One-On-One: Ritz-Carlton Exec Sees Tough Going For Buyers, Growth For Brand

Ritz-Carlton president and COO Simon Cooper last month spoke with Business Travel News editors David Meyer and David Eisen about the deluxe hotel operator's negotiations with corporate buyers and its expansion plans.

BTN: How have your negotiations with corporate travel buyers changed due to the current strong seller's market?

Simon Cooper: You try and walk a fine line, because these pendulums swing all the time. To be frank, if I was a buyer I wouldn't expect the pendulum to come back for maybe three to four years. I'm not just talking luxury. The upscale segment is where most of the corporate buying occurs—it doesn't really occur at our level—it occurs at the upper-upscale level: the Hiltons, the Hyatts and the Marriotts. If you look at supply and demand, provided nothing happens to demand and it stays at 3 to 4 percent, which is ticking along, you have to believe as a buyer you're going to have three to four tough years. There's almost no supply and a lot of it deals with the cost to build a full-service hotel in a North American city, which is extremely high, so I think you'll have three to four years of the pendulum favoring the seller, but one has to remember that the pendulum will go back the other way. Having said that, not unlike the airlines, energy costs in hotels—although not the same percentage as airlines—are going through the roof. Insurance has gone up, as have benefits. Relative to an airline, our benefits would be a lot more influential because our labor costs are much higher than an airline's labor cost. At most hotels, you are looking at 33 percent to 40 percent of costs going toward labor and with benefits growing in double-digits year after year, that's going to be a challenge.

BTN: At deluxe properties, are those labor costs higher?

Cooper: It could be higher. The only thing keeping it a little lower is if they've got less food and beverage and it's more around rooms, but you are still looking at 40 percent of your component as labor. I can definitively tell you that industry margins are not as good as they were in 2000. Still, with the seller's market today and prices increasing, the industry's profitability is not back to where it was in 2000.

BTN: Has there been a change in the services and amenities buyers ask for?

Cooper: No, not really. The key thing is that buyers continue to get greater control of their clientele. Obviously, procurement continues to play an increasingly important role and an increasingly dispassionate roll. Where the travel planner may have some concern about proximity to the office building, a less concerned procurement officer is going to say, "Isn't this a four-star hotel? So what if it's 10 blocks away, what's wrong with it? They can walk it."

BTN: Has there been an increase in your clients' ability to get more compliance with preferred properties?

Cooper: Absolutely, because of the systems available to them. They used to be post, now they're pre. The minute they make a booking that is out of program it comes up on the screen. In many cases, you can't even book it.

BTN: When clients can show you that they have a pre-trip system or can document the effectiveness of their policy, that speaks a lot to you.

Cooper: It speaks a lot to their ability to control their customers. Now, they can actually control blocks of rooms. You have much more certainty around the number of rooms we are going to give you. The greater the certainty, the more willing a hotel will be to negotiate.

BTN: What's happening in terms of new development and expansion?

Cooper: The key cities are opening. The level of interest in Moscow is huge, because arguably there are good hotels in Moscow, but not luxury hotels.

BTN: Will that be a meetings hotel?

Cooper: It'll have meetings, but the early interest is primarily on the transient. Moscow has more transient than group. It's more the people that have to do business there as opposed to a company saying, "Let's take our group to Moscow instead of Barcelona." I don't think it's in that type of arena yet. The Tokyo property will open March 28 of next year and be the tallest building in Tokyo. In Beijing, there are two projects. One will open at the end of this year and the Beijing West on Financial Street is right in the Battery Park of Wall Street of Beijing. The other one, Guangzhou, which is to the east and more corporate and diplomatic, will open in 2007. You have some good hotels, but arguably no luxury hotels in Beijing. Everywhere that we are going is a primary location for international business.

BTN: Are those expensive investments?

Cooper: Globally, there are not many places where you can build much more cheaply than others. In most cities now, the price of cement and steel is the same. Land is the variable. It's interesting how quickly over the past decade that cement in one part of the world has caught up with the price of cement elsewhere. It's become global pricing. I would say that most of the rooms we are building are 35 to 50 percent larger than anything we have, so with land being relatively cheaper in parts of China like Shenzhen and Guangzhou, the incremental cost of building isn't much more.

BTN: Is Europe an area of growth?

Cooper: Europe is an area of growth. There is one element of Europe, which is a reality. Every key location where we want to be in, we're going to compete with other people who want to make it residential and offices. Generally, what we are competing on is small, so trying to squeeze in a hotel of enough size is tough. We have a project in Vienna that we haven't quite announced yet. That's the sort of place we plan for. Having said that, we are having significant development outside of cities, like resorts. We've always been very successful with Barcelona, because Barcelona has a tremendous mix of leisure. We're now outside of Lisbon and outside of Dublin—the common element here is that these are all 15 to 20 minutes outside of key locations, with golf and meeting space. Every location we have in the Middle East, we are doing a second one. In Dubai, the new financial center, and Bahrain, we're doing a second Ritz-Carlton because of the success of the first ones. It's a huge market. U.S. business is primarily Dubai, European business is much more Bahrain and everybody is trying to come back and replicate what Dubai has done with business and leisure. The property in Dubai will open at the end of next year.

BTN: That's an awful lot of investment in real estate, isn't it?

Cooper: No, our business is not investing in real estate, especially outside of the U.S. We find partners who are real estate players in Dubai, in Bahrain, in Beijing—that's their business. That's where the marriage comes together.

BTN: How is the European incentive business?

Cooper: European incentive business is pretty good, especially automobile. In North America it died down, but that's not the case in Europe. There are many more product launches and incentives.

BTN: What's going on at Ritz-Carlton in North America?

Cooper: Dallas is under construction and that's going to be a great hotel. We just grabbed a share of the original Mansion on Turtle Creek so that's going to be a big deal. It will open in July 2007. Denver, which will open next year, is a conversion of an existing downtown building. Toronto will get under construction soon.

BTN: Where else in the U.S. would you like to see Ritz-Carlton?

Cooper: I always answer: Beverly Hills. Zoning is brutal there. Las Vegas would be the other one, down on the strip.

BTN: Whether it is a buyer's or seller's market, deluxe properties historically have been impervious to economic swings. Is this still true?

Cooper: There is a percentage of the market both in leisure and business that rain or shine is going to stay in luxury hotels, but there is absolutely a percentage of the market that is influenced by the economy. If the bonus checks on Wall Street aren't there, that impacts luxury hotels. There is a significant amount of business travel that is influenced by the economy and takeovers. If you have someone taking over a new company, suddenly the groups you had were gone. Acquisition and consolidation impacts that.

BTN: Things from the hotelier perspective have been very good. Is your outlook that this will continue?

Cooper: Our outlook for things continues to be good. There are obviously influences out there you have to look at. You take the eroding value of the dollar relative to European or Asian currencies. Does that tell you that more Americans are going to buy their vacations locally, which benefits the Ritz-Carlton? We have huge distribution in North America, the largest provider of luxury travelers, and the fact that some of them may be influenced to stay at home rather than travel abroad benefits us. We don't see anything on the horizon that is particularly negative.

BTN: Some hotels are less enthusiastic about group business because transient has been so fantastic. Have you recalibrated?

Cooper: No. We're very enthusiastic about our group business. Groups spend more ancillary money than a transient does. There is no doubt that transient demand is strong, but transient demand is also more expensive to deal with, so from a sheer profit point of view it's more expensive for a hotel to handle 500 transient guests than two 250-people groups.

BTN: Have you felt pressure to make changes in amenities to keep buyers from trading down?

Cooper: We don't see buyers trading down because of amenities. We're more likely to see them trade down because of price and profit pressure. The drive in our amenities is much more around what people are buying in their homes. The price of entry into a luxury hotel is to at least have what you've got at home. As the consumer has focused more on quality, there's an understanding as to what is value. That has created an expectation of what you are going to get in a Ritz-Carlton guest room.

BTN: Westin and others have upped the ante with their new bed products. Did you have to respond?

Cooper: No, we don't respond at all. We've been selling our beds for a long time. We upped our thread count from 300 to 400, but our bed is an incredible sleep experience. It's a price of entry. What Westin did was very smart. At their competitive level, they were smart to focus on that. It would be wrong for us to focus on that because our bedding was already exquisite.

BTN: Customers pay a premium to stay in a Ritz-Carlton. Are there amenities included in that price or offered on a complimentary basis?

Cooper: Not really. We clearly have products and standards that we hope provide a high-level of satisfaction to our guests. We have a bigger guest room than our competition and it's spotlessly clean. There is unseen stuff, which is hard to quantify, but things like protecting the privacy of our guests is paramount.

BTN: Do you envision free Internet?

Cooper: Oh yes, that will happen. Maybe two years from now.

BTN: Will there be a strain on travel buyers with regard to availability?

Cooper: It's always a strain on travel buyers with regard to availability and the reason is they all want the same nights.

BTN: In gateway cities, inventory is being taken out of the system, toward a residential component. Will this continue?

Cooper: Isolate New York. Twenty years ago a building owner would jump through hoops when the last renter vacated. Somebody twigged about five years ago and figured that you could vacate a hotel and convert it. That's completely different to our projects in Dallas, Denver and Battery Park, where the residential is a key component to the project; that's why the hotel is there. We don't do stand-alone hotels any longer; we need the residential component to make projects work.

BTN: What was Ritz-Carlton's most significant accomplishment in 2005?

Cooper: It was a year for us to regroup. Handling Hurricane Katrina was our biggest accomplishment. We saw both our hotels in New Orleans and Cancun close. Handling that was as good as it can be in the way we evacuated guests and employees.

BTN: What are you doing in 2006?

Cooper: We have new guest-room initiatives. That's the 400 square-count sheet, the flat-screen television, the Wi-Fi Internet, upgraded bathroom amenities and upgraded coffee and tea offerings, which a guest can make in their room without the need of room service. We did the research in early 2005 and these were the things that we found would move the dime. It was quite a realization to find guests want to have coffee and tea in the morning without having to answer the door for room service. It took us a while because we wanted to figure out a stylish way to present it.