Starwood Hotels & Resorts Worldwide CEO Frits van Paasschen, who last month marked his first full year at the helm of the multibrand hotel company, recently sat down with Business Travel News editor-in-chief David Meyer and hotel editor Michael B. Baker to discuss demand outlook, the latest round of corporate negotiations and growth goals amid the financial free-fall.BTN: How will the current financial crisis affect hotel demand?
Frits Van Paasschen: We're seeing a slow descent and probably a slow emergence on the other side, so we're planning for a difficult 2009 and hoping that, in the back half of 2009, we'll see an emergence and an improvement in market conditions. Since the Sept. 11 terrorist attacks, the capacity that has been added has been below the historic trend line and below demand growth. Relative to other slowdowns, that supply/demand situation may make the down cycle a little less extreme than it's been in other situations. Today, we can all safely say that we're seeing a pullback in demand. Things that unwind slowly like this and are getting more pervasive tend to take longer to bounce back, also.
BTN: As a result, what are corporate customers looking for in the negotiating experience?
Van Paasschen: They're looking for our ability to deliver on a global footprint, a background in information technology and the ability to be a partner at the same time. When it comes to rate discussions, our customers are testing our ability to hold rate. Even given the unusual nature of this economic downturn, try to find a room today in New York City. You would think that people would be panicking. The fact is, we're pretty full. That doesn't mean that food and beverage revenues aren't off a little bit, but we're not at this massive oversupply position, particularly in gateway cities and great resort locations. The opportunity is less than one might want on the buyer side of the table.
BTN: Will a decline in leisure travel change your business-to-leisure customer ratio?
Van Paasschen: We're about 75 percent business-to-business. You might see in some markets a slight change in mix looking forward, but I don't think it will be meaningful or sustained.
BTN: Are you adjusting your company strategy?
Van Paasschen: We've had to become more focused on doing a few things. Many people credit Starwood with being something of a maverick in the lodging business. When pressed, people typically say two or three things: the Heavenly Bed, the launch of W, no blackout days. People talk about us being innovative but don't point to a long list of things. Our focus is on doing fewer bigger initiatives and making them rise to the point of recognition. That is a bit of a departure, because when I arrived, we had a lot of initiatives, and a lot of very good ones. The focus and discipline to pick a few and have them rise above the clutter is the key.
BTN: Such as?
Van Paasschen: At the beginning of 2007, we embarked on a 36-month program where Sheraton would invest $4 billion to revitalize that brand, significantly remodeling properties, opening new hotels and launching brand initiatives like the Link @ Sheraton experience
(BTNonline, Sept. 22). That focus enabled us to establish a greater level of consistency with the Sheraton brand. This helps put us back on par with what Sheraton is as you look around the world. The launches of Element and Aloft are hugely innovative. At an Aloft, you get the same sense of how that brand can turn the select-service business on its head the way that W was able to for luxury 10 years ago. That informality, that cool factor that makes W so attractive can be translated to locations—Rancho Cucamonga; Rogers, Ark.; the Montreal airport; Lexington, Mass.; O'Hare airport—where you'd never imaging opening a W but where travelers with that appetite are going.
BTN: Is there room for more brands in your portfolio?
Van Paasschen: There's room for more, but there's not a need for more. We have significant growth aspirations, and we can meet those aspirations with the nine brands we have. Our portfolio of brands is both distinctive and compelling. I would never say that we wouldn't add to the portfolio if there were opportunities like Le Meridien was for us. Financially, it was an absolute home run. If there were another out there, I'd do it in a heartbeat, but those don't come along very often.
BTN: What's Starwood's current growth plan?
Van Paasschen: We've articulated a goal to grow by 500 to 600 hotels in the coming years. That's a challenging but very achievable goal, assuming that the economic uncertainty we see today is reaching its low point and that we don't sink into further global economic turmoil. The opportunities around the world continue to be extraordinary. When I first visited China in 1985, the per capita gross domestic product was $250. Today, it's $2,500. It's reasonable to assume that eventually will be $15,000 to $20,000. If you think of the demand for lodging in that population, we'd better get to work.
As rates get higher in China, people will start to look for lower-cost wages in other parts of the world, and that growth in demand will create an exponential opportunity in other countries that have been very poor. We have a couple of hotels in Vietnam today. I wouldn't be surprised if in four or five years we have 15 hotels. We have a number of hotels in Thailand today, and development continues to grow at a rapid rate. India is a fantastic opportunity. Rates are very high because of constrained supply. Sheraton has been in India for decades, and we have a great team on the ground going after that opportunity.
In the Middle East, there's oil money and the appetite for luxury and travel. The second airport in Dubai will have capacity twice that of Heathrow, and the new airport in Abu Dhabi will be the largest in the Emirates. There's oil money in central Asia in Kazakhstan and oil money in Russia. While it's a difficult country to operate in, it's important for our customers to have great properties there.
BTN: How do you attract capital for development amid the current credit crunch?
Van Paasschen: The strategy is having a superior economic equation for owners and having brands that command rates and give returns on the RevPAR side that makes this an attractive proposition for both sides. In the U.S. today, select-service projects at $15 million to $25 million are financeable at reasonable rates and ratios for established developers. The upper upscale and luxury segment is more challenging today, but that will come back. We enter into deals to build hotels with an eye toward the next 25 or 30 years. Whatever is happening today should be a distant memory over the life cycle of that hotel. We're taking the long view.