<B> Hoteliers As Financiers</B>
<I>Shift Suggests Tougher Negotiating</I>
By Maria P. Vallejo
The age-old image of a teenage bellhop working his way up to a top executive position in the hotel industry is rapidly giving way to a new vision of stock-ticker readers and bottom line-oriented hotel heads.
This noticeable movement to a hospitality industry driven by financiers rather than hoteliers is being met with mixed reaction by hotel insiders and analysts. Although some say it forecasts a more difficult negotiating environment for travel buyers, and even potential disaster in a down cycle, others herald the transition as a positive step towards a stronger and more successful industry.
Wall Street only recently has developed an interest in an industry it long considered too risky and unstable. Many see the entry of real estate investment trusts Starwood Hotels & Resorts, Patriot American Hospitality and Meditrust Co. as a huge vote of confidence.
"If anything, it's an acknowledgment of the success the industry has had," said Robert Mandelbaum, director of research and vice president of PKF Consulting in New York. "People are flocking to it from other types of investments, and looking at the returns that you can get if you are successful. Thank God there's money being plowed into the industry to sustain it and grow it."
Still, many are wary of the changes the real estate investment trusts may bring. Mandelbaum still defines a hotelier as "someone who worked their way up the ladder." A financier is someone who "has made his money elsewhere and wants to invest it in something he thinks he can make money in."
In broader terms, hoteliers are internally focused, with their efforts concentrating on activities that run the hotel properties, while financiers focus on earnings and company growth, said Bjorn Hanson, New York-based Coopers & Lybrand's hospitality industry chairman.
Beyond the titles, though, the larger question is how the shift in hotel ownership will affect the future of the hospitality industry. Analysts agreed that negotiating for lower rates, even during a down cycle in the market, may become more difficult as financiers take more control of the market.
"There's this drive in quarterly performance that could dictate how they run their operations," Mandelbaum said. "They may want to cut expenses, they may want to hold to their pricing lines and not discount as much as the industry has in past recessions."
Because these individuals must answer to their shareholders and base their success on stock prices and quarterly reports, analysts expect hotels will be less likely to significantly lower their rates even after the market turns.
"We're getting more people focused on finance and that's not necessarily good for the guest, or for the development of the chain and customer relations," said Ted Mandigo, president of T.R. Mandigo' in Chicago. "Wall Street needs to learn that there is a customer out there--and that customer is what drives the top line of that hotel."
There is also speculation that finance-driven hotel CEOs would more readily terminate existing corporate deals, despite the customer's previous history with the company, if corporations cannot provide enough volume. Analysts suggested that it is more important than ever that buyers consolidate their business into a few hotel chains, and be able to demonstrate their ability to deliver large volume, to retain corporate contracts in the next proposal season.
Despite these warnings, though, the experts noted that hotel rates have not risen this year at the same high levels as in the past. Although a series of consolidations have taken place, creating larger, more powerful hotel companies, there has still been enough competition to constrain rate increases and protect the buyer.
The change in the corner office from hotelier to financier became most apparent last year, as a series of mergers and acquisitions brought new REIT kids to the hotelier's block. Particularly dramatic in bringing REITs to the fore was the intervention by the white knight from Starwood in Hilton Hotels Corp.'s protracted battle for control of ITT Corp.
Today Starwood is the largest hotel company worldwide, with 660 owned and franchised hotels primarily under two brands, Westin and Sheraton. Headed by a 38-year-old chairman with a master's degree in business from Harvard Business School and a history as a stock market venturist, Starwood in less than three years became one of the most prominent hotel companies in the industry. Following its acquisition of the once-private Westin Hotels & Resorts and the massive publicly held ITT Corp., Starwood's size--and chairman Barry Sternlicht's lack of hotel experience--became a source of concern.
Still, analysts said the focus on bottom lines this year is not unique to financiers. "I'm seeing in general a focus on market return and expansion of a number of properties in a chain," Mandigo said. "The guest are looking for the service levels and they don't give a darn how it's done."
Some analysts disagreed that the new breed will lead to lower service levels or changes in managerial styles at individual properties. In the past few weeks, Starwood announced an executive management comprised of former Westin and Sheraton employees. Among those leaders with long histories in the business was former Westin chairman and CEO Juergen Bartels, who was named CEO of Starwood's hotels division.
"Barry Sternlicht is more of a financier, but look at the team he has put together, with Juergen Bartels and with the top people of Caesars and Sheraton," C&L's Hanson said. "He's catching on in the industry, and he's surrounding himself with experts. A financial type wouldn't make an investment if he didn't believe in the management team that existed or in the one that he was bringing with him."
Bartels early last week launched a 15-city tour that may assure some skeptics of the synergy created by the mammoth merger (see story, page 3).
If financiers continue to associate themselves with the traditional hotelier personalities, a successful balance can be acquired. The latest example of this harmony is Host Marriott becoming a REIT. Despite the new structure, the company will be guided with a management arm of hoteliers, while the company itself consists of people with long histories in the industry. The third party management arm will consist of Marriott International, which has been passed along through generations in the Marriott family.
Like Host Marriott, other public companies are run by someone who can hold dual titles of financier and hotelier. A prominent figure in the industry Stephen Bollenbach, Hilton Hotels Corp.'s chairman and CEO, is a financial wizard and has risen from the ranks of the hotel business, analysts said. "He's a guy who puts together deals and saves companies," Hanson said. "Yet, he clearly understands the lodging industry. Hilton is operating better even in the management level under his management compare d to when it was done with traditional hoteliers."
Traditional hoteliers of private companies said they believe this shift in leadership will positively impact their business because it will differentiate their product from public companies' products.
"The hotel companies' shift to a stock market base is a wonderful opportunity to differentiate ourselves," said Eric Danziger, president of Carlson Hotels Worldwide. "We are not guided by the stock market demands."
These hoteliers maintain that financier driven companies will focus on the short-run financial success rather than improve their companies long-run image and service quality.