> Late Majority<br />
Competitive Advantage (WTP<br />
vs. Cost)<br />
Luxury <strong>Hotel</strong><br />
<strong>Boutique</strong> <strong>Hotel</strong> Mass-Market<br />
<strong>Hotel</strong><br />
WTP<br />
Price<br />
Cost<br />
46
Exhibit 18:<br />
Exhibit 19:<br />
<strong>The</strong> <strong>Hotel</strong> business Transactional<br />
Process - Reserving a room<br />
Customer<br />
<strong>Hotel</strong> Website<br />
Telephone<br />
Travel Agent<br />
Unaffiliated Travel<br />
Website<br />
$ - Outsourced<br />
$ - lower than by phone<br />
Global Distribution<br />
System (GDS)<br />
Customer Reservation<br />
System (CRS)<br />
<strong>Hotel</strong><br />
$ - Switch -<br />
Fixed cost for W<br />
variable (per use) fee for Ian Schrager<br />
47
References:<br />
i American <strong>Hotel</strong> <strong>and</strong> Lodging Association, History <strong>of</strong> lodging, www.ahma.com<br />
ii Deutsche Bank, Lodging Industry Overview, August 2002, ABN Amro, <strong>Hotel</strong> & Leisure Direction 2003, Jan<br />
2003, Ernst&Young, 2002 National Lodging Forecast<br />
iii http//:www.tacnet.com/scripts/hotel.cfm<br />
iv PriceWaterhouseCoopers Research Briefing, October 2001<br />
v<br />
Hilton <strong>Hotel</strong>s Website<br />
vi<br />
Marriott <strong>Hotel</strong>s Website<br />
vii<br />
Anhar, Lucienne, “<strong>The</strong> Definition <strong>of</strong> <strong>Boutique</strong> <strong>Hotel</strong>s.” Hospitality Net, December 13, 2001.<br />
viii<br />
Ibid.<br />
ix<br />
Ibid.<br />
x<br />
Gordon, Meryl, “<strong>The</strong> Cool War: Ian Schrager vs. His Imitators,” <strong>The</strong> New York Times, May 27, 2001.<br />
xi<br />
Dunlap, David W., “From Planet Hollywood to a <strong>Hotel</strong> W in Gray,” <strong>The</strong> New York Times, Section B, p. 7,<br />
August 29, 2001.<br />
xii<br />
Anhar, “<strong>The</strong> Definition <strong>of</strong> <strong>Boutique</strong> <strong>Hotel</strong>s.” Hospitality Net, December 13, 2001.<br />
xiii<br />
DaRosa, Alison, “Upscale <strong>Hotel</strong>s Go Hip Instead <strong>of</strong> Traditional,” <strong>The</strong> San Diego Union-Tribune, Travel, p.<br />
D-3, September 9, 2001.<br />
xiv<br />
O’Connor, Stefani C., (citing Bjorn Hanson, head <strong>of</strong> PriceWaterhouseCoopers hospitality <strong>and</strong> leisure group),<br />
“<strong>Boutique</strong> <strong>Hotel</strong>s, A Difficult Segment to Define,” www.hotelbusiness.com, January 21, 2001.<br />
xv<br />
Ibid.<br />
xvi<br />
Ian Schrager’s Vision Statement, p. 1, www.ianschrager.com.<br />
xvii<br />
Bray, Roger, “Chains Awake to Designer Trend: <strong>Boutique</strong> <strong>Hotel</strong>s,” Financial Times, FT Report: Business<br />
Trav el, September 26, 2002, p. 2.<br />
xviii<br />
Anhar, “<strong>The</strong> Definition <strong>of</strong> <strong>Boutique</strong> <strong>Hotel</strong>s.” Hospitality Net, December 13, 2001.<br />
xix<br />
http://www.starwood.com/whotels/about/history.html<br />
xx<br />
Tomkins, <strong>Rich</strong>ard, “Schrager <strong>and</strong> NorthStar join forces,” <strong>The</strong> Financial Times , March 19, 1998 Gordon,<br />
Meryl, “<strong>The</strong> Cool War: Ian Schrager vs. His Imitators,” <strong>The</strong> New York Times, May 27, 2001<br />
xxi<br />
Parkes, Christopher, “Cool hotelier remodels façade,” <strong>The</strong> Times <strong>of</strong> London, October 28, 1996 (at <strong>the</strong><br />
Mondrian <strong>and</strong> London’s S<strong>and</strong>erson respectively).<br />
xxii<br />
Ibid.<br />
xxiii<br />
Tomkins, <strong>Rich</strong>ard, “ Schrager <strong>and</strong> NorthStar join forces,” <strong>The</strong> Financial Times, March 19, 1998<br />
xxiv<br />
NorthStar corporate website, www.northcap.com<br />
xxv<br />
Billig, Michael, “Schrager Hanging ‘For Sale’ Sign on New York’s Empire <strong>Hotel</strong>,” www.<strong>Hotel</strong>Business.com,<br />
June 20, 2002<br />
xxvi<br />
Gordon, Meryl, “<strong>The</strong> Cool War: Ian Schrager vs. His Imitators,” <strong>The</strong> New York Times , May 27, 2001<br />
xxvii<br />
Ibid.<br />
xxviii<br />
Ibid.<br />
xxix<br />
Ibid., Arden-Smith, Tara, “<strong>The</strong> man who’s shaking up <strong>the</strong> hotel scene,” <strong>The</strong> Boston Globe, June 10, 2001<br />
xxx<br />
Ibid.<br />
xxxi<br />
Gordon, Meryl, “<strong>The</strong> Cool War: Ian Schrager vs. His Imitators,” <strong>The</strong> New York Times , May 27, 2001<br />
xxxii<br />
Fink, Mitchell; Rubin, Lauren, “Schrager vs. Gerber: It’s a barroom brawl,” New York Daily News, May 11,<br />
2000<br />
xxxiii Gordon, Meryl, “<strong>The</strong> Cool War: Ian Schrager vs. His Imitators,” <strong>The</strong> New York Times , May 27, 2001<br />
xxxiv Gordon, Meryl, “<strong>The</strong> Cool War: Ian Schrager vs. His Imitators,” <strong>The</strong> New York Times , May 27, 2001<br />
xxxv Arden-Smith, Tara, “<strong>The</strong> man who’s shaking up <strong>the</strong> hotel scene,” <strong>The</strong> Boston Globe, June 10, 2001<br />
xxxvi Grant, Peter, “In Need <strong>of</strong> Financing, New York <strong>Hotel</strong> Developer Feels Trump's<br />
Pressure,” New York Daily News, July 13, 1999<br />
xxxvii<br />
Gordon, Meryl, “<strong>The</strong> Cool War: Ian Schrager vs. His Imitators,” <strong>The</strong> New York Times, May 27, 2001<br />
xxxviii<br />
Interview with Ian Schrager in Travel Agent, March 11 2002<br />
xxxix<br />
Murray, Sarah, “Boom time for New York hotels,” <strong>The</strong> Financial Times, January 14, 2003<br />
xl<br />
McMullen, Shannon, “New GM at NYC’s paramount to oversee redesign,” www.<strong>Hotel</strong>Business.com,<br />
February 27, 2003<br />
xli<br />
Billig, Michael, “Major re-fi in works for Schrager hotels,” www.hotelbusiness.com, January 17, 2003<br />
xlii<br />
Binkley, “Bloom Fades at <strong>Boutique</strong> <strong>Hotel</strong>s,” <strong>The</strong> Wall Street Journal, cited in <strong>The</strong> Chicago Sun-Times, Travel<br />
Section, p. 6, March 17, 2002.<br />
xliii Ibid.<br />
xliv Interview with Ian Schrager in Travel Agent, March 11 2002<br />
xlv Conversation with Robert Koren, VP <strong>of</strong> Operations, W <strong>Hotel</strong>s, on Thursday, February 6, 2003.<br />
48
xlvi Ibid.<br />
xlvii http://www.kimptongroup.com/about_concepts.html<br />
xlviii Blair, Jayson, “Not <strong>the</strong> Best <strong>of</strong> Times, But Manhattan <strong>Hotel</strong>s See Encouraging Signs,” <strong>The</strong> New York Times,<br />
Section B, p. 1, March 28, 2002.<br />
xlix http://www.starwood.com/whotels/search/hotel_detail.html?propertyID=97502<br />
l Shinn, So -Chung, “Starry Might: Starwood <strong>Hotel</strong>s <strong>and</strong> Resorts Invests in Design to Create Style, Attitude, <strong>and</strong><br />
Br<strong>and</strong> Distinction in its Six International <strong>Hotel</strong> Br<strong>and</strong>s,” Interior Design, Starwood Hospitality Supplement,<br />
March 27, 2001, p. S10.<br />
li Ibid.<br />
lii Scoviak-Lerner, Mary, “Challenging <strong>the</strong> Chains,” Business <strong>and</strong> Management Practices, Vol. 36, No. 1, p. 50-<br />
54.<br />
liii Starwood 2001 Annual Report, p. 4.<br />
liv Sullivan, Aline, “Future Face <strong>of</strong> <strong>Hotel</strong>s: Industry Looks For Right Formulas,” International Herald Tribune,<br />
Special Report, p. 9.<br />
lv Conversation with Robert Koren, VP <strong>of</strong> Operations, W <strong>Hotel</strong>s, on Thursday, February 6, 2003.<br />
lvi Seitz, Patrick, “How Dell, Starwood <strong>and</strong> Teva Fight, Win in Commodity-Priced Business,” Investor’s<br />
Business Daily, Section A, p. 1, May 4, 2001.<br />
lvii Conversation with Robert Koren, VP <strong>of</strong> Operations, W <strong>Hotel</strong>s, on Thursday, February 6, 2003.<br />
lviii Anhar, “<strong>The</strong> Definition <strong>of</strong> <strong>Boutique</strong> <strong>Hotel</strong>s.” Hospitality Net, December 13, 2001.<br />
lix Starwood <strong>Hotel</strong>s <strong>and</strong> Resorts Worldwide, Inc. Detail list <strong>of</strong> <strong>Hotel</strong>s <strong>and</strong> Rooms Owned, Leased <strong>and</strong><br />
Consolidated Joint Venture, as <strong>of</strong> June 30, 2002, p.5-6. <strong>The</strong> numbers quoted do not reflect franchised properties.<br />
lx Brown, Ron, “Hospitality Conference Presentation,” November 2002,<br />
www.starwood.com/corporate/investor_relations.html, slide 2.<br />
lxi Ibid.<br />
lxii Deutsche Bank, Starwood <strong>Hotel</strong>s & Resorts, August 2002<br />
lxiii “Starwood Announces Strategic Relationship With Cisco Systems to Deliver Secure, High-Speed Internet<br />
Access <strong>and</strong> Next -Generation Services to <strong>Hotel</strong> Guests,” Business Wire, March 5, 2001.<br />
lxiv http://www.starwood.com/whotels/service/index.html<br />
lxv Belgum, Deborah, “Own Br<strong>and</strong> <strong>of</strong> Whiskey,” Los Angeles Business Journal, October 14, 2002.<br />
lxvi<br />
Ibid.<br />
lxvii<br />
Conversation with Robert Koren, VP <strong>of</strong> Operations, W <strong>Hotel</strong>s, on Thursday, February 6, 2003.<br />
lxviii<br />
http://www.starwood.com/whotels/meetings/index.html<br />
lxix<br />
Conversation with Robert Koren, VP <strong>of</strong> Operations, W <strong>Hotel</strong>s, on Thursday, February 6, 2003.<br />
lxx<br />
“HSMAI Foundation Focuses Research on Defining Value Drivers For Business, Leisure <strong>Hotel</strong> Customers,”<br />
www.hotelresource.com, December 18, 2002.<br />
lxxi<br />
“Ian Schrager Completes St<strong>and</strong>ardization on HIS’ epitome Property Management System,”<br />
www.hospitalitynet.com, January 6, 2003.<br />
lxxii<br />
“Summary <strong>of</strong> Portfolio by Properties <strong>and</strong> Rooms, as <strong>of</strong> June 30, 2002,” p. 1, www.starwood.com.<br />
lxxiii<br />
www.starwood.com/corporate/company_info.html, p. 4.<br />
lxxiv<br />
www.starwood.com, “About <strong>the</strong> Company,” p. 1.<br />
lxxv<br />
“Travel Pros Give Starwood Br<strong>and</strong>s Top Honors in Business Travel News’ U.S. <strong>Hotel</strong> Chain Survey,”<br />
Business Wire, February 11, 2002.<br />
lxxvi “Savvy Travelers Vote 56 Starwood <strong>Hotel</strong>s <strong>and</strong> Resorts to Condé Nast Traveler’s 2002 Gold Lists,”<br />
Business Wire, January 7, 2002.<br />
lxxvii Conversation with Robert Koren, VP <strong>of</strong> Operations, W <strong>Hotel</strong>s, on Thursday, February 6, 2003.<br />
lxxviii Brown, Ron, “Hospitality Conference Presentation,” November 2002,<br />
www.starwood.com/corporate/investor_relations.html, slide 35.<br />
lxxix HSMAI Foundation Focuses Research on Defining Value Drivers For Business, Leisure <strong>Hotel</strong> Customers,”<br />
www.hotelresource.com, December 18, 2002.<br />
lxxx Conversation with Robert Koren, VP <strong>of</strong> Operations, W <strong>Hotel</strong>s, on Thursday, February 6, 2003.<br />
lxxxi Ibid.<br />
lxxxii Ibid.<br />
lxxxiii “Savvy Travelers Vote 56 Starwood <strong>Hotel</strong>s <strong>and</strong> Resorts to Condé Nast Traveler’s 2002 Gold Lists,”<br />
Business Wire, January 7, 2002.<br />
lxxxiv Falcone, Mark, Hausler, Eric, <strong>and</strong> Attie, Joshua, “Starwood <strong>Hotel</strong>s & Resorts: Coverage Initiated—<br />
Embedded Growth Opportunities,” Deutsche Bank Securities Inc., August 6, 2002, p. 35.<br />
lxxxv Ibid., p. 35-36.<br />
lxxxvi “Marriott to Reposition Renaissance as <strong>Boutique</strong> Br<strong>and</strong>,” www.hotelbusiness.com, August 27, 2001 (citing<br />
Bill Marriott, as quoted in <strong>the</strong> Wall Street Journal ).<br />
49
lxxxvii<br />
Berke, Jonathan, “Marriot (sic), Bulgari Launch ‘<strong>Boutique</strong>’ <strong>Hotel</strong> Chain, <strong>The</strong> Daily Deal, M&A Section,<br />
February 13, 2001.<br />
lxxxviii<br />
O’Connor, Stefani C., “Battered <strong>Boutique</strong> Label Needs ‘Lifestyle’ Change: Panel,”<br />
www.hotelbusiness.com, April 26, 2002.<br />
lxxxix<br />
Ibid., with quotations from Brad Wilson, General Manager <strong>of</strong> <strong>the</strong> W-Union Square <strong>Hotel</strong>.<br />
xc<br />
Conversation with Robert Koren, VP <strong>of</strong> Operations, W <strong>Hotel</strong>s, on Monday, February 3, 2003.<br />
xci<br />
Bray, “Chains Awake to Designer Trend: <strong>Boutique</strong> <strong>Hotel</strong>s,” Financial Times, FT Report: Business Travel,<br />
September 26, 2002, p. 2.<br />
xcii Fong, Tony, “<strong>Boutique</strong> <strong>Hotel</strong>s Hit Harder Than O<strong>the</strong>r Segments; Recovery Will Take Longer,” <strong>The</strong> San<br />
Diego Union-Tribune, August 21, 2002.<br />
xciii<br />
Lee, Gary, “<strong>The</strong> End <strong>of</strong> <strong>the</strong> <strong>Boutique</strong> <strong>Hotel</strong>?” <strong>The</strong> Washington Post, Travel, p. E01, April 21, 2002.<br />
xciv<br />
Binkley, Christina, “Bloom Fades at <strong>Boutique</strong> <strong>Hotel</strong>s,” <strong>The</strong> Wall Street Journal , cited in <strong>The</strong> Chicago Sun-<br />
Times, Travel Section, p. 6, March 17, 2002.<br />
xcv<br />
Starwood 2001 Annual Report, p. 4.<br />
xcvi<br />
Berke, “Marriot (sic), Bulgari Launch ‘<strong>Boutique</strong>’ <strong>Hotel</strong> Chain, <strong>The</strong> Daily Deal, M&A Section, February 13,<br />
2001.<br />
xcvii Binkley, “Bloom Fades at <strong>Boutique</strong> <strong>Hotel</strong>s,” <strong>The</strong> Wall Street Journal, cited in <strong>The</strong> Chicago Sun-Times,<br />
Travel Section, p. 6, March 17, 2002.<br />
xcviii Lee, “<strong>The</strong> End <strong>of</strong> <strong>the</strong> <strong>Boutique</strong> <strong>Hotel</strong>?” <strong>The</strong> Washington Post, Travel, p. E01, April 21, 2002.<br />
xcix “Starwood Reports Fourth Quarter <strong>and</strong> Full Year 2002 Results,” Business Wire, January 29, 2003.<br />
c Conversation with Drew Patterson, Starwo od revenue management executive, February 12, 2002.<br />
ci<br />
Lobby, W New Orleans French Quarter<br />
cii<br />
Guest Room, W Times Square<br />
ciii<br />
W New Orleans<br />
civ<br />
W New York – <strong>The</strong> Court<br />
cv<br />
W San Francisco<br />
cvi<br />
W New York – Union Square<br />
cvii<br />
W Sydney<br />
cviii<br />
W Suites Newark, CA<br />
cix<br />
Hudson <strong>Hotel</strong>, New York<br />
cx<br />
<strong>The</strong> Paramount <strong>Hotel</strong>, New York<br />
cxi<br />
<strong>The</strong> Delano <strong>Hotel</strong>, Miami Beach<br />
cxii<br />
<strong>The</strong> Clift <strong>Hotel</strong>, San Francsico<br />
50