Luxury Hotel Cos. Employ Innovative Expansion Methods

With demand improving each month this year, operators of deluxe hotel brands have begun to revive the ambitious expansion plans they mostly put on the back burner during the 2001 to 2003 downturn. When they seek to expand, however, high-end brands face an ever-shrinking number of desirable building sites in the high-visibility gateway cities around the world, where they most want to be. Even for such established brands as Four Seasons Hotels & Resorts and the Ritz-Carlton Hotel Co., overcoming high barriers to entry, particularly in Europe and North America, can be daunting.

Midprice hotels and, to a degree, upscale properties can get away with sites on the periphery of a city's main business or cultural center. Considering the rate premium they charge, deluxe hotels have no such leeway. Ratcheting up the development pressure, up-and-coming deluxe brands such as Mandarin Oriental Hotels, Fairmont Hotels & Resorts, Park Hyatt Hotels and Conrad Hotels understand that, at a minimum, they need to have a flag in New York, London, Paris, Tokyo and Rome, among other cities, to be a truly global player. That flag can be a conversion of an existing hotel or a new build. This, in turn, creates pressure of another kind on the brands currently managing prime conversion candidates.

Always intense, the competition among the deluxe brands for loyal guests has grown even more pronounced coming out of the downturn. Geographical distribution becomes a marketing tool. Given the relatively small pool of high-end business and leisure travelers, these brands know they need to have hotels in the gateway cities their customers visit. Otherwise, customers will have no choice but to book the competition.

Multi-use developments, where the hotel is only one component in a larger, luxury project, make it easier for the chains to expand, since the developer assumes a significant portion of the financial risk. Particularly popular in Asia, multi-use projects combine the hotel with condominiums, offices and high-end retail, or a combination thereof.

"Being in a gateway city in and of itself isn't enough," Ritz-Carlton Hotel Co. president Simon Cooper said. "Just because one is in a particular city, doesn't mean one is in the right location in that city. You have to be in the right project. Then one has to build the kind of hotel that is going to create the number-one positioning we seek everywhere."

Encountering barriers to entry is a given. "Our customers specifically need to be located near where it's convenient for both business and leisure, and that tends to be near the city center, the most difficult area to find opportunities," said Roy Paul, Four Seasons senior vice president for business development. "Yes, it's a barrier, it's tough and we struggle with it."

Much of the burden is borne by the owner/developer. "Barriers to entry to the best locations are a challenge in every location," Cooper said, "but they're a bit easier in many Asian cities than, say, Europe, where the lodging inventory tends to be more mature and less land is available. Part of overcoming the barriers is to be in the right project with the right partners."

In certain instances, conversions can be a viable alternative, though not always. "We look for opportunities to convert existing buildings, but the restrictions also can be significant," Paul said. "A profound renovation and conversion of historical buildings not only can take longer, it actually can be more expensive than new construction. The economics always drive the project." Four Seasons is scheduled to open properties in Hong Kong and Hampshire, United Kingdom, in 2005, and in Geneva and Beijing in 2006, among others.

Reflagging converted hotels can be problematic when the acquired property has a well-established name. The new brand wants to reflag the property, but risks losing the equity built up by the existing flag. "Because we manage a lot of iconic-type properties, such as The Plaza in New York, we tend to treat the assets with a lot of respect," said Chris Cahill, president and COO of Fairmont Hotels & Resorts, which in January assumes management of The Savoy in London. "The same applies to The Savoy. We haven't finalized how we're going to handle the branding, but you can be sure we're going to take advantage of a great asset brand."

Escalating development costs are an issue. "With each hotel we build, we tend to spend more per room, partly because costs are rising, but also because the luxury business traveler's expectations of a hotel today are significantly higher than they used to be," Cooper said. "Yes, the brand is important, but how you execute the brand in a particular location is even more important."

Multi-use projects have become the dominant model for deluxe development, according to John Wallis, senior vice president of marketing for Hyatt Hotels Corp., whose deluxe brand is Park Hyatt, citing projects underway in Beijing and Shanghai as examples. "The sheer economics proves that mixed-use developments make the most financial sense at the luxury end of the marketplace."

One of Park Hyatt's first experiences with multi-use projects was in Chicago. "We found that apartments above the hotel sold at a premium precisely because the hotel carried a well-known luxury brand," Wallis said. "For developers, the project has the prestige of the hotel brand and they're balancing their overhead costs. They get a quicker return on their investment because they can pre-sell the apartments."

In some cases, the condominiums are available for rental as hotel rooms. "In these condo hotel projects, residents put a unit back in the pool, so they derive income. In other instances, the apartments are pure condominium residences," said Dieter Huckestein, president of hotel operations for owned and managed hotels at Hilton Hotels Corp.

Typically, the apartments come with access to hotel services. "This assumes the building was constructed with this use in mind and there are no operational issues, affecting access for room service, for example," Hyatt's Wallis said.

Wherever possible, providing hotel services to residents makes economic sense for the developer. "If you have a restaurant and fitness facilities, including a spa, you might as well pursue the additional revenue," Huckestein said.

In Asia, the residential component frequently is devoted to serviced apartments, which are rented, as opposed to condominiums. "It probably reflects the difference in the maturity of the respective markets and the fact that many Western companies still are growing in Asia," Cooper said. "It's convenient for these firms to house their expat employees." Like U.S. condominium projects, the serviced apartments typically have access to hotel services. Ritz-Carlton's Asia portfolio by 2007 will expand to include two hotels in Beijing and Jakarta and a property in Tokyo.

In most mixed-use projects, the hotel is at the base of the building, which saves the best views for the condominium owners or serviced apartment residents at the top. Mandarin Oriental Hotels in Hong Kong is trying the opposite strategy "We're building a 110-suite hotel above a high-end shopping center and office building, which was built in 1985," said Wolfgang Hultner, CEO of the Americas. "The owners want to bring more life to the location, which is in the financial district. Structurally, the building can support the hotel addition, so they're proceeding."

Scheduled to open in mid-2005, it will be Mandarin Oriental's third property in Hong Kong.