Understanding the Luxury Hotel Segment
excellent article about the industry
covering a few different hotel brands and the trend
In 1924, General Motors CEO Alfred Sloan synopsized the automaker's strategy by saying the company would offer "a car for every purse and purpose."
The evolution of the hospitality industry has pretty much paralleled that philosophy, resulting in a broad choice of lodgings that range from the most basic, no-brand roadside motel to ultraluxurious pleasure domes worthy of Kubla Khan.
Now, almost 90 years after Sloan uttered those words, some of the largest U.S. hoteliers seem to be investing most of their capital and energy pursuing customers who have extra-thick purses.
The U.S. luxury hotel sector, long the domain of individual, iconic and independent hotels, had in recent years been marked by a growth of luxury-only chains such as Fairmont, Four Seasons, Peninsula Hotels and Mandarin Oriental. (Click the image, left, for a larger view of a list of the largest U.S. luxury hotel brands.)
Today, much of the U.S. luxury-hotel sector has become a battleground between companies that made their name in the upscale sector and are now looking for opportunities to get their most loyal customers to trade up from Buick-level lodging to Cadillac hotels.
Through mergers, acquisitions -- and, in the case of W, sheer happenstance -- companies like Marriott International, Starwood Hotels & Resorts and Hilton Worldwide are claiming an increasingly larger share of a constantly expanding luxury hotel market. And while that market accounts for just a sliver of the total U.S. room inventory, it is getting a widening percentage of development dollars as the domestic travel industry emerges from the Great Recession.
Like luxury-only brands Four Seasons and Fairmont, Marriott's JW Marriott, Starwood's W, Hilton's Waldorf Astoria and InterContinental Hotels Group's flagship brand are long past the one-of-a-kind presence pitched by smaller companies like Peninsula Hotels and Mandarin Oriental. Each has between 15 and 30 U.S. hotels under management.
The outliers are Marriott's Ritz-Carlton, which runs almost 40 U.S. properties, and Hilton's Conrad, which has just four U.S. hotels but is looking to expand the brand domestically.
"You have to look at them as retail stores," said RSBA & Associates President Rick Swig, whose family owned San Francisco's Fairmont Hotel for more than 50 years before selling its stake in 1998. "You look at the fact that 40 years ago, there were two Gucci stores in the entire world. Now, there are Gucci stores in every major capital. It's brand expansion."
The subject is particularly topical because financial institutions appear willing to fund only hotels that will cater to the wealthiest of travelers. In a report released early this month, Smith Travel Research found that the U.S. luxury-hotel development pipeline in April had widened 19% from a year earlier, while the pipeline for upper-upscale hotels, which include the flagship brands for companies like Hilton, Hyatt and Marriott, widened 11%. That contrasts with an overall development pipeline that shrank 9% in the same period.
There's a good reason for such a disparity between higher-end hotel development prospects and the rest of the market.
Last year, the luxury sector's 72% occupancy rate was the highest among the six sectors tracked by STR, while luxury average room rates increased 5.7%, also the highest growth rate among all sectors. For 2012, STR forecasts the luxury sector will see a 7.4% increase in revenue per available room, compared with just 4.3% RevPAR growth across all sectors. (Click on the image, left, for a larger view of the predicted RevPAR growth across all sectors.)
Nor is that supply-and-demand balance for luxury hotels likely to change anytime soon.
Bjorn Hanson, divisional dean of New York University's School of Tourism and Hospitality Management, estimates that luxury travelers account for about 15% of the overall travel market. Meanwhile, according to Jan Freitag, senior vice president of STR, just 300 of the approximately 52,000 U.S. hotels, or fewer than 1%, qualify as luxury. Even factoring in the luxury hotels' relatively larger footprints, the sector accounted for about 105,000 of the nearly 4.9 million U.S. hotel rooms, or about 2%.
That luxury contingent could continue to rise as a larger group of wealthier travelers from countries such as China, Brazil and India continue to take advantage of a relatively weak dollar by visiting the U.S. Earlier this month, the U.S. Department of Commerce reported that international visitors in March had boosted travel spending in the U.S. by 13% from a year earlier, to $13.7 billion.
That said, more demand and higher occupancy rates don't necessarily mean better profit prospects for the developers of the hotels behind these brands. Between the prime real estate these hotels occupy, their extensive food and beverage requirements and top-of-the-line finishes, the commonly used development rule of thumb -- that per-room costs equal the average room rate multiplied by 1,000 -- is conservative, Freitag said. Thus, a 200-room hotel looking to fetch a $400 room-night average might easily cost $100 million to develop.
And once the luxury hotel opens, higher staffing levels can make it that much harder to manage the debt payments. Whereas a 200-room select-service hotel might have 80 employees and a full-service upscale property might have 150, a 200-room luxury hotel will have a staff of anywhere between 250 and 400 people. That expense could rise further because many hospitality employees in urban centers are represented by unions.
"If you own a Hampton Inn next to Times Square, you're printing money, but it's not very glamorous," Freitag said. "Luxury hotels are super sexy and super glamorous, but it's really hard to make a dime."
Still, cities looking for an additional revenue stream as well as some cachet might chip in.
"Many of these projects have incentives," Hanson said, noting that municipalities can facilitate better financing terms and offer tax abatements to lure a luxury hotel developer with a strong brand name.
Luxury brands, he said, "have strong community support because they provide more jobs than limited-service hotels do."
Either way, the luxury market, unlike lower-tier sectors that offer comparable services at similar price points, offers a far broader range of experiences at a wider variety of price points. It can largely be divided into two camps: traditional and modern. More traditional luxury brands, such as Ritz-Carlton, Waldorf Astoria and St. Regis, play up their heritage and exacting service standards.
Meanwhile, on the more contemporary side, Marriott terms the typical JW Marriott guest as having "confident sophistication without pretense," while Hilton uses descriptions like "state of the art," "sophisticated" and "relaxed" to describe Conrad's service proposition.
While the differences might seem trivial to those more familiar with midscale or upscale hotels, they are substantial in practice. Room rates can be as much as $100 higher for a traditional luxury brand that features larger rooms, better finishes and a higher staff-to-room rate than a more contemporary luxury hotel in the same geographic market.
For the first quarter, Marriott said Ritz-Carlton hotels had an average daily room rate (ADR) of $336, while Starwood's St. Regis and Luxury Collection hotels had an ADR of $325. Meanwhile, W Hotels had a first-quarter ADR of $249, while Marriott didn't disclose JW Marriott's ADR. Closely held Hilton doesn't publish quarterly results.
Hanson points out that in addition to a typically higher room rate, the look and feel of a brand can push many aspirational luxury travelers toward a brand that stresses service without the formality.
"If you have a hotel that has mahogany paneling and oriental rugs, it may be incompatible to someone wearing shorts and a baseball cap," Hanson said.
Nowhere is the bifurcation strategy more evident than in downtown Los Angeles' $2.5 billion L.A. Live entertainment complex, which opened a block from the Los Angeles Convention Center in 2009. The following year, a 54-story tower housing an 878-room JW Marriott and a 123-room Ritz-Carlton opened for business at L.A. Live, marking the only instance in the world of the two brands being adjacent to each other. (Marriott said last month that a Ritz-Carlton/JW Marriott project will open in Macau in 2015.)
"Let's say there's a 2,000-person peak-night convention," Freitag posited. "The senior staff is going to stay at the Ritz, and everybody else will stay in the JW. Is there cannibalization? You would hope that with their pricing structure, there wouldn't be."
Unlike many of the widely known, less upscale brands, most of these brands were not created from scratch by their parent companies as part of an overall strategy to fill a niche. Marriott, which opened the first JW Marriott in Washington in 1984, acquired about half of Ritz-Carlton in 1995, a dozen years after the brand was founded. Marriott bought the other half of Ritz-Carlton in 1998.
Meanwhile, Hilton launched the Conrad brand in Australia in 1986 because the companies behind U.S. and international Hilton hotels were still two separate entities, and the U.S.-based Hilton was prohibited from using the Hilton name overseas. Conrad's first newbuild hotel in the U.S. opened in Miami in 2004. New York's first Conrad-branded hotel opened in March.
The Waldorf Astoria name dates to the 19th century. The original Waldorf opened in New York in 1893, and the Astoria was built next door four years later. Since acquiring the iconic New York hotel, Hilton has used the badge to help group its stable of other iconic, formerly independent properties.
Some of the Waldorf Astoria hotels, including Florida's Edgewater Beach Hotel and Arizona's The Boulders, were part of LXR Luxury Resorts under the ownership of Blackstone Group and joined Hilton when Blackstone took Hilton private in 2007.
Then there's Starwood's W, which debuted in 1998 with the conversion of what had been the Doral Hotel. Starwood opened the W San Francisco a year later.
"The W was never meant to be a luxury brand," said Swig, who is based in San Francisco. "It was supposed to be a modern version of what [New York hotelier Ian] Schrager was doing, but the customers pushed it in that direction. They opened the W San Francisco during the height of the dot-com era, and it started running like a luxury hotel at very high rates. And lo and behold, they figured out that there was a demand for this."
The big question now is how U.S. luxury market share among hotel companies will change during the next few years, especially since luxury hotel projects often fall apart during the four to five years it takes to get many of them built.
Still, with Starwood and Marriott focusing almost all expansion efforts for St. Regis and Ritz-Carlton outside of the U.S. and Hilton looking to expand Waldorf Astoria overseas, as well, less formal, more style-driven brands like Conrad and JW Marriott will likely gain exposure stateside.
At the same time, said Ritz-Carlton spokeswoman Allison Sitch, brands like hers are trying to shed some of their more classically luxurious trappings to focus instead on more personalized service and unique settings. That effort started in 2004, when the company began working with hotel owners on renovating many properties that featured the classical Ritz-Carlton architecture to provide a more individual appearance that tied better into the specific locale.
That initiative has intensified during the past two or three years, said Sitch, who insists that Ritz-Carlton is run independently from the rest of Marriott. (Ritz-Carlton co-founder Herve Humler remains the division's president.)
As examples of Ritz-Carlton's direction, Sitch spoke of ultra-personalized services, ranging from ensuring that turndown service is on the proper side of a single guest's bed to serving a drink in a particular type of glass to having a massage therapist at the ready once a guest checks in.
"How affluence is buying luxury has completely changed," Sitch said. "It doesn't matter now if it has a badge on it. The hotels are set up for providing experiences. We've long moved past the days of just having exquisite linens and marble."
Source:
Danny King at TravelWeekly
covering a few different hotel brands and the trend
In 1924, General Motors CEO Alfred Sloan synopsized the automaker's strategy by saying the company would offer "a car for every purse and purpose."
The evolution of the hospitality industry has pretty much paralleled that philosophy, resulting in a broad choice of lodgings that range from the most basic, no-brand roadside motel to ultraluxurious pleasure domes worthy of Kubla Khan.
Now, almost 90 years after Sloan uttered those words, some of the largest U.S. hoteliers seem to be investing most of their capital and energy pursuing customers who have extra-thick purses.
The U.S. luxury hotel sector, long the domain of individual, iconic and independent hotels, had in recent years been marked by a growth of luxury-only chains such as Fairmont, Four Seasons, Peninsula Hotels and Mandarin Oriental. (Click the image, left, for a larger view of a list of the largest U.S. luxury hotel brands.)Today, much of the U.S. luxury-hotel sector has become a battleground between companies that made their name in the upscale sector and are now looking for opportunities to get their most loyal customers to trade up from Buick-level lodging to Cadillac hotels.
Through mergers, acquisitions -- and, in the case of W, sheer happenstance -- companies like Marriott International, Starwood Hotels & Resorts and Hilton Worldwide are claiming an increasingly larger share of a constantly expanding luxury hotel market. And while that market accounts for just a sliver of the total U.S. room inventory, it is getting a widening percentage of development dollars as the domestic travel industry emerges from the Great Recession.
Like luxury-only brands Four Seasons and Fairmont, Marriott's JW Marriott, Starwood's W, Hilton's Waldorf Astoria and InterContinental Hotels Group's flagship brand are long past the one-of-a-kind presence pitched by smaller companies like Peninsula Hotels and Mandarin Oriental. Each has between 15 and 30 U.S. hotels under management.The outliers are Marriott's Ritz-Carlton, which runs almost 40 U.S. properties, and Hilton's Conrad, which has just four U.S. hotels but is looking to expand the brand domestically.
"You have to look at them as retail stores," said RSBA & Associates President Rick Swig, whose family owned San Francisco's Fairmont Hotel for more than 50 years before selling its stake in 1998. "You look at the fact that 40 years ago, there were two Gucci stores in the entire world. Now, there are Gucci stores in every major capital. It's brand expansion."
The subject is particularly topical because financial institutions appear willing to fund only hotels that will cater to the wealthiest of travelers. In a report released early this month, Smith Travel Research found that the U.S. luxury-hotel development pipeline in April had widened 19% from a year earlier, while the pipeline for upper-upscale hotels, which include the flagship brands for companies like Hilton, Hyatt and Marriott, widened 11%. That contrasts with an overall development pipeline that shrank 9% in the same period.
There's a good reason for such a disparity between higher-end hotel development prospects and the rest of the market.
Last year, the luxury sector's 72% occupancy rate was the highest among the six sectors tracked by STR, while luxury average room rates increased 5.7%, also the highest growth rate among all sectors. For 2012, STR forecasts the luxury sector will see a 7.4% increase in revenue per available room, compared with just 4.3% RevPAR growth across all sectors. (Click on the image, left, for a larger view of the predicted RevPAR growth across all sectors.)Nor is that supply-and-demand balance for luxury hotels likely to change anytime soon.
Bjorn Hanson, divisional dean of New York University's School of Tourism and Hospitality Management, estimates that luxury travelers account for about 15% of the overall travel market. Meanwhile, according to Jan Freitag, senior vice president of STR, just 300 of the approximately 52,000 U.S. hotels, or fewer than 1%, qualify as luxury. Even factoring in the luxury hotels' relatively larger footprints, the sector accounted for about 105,000 of the nearly 4.9 million U.S. hotel rooms, or about 2%.
That luxury contingent could continue to rise as a larger group of wealthier travelers from countries such as China, Brazil and India continue to take advantage of a relatively weak dollar by visiting the U.S. Earlier this month, the U.S. Department of Commerce reported that international visitors in March had boosted travel spending in the U.S. by 13% from a year earlier, to $13.7 billion.That said, more demand and higher occupancy rates don't necessarily mean better profit prospects for the developers of the hotels behind these brands. Between the prime real estate these hotels occupy, their extensive food and beverage requirements and top-of-the-line finishes, the commonly used development rule of thumb -- that per-room costs equal the average room rate multiplied by 1,000 -- is conservative, Freitag said. Thus, a 200-room hotel looking to fetch a $400 room-night average might easily cost $100 million to develop.
And once the luxury hotel opens, higher staffing levels can make it that much harder to manage the debt payments. Whereas a 200-room select-service hotel might have 80 employees and a full-service upscale property might have 150, a 200-room luxury hotel will have a staff of anywhere between 250 and 400 people. That expense could rise further because many hospitality employees in urban centers are represented by unions.
"If you own a Hampton Inn next to Times Square, you're printing money, but it's not very glamorous," Freitag said. "Luxury hotels are super sexy and super glamorous, but it's really hard to make a dime."
Still, cities looking for an additional revenue stream as well as some cachet might chip in.
"Many of these projects have incentives," Hanson said, noting that municipalities can facilitate better financing terms and offer tax abatements to lure a luxury hotel developer with a strong brand name.
Luxury brands, he said, "have strong community support because they provide more jobs than limited-service hotels do."
Either way, the luxury market, unlike lower-tier sectors that offer comparable services at similar price points, offers a far broader range of experiences at a wider variety of price points. It can largely be divided into two camps: traditional and modern. More traditional luxury brands, such as Ritz-Carlton, Waldorf Astoria and St. Regis, play up their heritage and exacting service standards.
Meanwhile, on the more contemporary side, Marriott terms the typical JW Marriott guest as having "confident sophistication without pretense," while Hilton uses descriptions like "state of the art," "sophisticated" and "relaxed" to describe Conrad's service proposition.
While the differences might seem trivial to those more familiar with midscale or upscale hotels, they are substantial in practice. Room rates can be as much as $100 higher for a traditional luxury brand that features larger rooms, better finishes and a higher staff-to-room rate than a more contemporary luxury hotel in the same geographic market.For the first quarter, Marriott said Ritz-Carlton hotels had an average daily room rate (ADR) of $336, while Starwood's St. Regis and Luxury Collection hotels had an ADR of $325. Meanwhile, W Hotels had a first-quarter ADR of $249, while Marriott didn't disclose JW Marriott's ADR. Closely held Hilton doesn't publish quarterly results.
Hanson points out that in addition to a typically higher room rate, the look and feel of a brand can push many aspirational luxury travelers toward a brand that stresses service without the formality.
"If you have a hotel that has mahogany paneling and oriental rugs, it may be incompatible to someone wearing shorts and a baseball cap," Hanson said.
Nowhere is the bifurcation strategy more evident than in downtown Los Angeles' $2.5 billion L.A. Live entertainment complex, which opened a block from the Los Angeles Convention Center in 2009. The following year, a 54-story tower housing an 878-room JW Marriott and a 123-room Ritz-Carlton opened for business at L.A. Live, marking the only instance in the world of the two brands being adjacent to each other. (Marriott said last month that a Ritz-Carlton/JW Marriott project will open in Macau in 2015.)
"Let's say there's a 2,000-person peak-night convention," Freitag posited. "The senior staff is going to stay at the Ritz, and everybody else will stay in the JW. Is there cannibalization? You would hope that with their pricing structure, there wouldn't be."
Unlike many of the widely known, less upscale brands, most of these brands were not created from scratch by their parent companies as part of an overall strategy to fill a niche. Marriott, which opened the first JW Marriott in Washington in 1984, acquired about half of Ritz-Carlton in 1995, a dozen years after the brand was founded. Marriott bought the other half of Ritz-Carlton in 1998.Meanwhile, Hilton launched the Conrad brand in Australia in 1986 because the companies behind U.S. and international Hilton hotels were still two separate entities, and the U.S.-based Hilton was prohibited from using the Hilton name overseas. Conrad's first newbuild hotel in the U.S. opened in Miami in 2004. New York's first Conrad-branded hotel opened in March.
The Waldorf Astoria name dates to the 19th century. The original Waldorf opened in New York in 1893, and the Astoria was built next door four years later. Since acquiring the iconic New York hotel, Hilton has used the badge to help group its stable of other iconic, formerly independent properties.
Some of the Waldorf Astoria hotels, including Florida's Edgewater Beach Hotel and Arizona's The Boulders, were part of LXR Luxury Resorts under the ownership of Blackstone Group and joined Hilton when Blackstone took Hilton private in 2007.
Then there's Starwood's W, which debuted in 1998 with the conversion of what had been the Doral Hotel. Starwood opened the W San Francisco a year later.
"The W was never meant to be a luxury brand," said Swig, who is based in San Francisco. "It was supposed to be a modern version of what [New York hotelier Ian] Schrager was doing, but the customers pushed it in that direction. They opened the W San Francisco during the height of the dot-com era, and it started running like a luxury hotel at very high rates. And lo and behold, they figured out that there was a demand for this."The big question now is how U.S. luxury market share among hotel companies will change during the next few years, especially since luxury hotel projects often fall apart during the four to five years it takes to get many of them built.
Still, with Starwood and Marriott focusing almost all expansion efforts for St. Regis and Ritz-Carlton outside of the U.S. and Hilton looking to expand Waldorf Astoria overseas, as well, less formal, more style-driven brands like Conrad and JW Marriott will likely gain exposure stateside.
At the same time, said Ritz-Carlton spokeswoman Allison Sitch, brands like hers are trying to shed some of their more classically luxurious trappings to focus instead on more personalized service and unique settings. That effort started in 2004, when the company began working with hotel owners on renovating many properties that featured the classical Ritz-Carlton architecture to provide a more individual appearance that tied better into the specific locale.
That initiative has intensified during the past two or three years, said Sitch, who insists that Ritz-Carlton is run independently from the rest of Marriott. (Ritz-Carlton co-founder Herve Humler remains the division's president.)
As examples of Ritz-Carlton's direction, Sitch spoke of ultra-personalized services, ranging from ensuring that turndown service is on the proper side of a single guest's bed to serving a drink in a particular type of glass to having a massage therapist at the ready once a guest checks in.
"How affluence is buying luxury has completely changed," Sitch said. "It doesn't matter now if it has a badge on it. The hotels are set up for providing experiences. We've long moved past the days of just having exquisite linens and marble."
Source:
Danny King at TravelWeekly
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