One-On-One: Starwood CEO Sees Upturn Ahead

Starwood Hotels & Resorts Worldwide CEO Frits van Paasschen on Sept. 30 spoke with Business Travel News editors David Meyer and Michael B. Baker to assess the business travel outlook and detail Starwood's increasingly global slant.

BTN: Is business travel due for a rebound?

Frits van Paasschen: What's very encouraging is watching the deal environment today: the number of IPOs being done, the number of mergers and acquisitions. That means not only are the financial markets functioning, but that people have enough confidence to start working transactions, calling lawyers and bankers, and those people are traveling. September is a tough month to read, and it's early to call October yet, but pretty soon we'll have a handle on how strongly business travel is coming back. We're seeing New York do better. New York to a certain extent is a bellwether for what will happen across North America.

We saw the downturn coming our way in the spring of 2008, and we worked hard to reduce our costs. For the last year and a half, we've been getting more efficient and asking ourselves hard questions about how we need to operate. If businesses now want to grow profitability, it's not by cutting costs another 10 percent, it's getting that top line to move just a little bit. Seventy-five percent of our business is corporate travel, so it's the business traveler that will make the difference.

BTN: Should we be girding for a second drop?

Van Paasschen: That's a reasonable concern to have. If there's another drop, I don't think it will be with another economic crisis. It will be because businesses and consumers pull back again, which will be a different kind of drop than businesses entering capital preservation mode because the debt markets are completely frozen.

We'll see quarters and numbers that will scare us a little and those that make us happy.

BTN: Are your luxury properties feeling the most pain?

Van Paasschen: Clearly, in the same way that Wal-Mart and Target were comping down by low single digits while Neiman Marcus and Saks were comping down in the mid-twenties. It's a societal kind of reaction that in our situation was somewhat exacerbated by the political rhetoric coming out of Washington. Having gone down as far as we've gone down, there's a better chance for more of a bounce back coming the other way. As soon as people are flush and have the opportunity to stay at a luxury hotel, they'll do it. In every one of our cycles, we've seen the move to luxury, the Calvinistic repentant period and the return to hedonism after that again.

BTN: Yet some in the industry say these restrictive travel policies are here to say.

Van Paasschen: It feels to me like the gym being full in January after the excess of the holidays and then being empty again when you get to March. After 9/11, we thought the world was a different place and travel would be different, but it came back in some respects like it did before. People's definition of luxury can change, too. Whereas the St. Regis and traditional luxury once was the only definition for it, W has really redefined the space. We're seeing a continued interest in luxury in W because there's a new younger owner who wants to put that in their city. There may be four luxury hotels downtown, but there's not one that has that same energy and vibe and design orientation.

BTN: How are your midprice properties faring?

Van Paasschen: After Sheraton, the two brands that have the biggest pipeline for us are Aloft and Four Points by Sheraton. We're the largest luxury and upper upscale players, but we're not major players in the select-service arena, and we have a chance to grow there. The response to Aloft has been terrific. It's unfortunate that we launched right into a downturn, but even with that, having opened our first Aloft in January 2008, in December 2009, we'll be in the mid-40s in terms of the number of Aloft hotels that are open. If we get to 100 hotels, you get to a point of critical mass where people recognize it.

The guest satisfaction scores for Aloft are very high, but not everybody loves them. In my view, you don't have a brand unless you have people who love you and people who hate you. We've carved out a space that demographically will continue to grow, because the people who love us have a younger psychographic mindset. It's a fun design experience. You walk in, and you either say, "I've been waiting for something like this" or "I'm not sure I belong here."

BTN: How do you characterize Four Points' position?

Van Paasschen: In the same way that W plays somewhere between upper upscale and luxury, Four Points by Sheraton plays up in the select-service area. Five or six years ago, Four Points by Sheraton was a place where we put bad Sheratons. We came to the realization that a bad Sheraton probably was also not a very strong Four Points by Sheraton, and we started to focus on making Four Points by Sheraton a real brand. Over that time period, RevPAR doubled and the percentage of new builds in the pipeline went close to 90 percent.

Sheraton has brand recognition right next to Coca-Cola and Nike, so we used that brand strength and Starwood's infrastructure to create a legitimate, strong select-service player. Now we're using that to look at conversion opportunities, because if there isn't new financing, there could be other properties that make sense as part of the system.

BTN: How will the Sheraton revitalization project affect the brand?

Van Paasschen: As you go around the world, there are still markets where Sheraton is like Scotch tape for "good Western hotel." We were the first Western hotel in China, the first in the Middle East in Doha and Kuwait and the first in Brazil and Argentina. This is a brand that went global when that was a pioneering thing. There are markets in the world where there are newer, snazzier hotels, but the locals go to the Sheraton because that's where they've always gone and is to them the heart of their city.

In 2007, we embarked on a program where the brand spent $4 billion within the United States, and another $2 billion spent outside of the U.S., either doing renovations or opening hotels (see story, left). In that timeframe, we will have opened 67 new Sheratons, renovated just about 100 hotels mostly in the U.S. and taken some hotels out of the Sheraton brand.

BTN: Have you been able to maintain portfolio growth during the downturn?

Van Paasschen: At the end of this year, we will have more than 1,000 hotels, which will keep us the largest upper upscale/luxury company. Of that 1,000, 250 have been opened in the last three years and another 350 have been significantly renovated, so 60 percent of our hotels will be substantially new as we enter this new phase in 2010. Of the 250, about 90 percent are new builds. The other 25 have been a conversion with a renovation, like the Sheraton in Dallas or Denver.

BTN: How did you pull that off?

Van Paasschen: Part of it was because our growth was so much more global, and we're opening in places that were growing. As we go from 50 hotels to 100 in China, those are all new properties, with the exception of the Great Wall Sheraton that was opened in 1985 and was the first Western hotel in Beijing. With the global growth and prosperity around the world, to be in a global branded position is a terrific thing. Some of our best Westins are in China, and we're opening the first four new Westins in India. If you think about that wave of Japanese travelers in the '80s, and remember the fact that there are 10 times as many Chinese, they've gotten to know us because 60 percent of our guests in China are Chinese. That will be a great source of growth for our owners in other parts of the world as people start to get out.

BTN: What are your other growth markets? India?

Van Paasschen: India is still early in its growth phase. Maybe in 10 years India will be where China is today. Southeast Asia is important. The Middle East, outside of Dubai, is important and Africa is important. The commodity economies in Africa and even Latin America are getting quite a bit of investment. There's Chinese investment money all over Africa. You may have seen the announcement of the Chinese oil deal in Nigeria. Knowing developers and owning and running hotels for 30 years in Africa means we're at the intersection of knowing the local government and communities as well as the Chinese investors on the other side.

BTN: Where does the United States figure in?

Van Paasschen: Our pipeline today is about 70 percent non-U.S., which is the most skewed to non-U.S. that it's ever been. We've crossed the Rubicon to more than 50 percent of our properties being outside the U.S. in the past few months, and we've seen that accelerating. As investment comes back in North America, that balance may shift again. Not many deals are being signed by anybody in North America today. That means in 2013, there won't be many hotels being opened. We should be well on our way into the next growth cycle by then. You should see strong demand growth in a year with very little unit growth. That's not too far out in the future.