hotel development

c h a p t e r o n e

O V E R V I E W

among the country’s living patterns. Peopleand industry have moved from the so-calledrust belt to the sun belt. The hotel businesshas been active in reborn and reconstructedcentral cities. The explosion of technology and information-based companies has con-centrated human endeavor in technologicalcorridors in California, Massachusetts, Wash-ington, Texas, and North Carolina, to name afew such places. It can be safely said thatwhere jobs are and major concentrations ofeconomic activity occur, hotels will follow.

Among other current and ongoing influ-encers of hotel design, construction, market-ing, and operation are the following. Note:This list is neither exhaustive nor exclusive.

• Demographics play a major role and willcontinue to be influential in the foresee-able future. As the baby boom generation

1.1 INTRODUCT ION

The vast majority of research articles and es-says in this book deal with one or more as-pects of what has been called the art andscience of modern hotel management. Itshould be noted that the word modern can beloaded with the potential of much misunder-standing. Hotels are changing and will con-tinue to change. As a result, the techniques ofmanagement of modern hotels must adapt tochanging circumstances. Subsequent sectionsof this book are designed to help the studentand practitioner discover information, meth-ods, and techniques for dealing with thesechanging circumstances.

� INFLUENCESLike many other American businesses, hotelshave been affected by shifts in emphasis

1

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COPYRIG

HTED M

ATERIAL

and its children mature, the population ofthe country will for many years be older,healthier, and better educated than previ-ous generations. These facts will presentnew challenges and opportunities to allbusiness managers.

• Technology—in the form of computers,communication, personal devices, andlaborsaving mechanical equipment—hashad and will have a major effect on theway in which hotels are managed and op-erated. The speed with which informationis accumulated, stored, manipulated, andtransferred is such that today most travel-ers expect that the hotel rooms they rentwill allow them to be as productive asthey are in the office or at home. Increas-ingly, with portable computing, personaldata assistants (PDAs), wireless commu-nication, and virtually everything some-how connected to the Internet, hotelsmust provide services and access that al-low guests seamless transition from thebusiness, travel, or home environment tothat of the hotel. Increasingly, entertain-ment must be fused with communicationand productive processes.

• The concept of market segmentation, orever-increasingly finely tuned market def-initions, will dictate hotel structures andorganizations, and management tacticsdesigned to address those market seg-ments have become even more importantto the management of hospitality servicebusinesses. With the increased power inthe information and data manipulationrealm, hotels have available to them ever-expanding databases about guests and arecreating new products to attract thosemarkets.

• One of the effects of the aging demo-graphic is the emergence of vacation re-

2 Chapter 1 � Overview

sorts—a modern incarnation of the time-share properties of several decades ago.Because these are being developed andoperated by name hotel companies andare marketed to the affluent, healthy,well-educated population segment, resortmanagers have had to absorb new mana-gerial realities.

• The well-documented change in the com-plexion of the national economy from onethat emphasizes goods and, to a lesser ex-tent, natural resources to one that empha-sizes services has kindled new ideas aboutthe way in which we manage the designand delivery of these services. Hotels,restaurants, and travel services are nowseen as unique entities that dictate specialkinds of managerial techniques andstrategies.

• Changes in people’s travel patterns havealtered the way we manage our hotelproperties. Deregulation of the airlineshas driven a change in the way millions ofpeople travel each year, given the hub-and-spoke design of airline services.Many hotel companies are now locatingmajor hotel properties adjacent to hub airtransport facilities, taking advantage ofthe fact that business travelers may notneed to travel to a central business district(CBD) to accomplish their purpose in agiven area. Meetings and conferences cannow be scheduled within a five-minutelimousine ride from the air terminal, andthe business traveler can be headed forhis or her next destination before the dayis over without having to stay overnight ina CBD hotel.

• New patterns of investment in hotel facili-ties have emerged in the last two decades,and more attention is now paid to achiev-ing optimum return on investment. Be-

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cause people from outside the hotel in-dustry are now participating in its finan-cial structuring, hotel operations are nolonger dependent on the vision of a singleentrepreneur. Managers now must designtactics and strategies to achieve hereto-fore unanticipated financial goals. Thesame trend has also altered the complex-ion of management and organization ofthe modern hotel. This is especially trueof publicly owned hotel firms, where WallStreet stock analysts heavily influencestock prices through expectations ofquarterly revenues and profits. This putspressure on hotel companies and theiroperations managers to perform, on aquarterly basis, in a way contrary to manymanagers’ instincts.

Most of the foregoing issues and influ-ences still operate (to a greater or lesser ex-tent) on the organizational structures andstrategies of the modern hotel. Since the lastedition of this book, however, other phenom-ena of an economic, cultural, and social na-ture have come to the fore, complicating ourview of hotel management. This furthers theargument that the hotel industry is a part ofthe greater economy and at the mercy of ele-ments often completely out of its control.

The cyclical nature of the U.S. and inter-national economies has recently affected significantly hotels’ ability to respond tochanging circumstances. In early 1993, for in-stance, employment growth was stagnant; cor-porate profits were low; the expansion of thegross national product (GNP) was only a mar-ginal percentage above previous years; andtravel in most segments was down due to cor-porate restructuring, downsizing, or reorgan-izing. Vast layoffs in the hundreds ofthousands had been announced every month.While fuel prices continued to be relatively

Section 1.1 � Introduction 3

stable, consumer spending patterns and highemployment growth had not materialized,particularly in light of corporate layoffs andthe ongoing nervousness of consumers aboutwhether or not their financial wherewithalwas safe.

Now consider late 2000, when the thirdedition of this book was being written. Unem-ployment was at an all-time low; the DowJones Industrial Average was between 10,000and 11,000; hotel occupancies had stabilizednationally in excess of 70 percent; and the fed-eral government was running a surplus for thefirst time in the memory of most.

Then what happened? The terrorist at-tacks in New York and Washington, D.C., in2001 changed the face of all business andtravel, immediately and probably for the fore-seeable future as well. Major airlines are inbankruptcy; hotels are struggling to achieveprofitable occupancies; business travel isdown; the high-tech stock market bubbleburst; the country is at war in a number of lo-cations; security has made travel more diffi-cult, if not actually annoying; and people arenervous. Join this with an imbalance of trade,the outsourcing of jobs, and the largest federaldeficits in history, and the face of the economyis challenging. This translates directly not onlyto business travel but personal and recre-ational travel as well. Finding ways to operateprofitably in such an environment is the job ofthe next generation of hotel operators.

Among the predictions I made in the pre-ceding edition was that cultural diversity willplay a role in the management and organiza-tional structure of the modern hotel in theUnited States. As surely as living patterns,economic cycles, and market segmentationhave influenced the hotel industry, so will thechange in ethnicity of the workforce. The cul-tural backgrounds that an increasingly diver-sified workforce will bring to hotel operations

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may be seen as a problem or a challenge—orboth. To most operators, it will be seen as anopportunity to demonstrate to an increasinglydiverse clientele that hotel companies arecommitted to hiring and training a workforcestructure that mirrors society. I see no reasonto change that prediction now; if anything, ac-culturation of the hospitality business will accelerate.

The legal and regulatory environmentsare increasingly important to all businessmanagers, and hotel operators are no excep-tion. Increasingly, operators must be aware ofand alert to realms of risk that can engenderlawsuits against them. Several articles and es-says in this edition highlight these threats tohotels and their guests. It should be noted thatpresent-day security concerns also have sig-nificantly affected the ways in which hotelsare operated. Awareness of the risk environ-ment and the regulatory realm are factorsthat affect a hotel’s ability to compete in theearly part of the twenty-first century. Essaysand articles in the security section and the hu-man resources section address this issue.

� INTRODUCTORYREADINGS

I have attempted in this edition to presentnew and (sometimes) different takes on thehotel business. This section is also used to ex-plore ideas that are new to the managementprocess, and that—who knows?—may nevercompletely catch on. Rather than focus exclu-sively on the operations of the major chains,the readings here are from the perspectives ofoperators, leaders, and experts such as re-gional operators, major industry consultants,and independent branded hotels.


John Dew, formerly president of Inn Ven-tures, a regional hotel management and de-velopment company that has built andoperated many Marriott products, in additionto a proprietary hotel product, provides an in-sider’s view of the steps needed to bring a ho-tel from conception to construction andoperation. This unique view of hotel opera-tions connects the concept of hotel develop-ment with the realities of day-to-dayoperation. It should help aspiring managersunderstand how the intricacies of the devel-opment process may influence the marketingand management of the hotel.

Peter Cass offers the reader insights,heretofore unavailable in books of this nature,into independently branded hotels that associ-ate to provide market strength. He makes thecase that the future success of independenthotels is linked to their ability to find ways tomaintain their independence while sustainingcompetitive advantage in the luxury segment.

Because new construction of hotels di-minished greatly after 9/11 but firms stillneeded to grow, rebranding existing proper-ties generated a lot of growth activity. Re-branding is a complicated process that mustbe accomplished within critical time frames tocoincide with marketing, financial, and opera-tional variables. Tom Dupar is a seasoned vet-eran at this fascinating and important activityand has participated in rebranding operationsaround the world. His essay on the intricaciesof rebranding was a mainstay in the previousedition of this book. Today’s economic cir-cumstances are different, and Dupar’s busi-ness has changed its focus to opening newmajor projects. His piece serves as a usefulcompanion to that of John Dew, and the twoshould be read together, with an eye towardcomparing Dew’s smaller project focus andDupar’s large projects.

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Perhaps proving the axiom that “every-thing old is new again,” the concept of healthand wellness spas as a hotel and resort prod-uct has enjoyed a resurgence. Once theprovince of high-end hotels and resorts, theidea of being pampered in a spa has beenadded to the service mix in many more mod-est hotels and resorts. While the big-namespas at five-star properties still set the stan-dard for pampering and pricing, the comfortof personal service in less lavish spas seems toappeal to the modern traveler as well. PeterAnderson’s overview of the spa industry pro-vides insights into this fascinating serviceproduct.

In addition to products, building, and re-branding, I have also chosen to include in thesection two recently reviewed and studiedideas that may or may not be adopted acrossthe industry.

At the end of this section are a number of

Section 1.2 � The Hotel Development Process 5

suggested readings for the student who wouldlike to gain more in-depth knowledge aboutthe hospitality industry as a whole and spe-cific historical antecedents. In particular, thebooks by Hilton and Jarman look closely atthe intermachinations of the establishment bytwo early pioneers of the industry, one ofwhom, Conrad Hilton, lives on in an interna-tional, publicly traded company operated byone of his sons. E.M. Statler’s contributions tothe modern hotel business are legendary inthat he is generally credited with foundingand operating the first commercial hotel con-cept that recognized the realities of the earlybusiness traveler at the beginning of the twen-tieth century. The suggested articles aredrawn from recently published historicoverviews of the hotel side of the hospitalityindustry in the United States. They also high-light other major forces in the development ofthe modern hotel business.

1.2 THE HOTEL DEVELOPMENT PROCESSJohn Dew

� INTRODUCTIONThe bulldozers are working and a constructioncrane is being erected on that vacant lot youpass each day going to and from home. Thesign on the fence states that a new hotel is be-ing built with a planned opening date of spring2007. If you have ever wondered just how thathotel was created, you may have wonderedabout some or all of the following questions:

• How did someone select that particularvacant lot?

• Who actually creates a new hotel?

• Who owns it?

• Where did they get the money to build it?

• How long does the process take from ideato grand opening day?

• Who selects the architect, the engineers,and the interior designer?

• Who manages the myriad details that gointo the development of a new hotel?

• Who will manage the hotel once it’sopen?

We hope to address these and other ques-tions you may have in this chapter.

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� THE DEVELOPMENTCOMPANY

The developer is the entrepreneur, the risktaker, who originates the idea for the hotel. De-pending on the business structure selected, thedeveloper often puts his or her personal wealthat risk when engaging in a hotel project. Thedeveloper, along with a small staff of people,networks with commercial real estate agentson the lookout for a suitable hotel site. De-pending on the type of hotel to be developed, asite of at least two to four acres is required (forcomparison, an acre is roughly the size of afootball field). This property must be zoned bythe city for a hotel, be visible from a freeway ormajor street arterial, and have city approval forsuch construction activities as curb cuts, left-hand turn lanes, and delivery truck access.Commercial realtors offer sites for the devel-oper’s consideration that include maps, aerialphotos, and proof of hotel zoning.

Sometimes the developer views potentialsites by driving around the neighborhoodwithin five miles of the site or touring multi-ple sites by helicopter, noting where the po-tential guests live and work and wherepotential competing hotels are located.

The price per square foot of the land isconsidered. The higher the cost of land, thehigher the rates the hotel will need to charge.Is the price too high for the average daily rate(ADR) in this particular market? Is it toolow? Or is it acceptable? This is determinedwhen the hotel financial pro forma budgetdocument is created.

� THE FEASIBILITY STUDYWhen the developer selects a site, a feasibil-ity study is often commissioned to obtain an


analysis of the site by an objective third party.Companies offer hotel feasibility studies for afee and are experts in a particular market, ordevelopers may use the consulting group ofone of the major public accounting firms.

The company retained to do the feasibil-ity study can spend up to several months gath-ering detailed data to see if, in their opinion, itmakes economic sense to build the hotel.Their conclusion offers an objective third-party opinion as to whether the project is feasible, hence the term feasibility study. Gen-erally, the feasibility study considers, evalu-ates, and makes recommendations about theproject based on the following variables:

The Site• Proper zoning

• Size in square feet/acres

• Visibility from arterials/freeways

• Traffic counts/patterns

• Accessibility from streets, freeways, air-ports, train stations, etc.

• Proximity to where potential guests live,travel, or work

• Barriers that discourage competitioncoming into the market, if any

• How adjacent property and businessesare utilized

• Master area development plans

• Local permitting process and the degreeof difficulty for that particular city

• Impact fees charged by the city

The Economy of the Area• Major employers, government agencies

• Business trends for each employer/agency

• Hotel needs and the demand for each

• Leisure travel demand in the area

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• Nearby tourist attractions

• Visitor counts

• Conventions, trade shows, and meetingshistory

The Hotel Market• The competitors, both existing and

planned

• Historical occupancy of hotels in the area

• Historical average rate

• Proprietary data on area travel

Identification of Which Hotel MarketSegment to Serve• Full service

• Limited service

• Extended stay

• Luxury

• Midprice

• Economy

• Budget

Selection of Appropriate Hotel Design• High-rise

• Midrise

• Garden apartment style

• Hybrid design

Selection of Appropriate Hotel Brand• Franchised (Marriott, Sheraton, Hyatt,

etc.)

• Licensed (Best Western, Guest Suites,etc.)

• Independent

• Independent with strategic market affilia-tion (Luxury Hotels of America, HistoricHotels of America, etc.)


Ten-year Projection• Occupancy projection by year

• ADR by year

• Estimated cash generated for debt

• Estimated cash generated for distributionto investors

• Estimated cash-on-cash return (after-taxincome divided by equity invested)

• Overall projected yield

• Projected internal rate of return

• Net present value of the project over eachof the next ten years

Once the feasibility study is completed,the developer is prepared to move forwardwith the project. Often, at this stage of theprocess, the developer purchases an option onthe land to tie it up until the remaining devel-opment steps can be completed—and to pre-vent the competition from purchasing it.

� CREATION OF THEOWNERSHIP ENTITY

An ownership entity (note that this is differ-ent than and separate from the developmentcompany) must be created to hold title to theland—and the hotel, once it’s built. Consider-ing the limitation of liability to the investors,tax consequences, estate implications for theinvestors, and potential requirements of themortgage lender, a business structure is se-lected, normally in one of the following forms:

• Limited liability company (LLC)

• Limited partnership (LP)

• S corporation (formerly known as a Sub-S corporation)

• C corporation

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� THE DEVELOPMENTAGREEMENT

The newly formed entity now enters into adevelopment contract with the developmentcompany to take the project to completion.The development company charges a fee, ap-proximately 3 percent of the total projectcost, for this service. The agreement generallycovers such variables as:

• Selection of architect/engineers

• Selection and supervision of a generalcontractor

• Processing all building and occupancypermits

• Raising all the equity money from in-vestors

• Securing a construction mortgage loan

• Selecting a franchise company

• Securing the franchise

• Selecting an interior designer that meetsfranchise company requirements

• Purchasing all opening furniture, fixtures,equipment

• Selecting a management company to op-erate the hotel

• Liability for cost overruns

� SELECTING A FRANCHISEDepending on the type of hotel to be built(based on the feasibility study), the developerrecommends a franchise company to the ho-tel owner. A major consideration is the bestfranchise brand for the market segment to beserved. Each franchise company has different


franchise fees, royalty fees, and marketing/miscellaneous fees as part of its agreementstructure with the operating company. Con-sideration must also be given to the brands al-ready represented in the target market thatmay be available for franchise. The franchisecompany is approached and a franchise is re-quested, with the feasibility study offered asbackup for the request.

The next step is for the franchise com-pany to conduct an impact study of the mar-ket. This considers such matters as possiblenegative impact on existing hotels that carrythe franchiser’s flag. If the impact is judged tobe insignificant, a franchise is usually grantedto the ownership entity for a one-time fee ofabout $400 per room, depending on the fran-chise selected, with continuing royalty andmarketing, usually based on a percentage ofhotel revenue.

� SELECTING ANARCHITECT

Because the final product of this process is abuilding the operator has to run as a hotel,the architect’s experience in designing hotels,his or her experience with the prototypicaldrawings of the franchise selected, the fee,and his or her on-time record must be con-sidered. Architect fees can run up to 5 per-cent of the total project cost but are oftennegotiated down, if the project is big enough.The firm’s experience and record on similarprojects are critical. The architect does nothave to operate the hotel when it is com-pleted. The developer wants the architect todesign a hotel that will be easy to operate andmaintain.

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� SELECTING A GENERALCONTRACTOR

Major consideration are the quality and reli-ability record of the general contractor andthe firm’s use of and relationships with themany subcontractors needed for a project ascomplex as a hotel. Again, experience inbuilding the hotel type is important. It ishoped that the general contractor has learnedfrom any mistakes made in building similarhotels. The general contractor and architectoften bid the project as a team; this helps thedeveloper determine the final cost. Often, upto a 10 percent contingency cost that allowsfor unforeseen circumstances is built into theproject bidding process.

� FINANCING THEPROJECT

The following variables must be determinedto qualify for financing:

• The cost of the land

• Design and construction cost of the building

• The cost of furniture, fixtures, equipment,and opening supplies

• Pre-opening marketing and labor costs

• A six-month operating capital cash reserve

The sum of these constitutes the totalcost of the project for purposes of securing financing.

With this information, the ten-year oper-ating pro forma budget is updated to reflectactual costs. It’s now time to go to the moneymarkets for construction financing. The terms


and conditions of a construction loan can varywidely depending on the individual lender.Important terms that can affect the cost of theloan include:

• Personal guarantees by developers and/orequity partners/investors

• Loan origination fees

• Interest rate

• Required loan-to-value ratio

• Terms of repayment

• A requirement that interest/taxes be heldin reserve

• Required debt service coverage ratios

• Length of the construction loan; lengthand costs of extensions

These are only a few of the considerationsthat must be analyzed when selecting alender. The developer, on behalf of the own-ing entity, then approaches a number of lend-ing institutions. The lending institutionsanalyze the deal and offer a proposed termsheet that answers all of the borrowers’ ques-tions. This allows the borrowers to select thelending institution with which they wish towork. The lender then commissions an ap-praisal of the project by an independent appraisal company such as Hospitality Valua-tion Services (HVS). Based on the appraisal,the lender issues a loan commitment for theproject that usually offers up to 60 percent ofthe project cost.The balance must be raised asequity from investors.

� RAISING THE EQUITYINVESTMENT FUNDS

With the bank committed to about 60 per-cent of the cost, the remaining 40 percent

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must be raised in equity commitments by in-vestors. To pursue these, the developer pre-pares an offering solicitation document thatmeets current securities and exchange law.The nature of this document depends on thetype of business entity that was formed. Forlimited partnerships or limited liability com-panies, a private placement offering circularand project description is prepared. For S orC corporations, stock offerings are preparedfor sale consistent with applicable federal andstate securities laws.

The developer now contacts moneysources that have risk capital available to in-vest. These can include:

• Individual investors

• Private asset managers

• Opportunity fund managers

• Venture capital fund managers

These potential investment sources areoffered the opportunity to invest in the hotel.Based on their study and evaluation of the re-ports, documents, and studies detailed above,they decide whether or not to offer funding tothe developer.

Once the loan is secured, the equityraised, and the building permit issued by thecity, the land purchase option is exercised andthe purchase is completed. Then the 12–16-month construction process begins. If the ar-chitect’s plans work as intended, if the generalcontractor has no problems with subcontrac-tors, unions, or permits, if all the furnishings,fixtures, and equipment arrive on time, if theweather cooperates, and if the employmentmarket is such that human resources are suf-ficient to open a hotel, then congratulations!The hotel will open on time.


� SELECTING THEMANAGEMENTCOMPANY

Often even before the construction activitycommences, the owning entity selects an ap-propriate management company to managethe pre-opening, marketing and sales, selec-tion and training of the opening staff, prepara-tion of the operating budget, and day-to-dayoperations once the hotel is opened. Manage-ment companies charge 3–5 percent of rev-enue for this service. In recent years,management companies have charged 3–4percent of revenue and 2–3 percent of grossoperating profit so they can be measured andevaluated on both sales and profitability.

The franchise company may offer to pro-vide management services to franchisees.Marriott International, Inc., for example,manages about 50 percent of all hotels thatcarry the Marriott flag under 20-year con-tracts. Independent management companiesmanage the remaining hotels under long-termmanagement contracts of up to ten years’ du-ration, often with several five-year renewaloptions.

� CONCLUSIONThis is a largely linear explanation of thecomplicated process that a developer goesthrough in order to create a hotel. It has beendescribed in a step-by-step process, but in re-ality, many of the steps are carried out con-currently to save time (and money).Nevertheless, the hotel development processtakes about three years from original concep-

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tion to first guest. It is important to rememberthat during the initial stages of the process,the developer can have as much as $1 million(U.S.) or more at risk in the process before afinal go/no-go decision is reached. Only afterthe project is approved and all financing is inplace can the developer start to recover up-front costs and collect development fees.

Hotel development with its componentparts of hotel feasibility studies, hotel ap-praisal, hotel real estate finance, and hotelmanagement are all among the career oppor-tunities available to hotel and restaurant ad-ministration graduates.

� PUTTING IT ALLTOGETHER—THE STORYOF AN EXTENDED-STAYHOTEL DEVELOPMENTPROJECT

The City Development Commission in a Pa-cific Northwest community purchased a 1.55-acre parcel of riverfront land in thedowntown area. The land was previously con-taminated with industrial pollutants thatmade the parcel unsafe for habitation andconstruction. The City Development Com-mission used state, local, and federal grants tohave the land decontaminated, created a mas-ter plan for the area, and then offered the par-cel for sale and development.

The City Development Commission is-sued a request for proposal (RFP) that out-lined the asking price of $2,076,240 ($30/sq.ft.) for the land and the design requirementsset down by the Commission for a buildingthat would fit the intended look and feel of


the area.The RFP was sent to many major ho-tel companies and commercial real estatebrokers, asking prospective buyers to submita purchase price bid along with a statement ofthe buyer’s development history and ability todevelop a hotel of the type envisioned by theCommission. It listed a closing date by whichall bids had to be submitted.

An area commercial real estate brokercontacted a hotel development and manage-ment company with a long history of devel-oping and managing extended-stay hotels inthe Pacific Northwest, including a propertylocated in a similar setting to that being of-fered for sale.The commercial realtor offeredto represent the developer in negotiationswith the City Development Commission,which would be paying the real estate com-mission on the sale. An agreement wasreached with the commercial real estate bro-ker to represent the buyer to the seller, andthe developer went to work in preparing aproposal.

The developer conducted a feasibilitystudy to see all of the conditions in the mar-ketplace that would be encouraging or dis-couraging to this development project.Studies were conducted to estimate howmany room-nights were being sold within afive-mile radius, how many extended-stayroom-nights were available in the market,how many hotel rooms existed, and howmany were being planned over the followingfive years. From this, the developer was ableto estimate the number of extended-stayroom-nights available needed to produce an82 percent occupancy with an average dailyroom rate of $141 when the hotel achievedstabilization three years after opening. Thatprovided the basis for a ten-year revenue estimate.

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The developer proposed a nine-floor, 258-suite extended-stay hotel with an indoor pool,spa, and exercise facility, a guest laundry, of-fices, meeting facilities, and a three-floorparking garage with parking for 193 automo-biles, all at a total cost of $38 million, or$147,286 per suite.

The $38 million construction budget wasbroken down as follows:

Land 6.0%Construction 66.0%Office Equipment 1.4%Furniture, Fixtures, Equipment 7.4%Architecture/Engineering 2.8%Permits/Fees/Environmental 2.8%Appraisal/Legal/Tax/Insurance 1.3%Pre-Opening Expenses 1.3%Construction Loan Fee 1.1%Developer Fee 2.8%Construction Interest 2.8%Working Capital 2.1%Contingency 2.2%

Total 100%

The opening date for the hotel was pro-jected at 27 months from the date of proposalacceptance.

The City Development Commissionawarded the project to the developer, andwork began.

First, an ownership limited liability com-pany (LLC) was formed as the ownership en-tity that would hold title to the hotel.

The LLC, in turn, entered into a develop-ment and construction management agree-ment with the development company tomanage the arrangements for financing andconstruction of the hotel.

The developer, as agent for the ownershipLLC, also entered into a hotel managementcontract with a management company tomanage the pre-opening marketing, pre-opening hiring and training, and the day-to-


day operation of the hotel once it wasopened.The arrangements called for the man-agement company to be paid 3 percent of rev-enue and 2 percent of the net operatingincome for management services.

The ownership LLC then contacted a ma-jor hotel company and applied for a franchiseto allow the development and operation of anextended-stay hotel. A 20-year franchise wasgranted with a fee of $400 per suite or,$102,800. This was to be followed by a 5 per-cent royalty and a 3 percent advertising feeonce the hotel was open and operating.

The developer, acting as agent for theowner, prepared a private placement memo-randum document seeking investments fromaccredited investors.These investors were pri-marily defined as people with a net worth of$1 million, or those with an income in excessof $200,000 over the previous two years andexpecting an income in excess of $200,000 inthe current year. (Note: Additional entitiesmay also be defined as accredited investors bythe Securities and Exchange Commission.)

The private placement memorandum of-fered $100,000 units of ownership to accred-ited investors, guaranteeing a 9 percent priorityreturn on the investment and a combined 50percent ownership in the hotel. A group of ini-tial investors retained the other 50 percent inexchange for putting the project together. Thiseffort was successful in raising 40 percent ofthe total cost of the hotel in anticipation that alender would provide the remaining 60 percentin the form of a construction loan. In additionto the priority return, investors could expect toparticipate in any future capital gain realizedshould the hotel be sold.

The development company, continuingto function as agent for the owner, thensought a commercial bank to provide three-year construction financing for the project.

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As $22,800,000, or 60 percent, of the $38 mil-lion development cost was to be borrowed,only major banks were considered asprospective lenders. The size of the construc-tion loan was above the lending limits ofmost small regional banks. After a precon-struction appraisal by a third-party appraisalfirm chosen by the lender confirmed thevalue at $38 million upon completion of con-struction, and for an origination fee of$400,000, a three-year construction loan wassecured. The terms allowed the developer, asagent for the owner, to draw down the loanevery 30 days after providing proof thatfunds had been properly disbursed in theconstruction process.The loan documents setan interest rate and also required that theownership LLC seek a permanent mortgageprior to the three-year expiration date onthe construction loan.

The development company then negoti-ated with and selected a general contractorwith significant hotel construction experiencewho acted on behalf of the developer, asagent for the owner. The general contractorthen selected design-build subcontractors andan interior designer to select colors, fabrics,furniture, fixtures, and equipment to meet thehotel franchise design requirements.

Building permits were applied for, andthe building design was presented to the CityDevelopment Commission for its approval,along with other groups with a stake in theappearance of the finished building in rela-tion to the area and neighborhood. With all ofthese approvals in place, construction com-menced, and the hotel opened two years later.


� POSTSCRIPTThree years after the hotel opened, the own-ership LLC had the obligation to secure per-manent financing on the hotel to replace theconstruction loan. The September 11, 2001,terrorist attacks on the World Trade Centerand the Pentagon slowed travel throughoutthe United States. As a result, the hotel didnot achieve the projected occupancy or av-erage daily rate during the three-year con-struction loan period. An appraisal that wasprimarily based on the hotel’s trailing 12-month net operating income produced avalue about $2 million below the originalconstruction cost. The bank that had pro-vided the construction loan notified theowners that they did not wish to providepermanent financing under these circum-stances. The owners were forced to conducta search for a new mortgage bank. Theywere able to find a mortgage, but only afterbuying down the loan by $2 million to bringthe loan-to-value ratio back to 40 percentequity and a loan at 60 percent of the ap-praised. This illustrates the risk that devel-opers face when entering into a hotelproject.

However, as hotel values historically peakand decline on about a ten-year cycle, theowners look forward to the option of sellingthe hotel on the next peak, which will allowthem to capture the original projected returnthrough capital appreciation. Hotel develop-ment and ownership is a high-risk, high-reward enterprise.

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Dramatic changes have affected the hotel in-dustry over the past 30 years. These changeshave had a disproportionately high bearingon the independent hotel owner, who, in theface of increasing pressure from large, well-funded chains, struggles to maintain inde-pendence and to compete on the basis ofdistinctive hospitality and character.

Several organizations provide indepen-dent hotels and resorts with reservations andsales services. As competition has evolved andintensified, some of these organizations havemodified their structure and enhanced theirservices to meet the changing needs of inde-pendent hotels and competitive market dy-namics.Today, independent hotels may choosefrom among more than 20 such organizationsdelivering varying degrees of competitive ad-vantage and ownership independence.

� A NEW MARKET MODELIn the new millennium, the face of the globalhospitality market continues to change at arate never before seen. Four factors con-tribute to this rapidly changing environment:

• The broadening and diversification of theglobal consumer market. Both the demo-graphic and psychographic characteristicsof the global consumer market are grow-ing and changing radically.


• The rapid advancement and availability oftechnology. This includes internal hoteloperating systems, revenue management,direct-to-consumer communications andbooking technology (Internet), marketingtechnology (customer databases), andtelecommunications and automated salessystems that enable central sales offices tobecome revenue producers.

• The growth and importance of globalbrands. Recognized brand names andbrand attributes are important in reach-ing diverse customer segments and in cre-ating customer loyalty.

• Consolidation of multiple brands under asingle global management. The manage-ment and leveraging of multiple brandsuse similar technology platforms andshared sales and marketing infrastruc-tures to consolidate and direct consumerdemand.

Some established ways of doing busi-ness—long-term, high-fee management con-tracts and franchises, a focus on traditionaldistribution channels, and traditional hospital-ity industry marketing techniques—are nolonger effective in the new consumer-focusedmarket. More and more hospitality marketingbudgets are being directed toward technology-enabled customer booking and communica-tion; this shift away from traditional hospitalitymarketing techniques is expected to evolve

1.3 HOW WELL DOES THE BRANDEDDISTR IBUT ION COMPANY ALLOWINDEPENDENT HOTELS TO COMPETEWITH THE CHAINS?Peter Cass

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over several years and involve millions of U.S.dollars in telecommunication, e-commerce,data warehousing, and one-to-one marketinginvestment. The independent hotel or resortand many small branded management compa-nies may not be able to fund this requirement.

However, this shift will not affect all inde-pendent hotels and resorts simultaneously.The first wave of change will hit the globalbusiness and city hotel market. This is prima-rily because of brand competition and the factthat the business travel distribution networkis more structured and driven by multina-tional corporations desiring lower and morepredictable costs. The second wave will affectthe leisure market, and the changes could fol-low quickly. Leisure travel content, includingpackaging on the Internet, will increase rap-idly as the presently fragmented leisure traveldistribution network becomes more unifiedand efficient through consolidation.

The emergence of e-commerce modes inthe hospitality industry is not eliminating theintermediary and empowering the individualproperty, as once thought; instead, it is creat-ing new, more powerful intermediaries. Someof these evolve from the hospitality industry,while others are opportunistic e-commercecompanies.

� MANAGEMENTCOMPANIES ANDFRANCHISES

In the 1970s, hotel chains continued to evolveas the need for capital to invest in additionalproperties restricted growth opportunities.This pressure bolstered the proliferation ofthe management contract, whereby the chainoffers the hotel owner the rights to use its

Section 1.3 � How Well Does the Branded Distribution Company Allow Independent Hotels to Compete? 15

brand name and established facility and ser-vice standards as well as trained operationsmanagement and reservation and marketingservices—for a significant fee, usually a per-centage of gross sales. The pressure to growalso fostered the development of the fran-chise concept and franchise system in NorthAmerica. The franchise differs from the man-agement contract in that the owner is respon-sible for operations, including meeting thefranchise standards.

The growth of management and franchisecontracts has been remarkable, and today, ac-cording to a recent study, 75 percent of thehotel rooms in North America are covered bysome form of branded franchise or profes-sional management agreement (Travel Re-search International, 1999).

These new business structures continuedto threaten the traditional independent ownerby accelerating the growth of the chains’ shareof the lodging market. In response, the mar-keting/referral organizations formed in the1960s began to offer a wider range of services.While these additional offerings leveragedlinkages to the global distribution systems andled to strong relationships with travel agents,the consumer was largely ignored, and the or-ganizations did little to generate consumerbrand awareness.

In the United States, strong consumerbranded operators are attracting increasingamounts of capital to fund their growth at theexpense of unbranded operators (Pricewater-houseCoopers, 2000).

� BRAND DEVELOPMENTAs the consumer market became more diverse and the hospitality product more

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segmented, branding became increasingly im-portant. By the late 1980s, without a recog-nized brand affiliation or a close relationshipwith the lending community, owners/develop-ers found it difficult to obtain permanent fi-nancing on a new hotel or resort. Lenders,believing that an established brand providedgreater economies of scale and established in-frastructure, opted for the lower-risk alterna-tive. In this brand-driven environment, theindependent hotels’ distinctive style and char-acter became a competitive advantage, butonly if they were able to meet recognized stan-dards. As a result, the need for independenthotels to be associated with a clearly defined,trusted brand became more critical than ever.

In the late 1990s, independent hotels, par-ticularly those in Europe, began to face thedaunting costs of upgrading their technologi-cal infrastructure and facilities to accommo-date changing consumer needs. Such upgradesas new property management systems, high-speed Internet access, two-line phones, in-room faxes, and leisure and health facilitiesbecame critical to maintaining competitive-ness. When coupled with ever-increasing costsof consumer marketing, these costs put un-precedented strains on independent hotels’ fi-nances. As a result, these hotels becameincreasingly focused on leveraging greater re-turns from their reservation affiliation.

� RESERVATIONAFFILIATIONS—ACHALLENGE TOEFFECTIVENESS

The relationship of independent hotels andresorts to reservation affiliations has beenlong and generally successful. These relation-


ships operated best in a market environmentthat was stable, somewhat homogeneous interms of demographic market segmentation,and where travel influencers played a domi-nant role in transient business, group, andleisure travel. Reservation affiliations aremost effective in regional hospitality marketsthat do not have multiple brand competitionand when the goals and objectives of thereservation organization are in alignmentwith the goals of the independent hotel own-ers. A contributing element to the attractive-ness of reservation affiliations has alwaysbeen the networking and camaraderie oppor-tunities for the professional management atindependent hotels.

Reservation affiliations focus on tradi-tional channels of distribution. Access to theGlobal Distribution Systems (GDS) is nolonger a competitive advantage; the GDS is auniversal pipeline. The new competitive play-ing field is proprietary distribution channelsleveraged by consumer segmentation, e-com-merce technology and partners, and innova-tive customer management programs.

In the new technology-driven and con-sumer-empowered global market, the strengthand effectiveness of reservation affiliationsare challenged by new market and operatingimperatives. The cost to compete againstchains will grow exponentially.As competitionintensifies, it is probable that local and re-gional market share at independent hotels andresorts will be drawn off by local and regionallicensees of strong global brands. Independenthotels, therefore, need to draw more nationaland international business to fill occupancygaps. This requirement runs counter to the es-tablished business model and capabilities ofreservation affiliations.

The average room-night contribution ofreservations companies to affiliated inde-

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pendent hotels is less than 5 percent of avail-able rooms (Preferred Research).

At least four emerging factors are chal-lenging the effectiveness of traditional reser-vation organizations:

1. The growing demographic and psycho-graphic complexity of the global con-sumer market requires significant newexpertise and resources in the area of seg-mentation and analysis.

2. The emergence of consumer direct-book-ing Internet technology requires signifi-cant new and ongoing investment.

3. The new marketplace requires innovativeglobal brand management together withresources to establish and maintain abrand in the face of intense competition.To be competitive, a brand must attractnew development and must therefore bestrong enough to convince lenders tocommit to permanent financing. Brandmanagement also includes loyalty pro-gram management and the developmentof regional and global partners tostrengthen and extend the effectivenessof the brand.

4. The corporate objectives and governancepolicies of traditional reservation organi-zations are influenced by the need to growand meet shareholder profit require-ments. These goals for growth can be atodds with the goals and expectations of in-dependent hotel and resort members.

The traditional reservation affiliationsmust change not only their focus but alsotheir structure if they want to succeed in thisnew competitive world.

The traditional reservation organizationmust be prepared to respond to competitivechallenges by expanding resources and skills


necessary to increase average room-nightcontribution to affiliated independent hotelsto 15 percent—an average growth per mem-ber hotel of at least 200 percent over presentperformance levels (Preferred Research).

In response to this competitive environ-ment and the need for more cooperative andfocused business relationships, a new hospi-tality business structure is evolving for allscales of hotels: the branded distribution company.

� CHARACTERISTICS OF ABRANDED DISTRIBUTIONCOMPANY

The ideal branded distribution organization isa conventional equity company with owner-ship shared (in some cases) by the individualhotel owners, who have direct input into thecorporation through an elected board of di-rectors. This ownership structure creates atrue operating partnership and a sharing ofenergies toward the common goal of creatingvalue through increased brand awareness androom sales. Corporate profits must be ade-quate to maintain technical and managerialleadership and to support the shareholders’investment.

Unlike a reservations and representationcompany, a branded distribution corporationowns and builds a branded distribution net-work asset that, in turn, provides services asset out in the diagram below. The sole focus isperformance for the affiliated independenthotels and resorts.

Joining such an organization is appropri-ate for independently owned and managedhotels and resorts that want to keep ownercontrol but require effective and low-cost

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Table 1.1 Hospitality Structures and Corresponding Brands

Flagged andTypes of Representation Reservation Reservation/ Branded FranchiseBusiness Firms (Group Services Sales Distribution ManagementStructure Meetings Only) Only Affiliations Companies Companies

General • Primarily Trade-Focused • Consumer & Trade-FocusedAttributes • Primary Reservation Technology • Performance Focused

• Disparate range of abilities in: • Brand Management• —Management Expertise and Depth • Quality Standards and Assurance• —Marketing, Sales, and Reservation Support • Multiple Technologies

• Integrated Marketing and • Technology Solutions• Customer Recognition and• Loyalty Programs• Full-Service Provider• —Purchasing, Technology• —Recruitment, Training• —Consultative & Design Services• Management Expertise and Depth

Examples of ALHI Utell Flag Int’l Concorde Preferred Hotels Accor brandsOrganizations, David Green Lexington Golden Tulip and Resorts Bass brandsBrands, and Helms Briscoe Pegasus/ Historic Hotels Worldwide Carlson brandsManagement Hinton/Grusich Rezsolutions Leading Hotels (for profit) Cendant brandsCompanies Krisam Supranational of the World Best Western Choice brands

TRUST Relais and Chateaux (not for profit) Four SeasonsSmall Luxury Hotels Summit Hilton brandsSterling HyattSRS Hotels MandarinSteigenberger Marriott brands

Starwood brandsWyndham

Relationship Client Client Member (some Member-Owner Licenseeof Hotel are Owners)Owner toStructure

Owner High High High High LowControl

Room-Night Low Low Low-Medium High HighProduction

Consumer Low Low Low High HighFocus

Overall Low Low Low Low HighFees

18

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distribution, global consumer brand aware-ness, and group purchasing benefits withoutthe encumbrances and costs of a traditionalhotel chain franchise or management con-tract. Above all, it promises the independenthotel awareness of, and access to, their targetconsumer and rapidly emerging technologythrough cooperative ownership.

Table 1.1 shows a summary of the keycharacteristics of the various marketing busi-ness structures and suggests examples of cor-responding brands.

� THE BENEFITS OF ABRANDED DISTRIBUTIONCOMPANY

This new business structure is attractive froman owner’s or a developer’s standpoint for anumber of reasons, including:

• Costs: First, it requires less up-front cash;second, ongoing fees and reservationcommissions are significantly lower thanwith either a pure franchise or manage-ment agreement. For example, a 9 or 10percent franchise fee in many casesequals 50 percent of gross profits.

• Contract terms: The terms are typicallyshorter, easier to negotiate, and allow forsubstantial owner control over the opera-tion, style, and character of the hotel. As aresult, conflicts can be avoided, and thebranded distribution contract can becompleted and signed in as few as 45 days.

• Marketing: It frees hotel managementfrom the daunting and increasingly ex-pensive task of acquiring profitable newcustomers and allows them to focus theirattention and operating skills on the de-


livery of an exceptional hospitality experience.

• Common objectives: Both the owner andthe branded distribution company enterinto the agreement with the same primaryobjective: revenue. The branded distribu-tion company receives no revenue if itdoes not deliver to the hotel or resort.This shared goal strengthens and ener-gizes the relationship between the twopartners.

From a branded distribution company’sstandpoint, this structure allows the brand toexpand faster because capital is not used tosubsidize additional construction or to sup-port an older business model. Instead, fundsare used to build and maintain an up-to-date global distribution network and infra-structure composed of telecommunications,e-commerce functions, reservations software,data warehousing capability, and sales andmarketing. The efficiency of the operation isassured by a focus that is almost entirely onthe most important part of this business rela-tionship—the generation of brand awarenessand measurable room-night revenue for eachaffiliated hotel or resort.

Unlike hard flags, which focus primarilyon hotel operations and asset managementsuch as the Marriott or the Westin, and reser-vation affiliations, which focus on professionalcamaraderie and traditional distribution chan-nels such as the Best Western, the branded dis-tribution company is primarily market-focused; its full attention is on customer andtravel influencer communication, relationshiptechnology, and revenue streams. (Note: Travelinfluencers are the intermediaries betweenconsumers and the travel product and includetravel agents, etc.)

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In contrast, asset management, profitabil-ity, and operating efficiency are the majorconcerns of management companies, whichtend to be public companies with stockholderexpectations that must be met. It is often thecase that strategic asset management con-cerns conflict with day-to-day tactical operat-ing needs. This is evident in Marriott’s recentmove to separate its ownership and operatingdivisions, to the benefit of both.

The same conflict can arise between theindependent owners of a hotel property, whoare focused on real estate concerns, and themanagement company they hire. Such misun-derstandings can sour what should be a mutu-ally supportive relationship. The fact thatmanagement contract fees are charged andcollected, even when the cash flow is negative,does not create owner confidence in the part-ner. A franchise relationship can cause a sim-ilar conflict and put a financial and operatingburden on an owner.

In contrast, participation of independentowner/operators as shareholders in a brandeddistribution company enables them to movebeyond these concerns and focus on their op-eration and the consumer—the source oftheir revenue and the basis of their success.

� ARE THERE ANYDRAWBACKS TO ABRANDED DISTRIBUTIONCOMPANY?

The owners of property within a branded dis-tribution company must relinquish a minimalamount of control and decision making,mainly in the areas of branding and qualityassurance. In certain cases, member proper-


ties may have to adopt and maintain specificquality standards. In addition, they may alsobe required to demonstrate their affiliationwith the branded distribution companythrough using its logo on marketing materialsas well as participating in e-commerce and in-ventory management initiatives.

However, these drawbacks can actuallyenhance a hotel’s operations and market po-sitioning while allowing the hotel to maintainindependent ownership and management.

� ENSURING COMPETITIVEADVANTAGE

Independent hotels face significant risk in to-day’s marketplace. Given the advances intechnology and the profitability pressures putupon chain hotels by shareholders, competi-tion for customers is intensifying. Keeping instep with competitive chain hotels presents asignificant challenge to independent owners.To address this, they currently have severaloptions outside of the branded distributioncompany, including representation firms,reservations services, flagged chains, and fran-chise management companies. However,given the economic, societal, and technologi-cal trends that are dramatically changing thehospitality industry, several of which are ana-lyzed in this book, many of these old-economy options can offer only short-termsolutions to long-term competitive pressures.

A branded distribution company has aninherent advantage going into this new com-petitive arena. Its sole focus is on customeracquisition and management, achievedthrough the development of new technolo-gies. This competitive advantage extends tothe independent hotel aligned with a branded

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If you ever have the chance to be involvedwith opening a hotel, jump at the opportunity.Opening a hotel is one of the most rewardingjobs in the hospitality industry despite its frus-trating and exhausting aspects.

Walk into any hotel, anywhere, and lookaround. Everything you see, hear, and feel,every detail, involved many people andcountless decisions. I have been an operationsproject manager (OPM) since 1989 and haveopened over 40 three-, four- and five-star ho-tels around the world. From Guam to Malta,Berlin to St. Louis, each project has beenunique, each project has been the same, andeach has been professionally rewarding.

The OPM is the third person hired, afterthe general manager and the director of mar-keting. The role of an OPM is to pull togetherthe visions of the architect, interior designer,owner, operator, and others. When these vi-sions are successfully melded, the hotel guest issatisfied, the owner makes money, and the ar-chitect and interior designer can add the proj-ect to their list of successful accomplishments.

Section 1.4 � The Art and Science of Opening a Hotel 21

The OPM oversees the following aspectsof a project:

• Reviewing blueprints and specificationsfor the entire building

• Assisting with the creation of a modelroom

• Developing the pre-opening staff plan• Developing and managing the pre-open-

ing budget• Developing the operational supplies and

equipment budget (OS&E)• Overseeing the purchasing, warehousing,

delivery, and installation of the OS&E• Developing the interior graphics package• Coordinating the installation of third-

party vendors

� BLUEPRINTSThe OPM’s responsibilities start with the ar-chitectural blueprints. The focus is to ensure agood flow for guests, staff, and goods.

1.4 THE ART AND SC IENCE OF OPENINGA HOTELTom Dupar

distribution company. By providing the inde-pendent owner with a global brand and thetechnology and expertise to acquire prof-itable new customers, the branded distribu-tion company enables the hotel managementto focus its attention on the delivery of excep-tional service and profits to the owners. Thisseparation of skills, expertise, resources, and

operating cultures in a cooperative businessrelationship provides a model and formulafor success.

Independent hotels and resorts that alignthemselves with a branded distribution com-pany will not only continue to operate prof-itably in the new global marketplace, but willalso flourish.

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The bellperson bag storage room shouldbe located between the porte cochere (entry)and the elevators and contain 1 square foot ofspace for each guest room.

If valet parking is offered, ensure that aconvenient cashier’s station is located nearthe porte cochere. Arrange for a key rack tohold the keys for each valet parking stall.

Given a 10,000-square-foot ballroom, thecatering department can sell functions for800� for dinner.This requires 80 6-foot roundtables, 800 chairs, a dais for the head table, adance floor, and staging for the band. If soldfor a 700-guest all-day meeting, the classroomsetup requires 1,400 linear feet of narrow ta-bles and 700 chairs. A short theater meetingsetup for 1,000 requires 1,000 chairs, apodium, staging, and audio visual equipment.The same space accommodates a cocktail re-ception for 1,400 guests; this requires cocktailtables, portable bars, buffet stations, and soon. This all boils down to ensuring amplestorage space for equipment not being used—at least 1,500 square feet.

Moving goods from the back of the houseto the front requires careful planning to en-sure that precious labor dollars are used effi-ciently. Are the rollaway beds, cribs, and highchairs stored near an elevator for quick deliv-ery? The housekeeper closets should be cen-trally located on guest room floors to cutdown on access time. A 6-foot, 2-cubic-yardgarbage cart will not work if the elevator isonly 5 feet deep.

If ice machines are offered for guest self-service, they must produce an ample supply(10 pounds per room per 24-hour period) forthe number of guest rooms on that floor orfloors. The ice machine room requires theproper utilities, including electricity, plumb-ing, lighting, and HVAC. Don’t forget the sign


on the outside of the room, which must meetADA standards!

� MODEL ROOMBuild a typical king and double/double guestroom close to the site so you can review everysingle item in them. Are ample electrical andtelecom outlets placed exactly where the TV,lamps, clock radio, mini-bar, coffeemaker, hairdryer, Internet access, and telephones are lo-cated so the cords are hidden? Are spare out-lets offered for guest use (computer, iron,etc.)? Is the closet rod hung so the ironingboard organizer and iron board fit in thecloset? Is the thermostat location convenientfor guest access?

Are the case goods (dresser, nightstands,headboards, chairs, etc.), designed for com-mercial heavy-duty use? Will they hold up toabusive use? Do they have sharp corners thatwill snag guest clothing? Does the bedskirthang 1⁄2 inch off the floor? Do the bedsidelamps give off enough lumens so guests canread in bed? Does the room meet or exceedevery operator brand standard?

These model rooms serve as sales toolsfor the sales and marketing staff selling grouprooms up to three years before opening.

� PRE-OPENING STAFFPLAN

The pre-opening staffing begins with an orga-nizational chart with all positions. Once the ti-tles and staff counts by position are finalized,then spreadsheets are created to include theposition titles, start dates, pay rates, bonus,transfer allowances, and number of full-timeequivalents (FTEs) for all positions.

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The pre-opening staff plan is a compre-hensive document that states who is hired,when they start, how much they are paid, andwhether or not they are allocated a relocationallowance and benefit costs. Each of thesepieces is used to build the pre-opening staffplan budget. If hiring has already begun andthe opening date changes, the budget must beamended. Hiring a position that does not con-form to the plan, such as bringing on arenowned chef one month earlier thanplanned, also requires the budget be modified.

� PRE-OPENING BUDGETThe OPM develops and manages the pre-opening budget. This budget typically consistsof three major categories; labor cost (40 per-cent), sales and marketing efforts (40 per-cent), and miscellaneous (20 percent).

The labor cost is taken directly from thepre-opening staff plan.

Sales and marketing activities compriseadvertising, collateral, public relations, andtravel to see clients.

Rounding out the budget are all of themiscellaneous items. These include officespace rental before moving into the hotel,utilities (power, water, Internet, and tele-phone), human resources recruitment (ads,headhunters, drug testing, etc.), training mate-rials, association dues, and licenses and per-mits (business, liquor, sales tax collection,etc.).

If the hotel opening date is delayed forany reason, the pre-opening budget is af-fected. Additional costs include labor, officerent, utilities, and marketing efforts. If theopening date changes within three weeks ofthe original plan, major costs are encoun-tered, as most of the staff is already hired.


� OPERATIONAL SUPPLIESAND EQUIPMENT (OS&E)

The largest and most complex aspect of theOPM’s responsibility is specifying, quantify-ing, and budgeting for the operational sup-plies and equipment (OS&E) list. This budgettypically pencils out to $8,000 to $10,000 perguest room for a typical four-star property.The list of goods typically exceeds 2,500 lineitems. Add a little more for a full-service re-sort; deduct a little for an in-city business hotel.

The OS&E comprises all of the items thatare not nailed down, with the exception of thefurniture, fixtures, and equipment (FF&E).The FF&E is typically specified and orderedby the interior designer.

Typical guest room items include bedding(frames, box springs, mattresses, mattresspads, sheets, pillows, pillowcases, towels, etc.),clock radios, hangers, laundry bags, laundrytickets, iron, ironing board, ironing board or-ganizer, luggage rack, guest amenities (soap,shampoo, lotion, etc.), hair dryer, shower cur-tains, and shower curtain hooks.

Housekeeping equipment includes vacu-ums (guest room and wide-area units), carpetshampooers, carpet extractors, housekeepercarts, laundry bins, garbage trucks, valet deliv-ery carts, and shelving, to name a few of manyitems. Housekeeping must also keep an in-ventory of guest request items including hu-midifiers, dehumidifiers, cribs, high chairs,rollaway beds, bedboards, spare pillows, tow-els, amenities, refrigerators, laundry soap, andso on.

Food and beverage front-of-the-houseitems include flatware (knives, forks, andspoons), hollowware (serving trays, servingutensils, chafing dishes, sugar bowls and sauce

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boats, punch bowls), glassware, table linen,napkins, skirting, salt and pepper shakers,china, plate covers, espresso machines, menucovers and the list goes on and on.

Banquet items include all of the aboveplus tables, chairs, staging, staging steps andrailings, dance floors, carts, carving boards, icecarving trays, flags, podiums, portable bars, icebins, pianos, and tray jack stands.

The largest purchase order—typicallyover 100 pages long—is for a full-servicekitchen and includes everything a chef needsto produce the menus being sold at the hotel.Every utensil, pot, pan, dish, and glass rack,warewashing chemicals, mops and buckets,specialty items (roller-docker, anyone?) mustbe reviewed by the chef, purchased, and deliv-ered the day before the chef starts burning inthe kitchen.

On the hotel administration side, theOPM specifies the office desks, chairs, corkand dry-erase boards, conference tables, filingcabinets, safes, bullet-proof window for thegeneral cashier’s office, fax machines, copiers,currency and coin trays, and a set of flags forthe exterior flagpoles.

One of the largest and most complicatedpurchase orders is for staff uniforms. My re-cent Kona, Hawaii, project uniform purchaseorder was 68 pages long.The invoices coveredover 100 pages!

Before quantifying uniform needs, manyquestions are asked. Do we need summer andwinter uniforms? Will the uniforms be laun-dered by the hotel or the hotel associates?How many extra servers are needed for a ca-pacity dinner function in the ballrooms? Isthe intent to have a large percentage of part-time staff? Which uniforms need custom em-broidery (restaurants, culinary, engineering,etc.)? What percentage of spare uniforms areneeded in reserve?


Once these questions are answered, thenthe selection process begins. Operations andthe interior designer review the look and feelthe options available. Each position (house-keeper, bellperson, etc.) or similar position(front desk clerk/concierge) has different re-quirements. Housekeepers and bellpersonsrequire durable uniforms that breathe andcan handle lots of bending and stretching.Theuniforms of the culinary and engineeringstaffs are often stained and must hold up tonumerous launderings.

The uniform order is placed 90 to 120days before the first uniformed staff is hired.To quantify the sizes required, a typical bellchart sizing curve is used for the particularcountry or region of the hotel. The uniformsare delivered and sorted prior to the individ-ual fitting process. On the line staff’s secondday on the job, each individual is measuredfor uniforms. An army of seamstresses thentakes the pants, jackets, and dresses and alterseach piece for each associate. The fitted uni-forms are issued a few days before openingday.

� PURCHASING,WAREHOUSING,DELIVERY, ANDINSTALLATION OF THEOS&E

In an ideal process, the 500 purchase ordersare issued beginning six months prior toopening. Each order is tracked to ensure it isdelivered to the proper location on the de-sired date. Most goods are delivered to a localwarehouse and pulled for delivery to the siteas the general contractor completes construc-

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tion and turns over areas. Some goods areshipped directly to the site to eliminate dou-ble handling. These large orders include bedsets (21 40-foot shipping containers for theKona project), televisions (3 containers), ban-quet chairs (2 containers), banquet tables (3containers), and guest room safes (1 con-tainer). The linen order for guest rooms andF&B are shipped to an off-site laundry facil-ity for initial washing.

Once the goods are on site, they are typi-cally staged in the largest ballroom for un-packing and distribution. The unpackingprocess requires a plethora of workers. Forexample, each clock radio must be unpacked,the electrical twist tie removed, the 9-volt bat-tery installed, and the time set. Then the unitis placed in a guest room on the nightstand.For the 525-room Kona project, this task re-quired two people for three eight-hour days.Once they completed this task, they spent thenext five working days installing the 7,000�shower curtain hooks, 525 shower curtains,and 525 shower liners. Then they unboxed30,000 glasses and placed them in glass racksfor washing. These kinds of tasks must be car-ried out for each of the 2,500 line items.

Once receiving and distribution begins onsite, another element comes to the forefront:garbage. During the five-week Kona installa-tion process, over 3 tons of packing materialwere generated every day! Making friends withthe local waste-hauling service is a priority.

� INTERIOR GRAPHICSPACKAGE

The project manager reviews the interiorgraphics package for errors and omissions.This package includes every sign needed to


direct guests and staff in front and back of thehouse areas. The recent Kona project in-cluded 1,600 signs, 98 percent of which wereone of a kind.The text must be correct, the di-rectional arrows must point the correct way,and most are required to include raisedBraille text, per the ADA.

The OPM works with the marketing de-partment to develop the identity for theunique areas within a property. These includethe restaurants, bars, pools, spa, and retail ar-eas. These logos are incorporated into the sig-nage package, collateral (cocktail napkins,menus, check presenters, etc.), and uniforms.

� THIRD-PARTY VENDORSMany third-party vendors must have accessto the property prior to opening. The projectmanager schedules and directs all of thesevendors, including the soft-drink vendor (whoinstalls soda guns for the bars and vendingmachines for the guest floors), the coffeecompany (which must install and test equip-ment), the pay-per-view TV vendor (whomust connect every television in the buildingand test the signal strength), the warewashingchemical vendor (who must install and cali-brate the dishwashing machines), and the of-fice furniture installer (who must assemble alloffice equipment). Among the other vendorsare those dealing in copier services, postagemachines, telephones, fitness center equip-ment, security systems, and first aid supplies.

These vendors are constantly informedwhen they can install their equipment basedon the general contractor’s completion dates.When the construction schedule changes, ven-dors must be updated so they show up whenthe area they need access to is ready.

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� HUMAN RESOURCESThe OPM assists the human resources per-sonnel during the last two months of pre-opening so that they have all of the tools theyneed to recruit and hire the staff. On average,the HR department interviews at least fiveapplicants for every position. This works outto over 1,000 applicants for a typical 300-room four-star hotel. This process is referredto as the mass hire.

The mass hire is typically conducted overa two- or three-day period six weeks beforeopening. To interview this many job seekers,HR requires office space, reception space forup to 200 at one time, rest rooms, and breakrooms for the interviewers. The OPM coordi-nates all of these details so that the operationsteam can focus on the recruitment.

Once the offer letters are accepted, allline associates start work about three weeksout. The first few days on the job are dedi-cated to group training, operational philoso-phies, code of conduct, and other generalpolicies. On day three, divisional trainingtakes place. In the second week of training,the staff is broken out into departmental orjob-specific duties.


Departmental training includes teachingstaff to make beds, clean a room, cook everymenu item, the most efficient route to eachguest room, and what to tell the guest enroute to the room.

� OPENING DAYThe activity during the last 72 hours beforethe opening ceremonies is chaotic. This is thetime that all hands are on deck. Sixteen-hourdays are the norm. Rooms are cleaned.Housekeeping closets are stocked. Liquorand food storerooms are filled. The generalcontractor completes all small details such aspaint touch-ups. Artwork and furnishings areinstalled in the public areas. Rehearsals areconducted for all aspects of the operation, in-cluding serving test meals and cocktails, guestcheck-ins and check-outs, and even such easy-to-overlook activities as valet parking andvacuuming the pool.

As soon as the general manger cuts theceremonial ribbon, the OPM knows whatkind of job has been done. The next step is tofind the next project and do it all again!

1.5 ON-L INE PR IC ING: AN ANALYS IS OFHOTEL COMPANY PRACT ICESPeter O’Connor

The importance of electronic hotel-distribu-tion routes has grown substantially in recentyears. According to statistics quoted in theHorwath Worldwide Hotel Industry Studies,direct reservations fell from approximately 39percent in 1995 to 33 percent in 1999, with the

shift in sales going almost exclusively to elec-tronic channels (O’Connor, 2001, 70–93).While hotels continue to make extensive useof travel-agent-oriented global distributionsystems (GDSs), consumer adoption of theInternet as a reliable and secure commerce

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medium has prompted a change in the way inwhich hotel rooms are being distributed.

The Internet has dramatically changedthe way people communicate, research infor-mation, and buy goods and services. Travelproducts in particular have proven to be suit-able for sale on line. The typical Internetuser—an affluent, frequent traveler whospends more than the average on leisure andentertainment—is an attractive market fortravel suppliers (NFO Plog Research, 2000).Furthermore, from a consumer’s perspectivepurchasing travel products on line has, inmany instances, become faster, easier, andmore convenient than contacting a travelagent or telephoning a supplier directly. As aresult, on-line travel-related revenues areforecast to grow sharply. For example, accord-ing to a recent report by Jupiter MediaMetrix, on-line travel sales will more thantriple in the next five years—from US$18 bil-lion in 2002 to US$64 billion in 2007 (JupiterMedia Metrix, 2001).

Booking volumes are also forecast toclimb. The Travel Industry Association ofAmerica (TIAA) estimated that by the end of2002 between 6 percent and 10 percent of alltravel reservations would originate on theweb (TIAA, 1998). If Jupiter’s 2007 predic-tion comes true, travel will be the biggest sell-ing on-line product, with a volume nearlydouble that of the current leading product,PC hardware (Forrester Research).

Price is key to selling successfully on line.Studies by Internet analysts Gomez and PhoCusWright, and also a study by TIAA, allidentified price as being one of the key moti-vating factors that encourages consumers topurchase travel on line (Gomez.com, 2000;PhoCuSWright, 2001;TIAA, 2001). For exam-ple, the PhoCusWright study found that com-petitive pricing is the best way to attractcustomers (Pastore, 2001). When travelers

Section 1.5 � On-Line Pricing: An Analysis of Hotel Company Practices 27

who haven’t bought on line were asked whatwould encourage them to do so, 64 percentsaid that saving money would make themmore interested. No other benefit—whethersaving time, getting bonus loyalty-club points,more control, or obtaining better informa-tion—came close to this level of response.

� HOTEL PRICING ONTHE WEB

Yesawich, Pepperdine, and Brown found in a2000 study that almost six out of ten leisuretravelers now actively seek the “lowest possi-ble price” for travel services (Yesawich, Pep-perdine, and Brown, 2000). Similarly, a 2001Forrester Research study found that 66 per-cent of all buyers had used an on-line dis-count in the previous 12 months to buy travelon line (Forrester Research, 2001), and astudy by the Joint Hospitality Industry Con-gress found a real expectation among con-sumers that Internet prices would be lowerthan those available in the “bricks and mor-tar” world (Joint Hospitality Industry Con-gress, 2000).

Such a perception has developed for sev-eral reasons. First, many of the best-known In-ternet retailers (such as, for example,Amazon.com) initially competed with tradi-tional outlets based, to a large extent, on price.Second, savvy consumers are aware that web-based distribution costs are lower than thoseof other channels (Nua, 1998). As Jack Ged-des, Radisson Hotels Worldwide’s managingdirector, sales and marketing Asia, has pointedout: “Consumers now understand that suppli-ers are cutting costs through this channel andexpect savings to be passed on to them, as wellas being rewarded for making the bookingthemselves” (Muqbil, 1998). Such expectations

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are being reinforced by the budget-airline sec-tor, which offers substantial discounts for on-line bookings. Companies such as EasyJet,RyanAir, and Buzz estimate that by avoidingtelesales and travel agents, they can achievesavings of up to 30 percent—which they passon to customers in the form of lower fares(Cooke, 2000). Similar or even greater levelsof savings can be made by hotel companies, ascan be seen from the internal Accor figures inTable 1.2, which show how an 80- to 90-percent savings in transaction charges can beachieved by selling directly to the consumeron line. Finally, many hotels (and airlines) usethe web to sell last-minute deals—packages atrelatively low prices but with short lead times.While such promotions can help dispose ofunsold inventory, they have also resulted inthe public’s associating rooms sold over theInternet with lower prices.


These factors have combined to makeconsumers associate on-line booking withgood value, which in the consumer’s mindtranslates into low prices. However, in thecase of hotel brands’ own web sites, industrypractice frequently seems to be the oppositeof theory. In a 1999 survey, for instance, a col-league and I found that rates obtained fromthe web site were usually substantially higherthan those obtained by contacting the centralreservations office (O’Connor and Horan,1999). That study was limited, however, inthat it focused only on direct sales over hotelchains’ own branded web sites. Electronicdistribution is rapidly evolving for hotels, anda large number of other on-line consumer-focused channels are now available, withmost chains using multiple routes to reachthe consumer (Castleberry et al., 1998,19–24).

Table 1.2 Reservation Cost by Distribution Channel

TotalRoute Transaction Fee Cost

Traditionaltravel

Customer agent GDS Switch CRS HotelTraditional $5.90 $3.20 $0.20 $4.20 $13.50route

Onlinetravel

Customer agent GDS Switch CRS HotelOnline $3.00 $3.20 $0.20 $4.20 $10.50intermediaryroute

Customer Hotel company website HotelDirect $1.50 $1.50online route

Source: Dresdner Kleinwort Benson/Accor, quoted in Travel and Tourism Intelligence, TheInternational Hotel Industry: Corporate Strategies and Global Opportunities (London: EconomicIntelligence Unit, 2001).

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The availability of numerous points ofsale poses some interesting questions. Fore-most among these is: Is there consistency be-tween the room availability and prices beingoffered over each of the channels? Unlike inthe physical world, where a potential cus-tomer would have to telephone or visit sev-eral suppliers, comparison shopping on theweb can generally be accomplished relativelyquickly. Research has shown that consumersshopping for travel on line almost alwayscheck more than one site before purchasing.According to Jupiter Media Metrix (2001),just 10 percent of would-be guests visit onlyone site to book a hotel room, another 43 per-cent visit two or three sites, and 22 percentvisit four or more sites. Because they checkprices in several places, on-line purchasershave become increasingly intolerant of incon-sistent information, and may react unfavor-ably to a firm’s disparate rates by bookingwith the company’s competitor. Two relatedquestions, then, are:

1. If rates are not consistent across channels,is any one route consistently cheaper?

2. Is the company’s approach to pricing log-ical from both the consumer’s and the ho-tel’s perspective?

In this paper, I seek to answer those questions.

� METHODOLOGY ANDLIMITATIONS OF THESTUDY

Previous studies of hotels’ Internet use havebeen limited. Murphy et al. (1996, 70–82) fo-cused on rating the content of hotel web sites,while Van Hoof and Combrink (1998, 46–54)attempted to measure managers’ perceptions


of and attitudes toward the Internet. Web-reservations facilities were investigated in de-tail in the co-authored paper that I mentionedabove (O’Connor and Horan, 1999). How-ever, the issue of pricing over several distri-bution channels does not appear to have beenthe subject of extensive systematic researchto date. The objective of this study, therefore,was to analyze the room rates being offeredto consumers over multiple electronic distri-bution channels.

An exhaustive analysis of the rates beingoffered by all hotels would be virtually impos-sible. Those rates are constantly in flux, ashoteliers project occupancy rates and open orclose rate classes accordingly (according toyield-management principles). I believe, how-ever, that major international hotel chains’electronic-distribution activities are indicativeof industry patterns, because recent researchhas shown that large companies are most ac-tive on the web—perhaps because their sizeoften gives them an advantage in terms oftechnical expertise and financial resources. Asa result, I decided to focus this study on thebehavior of the top-50 international hotelbrands. While this strategy means that thefindings are not representative of the industryas a whole (and, therefore, not generally ap-plicable), it does allow establishment of an ac-curate benchmark of trends as they currentlystand. The companies were chosen based onthe ranking of the top-50 hotel brands pub-lished in Hotels magazine in July 2000. Two ofthose companies (Disney and Club Med) wereremoved from the listing because they operateresorts and distribute their rooms largely aspart of packages, which means that their prod-ucts are not directly comparable to the rest ofthe industry. Furthermore, another three com-panies neither offered on-line reservations ontheir own web site nor were they listed on anyof the other channels studied. Thus, the results

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discussed below reflect the findings from the45 hotel brands for which consistent datacould be found.

Five major types of electronic business-to-consumer distribution channels were iden-tified from the literature, and leadingexamples of each category were selected forinclusion in the study. In addition to a chain’sown web site (e.g., www.marriott.com), thesecomprised channels that draw their data andreservations engine from the GDS (i.e., Expe-dia and Travelocity); those that are based onthe databases and reservation engine of theswitch companies (namely, Travelweb); andpure web-based channels with an inventoryand reservations database that is maintainedon line (i.e.,WorldRes).While not collectivelyexhaustive, these represent the majority ofhotel-reservation sites. Omitted from thestudy were the auction-style web sites, such asPriceline.com, which are not comparable totypical booking approaches.

As another point of comparison, I incor-porated voice channels into the study by ana-lyzing the rates offered by the toll-freenumber to the central reservations service(CRS). Data were collected by repeatedly of-fering to reserve a standard double room forspecified dates in a selected property fromeach of the brands using each of the distribu-tion channels discussed above. Where theproduct requested was available on the sys-tem, both the number of rates displayed andthe lowest rate available were recorded foranalysis. To help ensure consistency, I ignoredrates not available to the general public (e.g.,corporate, military, AARP, and AAA), andanalyzed only those rates that could bebooked by a “normal” customer. After check-ing the web sites, I telephoned the hotel com-pany’s CRS to request the same booking. Inthat case, I recorded only the first rate quoted


by the agent, and I did not ask for a lower rate(nor did I record any subsequent offers afterI demurred from making a reservation). Al-though better rates could probably beachieved by haggling, I decided that negotiat-ing would leave no systematic way of consis-tently determining the lowest rate, dependingas it does on the caller’s persistence. Theabove process was repeated for five sets of al-ternative dates to reduce the possibility of er-ror due to system malfunctions or otherexceptional circumstances.

� SUMMARY OF RESEARCHFINDINGS

As can be seen from Table 1.3, each of themajor hotel brands uses multiple simultane-ous distribution channels. The most com-monly available channels were voice (via thecompany’s CRS) and electronic (through thecompany’s corporate web site). The companythat did not make a CRS number availablewas in the economy sector. Offering hotelrooms via the company web site is almost uni-versal, all but one of the brands surveyed of-fering on-line reservations in this manner. It isinteresting to note that this represents a con-siderable advancement when compared tosurveys made only a few years ago, whichfound that only approximately 50 percent ofthe major hotel companies provided on-linereservations (O’Connor and Horan; Hensdill,1998).

As shown in Table 1.3, hotel companiesmake less use of the other channels investi-gated. Approximately four-fifths of the majorbrands used the GDS-based intermediariesExpedia and Travelocity, three-quarters usedTravelweb, and barely one-third used World-

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Res. These findings are not in themselves sur-prising. Both Expedia and Travelocity drawtheir data from the GDSs, where the majorityof the hotel brands represented in this study(being major hotel companies) can reason-ably expect to be represented. Similarly, Trav-elweb draws its data from THISCO (TheHotel Industry Switching Company), and thus any of the hotel brands that use this astheir switch service could be expected to make inventory available for sale via Travelweb.

I found the chains’ low usage of World-Res surprising. With the exception of a com-pany’s own web site, using WorldRes has thelowest potential transaction cost and thuswould appear to be an attractive channel foruse by hotel companies. Examination of itsproperty database reveals a large percentageof independent hotels, bed-and-breakfastinns, and small hotel chains. An unresolvedquestion is why the major brands do not ex-ploit this distribution channel.

� RATES AVAILABLEEach of the electronic channels offered multi-ple rates. As can be seen from Table 1.4, eachchannel presented an average of five rates in


response to the request, with more being of-fered to the customer by Travelocity than bythe other channels surveyed.

Presenting a variety of rates to the cus-tomer has both positive and negative implica-tions. From a positive perspective, it offerschoices to potential customers, allowing themto match their needs with the products beingsold. On the other hand, presenting a largenumber of rates without adequate differenti-ation between products can confuse cus-tomers regarding what they are getting fortheir money. This is best demonstrated by anexample encountered in the study, where aproperty offered 17 different rates for a par-ticular date on Travelweb, with few (if any)discernible differences in the room descrip-tions. Clearly such a scenario would be con-fusing and frustrating for any customerwishing to book that property.

Mean prices. It was difficult to make ageneral observation about which of the sev-eral channels is consistently least expensiveon average, although Expedia’s rates weremarginally lower than those offered by otherchannels and WorldRes seemed to offer con-sistently higher rates than did the others (seeTable 1.5). Indeed, all things considered,prices across each of the channels were com-parable—with the average price for the

Table 1.3 Channels Used by Major Hotel Brands (n � 45)

Channel Number (n) Percentage

Hotel company website 444 97%Expedia 38 84%Travelocity.com 35 78%Travelweb 34 76%WorldRes 14 31%Voice (CRS) 44 97%

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requested room being in the range of US$163.It was interesting that Expedia’s mean rateswere lower, because as an on-line travelagency, it has a high distribution cost, and itwould be logical to assume that rates offeredover this channel would reflect the highercosts. By the same token, since WorldRes’stransaction costs are relatively low in compar-ison with those offered by the other channelssurveyed, hotels could potentially offercheaper rates over this channel. In otherwords, what I found is that when selling hotelproducts on line, there does not appear to bea relationship between the cost of using thedistribution channel and the rate offered. Il-logically, the electronic channels with thehighest transaction costs for the hotel seem toregularly offer the best value to the customer.


As will be discussed below, hoteliers need torethink their current practices and take actionif they are to benefit from the increasing mar-ket for on-line hotel-room sales.

Segment breakout. The foregoing discus-sion was based on an overall look at hotel-room sales distribution. If the brands studiedare subdivided into classifications based ontheir targeted market segment, a differentpicture emerges. As can be seen from Table1.6, hotels at the low end of the market are farmore likely to offer consistent rates across allchannels used. While it could be speculatedthat the reason for this might be that econ-omy properties are more likely to have a sin-gle fixed price for their product irrespectiveof demand, it could also be due to a more con-sistent pricing strategy on the part of the ho-

Table 1.4 Number of Rates Offered to the Customer

Channel Mean Standard Deviation

Hotel company website 4.27 3.6Expedia 3.66 1.4Travelocity.com 6.07 3.3Travelweb 5.62 3.6WorldRes 4.58 3.8Voice (CRS) 1.00 —

Table 1.5 Average Rates Offered to the Customer

Channel Mean Standard Deviation

Hotel company website $159 112Expedia $152 116Travelocity.com $166 134Travelweb $162 115WorldRes $181 168Voice (CRS) $163 117

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tel companies involved when addressing a rel-atively price-sensitive market. Furthermore itcan be seen that consumers at the low ends ofthe market are far more likely to obtain lowrates through direct (company-owned) chan-nels. For economy brands, direct sales overthe company’s own web site were lowest 26percent of the time.When coupled with the 46percent of cases where the same rate is of-fered irrespective of the channel used, thatmeans that a consumer reserving an economyroom will find the cheapest rate on the hotelcompany’s web site nearly three times out offour.With mid-price products, the chain’s website is even more likely to give the best rate,offering the lowest rate nearly half of thetime.

The situation is different at the upper endof the market. Luxury-hotel companies’ websites gave the cheapest rate in less than 10percent of cases. Furthermore, Table 1.7shows that the company’s web site quoted thehighest rate in over one-third of cases. Over-all, the evidence seems to indicate that if youwant to stay in up-market hotels, you should


avoid booking on these hotels’ web sites ifyou are searching for good value. Instead, theon-line intermediaries (in particular, Expe-dia) offer the highest probability of findingthe best rate available for high-end proper-ties, with an average savings of 5 percentavailable by booking through Expedia ratherthan on the company’s own site.

Haggling required. It is also clear fromthe data that a hotel company’s CRS is notthe place to obtain the best rates, at least ifone takes the first offer as I did for this study.Irrespective of the market segment, there is ahigher probability of being quoted the highestrate through this channel, and bookingsthrough this route were almost never thecheapest available.This finding, however, is toa large extent driven by my methodology. In-deed, in many cases, as soon as I indicatedthat I did not plan to make a booking at thequoted rate, the CRS associate quoted an-other, lower rate. This anecdotal finding sug-gests that negotiation might have resulted inlower prices. (This is a longstanding CRSpractice; see Lewis and Roan, 1986).

Table 1.6 Market Sector Analysis (Lowest Rates)

Percentage of cases where a channeloffered the lowest rates

Channel Economy Midprice Luxury Chi-squared

All rates equal 46% 21% 28% 0.016*Hotel company website 26% 47% 14% 0.036*Expedia 14% 11% 41% 0.030*Travelocity.com 3% 5% 7% 0.750*Travelweb 9% 5% 7% 0.900*WorldRes 0% 0% 0% —Voice (CRS) 3% 11% 3% 0.600*

*Indicates that the association is significant at the 95-percent confidence level.

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� DAWN OF A NEW WAYFrom the above discussion, it can be seen thatboth the range of channels through which ho-tels can be booked and the complexity of suchchannels have grown. This study represents afirst attempt at documenting hotel compa-nies’ pricing practices over electronic routes.The study revealed that the majority of hotelbrands now use simultaneous, multiple elec-tronic channels of distribution, making theirrooms available to a relatively wide audience.While the use of CRS-based reservations hasfallen slightly, there has been a growth in theavailability of hotel companies’ own websites, and a vast majority of companies that Istudied now make their rooms available forsale in this manner. The differences betweenthis study’s findings and earlier published re-search indicate a major expansion in hotelchains’ use of the web as a direct-salesmedium, perhaps accompanied by a realiza-tion of the web’s benefits in comparison withother, more traditional, electronic channels ofdistribution.

Most companies offer multiple rates to


customers over each channel. It is interestingto note, however, the large number of compa-nies that now offer consistent pricing acrossall channels. Previous research found lessthan 10 percent of companies had consistentpricing and cited the lack of integrationamong the various inventory databases usedto manage inventory as a possible cause. Yetover one-third of the brands I studied now of-fer consistent pricing across multiple chan-nels, indicating progress in the industry’smanagement of electronic distribution.

Although no single channel consistentlyoffers the lowest prices, in-depth analysis doesreveal a link between pricing and the marketbeing targeted. First, the lowest prices canrarely be obtained from the CRS (absent ne-gotiation), irrespective of market segment. Ascompared to the first-offered CRS price, awould-be customer can save at least 5 percentby booking over any of the electronic chan-nels I examined. From the data it can be seenthat consumers are more likely to find thelowest prices on the hotel chains’ own websites in the economy and mid-price segmentsthan will be found from those companies’

Table 1.7 Market Sector Analysis (Highest Rates)

Percentage of cases where a channeloffered the highest rates

Channel Economy Midprice Luxury Chi-squared

All rates equal 46% 21% 28% 0.016*Hotel company website 14% 16% 34% 0.011*Expedia 0% 21% 7% 0.017*Travelocity.com 3% 5% 10% 0.450*Travelweb 0% 0% 0% —WorldRes 6% 0% 0% 0.240*Voice (CRS) 31% 37% 21% 0.440*

*Indicates that the association is significant at the 95-percent confidence level.

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CRS or third-party web sites. So-called up-market hotel brands are, on the other hand,more likely to quote higher prices on theirown web site than what they offer on otherchannels. Economy brands seem to be theonly ones in the industry as a whole display-ing a logical on-line pricing strategy (in termsof the relationship between the cost of using achannel and the rates offered there) and alsoin terms of actively managing their channelsof distribution.

Implications. First, it is clear that for thosewith a taste for upscale products, the hotelbrand’s own web site is not the place to shop,as better value can be obtained in most casesthrough other channels. More interesting,however, is the fact that, in general, priceshave become more or less equal across manyof the channels investigated, and by implica-tion, across many other electronic distributionchannels as well. It is well established thattime is a valuable commodity in today’s soci-ety. Since the number and variety of ways thata consumer can book a hotel room has be-come undeniably manifold, the cost associ-ated with searching through even a smallnumber of the many consumer-focused chan-nels currently available in the marketplace inan attempt to find a low price has increased.Given that this study has found that many ofthe rates being offered over alternative chan-nels are more or less the same for many ho-tels, customers should reconsider whether allthat time and energy searching for the lowestrate is actually worthwhile.

The implications for the hotelier are morepressing. My findings suggest that many hotelchains are not actively managing the roomrates being offered in their portfolio of elec-tronic distribution channels. Most companiesoffer multiple rates on each channel, which, asdiscussed earlier, can be beneficial as it givesa choice to the customer. Displaying too


many rates, though, can be counterproduc-tive, if the customer becomes overwhelmed.Presenting a small number of tightly definedrates would be the most appropriate solution.However, most companies currently displayabout five rates in response to a customer in-quiry, with others showing significantly more,usually with little or no apparent product dif-ferentiation. In addition, there appears to beinconsistency in terms of the rates being of-fered over electronic channels. In many cases,no clear or logical pricing strategy is appar-ent. The lowest prices are offered on channelswith the highest transaction costs, and viceversa. A small number of companies offerconsistent pricing irrespective of the channelbeing used to make the booking. Informal fol-low up with those companies revealed thatthey follow this strategy as they believe in theprinciple of one “correct” price for each cus-tomer. In this way, they do not have to addressthe issue of customer dissatisfaction as a re-sult of a person’s being quoted a lower pricefor a room on a different channel after havingalready made a booking. However, such anapproach ignores the issue of the cost of pro-cessing a booking over a particular channel.As was discussed earlier, such costs varygreatly depending to a large extent on thenumber of intermediaries between the sup-plier and the customer. The greater the num-ber of intermediaries, the greater thetransaction cost and processing fees—andtherefore the greater the distribution cost.This would seem to argue for having highrates on the channels that have high-coststructures and low prices on those with low-cost structures. Coupled with this matter isthe fact that customers have become moreknowledgeable about and comfortable withe-commerce issues in general, are more awarethat distribution costs are lower in the virtualworld than the bricks-and-mortar one, and

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thus increasingly expect to find the cheapestprices over electronic, and particularly directelectronic, routes. Put simply, when they go toa hotel company’s web site, they expect tofind the best value there.This study has shownthat in many cases this is simply not the case,given that luxury hotels in particular tend tooffer their highest rates over direct chan-nels—and (ironically) their cheapest ratesover the most expensive on-line intermedi-aries. Informal follow up to the study revealedthat this may be due to the proactive ap-proach of the on-line companies in contactinghotel companies on practically a daily basisand encouraging them to reduce their rates inreturn for better positioning on their searchlistings. In contrast, the rates on hotel compa-nies’ web sites go largely unmanaged, in manycases being set far in advance and not ad-justed to reflect changing supply and demand.

Irrespective of its root cause, the behaviorof hotel companies is driving Internet shop-pers into the arms of the waiting on-line intermediaries, where in addition to consis-tently low prices, they also find wide productchoice. Because of this, it’s likely that manyhotels are losing potential bookings to com-petitors as a result of consumers’ migration


toward the on-line travel sites that offer rela-tively low rates from many different hotelchains. Instead of being presented with a listof a chain’s properties on a company’s website, prospective guests see a much wider vari-ety of options from the on-line intermediaryand may be tempted to book a competitor’sroom (especially if price becomes an issue).Once consumers conclude that they will usu-ally find better prices on a third-party chan-nel, they will make Expedia or Travelocity, forexample, their first port of call for futurebookings—threatening brand loyalty, drivingup transaction fees, increasing reservationleakage, and strengthening the third parties’power to demand “special rates” or commis-sion overrides for a company to gain premiumpositioning (or even inclusion) in their searchlistings. Hotel companies need to take urgentaction if they are not to lose control over thesale of their own product. At the very least,this means offering consistent prices over allchannels, but more probably means providingcustomers the lowest rate over their own website. This would decrease guests’ motivationto book on alternative electronic channels,would help build web-site traffic, and shouldhelp to decrease distribution costs.

1.6 CUSTOMER RELAT IONSHIPMANAGEMENT—A DR IVER FOR CHANGEIN THE STRUCTURE OF THE U .S .LODGING INDUSTRYGabriele Piccoli, Peter O’Connor, Claudio Capaccioli, and Roy Alvarez

Note: Over the past two years, we have en-gaged in significant formal and informal dis-cussion with senior executives from top hotel

chains, management companies, and owner-ship groups. The propositions presented hereare the fruit of these discussions as well as in-

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depth case studies of two of the largestU.S.–based hotel chains.

Customer Relationship Management(CRM)—a managerial philosophy that en-ables a firm to become intimately familiarwith its customers—is currently gaining wide-spread popularity in many industries. Firmsthat embrace CRM strive to provide consis-tent and personal customer service over timeand across multiple touch points. At firstglance, the lodging sector, with its emphasison customer service and multiplicity of cus-tomer touch points, seems ideally positionedto take advantage of CRM initiatives. We be-lieve, however, that the current structure ofthe lodging industry gives rise to a “data-own-ership dilemma,” which appears to be limitingthe adoption of a comprehensive CRM ap-proach.10 The three parties typically involvedin running a hotel—the owner, the manage-ment company, and the brand (Brand refersto the franchiser that flags a given property(e.g., Hilton, Marriott, Six Continents)—havepartially misaligned interests and, as a result,often resist sharing customer data, a prerequi-site for successful CRM. (The recent slew oflawsuits between brands and ownershipgroups that allege data misuse confirms theoften conflicted relationship between the en-tities; see Billing, 2002, for example.)

This paper highlights the data-ownershipdilemma and outlines several possible futurescenarios leading to its resolution. The firstsection introduces the CRM concept and dis-cusses the potential benefits and risks it en-genders. The second section examines thecurrent structure of the U.S. lodging industryand outlines the complementary role of thethree major industry players—owners, man-agement companies, and brands. The follow-ing section demonstrates why the currentstructure of the lodging industry creates abarrier to successful CRM adoption by hotel

Section 1.6 � Customer Relationship Management—A Driver for Change 37

companies. The effect of the “data-ownershipdilemma” is discussed. The final section of thearticle presents alternative scenarios as tohow the dilemma may be resolved.

� CUSTOMERRELATIONSHIPMANAGEMENT

Customer Relationship Management (CRM)is currently one of the hottest topics in thefields of business strategy, information tech-nology, and marketing management (Hall,2001, 24–27). Put simply, CRM is a manage-ment philosophy that calls for the reconfigu-ration of the firm’s activities around thecustomer. CRM differs from traditional mar-keting initiatives (see Table 1.8) in that, whilethe latter take predominately a short-term,transaction approach, CRM focuses on maxi-mizing revenue from each customer over thelifetime of the relationship by getting to knoweach one intimately (Wilson, Daniel, and Mc-Donald, 2002, 193–219). CRM is also, by defi-nition, a crossfunctional philosophy that callsfor substantial business integration (Markus,2000). Thus, to implement CRM successfully,a very different mindset is needed: The firmno longer markets to customers, but it fostersa relationship with them through programsthat span marketing, operations, informationsystems, accounting, and other organizationalfunctions.

One of the questions most often askedabout CRM is, “why bother?” Changing anorganization’s philosophy and methods of op-eration is troublesome; developing and main-taining in-depth customer databases isexpensive and the benefits of the approachare not guaranteed. Day, Dean, and Reynoldsneatly summarize the benefits of using CRM

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(Day, Dean and Reynolds, 1998, 828–837)First, by developing a closer relationship withcustomers, the firm may gain a competitiveadvantage and, through increased switchingcosts, may be able to defend it. Over time in-dividual customers typically educate a com-pany about their individual needs, wants, andpreferences—a costly process that they arereluctant to repeat with a rival (Peppers andRodgers, 1994, 6). Thus, getting to know cus-tomers intimately creates a barrier to imita-tion of the leader’s strategy.

Second, effective CRM can lead to in-creased customer satisfaction. Properly im-plemented, the customer-company dialoguefacilitates the tailoring of products and ser-vices closely to individual needs, and the de-velopment of new products and services tomeet changing needs or even anticipate fu-ture needs (Palmer, 1994).

Third, using CRM techniques contributesto decreasing overall marketing expenditure.Acquiring new customers is estimated to bemore expensive than keeping existing ones(Blattberg and Deighton, 1996, 136–144). Fig-ures of between five and seven times as muchhave been quoted (Kotler, 1997). And, last,


developing a closer relationship with cus-tomers is thought to increase customer loy-alty, and loyal customers are thought to staywith the firm longer, buy more from it, andbuy more often (Dowling, 2002, 87–104). Anoft-quoted statistic is that companies can im-prove profitability by between 25 and 85 per-cent by reducing customer defections by 5percent (Reichheld and Sassre, 1990,301–307). While the value of loyalty is cur-rently being debated (Reinartz and Kumar,2002, 4–12), for some time now lodging firmshave been fostering loyalty through frequent-traveler programs and CRM may be seen asthe logical next step.

The above arguments offered by CRMproponents suggest that CRM leads to higherprofitability due to increased sales, decliningcustomer acquisition costs, and increasingprofitability of customers willing to pay a pre-mium for “better” service. Figure 1.1 presentsa graphical representation of how CRM isthought to work. The top row of effects leadsto building relationships with customers andthus establishing customer loyalty. The bot-tom row lists well-accepted outcomes of data-mining activities. Together those two sets of

Table 1.8 Traditional Marketing Versus CRM Approach

Traditional Customer RelationshipMarketing Management

Transaction focus ←→ Customer focusShort-term focus ←→ Lifetime focusOne transaction ←→ Multiple transactionsBroadcast approach ←→ Sniper approachOne-way, one-time ←→ Two-way,

communications continuous dialogSegment of many ←→ Segment of one

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outcomes have stimulated many companiesto invest in creating a database-driven CRMsystem (Dowling, 2002).

Some authors warn that substantial in-vestments in CRM are not right for everyone(Gronroos, 1990, 3–11). In a small or nichebusiness, for example, it is relatively easy tokeep in touch with customers’ preferences.But because of the significant increase in theamount of information that must be managedas the firm’s scale and scope increase, success-ful CRM requires significant investments intechnology, process redesign, and people. Anairline or a major international hotel chainmust manage substantially larger amounts ofdata than does a small inn to achieve a similarrelationship with its customers. However, in-formation technology (IT)—used appropri-ately—can help mitigate the problem.Between 1990 and today, the world has seenenormous transformations in the extent to


which organizations can deploy computerpower. IT allows customer data to be col-lected, consolidated, manipulated, and ana-lyzed on an unprecedented scale, and IT hasbeen identified by many authors as one of thekey success factors for CRM implementation(Hall, 2001). IT allows increased reach intonew markets without high incremental entrycosts, and facilitates specifically tailored cus-tomer marketing and increased responsive-ness (Gamble, Stone, and Woodcock, 1999).

The role of IT in CRM efforts is so im-portant that some writers (such as Copulshyand Wolf, 1990, 16–20), and many practicingmanagers and vendors, associate CRM withthe technology that is used to support the ap-proach. Many use the term in the highly spe-cific sense of database marketing, where arange of demographic, lifestyle, and purchas-ing activities are recorded and tracked, andsubsequently used as the basis of targeting

Loyal customers

• Increased ARPU*• Stronger brand attitude• Less price sensitivity• Reduced customer churning

• Increased ARPU*

• Cost reductions• More-targeted communications

• New customer insights• Early warning system

• Better responsiveness tocustomer needs

• Increased customersatisfaction

Cross-selling

Better target marketing

Market research

Relationship

CRM program

Customerdatabase

Data mining

*ARPU=average revenue per user

Figure 1.1 CRM Model

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differentiated products to selected customergroups. In turn, their response to each mar-keting contact is tracked and used to furtherrefine the approach. However, CRM is abroader concept than just technology. For ex-ample, CRM has been defined as “an enter-prise-wide commitment to identify yournamed, individual customers and create a re-lationship between your company and thesecustomers so long as that relationship is mu-tually beneficial” (Gamble et al., 1999). Thisdefinition highlights several key CRM con-cepts—that the company will actively seekout the right customers (and, by implication,will not target those that will not do businesswith them), will develop a long-term, mutu-ally beneficial relationship with each cus-tomer by starting and maintaining a two-waydialogue, will strive to satisfy customers’needs and solve customer problems, and willsupport customers throughout the life cycle oftheir interactions with the firm (Piccoli,Spalding, and Ives, 2001, 38–45).

This approach to CRM demands morethan computer systems and information tech-nology. The customer must become the focalpoint of the organization. All members of theorganization must understand and supportthe shared values required for CRM, its phi-losophy must encompass not just marketingbut the entire organization, and it must beused to manage all aspects of the customer re-lationship in a coordinated way.

Although limited research about the ef-fectiveness of CRM has been published todate, most observers agree that successfulCRM is predicated on the ability to effec-tively capture exhaustive data about existingand potential customers, profile them accu-rately, identify their individual needs and idiosyncratic expectations, and generate ac-tionable customer knowledge that can be dis-


tributed for ad-hoc use at each point of con-tact (Newell, 2000). The objective is toachieve a comprehensive view of customers,and be able to consistently anticipate and re-act to their needs with targeted and effectiveactivities at every customer touch point. CRMrequires the firm to keep track of the infor-mation produced through each interaction sothat it can “learn” on a continuous basis, getto know each guest better, and enrich its data-base of individual customer knowledge(Marsan, 2000, 91–94). Godin has likenedCRM to “dating a customer,” in that it is along-term process that requires an investmentof time, information, and resources by bothparties (Godin, 1999). The result is an active,participatory, and interactive relationship be-tween customer and supplier. Lastly, CRM isabout customization, or the ability to consis-tently treat different customers differently(Newell, 2000). Relationships differ as theydevelop. We do not treat old friends in thesame way as new friends or good friends inthe same way as casual acquaintances (Gam-ble et al., 1999). Such consistent personalizedinteraction requires integration and synchro-nization of many organizational functions,from marketing to accounting to operationsand information systems. Failure to under-stand the scope, essence, and magnitude ofCRM is likely to result in problems, ratherthan its promised benefits.

� THE POTENTIAL OF CRMIN THE LODGINGINDUSTRY

Lodging-industry participants face an increas-ingly competitive market (Vialle, 1995). In ad-dition, the basis of competition is changing.

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Location, a key driver of business, is fixed inthe short and medium term, and attractingand retaining customers based on facilitiesand amenities is becoming increasingly diffi-cult as they have become increasingly stan-dardized across competing brands. Pricecompetition is unattractive, even more so asconsumers are able to easily find and com-pare prices over the Internet (O’Connor,2002, 285–293). As a consequence consumersare increasingly displaying less brand loyalty(Gamble et al., 1999), and CRM is becomingincreasingly attractive as a way for hotel com-panies to differentiate themselves from theircompetitors (Francese and Renaghan, 1990,60–63).

The lodging sector is ideally suited to ap-plying the principles of CRM. In few other in-dustries is there such potential to build up acomprehensive and accurate picture of theclient. In few other industries do customersprovide the significant amount of informationhotel guests divulge when making a reserva-tion and during their hotel stay. Every inter-action between the guest and the customer isan opportunity to refine knowledge about heror him and to further build a relationship. Bymethodically collecting, consolidating, andanalyzing both guest preferences and transac-tional data, hotel chains have the potential todevelop a deep understanding of each cus-tomer’s needs and preferences, provide substantially improved service levels, individ-ually tailor the customer experience, and gen-erally offer more personalized service.Providing outstanding personal service is cer-tainly not a new concept in the hotel sector.Companies such as Ritz-Carlton and theSavoy group historically maintained exten-sive manual guest-history systems recordingguest preferences in an effort to better servetheir best customers. However, when oper-


ated manually, such systems are expensive tomaintain, are frequently inaccurate, and canonly be used to track a limited number ofclients at individual properties (Main andO’Connor, 1998, 7–15). Developments in in-formation and communications technologieshave enabled automation and efficiencies inthese processes, reducing costs, increasing ac-curacy, and allowing comprehensive knowl-edge about each customer to be shared on aglobal basis. As a result, many companies areturning to technology to improve customerservice by implementing large-scale CRMprograms.

Analysis of the lodging sector shows that,driven in most cases by pressure from the mar-keting function, many of the dominant hotelchains are in the process of deploying (or havealready deployed) the technological infra-structure to support CRM. A recent study byArthur Andersen and New York Universityfound that over one-third of U.S. hotel chainshad a data warehouse in 2000, with another 50percent planning to install one in the near fu-ture (Hospitality 2000, 8). Many chains haveintroduced information systems to improvethe targeting of marketing and sales efforts.Such systems can help the firm to assess thevalue of each customer as well as theirpropensity to respond to various offers, and tomarket to them individually.

As discussed earlier, while important,such initiatives do not imply that the companyhas adopted CRM. In most cases, such devel-opments focus solely on marketing objectivesand lack the integration among functional ar-eas that characterizes a CRM initiative. Onlywhere the company reconfigures its opera-tions to deliver a comprehensive view of thecustomer and to support consistent, highlypersonalized service at every customer touchpoint could it truly be regarded as CRM. Few

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companies in the lodging sector appear tohave progressed to such an advanced stage.

Given the geographic dispersion of hotelproperties and the role of brands in market-ing and distribution, large-scale CRM initia-tives seem most justifiable at the brand level.Implementing CRM at this level would helpto increase consistency and personal servicethroughout the chain and at each customertouch point. However, to achieve this, consis-tent and comprehensive information must becaptured from all properties within the brandand then consolidated, analyzed, interpreted,and subsequently disseminated to each prop-erty in time to influence the next customer interaction.

Two barriers currently prevent that fromhappening—a lack of standardization and IT-system integration within each franchise, andthe fact that at any one time there may be upto three parties holding a stake in the opera-tions of a particular property (owner, manage-ment company, and brand). The two issues arelargely interconnected as the industry’s gener-ally reactive attitude toward IT has been exac-erbated by its structural characteristics. Thetechnical challenge is subsiding due to recentdevelopments in technology, including theemergence of the application service provider(ASP) model. (Note: When software applica-tions are delivered using an ASP model, theyare not installed on the computers at the prop-erty. Rather, they are accessed by remote usersvia the Web.Thus, IT resources under the ASPmodel are not bought but acquired as a ser-vice.) A discussion of these technologies is be-yond the scope of this article. Note, however,that, even assuming away technological chal-lenges, we believe that the structure of thelodging industry creates severe obstacles tosuccessful CRM. The remainder of the paperfocuses on these challenges.


� THE LODGINGINDUSTRY’S STRUCTURE

Lodging is an important component of thetourism industry, providing accommodation(and associated ancillary services) to travelerswhile away from home. Lodging operationsare diverse, ranging from small bed-and-breakfast properties in rural locations to largehotels with several thousand rooms in majorcities. Table 1.9 provides an overview of geo-graphical dispersion, showing that the major-ity of the world’s hotel properties areconcentrated in Europe (55 percent) andNorth America (22 percent). The exhibit alsodemonstrates that the average property sizein North America is larger than that in Eu-rope (56 versus 28 rooms), with chain-affili-ated properties being more common in NorthAmerica. Despite controlling only a minorityof room stock (approximately 30 percent oftotal room supply) hotel chains dominate thelodging sector (Corporate 300, 1998, 51–77)and tend to exert a disproportionate influ-ence on industry operations and performance(Cline and Rach, 1997, 35).

In addition to generally having higher oc-cupancy and average daily rate (WorldwideHotel Industry Study, 1998), chain propertiestend to be more profitable, delivering tradingprofit per room seven times more than theirindependent counterparts (Slattery, 1992,90–102). As a result, the industry is expectedto continue to consolidate, with an increasingnumber of mergers and acquisitions resultingin a small number of large companies domi-nating the marketplace (Corporate 300,1998).

A differentiation must be made betweenhotel ownership, hotel branding, and hoteloperations. Historical developments with

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Real Estate Investment Trusts (REITs) in theUnited States gave rise to a situation wheremany owners could not operate their own ho-tels. Instead they must use a separate man-agement company to oversee day-to-dayoperations (The International Hotel Industry,2001, 85), resulting in a split between hotelownership and hotel operations. The situationis further complicated by the widespread useof both franchises and marketing agreementsthat provide a consumer brand and requirecompliance with brand standards (Singh,1997, 89–107).

At any one time there may be up to threeparties holding a stake in the operations of aparticular property: (1) the owner, who holdstitle to the assets, is responsible for mortgagepayments and provides the capital for the operation; (2) the brand, which brands the


property and provides standards, distributionservices, marketing, technology, and otherservices; and (3) the management company,which provides management talent and oper-ates the property on a day-to-day basis. Table1.10 demonstrates how, with the exception of Wyndham International, the major brandcompanies own less than one-third of theirbranded properties, with various managementcompanies operating the remainder on behalfof their owners. Furthermore, as Table 1.11shows, within each management company thebrand portfolio is quite mixed, with each com-pany operating under a variety of competingflags in different geographical markets. Thedata lend support to our claim that in the U.S.lodging industry there are multiple stakehold-ers with, at times competing, interest in the op-erations of the property. In the remainder of

Table 1.9 The International Hotel Industry

Total Percentage Total AverageRevenue Number of Total Number Size of(109) US$ of Hotels Hotels of Rooms Hotel (Rooms)

Africa 6.3 10,769 3.5* 343,347 32Caribbean 7.9 5,290 1.7* 155,253 29Central America 1.2 1,160 0.3* 41,221 35North America 62.1 66,943 21.7* 3,738,977 56South America 9.8 14,576 4.7* 487,787 33Northeast Asia 23.7 10,192 3.3* 719,480 71Southeast Asia 12.8 13,211 4.3* 453,657 34South Asia 3.1 3,663 1.1* 159,417 44Australia and Pacific Islands 6.6 10,082 3.2* 229,319 23Middle East 9.2 4,735 1.5* 162,178 34European Economic Area 87.5 151.945 49.4* 4,242,193 28Other Europe 22.5 19,178 6.2* 676,631 35

Total 247.8 307,683 100* 11,333,199 37

Source: World Travel and Tourism Council 1995*Total does not add up to 100 due to rounding.

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Table 1.10 Portfolio Composition of Major U.S. Brands1

Parent U.S. Total Company Franchised, ManagementCompany Brands Properties Owned Licensed Contract

Cendant Corp. Days Inns 1,943 0 1,943 0Ramada 1,005 0 1,005 0Super 8 1,933 0 1,933 0Howard Johnson 425 0 425 0Travelodge 475 0 475 0Knights Inn 226 0 226 0Villager Lodge 118 0 118 0

Total 6,125 0 6,125 0

Six Continents Holiday Inn Hotels 1,056 5 1,004 47Holiday Inn Express 1,083 0 1,078 5Crowne Plaza 77 6 51 20

Total 2,216 11 2,133 723% 98.6% 1.2%

Hilton Hotels Corp. Hampton Inns 1,094 1 1,081 27Hilton Inns/Hotels 230 40 171 15Doubletree 153 10 49 59Embassy Suites 155 6 75 57Homewood Suites 89 14 59 16

Total 1,721 71 1,435 1744.4% 81.3% 9.8%

Marriott International Marriott Hotels 277 4 39 234Courtyard 493 1 236 256Fairfield Inn 464 0 412 52Residence Inn 362 0 242 116Renaissance 53 0 22 31

Total 1,649 5 951 689.5% 60.8% 38.5%

Starwood Hotels and Sheraton 189 40 105 44Resorts Worldwide Westin 57 22 10 25

Four Points 105 6 84 15Total 351 68 199 84

18.9% 58.8% 16.7%

Hyatt Hotels Corp.2 Hyatt Hotels and Resorts 120 18–36 4 80–98Total 15–30% 3% 67–82%

Wyndham Wyndham Hotels and Resorts 114 81 13 20International Wyndham Luxury Resorts 6 3 0 3

Summerfield Suites by Wyndham 38 27 11 0Total 158 111 24 23

70.2% 15.2% 14.6%

1Adapted from: The Brand Report, Lodging Hospitality, August 2000.2Hyatt Hotels Corp. is privately owned, and a precise classification of ownership is not available.Range estimates were provided directly by company representatives.

44

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Table 1.11 Portfolio Composition of Major U.S. Management Companies

Management CompanyMeristar Hospitality Corp. and Felcor Lodging Trust

Number ofParent U.S. Brands Properties

Six Continents Holiday Inn and 21Crowne Plaza

Hilton Embassy Suites 6Hilton Inns/Hotels 35Hampton Inns 6Doubletree 9Homewood Suites 6

Marriott Courtyard 9Fairfield Inn 2Marriott Hotels 5Residence Inn 2Renaissance 0

Starwood Sheraton 16Westin 3

Wyndham Wyndham 4

Others Multiple Brands 59

Total 183

Management CompanyLodgian, Inc.



Hilton Hilton Inns/Hotels 4Hampton Inns 2Doubletree 1

Marriott Courtyard 8Fairfield Inn 5Marriott Hotels 1Residence Inn 2

Starwood Four Points 3


Total 109

Management CompanyInterstate Hotels Corp.



Hilton Embassy Suites 1Hilton Inns/Hotels 4Hampton Inns 38Doubletree 0Homewood Suites 5

Marriott Courtyard 10Fairfield Inn 6Marriott Hotels 14Residence Inn 13Renaissance 2

Starwood Sheraton 2Westin 1

Total 138

Management CompanyTharaldson Property Management, Inc.



Hilton Hampton Inns 7Homewood Suites 36

Marriott Courtyard 18Fairfield Inn 113Residence Inn 32


Total 334

Source: The Brand Report, Lodging Hospitality, August 2000, and the authors’ independentresearch.

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the article we demonstrate how the structureof the industry can provide significant obsta-cles to the success of CRM initiatives.

� THE DATA-OWNERSHIPDILEMMA

As was discussed earlier, CRM’s success ispredicated on the ability to collect, analyze,and disseminate large amounts of timely andrelevant information for customer-service op-eratives to act on to improve the experienceat each point of customer contact. Thus, aCRM initiative cannot be successful withoutcommitment among a critical mass of proper-ties. Hotel chains cannot provide a consis-tently high level of personal service unlesscustomer data can be garnered from most, ifnot all, of the affiliated properties, organizedand synthesized in one central location, andsubsequently redistributed to each propertyon an as-needed basis. However, we proposethat (technological constraints aside) this ap-parently simple theoretical proposition is dif-ficult to realize in the lodging industry due toan inherent data-ownership conflict betweenthe major industry stakeholders. In the fol-lowing sections we present the main issuesfacing the brand, the management company,and the owner.

The Brand. For brands, the developmentof an effective CRM initiative is deemed animportant competitive move as it would facil-itate the development of a deep understand-ing of customer needs and preferences,potentially resulting in a high level of person-alization, thus helping to improve service lev-els across the brand as a whole. As a resultguests would have a strong incentive to re-main loyal to the brand and patronize affili-


ated properties, thus increasing the valueproposition for owners and operators throughimprovements in financial performance.

For the promised benefits of CRM to ma-terialize, standardized information systemsmust be implemented throughout the fran-chise network to allow data to be obtainedfrom all branded properties—a problem inthe past, becoming less important as a resultof recent technology improvements. Further-more, the brand must be willing to share thecustomer knowledge generated by the consol-idation of customer data chain-wide with theindividuals that can take action based on it ateach point of customer contact. Such datasharing presents the first dilemma. In somecases, the brand may be reticent to dissemi-nate customer knowledge back to the prop-erty for fear that owners or operators mightuse it to poach high-value customers and di-vert them to competing brands within theirown portfolios. For example, imagine a man-agement company that operates a hotel flyingone flag (Brand A) in a particular market, anda competing flag (Brand B) in others. Thiscompany might be tempted to steer high-value customers toward its Brand B hotels inmarkets where it does not operate Brand Ahotels. Thus, Brand A is faced with a deci-sion—either share the data it collects compa-nywide to reap the benefits of large-scaleCRM and risk the poaching of high-value cus-tomers by some of its partner managementcompanies operating individual properties; orprotect its customer knowledge from the in-terests of multi-flag owners and operators,thus forgoing the full benefits of CRM.

The Management Company. Manage-ment companies do not appear to havestrong incentives to develop a CRM initiativefor themselves. As was shown in Table 1.11,such companies tend to operate a varied

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portfolio of properties, each flying differentflags, on behalf of different owners. By defi-nition a CRM initiative developed acrossflags is unlikely to generate brand loyalty andthus is of limited interest to most manage-ment companies.

The question arises, however, as towhether management companies should ac-tively cooperate with the collection of opera-tional guest data by brand-level CRMinitiatives. As most companies operate a var-ied portfolio of flags, if the management com-pany participates in a brand-based CRMinitiative, it will stand to gain only in thoseproperties that carry that particular brand.Conversely, participation will result in a com-petitive disadvantage in markets where itcompetes against the brand. As a result, man-agement companies have little incentive tosupport brand-level CRM initiatives by con-tributing data about customers that stay at itsproperties. In fact, by doing so, they would ineffect be undermining their own operations inmarkets where the brand operating the CRMinitiative is a competitor rather than an ally.Moreover, while the management companymay not be interested in detailed customerdata for branding purposes, it certainly findsvalue in customer data that allows it to createcustomer-value models and better targethigh-value prospects, particularly with respectto group business. Consequently, manage-ment companies have in effect an incentive tolimit data disclosure and not cooperate withbrand-level CRM initiatives.

The Owner. While owners, like operators,typically have many flags in their portfolio ofproperties, they have a different focus interms of profitability. Many primarily viewhotel ownership as a real-estate investment,and have a marginal interest in the question,“Who owns the data?”Where their properties


fly the flag of a successful CRM initiative,they may have an advantage over other com-peting properties; where their properties flycompeting flags, they may be at a disadvan-tage. Thus, the same dilemma facing the man-agement company seems to affect theowners—whether to participate in brand-level CRM initiatives, or to refuse to cooper-ate with the collection and consolidation ofcustomer data. The owners may also have in-terests that go beyond the use of the datastrictly for operational purposes. Customerdata may be used by the other entities (thebrand and the management company) formarketing purposes and analyses that runcounter to the owner’s own interests (e.g.,studying the feasibility of building new prop-erties in the same geographical area).

� CONCLUSIONS ANDIMPLICATIONS

In this paper we have drawn attention to whatwe term the “data-ownership dilemma”—theinherent conflict that various entities in thelodging industry face as they embrace CRM.We propose that the data-ownership dilemmarepresents a significant, yet often unrecog-nized, challenge to the success of CRM initia-tives. As was discussed, CRM strategiesappear most applicable at the brand level, buttheir success is dependent on the active coop-eration of both the operator and the owner ofeach property. For CRM to succeed at thebrand level, operators must supply the brandwith in-depth customer data—a requirementwith which operators in particular, and own-ers to a lesser extent, have little incentive tocomply. Brands also face challenges in termsof maintaining control over the resulting

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customer knowledge and preventing itsspread outside the brand network.

Because of this conflict, we believe thatCRM in the lodging industry may neverprogress beyond its current, relatively limited,level of sophistication. While database-mar-keting techniques will continue to be used, wepropose that few hotel companies will suc-cessfully implement large-scale, chain-wide,CRM initiatives. Only if significant changeoccurs in the structure or methods of opera-tion of the sector are the full benefits of aCRM approach likely to be realized.

In closing, we speculate as to whatchanges will have to occur for successful im-plementation of CRM initiatives. We seethree possible scenarios: there will be a fun-damental change in the way in which hotelbrands are organized; a change in the natureof franchise agreements and managementcontracts; or there will be more cooperationamong brands to take advantage of CRM’spromised benefits. These three scenarios arefurther developed in the remainder of this article.

The first scenario is that the need foradoption of a CRM approach will inducechanges in the ownership and managementstructure of the lodging sector. If CRM trulyprovides compelling benefits, the large brandsshould begin to pressure the managementcompanies and franchisees within their net-work to provide the data needed for success-ful CRM operations. Those brands thatmanage a relatively large number of theirown hotels will be in a good position to takeadvantage of these initiatives quickly, shouldface little resistance as a result of the data-ownership dilemma, and should be able toeasily reap the benefits of CRM. WyndhamInternational’s ByRequest initiative demon-strates that highly integrated lodging brands


are moving quickly to embrace CRM (seesidebar). If these pioneers are successful intheir effort and are able to attract and retainhigh-value customers, competing brands willhave to follow suit and develop similar CRMcapabilities. Such companies would have toresolve the data-ownership dilemma either by“integrating down” or by restricting the num-ber of flags that the companies operatingtheir hotels can fly. Integrating down impliesthat brands would move aggressively to takeover the operational management of theirbranded properties. Such integrated compa-nies should be able to standardize the IT in-frastructure needed to support CRM,mandate the collection and consolidation ofcustomer data, and provide each propertywith dynamic access to the central knowledgerepository. Since all operations would effec-tively be managed by the brand, there wouldbe no conflicts of interest and no danger ofhigh-value customers being poached, freeingthe brand to take full advantage of the CRMinitiative.

Obviously, taking over operational con-trol of their unit properties would be a dra-matic and high-risk strategy. Thus, brands,particularly in the short term, may insteadconcentrate on restructuring their manage-ment and franchise agreements to minimizethe barriers to success discussed earlier. Re-development should focus on two main ar-eas—data collection and data use. Whilemany franchise agreements require proper-ties to feed its customer-folio data back to thecentral level, few specifically mention anyother data collected about the guest.As CRMis dependent on building up a holistic pictureof the guest’s needs and behavior, this over-sight may force brands to restructure con-tracts to force greater compliance with dataneeds. Such restructured contracts could spec-

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A CRM EXEMPLAR: WYNDHAM INTERNATIONAL

As part of our research, we investigatedthe CRM initiatives of large hotel chains. Onesuch chain, Wyndham International, hasmade CRM a cornerstone of its brand strat-egy. We briefly describe the key characteris-tics of Wyndham’s CRM approach to aid thereader in understanding the principal charac-teristics of large-scale CRM initiatives.

Wyndham International is one of thefive largest U.S.–based hotel chains, with aportfolio of over 160 branded properties.Af-ter converting from paired-share REIT sta-tus to a C corporation in 1999, Wyndhamrevised its corporate strategy in an effort tobecome a “world-class branded hotel oper-ating company.”1 Wyndham’s differentiationstrategy is nicely captured in the words ofAndrew Jordan, Wyndham’s senior vicepresident of marketing: “We said, okay, weare going to reinvent the Wyndham brand.We are going to say: We are all about per-sonalized service. We are going to say: Weare the brand who really recognizes thatguests are individuals, we know you havespecific needs, quirks—you tell us aboutthem one time and we are going to remem-ber them.”2

The cornerstone of Wyndham’s strategyis its membership-based CRM initiative:Wyndham ByRequest. When a guest joinsByRequest, he or she completes a compre-hensive profile including general and contactinformation, room preferences (e.g., room lo-cation, needed extra items, newspaper),credit card and express check-in/check-outpreferences, airline frequent-flyer prefer-

ences, personal interests (e.g., activities, mu-sic, readings, spectator sports), and compli-mentary beverages and snacks (e.g.,preferred wine, soft drinks, juice, snacks).

The above information is compiled atWyndham’s headquarters and a pledge ismade to the guest that, irrespective of whichproperty in the Wyndham chain the guesttravels to in the future, he or she can expecta consistent level of personalized service.This includes a room that is located wheredesired and fitted with the required ameni-ties, a welcome snack and drink that’s of theguest’s liking, and information that suits thetraveler’s interests (e.g., reading material, in-formation about shows or sporting events).

Key to the initiative’s success is the real-ization that, while important, the technologyunderlying Wyndham ByRequest—includingthe website, the preferences databases, and integrated operational systems (e.g., PMS)—does not in and of itself deliver the ByRequestpromise.As a result,Wyndham has designatedstaff members to support ByRequest and cre-ated a property-level position—the WyndhamByRequest manager—who has responsibilityover property-level execution, and Wyndhamhas developed integrated processes for deliv-ering the ByRequest promise.

1“Letter to Shareholders,” Wyndham Interna-tional 2000 Annual Report, 2001.

2For complete information about WyndhamByRequest, see G. Piccoli and L. Applegate,“Wyndham International: Fostering High-Touch with High-Tech,” Harvard BusinessSchool Case Study, 2003; # 9-803-092.

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ify that all customer data generated at theproperty level be extracted and loaded to thebrand’s central data repository. Managementcontracts also need to be rewritten to offerprotection to the brand as it disseminates cus-tomer knowledge back to the property level.Both of these measures mean that ties be-tween brands and operators would bestrengthened, which may ultimately result infurther industry consolidation as owners andoperators feel pressure to fly a limited num-ber of flags. In an extreme scenario, each op-erator would effectively become aligned withone brand and fly only one flag.

The final potential scenario we envision isthe emergence of an industry consortium thatboth develops and maintains the CRM infra-structure and standardizes customer-data col-lection and distribution. As it has happenedhistorically with hotel e-commerce systemssuch as THISCo (The Hotel Industry Switch-ing Company), HDS (Hotel Distribution Sys-tems) and Avendra (an e-procurementmarketplace), competing brands could coop-erate to develop the standards and the infra-structure necessary to capture, store, organize,and distribute customer information. Such ascenario is attractive as joint development


would mean that the infrastructure could bedelivered and operated at a fraction of thecost of proprietary initiatives. Thereafter,rather than being used as a basis of competi-tion, customer data would be shared and com-panies would compete on the analysis,interpretation, and use of such data. For ex-ample, competing brands could use the samedata to market to their chosen customer bases.Competitive advantage would come from howwell they could use the data to identify, target,and build a relationship with each individual.

We believe the latter scenario to be theleast likely, even though it may optimize industry-wide performance. The likelihood ofan industry consortium developing and man-aging customer information for the benefit ofthe industry as a whole is small, as the indus-try’s belief in the proprietary value of cus-tomer data, the industry’s structure, privacyissues, as well as a culture that precludes trustin this domain makes the cooperation neces-sary unlikely. We see a change in contractualagreements and in industry structure as farmore probable. In any case, given the poten-tial proposed for lodging-industry companies,careful consideration must be given to thedata-ownership dilemma to avoid failure.

1.7 SPAS AND THE LODGING INDUSTRYPeter C. Anderson

� OVERVIEWSpas are becoming such a significant compo-nent of the service menu for resorts and full-service hotels that their absence, especially inamenity-rich resort environments, is glaringly

obvious. Within the leisure industries in 2003,revenues related to spas ranked number fourbehind golf fees and dues ($19.7 million),cruise line revenues ($14.7 million), andhealth club revenues ($14.1 million). At $11.2million, spa revenues outpaced amusement

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park revenues ($10.3 million), box office re-ceipts ($9.5 million), and vacation ownershipsales ($5.5 million) (Thacker, 2004; Audi andWright, 2004). In this section, we first examinetrends that support a sea change in NorthAmericans’ attitude toward spa use. Afterevaluating spa demand demographics, we dis-cuss the types of spas currently popular in theindustry, development and operational con-siderations, the components of a spa experi-ence, compensation issues, and trends in thespa industry.

� SPA DEMANDAccording to the International SPA Associa-tion research, between 2002 and 2003, 11 per-cent of the national population over the ageof 16 made one or more spa visits. This statis-tic shows that one in ten Americans visited aspa during that period. Additionally, of these,41 percent were visiting spas for the first time,indicating a larger population embracing spausage. Age demographics show that 14 per-cent of clients are between the ages of 16 and24, and over 50 percent are in the 25 to 44 agebracket.

An emerging national statistic is the num-ber of male visits to spas. Twenty-three per-cent of spa visits and 29 percent of spa goerswere men in 2003, trending toward specialgender-oriented treatments and male-onlyspas being opened worldwide.

Spa selection criteria are determined by anumber of factors. An established and knownenvironment—for instance, as a part of an established resort, club, or destination spa—often influences the decision, as does atmo-sphere, quality of treatment, and friendlinessof staff. Additionally, among spa goers, nine

Section 1.7 � Spas and the Lodging Industry 51

out of ten respondents report they would re-turn for a similar experience.

Most spa customers believe they receivedgood value for their spa dollar. On a 10-pointscale, services were given an average of 8 forvalue, with massage generating 8.8 on thevalue-for-service scale.

Spa services demonstrated the highestand heaviest demand on weekends, followedby appointments after work on weekdays.Gender demographics also play a role in spademand, as men are more likely to go for reg-ular weekly visits after business hours orwhile traveling on business. Women, however,often visit spas during regular business hours(Thacker, 2004; Audi and Wright, 2004).

The International Hotel Resort Spa Asso-ciation (IHRSA) reports that branded resortspas such as Canyon Ranch are opening in theday spa market, adding new competitive pres-sure on the independents. Nontraditionalplayers are also adding product supply. Forexample, corporations are creating in-housespa environments, hospitals are adding well-ness as part of their repertoire, and medi-spas,with a primary focus on cosmetic surgery, areadding spa business as an additional profitcenter. Health clubs are also trying to capturea piece of the pie by adding spa practices. Therationale in this market is that time-crunchedpatrons can benefit from the one-stop-shop-ping approach to fitness and wellness, but thehealth club operator also uses the spa as anenticement to join the fitness center.

As the day and destination spa marketsbecome saturated, it will become imperativefor survival that each operator differentiatefrom the competition. The necessity for mar-ket segmentation to ensure clear communica-tion with consumers will be a key to success inthe maturing spa market.Another componentof success will be a branding strategy that the

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consumer can immediately identify with re-spect to spa performance and the consumer’spersonal comfort level.

� HEALTH ISSUES ANDSPA DEMAND

Increasingly, spa goers are looking to createprolonged wellness that integrates and re-news body, mind, and spirit. To that end, East-ern and Western lifestyle issues related tomedicine, philosophy, and spirituality are be-coming a mainstay of many spa/wellness ex-periences. To best deliver this, the wellnessspa (located at day, destination, or resort en-vironments) supports guest needs by creatingan experience, not just a series of treatments.All the guest amenities, facilities, treatments,and programs must be seamlessly integratedinto a personally tailored guest experience.These experiences should be targeted towardcouples, parents with children, and teenagers.In the early 1990s, spas were considered a nat-ural outgrowth of fitness facilities and fo-cused primarily on treatments related to bodywellness. As market sophistication evolved,the body-mind connection attracted con-sumer focus. In the beginning of the twenty-first century, spas and marketers are overtlyaddressing body, mind, and spirit connectionsin order to respond to emerging market sensi-bilities. Among the components one mightfind in a modern spa are services related to:

• Complementary and alternative medicinein mainstream lifestyles

• Traditional Western medical and Easternlifestyle/wellness practices

• A proactive approach to overall healthand the quality of one’s life


Body• Action spas are attracting a greater per-

centage of men who are looking for a wayto unwind and keep active. Because ofthis trend, an aggressive array of activi-ties—including cardio-circuit courses,squash, racketball and tennis, free andfixed weights, jogging, and bike paths,hikes, and water spots—is still a basicspa/wellness requirement.

• As part of the wellness experience, med-ical affiliations are sometimes available toprovide information and to check bloodpressure, heart conditions, bone density,and so on.

• Exceptional food can be tailored to virtu-ally any dietary restriction or request.

• When examining which body treatmentsto include, note that salt glows and exfo-liant treatments are approximately fourtimes more popular than any other bodytreatment. These items are a mainstay insuccessful spa services.

• Guests must be able to upgrade their ex-perience with add-ons such as eye-firmingtherapies and mineral-enhanced hydro-therapy soaks. Further, it is important tosell services in several time blocks soguests can select services that fit theirschedule and financial budget.

Body, Mind• Educational programs at many levels in-

clude classes and clinics. These programspersonally empower the guest, expand thewellness center’s demand base, and en-courage repeat visits. Health and wellnessissues encompass cardiovascular health,holistic childrearing, the integration ofEastern and Western medical practices, in-digenous spiritual practices, aging, inti-

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macy, transition/death, vitality, strengthtraining, cooking programs (macrobiotic,vegan, vegetarian, indigenous), women’sissues, and so on. Traditionally, educa-tional programs at spas have focused pri-marily on personal health issues.

• Mind-body techniques may include spiri-tual and cultural instruction. Examples in-clude tai chi, visualization, progressivemuscle relaxation and biofeedback,labyrinth walking, meditating and chant-ing, sweat lodges, and storytelling.

• Extensive yoga programs should includeHatha yoga for body control, Ashtangayoga for cardio workout, Iyengar yoga forbalance and alignment, and Kundaliniyoga for breath work.

Body, Mind, Spirit• Comprehensive touch/alternative manual

therapies including chiropractic treatmentand deep tissue massage (rolfing, myofas-cial release, nueromuscular massage, acu-pressure/shiatsu, watsu, Trager massage,etc.) are a necessary component of anywellness clinic. This modality is an exten-sion of the basic massage offered at allspas and wellness/healing centers. Practi-tioners who provide manual therapiesshould be cross-trained in the areas ofsubtle energy work such as reiki, chakrabalancing, and chi gung. Offering alterna-tive touch/energy therapy as a componentof traditional massage has the potential toaccelerate market acceptance.

• Ayurvedic treatments are popular andprovide an additional link between theEast-meets-West philosophy showcasedin many day spas. Elements of ayurvedictreatments can be incorporated into mosttouch therapies.


As far back as 1993, a well-known studyby David Eisenberg revealed that one-third ofall patients had visited a practitioner of alter-native health care in the past year, at a cost of$13.7 billion. This indicated to the medicalcommunity that the significant out-of-pocketexpenses implied not only lost revenues to tra-ditional (allopathic) doctors but also a broaddissatisfaction with mainstream medicine. Agreat number of people were taking the issuesof health and well-being into their own con-trol, thus setting the stage for the popularity ofproactive wellness programs.

In 1997, Eisenberg updated his study. Heestimated the total number of visits to alter-native medical providers at 600 million, rep-resenting an expenditure of over $27.1 billion.The number of visits to alternative care physi-cians in 1997 was greater than the total num-ber of visits to traditional primary carephysicians in the same year. The increasingpopularity of alternative wellness modalities,the aging of the population, and the strengthof the economy are all factors that supportthe growth of this trend. As of this writing, itappears to continue to grow.

The use of at least 1 of 16 (alternative)therapies during the previous year increasedfrom 33.8 percent in 1990 to 42.1 percent in1997. The fastest-growing therapies wereherbal medicine, message, megavitamins, self-help groups, folk remedies, energy healing,and homeopathy. The probability of users vis-iting an alternative medicine practitioner in-creased from 36.3 percent to 46.3 percent. Inboth 1990 and 1997, alternative therapieswere used most frequently for chronic condi-tions, especially back problems, anxiety, de-pression, and headaches. In general, it can beconcluded that alternative medicine expendi-ture increased substantially between 1990 and1997, and this can be attributed primarily to

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an increase in the proportion of the popula-tion seeking alternative therapies rather thanincreased visits per patient.

The most frequently reported principalmedical conditions for which alternative therapies were sought are summarized inTable 1.12.

� SPA CLASSIFICATIONSpa development and its attendant popular-ity have deep historical roots and vast poten-tial for the hospitality industry. The term spawas once reserved for European destinationresorts where guests went to “take the wa-ters” and restore a healthy and balanced life.However, the term now is used to describemany types of facilities and amenities in theU.S. lodging industry. At one end of the spa


spectrum are dedicated destination resortspas aimed primarily at those seeking a spe-cialized combination regime of health, fitness,and pampering. Modalities and treatments in-clude massages, unique treatments, custom di-etary plans, lectures, and adventures that caninclude, but are not limited to, an array of ac-tivities ranging from nonsurgical facelifts tohelicopter skiing.

Destination resorts, such as Miraval’sLife-in-Balance and Canyon Ranch, with lo-cations in the Berkshires in Massachusettsand the Arizona desert, draw demand be-cause of their facilities and reputation. Theprimary reason for going to a destination re-sort spa is to enjoy the spa itself and its re-lated activities. The destination itself is ademand generator.

Closely related to a destination resort spais the amenity spa. Amenity spas provide

Table 1.12 Most Frequently Reported Principal Medical Conditions

Alternative Therapy

Ailment Primary Secondary

Back problems Chiropractic MassageAllergies Herbal RelaxationFatigue Relaxation MassageArthritis Relaxation ChiropracticHeadaches Relaxation ChiropracticNeck problems Chiropractic MassageHigh blood pressure Megavitamins RelaxationSprains or strains Chiropractic RelaxationInsomnia Relaxation HerbalLung problems Relaxation Spiritual healing/herbalSkin problems Imagery Energy healingDigestive problems Relaxation HerbalDepression Relaxation Spiritual healingAnxiety Relaxation Spiritual healing

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services to resorts and full-service hotels. Theprimary difference between an amenity spaand a destination spa is the scope and depth ofspa services. Amenity spas, while sometimesquite extensive, support the resort environ-ment, whereas destination spas are the focusof the resort environment. In situations wherea full-service, high-end hotel is located in anurban environment and has a significantlylarge spa component, the spa can operate asboth an amenity spa (to the hotel) and a dayspa (to the local community). Later in thischapter, we study the case of the Westin LosAngeles Century City’s 35,000-square-footSpa Mystique. This spa supports the needs ofthe hotel’s convention and individual travelerswhile experiencing heavy local day spa use.

Middle-market hotel properties now feelobliged to add a spa as an amenity; however,due to capital and real estate restraints, oftenthey cannot provide a full-service location.Asa result, this sector has seen an explosion inpoorly conceived and executed spa additionsthat provide the owner the opportunity to add“. . . and spa” at the end of the business name.These are often no more than the result ofsubcontracting a massage therapist and con-verting the guest room closest to the swim-ming pool into an exercise room. These spasseldom surprise and delight their guests andoften reflect poorly on the spa industry over-all. Fortunately, the sophistication of the in-dustry is making it harder and harder for the“. . . and spas” to succeed.

As the spa industry matures, certain de-velopment trends are emerging. In 2005, thespa industry was considered the fastest-grow-ing segment of the travel, hospitality, andleisure market, showing 26 percent growthfrom 2002 to 2004. Spas are no longer consid-ered a niche industry but rather an entity untothemselves.


The spa industry is made up of the fol-lowing segments, each with its own character-istics and operational opportunities:

• Destination spas

• Resort hotel spas

• Day spas

• Medical spas

• Mineral springs

• Club spas

� Destination SpasA destination spa is one whose sole purpose isto provide programs and facilities that sup-port lifestyle improvements and enhanceguest health. The services offered are profes-sionally administered and include fitness, ed-ucation, and lectures on lifestyle, nutrition,and disease prevention. Because of theirhealthful orientation, destination spas oftenprovide programs that support postoperativeconditions, address various addictions, andprovide tools to cope with serious, prolongedillness.

The destination spa industry constitutesonly 1.6 percent of the total spa industry, perthe International Spa Association’s IndustryStudy (Thacker, 2004). However, the growthin the development and use of destinationspas reflects the market’s trend toward well-ness and health as a major component in spamenus.

� Resort Spas/Amenity SpasResort spas are located on the grounds of va-cation resorts where treatments for mind,body, and spirit are offered to complement

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other resort activities such as golf, tennis,horseback riding, skiing, and water sports.Healthful spa cuisine is on the menu as an op-tion, complementing traditional offerings. Inthe evenings, guests can enjoy resort pastimeslike dancing and live entertainment. Chil-dren’s programs are also offered. Accordingto the ISPA Spa Industry Study (Thacker,2004), the resort spa represents 14 percent ofspa locations in North America but accountsfor almost 41 percent of the total industry rev-enue, 27 percent of all spa visits, and 26 per-cent of the industry’s employees.

A luxury resort spa has the ambience of asecluded retreat on the grounds of a first-classresort. Set in beautiful surroundings, these re-sorts commonly have world-class golf coursesand other excellent recreational facilities.Gourmet dining and exceptional spa thera-pies are not only expected but demanded.

� Day SpasDay spas are designed to provide a healing,beautifying, or pampering experience in ashort period. Guests may book individualtreatments that last as little as an hour or apackage of treatments that take up to a wholeday. Found throughout North America, dayspas are freestanding or located in healthclubs, hotels, and department stores. The dayspa industry constitutes 72.2 percent of the to-tal industry revenues, per the InternationalSpa Association’s 2004 Spa Industry Study.The large percentage of day spas and theirgrowth pattern reflect spa goers’ time crunch.Day spas can be owner-operated or chain-affiliated.

Preliminary data from ISPA’s 2004 surveyshow that industry growth is still robust. As ofmidyear 2004, there was a total of 12,000 spas


nationally, of which 8,700 were day spas.These numbers reflect 25 percent growth inthe industry in general and 20 percent growthexclusively in this market. The total numberof day spa visits in 2003 was 81.2 million.However, only 13 percent of the general pop-ulation had used a spa in the prior three-yearperiod, indicating that the industry still haslarge growth potential.

� Medical SpasMedical treatments in various spa environ-ments represent a significant trend in thescope, depth, and inclusiveness of numerousspas. Medical spa treatments can range fromelective, reconstructive surgery to noninva-sive Eastern modalities incorporating ele-ments of Eastern philosophy that draw on thebody-mind-spirit connection to create posi-tive, measurable changes in the client/patient.Slightly over half (51 percent) of the medicalspas in North America have a partnershipwith a medical doctor, and 26 percent have adoctor on staff. The remaining configurationsinclude being located in a doctor’s office orhaving licensed staff members. Botox and mi-crodermabrasion are the two most populartreatments, followed by chemical peels andlaser hair removal.

In North America, allopathic or Westernmedical procedures found in medical spas of-ten incorporate Eastern-based treatments.Day, destination, and resort/amenity spas areadding medical treatments to their spa menus.Part of this trend is directly attributed to mar-ket demand, and part is attributed to healthinsurance plans that reimburse for some pro-cedures. According to the ISPA 2004 survey,medical spas are the fastest-growing spa seg-ment with respect to number of locations. The

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average annual growth in medical spas by lo-cation since 1999 is approximately 45 percent.Cumulative growth from 1999 to 2004 is 205percent and from 2002 to 2004, 109 percent.Medical spas generated an estimated1,900,000 visits in 2003, representing 1.39 per-cent of the total spa visits. However, this per-centage of visits accounts for approximately2.1 percent of the total industry revenues, re-flecting the lucrative nature of this segment ofthe industry.

� Mineral Springs SpasMany mineral springs spas are considered tobe the original spa prototype, where guests goto “take the waters.” Mineral springs spas, bydefinition, are located at naturally occurringmineral springs, and by number of locationsrepresent 2.8 percent of the total spa industry,or 1.3 percent of the total industry revenues,making this one of the more modest income-producing segments of the spa industry. Thepopularity of mineral springs spas is reflectedin a cumulative growth from 1999 to 2004 of143 percent. Growth from 2002 to 2004 repre-sents only 15 percent, implying that the num-ber of sites available directly affects thegrowth in this segment.

� Club SpasClub spas lack a lodging component, and theirprimary objective is to facilitate daily fitnessactivities. Many club spas’ services comple-ment the primary fitness component of theclub by offering sports massage (deep tissue),chiropractic services, physiotherapy, and re-lated treatments that address issues of painmanagement, flexibility, and mobility. By lo-


cation, club spas represent 5.8 percent of thetotal spa industry in North America and ac-count for approximately 3.7 percent of the in-dustry’s revenues. Growth in the club spaportion of the spa industry is the lowest of allspa segments. Between 2002 and 2004, cumu-lative club spa growth was only 3 percent.

� SPA OPERATIONS� Spas as an Operating

DepartmentHistorically, spa operations were treated bymanagement similarly to other revenue de-partments, like catering and restaurants.These departments were simply perceived asan amenity needed to attract guests to the ho-tel. As long as the department broke even, ordidn’t lose too much money, their ability to in-crease occupancy was deemed sufficient justi-fication for their existence. However, in thelate 1990s, hotel spas followed the path ofother operating departments and trans-formed from support facilities to profit cen-ters. This trend is strong and continues today.

In 1999, PKF Consulting identified only30 hotels in the United States, thousands thatreport data to the PKF, extensive spa facilitiesand analyzed the financial performance ofthose properties and their spa departments.Dedicated destination spa resorts were notincluded in the analysis due to an insufficientsample.

While spas were a relatively small sourceof revenues for the sample properties, sparevenues grew at a relatively strong pace. In1999, spa revenues for the subject sample rep-resented just 3.3 percent of total sales. How-ever, from 1998 to 1999, spa revenues grew

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16.6 percent. This compares to revenuegrowth rates of 5.2 percent for rooms, 12.2percent for food, and 3.2 percent for telecom-munications, and a 0.3 percent decline in rev-enues for the beverage department.

During 1999, the spa departments in thesample of hotels averaged a departmentalprofit margin of 30.7 percent. However, spadepartment profits did grow a strong 51.3percent from 1998 to 1999.

Spas mirror and enhance trends in thelodging industry. Drawing heavily from resi-dential design and the use of technology, ho-tel designers and operators create a spaexperience that:

• Complements the lodging experience

• Drives occupancy levels

• Enhances average daily rate

• Provides a distinctive marketing advan-tage

North American spas are rapidly becom-ing more segmented, pursuing market nicheswell outside the traditional ladies-who-lunchdemographic. Adventure spas, fitness spas,children spas, family spas, and even pet spasare part of a new generation of spa facilities,spa programs—and, most importantly, spa afi-cionados. Spas now attract a much wider de-mographic that includes men, women,couples, children, teenagers, and families.

Since the early part of the twenty-firstcentury, spas have been redirecting theirmenus to include stress relief and results-oriented therapies. By focusing on the socialbenefits of hanging out in a safe, relaxingplace, they not only address current marketneeds but also support the development ofspa programs that can be incorporated intovirtually any leisure-oriented environment orlevel of lodging. In particular, destination spas


and full-service resorts provide platforms thathave both the infrastructure and theeconomies of scale to support cutting-edgespa treatments, sometimes also referred to asspa modalities.

Spas are no longer solely about frivolousself-indulgence and luxurious pampering.They are being reevaluated and repackagedwith a broader emphasis on self-care, stressrelief, emotional balancing, and preventative(as opposed to reactive) wellness modalities.This trend is being embraced by aging babyboomers as an adjunct to traditional healthcare. Because of this trend in health care, ho-tels and resorts have acknowledged and em-braced the need for full-service spas as part oftheir amenities and facilities. The inclusion ofa well-integrated spa can provide additional(and lucrative) sales and marketing opportu-nities. Conversely, the exclusion of a spa facility may disqualify a property from con-sideration. Ironically, many hotel guests maydismiss a property out of hand for lacking aspa not because they require the services of aspa but rather because its absence may implyother areas of the hotel are also deficient inmeeting current market expectations.

Is it logical, then, that all full-service ho-tels and resorts without a spa should, withouthesitation, incorporate one into their prop-erty? Clearly not. Numerous factors must beconsidered in developing or repositioning aspa, especially in chain environments wherethe lodging brand is already established. Be-cause spas are capital- and labor-intensive,they must materially enhance the property’srevenue stream to be considered viable. In ad-dition to creating spa revenue, a spa facilityalso must extend length of stay, drive roomrates, enhance shoulder and low-season de-mand, augment food and beverage revenues,and capture new market segments.

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Successful spa operations start with astandardized level of procedures and a prior-itized sensitivity to guest needs. As it is for alldepartments in a lodging environment (orbusiness models in the freestanding day andmedical spa world), profitability is essential.Especially in a spa environment, a dynamicbalance is essential to meet the fiscal require-ments of the owners and the physical needs ofthe guest.

A savvy spa manager continually moni-tors the spa and hotel operations to ensurethat everything possible is being done to en-hance the synergy of the two entities. Con-stant monitoring also provides an earlywarning system to the spa operator if rev-enues are falling or if expenses are not in linewith anticipated revenues or budgetedamounts. Spotting these trends early enablesthe manager to take efficient, proactive stepsto ensure that positive trends are enhancedand negative ones controlled. Constant moni-toring sets a standard of operations, which isan excellent way to train and motivate em-ployees. It also puts employees on notice thatthe spa is a well-run business with extensiveattention to detail, which should discourageany actions that might not be in the best in-terest of the spa’s reputation and profitability.

� Customer Service TrainingA spa’s reputation is easily made or destroyedby its level of customer service. Guests canforgive an occasional shortcoming if the levelof service is exceptional. For this reason, it isessential that all spas have an integrated qual-ity management program that provides ongo-ing training to assist its employees inaddressing customers’ expectations. Cus-tomer service training (CST) helps ensure


that guests’ expectations are exceeded. In aspa environment, expectations are usuallyvery high, and a trusting bond can be quicklyestablished if the spa employees are sensitiveto guest needs.

The guest’s arrival sequence, starting atthe front desk, initiates the spa ritual thatbrings the spa guest to a place of trust, relax-ation, and rejuvenation. CST is proactive andprovides employees with the tools they needto meet or exceed guest expectations. GuestCST is a never-ending, all-inclusive processthat bridges textbook training scenarios withoperational realities. The traditionally highturnover of spa employees in the hospitalityindustry requires that CST be introduced as apart of the orientation process and reinforcedregularly.

Nonproductive training time (time thatdoes not directly produce revenue for thespa) is actually a minor expense when com-pared to the expenses related to employeeturnover, poor service, dissatisfied customers,and, ultimately, loss of business and reputa-tion. Budgets must include CST as a non-optional employee expense. For long-termsuccess, CST is vital when margins are tight,business is slow, and turnover is high. There isa strong correlation between high employeeturnover and low CST. Employees shouldknow that the training program is an invest-ment in them.

CST gives the employee the means to un-derstand what is expected of them as a repre-sentative of the establishment and identifieswhat guests expect from their visit. Seeing theprocess from the guest’s point of view helpsemployees meet or exceed expectations. Thisminimizes the need to provide discounts orcompensation in cases of service deliveryproblems. Discounting or “comping” goodsand services is a knee-jerk response to poor

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service and should be reserved for the last ef-fort in service recovery; CST should stressthis.

An inclusive training program is the en-gine behind stellar customer service and guestloyalty. CST should be seamless; while it pre-dominately addresses the needs of the guest,the program also includes instruction on prof-itability and yield management, thus address-ing the needs of the owner as well. In order tomeet or exceed profitability goals, customerservice must be delivered in a fiscally respon-sible manner. Employees must understandcustomer service in the operational context ofthe property in which they are employed.

Minimizing the expense of a CST pro-gram starts with the proper selection of em-ployees. While there is no steadfast guaranteethat a potential employee will work out overthe long haul, first impressions, prior work ex-perience, references, and, above all, attitudeand enthusiasm are indications of whether ornot it is appropriate to hire and invest thetime and money in an applicant.

Management’s expectations of guest ser-vice delivery should be clearly articulated andintegrated into the corporate culture and re-inforced daily at all levels and in all depart-ments. Employees, no matter what theirresponsibility, position, or tenure, must betreated with the same level of respect and dig-nity that management requires for theirguests. Reinforcing the tenets of customerservice within the corporate culture providesthe employee with the tools to do the rightthing—that is, to ask, “What do I need to doto make a spa guest happy? How do I exceedtheir expectations?” Sometimes the little de-tails reap the greatest rewards.

Employee empowerment is a key compo-nent in CST. As an employee’s experienceand skill base develops (and as management


becomes comfortable with an employee’s per-formance), levels of empowerment should beincreased proportionately. Empowerment is avote of confidence in an employee and a wayto quickly resolve problems as they arise. Thissituation is said by spa managers to increasejob satisfaction, and the employee’s owner-ship of his or her position.

CST also requires a strong foundation inthe technical skills of how a department runs.Routine procedures, appropriate lines of oraland written communication, and what is ex-pected of each employee in the normal courseof his or her shift help minimize problems.When problems do occur, a strong foundationin technical skills makes it easier for the em-ployee to create alternative solutions for theguest.

Training draws on employees’ EQ (emo-tional quotient) as well as their IQ (intelli-gence quotient). CST requires that employeesdraw on their ability to empathize with theguest. This starts by training employees tosuspend judgment of a situation, become at-tentive listeners, and know the right questionsto ask. This allows them to understand whatthe actual problem is. Training employees inthis type of customer service delivery assiststhem in focusing on the salient issues and cre-ating ways to address them.

Because CST is ongoing, employees canbenefit from their peers’ experiences. Vehiclesto exchange this type of information can be asinformal as role-playing and round-table dis-cussions, or as structured as an employeenewsletter. Incentives, acknowledgments, andrewards for excellent customer service deliv-ery are an integral part of the training pro-gram. Successful CST supports a skilled andunified staff, which translates into profitableoperations. CST is an investment in propertythat owners can’t afford not to make.

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� Provide Value, CreateValue

Spa aficionados are savvy.They are looking tobe indulged, pampered, and nurtured, notfleeced. Setting price points with market sen-sitivity can create tremendous customer loy-alty. Because spas are no longer a one-timeindulgence but rather a lifestyle choice, it isimportant to price services competitively andprovide incentives for customers to returnregularly.

Numerous variables are involved in thedevelopment and operation of a spa as part ofa hotel or resort. Doing one’s homework is es-sential to success. When a spa is developed orrepositioned correctly, it can be a lucrativeand rewarding experience. When it is not de-veloped correctly, it can be a financial liabilitythat haunts the spa director and jeopardizesthe hotel’s market position.

If spas and their programming are not anintegrated part of the hotel’s future develop-ment, the property may lose a significantcompetitive opportunity. Spa-less hotels orpoorly run properties have an inherent com-petitive market disadvantage. Not only dothey find it more difficult to penetrate themarket but they also often lose market share.

� HOW BIG SHOULDIT BE?

� Resort SpasThe ratio of guest rooms to treatment roomsis based on many factors, including the antici-pated return on investment to the owners, thetopography of the site, the scope and theme of

the spa, and the competition. In a destinationresort, where the reason for the spa facilitiesis the reason for the trip, there should be anaverage of 1 treatment room for every 4 to 5guest rooms. At the other end of the spec-trum, such as a casino hotel, the spa is defi-nitely an amenity, and 1 treatment roomshould be built for every 50 to 100 guestrooms.

The spas at lower-end hotel propertiesnormally are limited in scope and are oftenbetween 3,000 and 6,000 square feet, whereasluxury spas at full-service, high-end resortsaverage between 10,000 and 35,000 squarefeet. These ranges vary based on each hotel’sspecific circumstances, including seasonality,accessibility, meeting space, fill patterns, andlocal demand. Each market and each lodgingproduct must be individually evaluated to as-sess the appropriate ratio of treatment roomsto guest rooms.

Another matrix that measures the viabil-ity of a resort or hotel spa is the cost to buildthe facility. Once again, a number of factorssupport various outcomes in this process, in-cluding the amount of available land, the fin-ishes of the spa, the finishes of the hotel(these should be compatible), and the need todevelop a spa either vertically or horizontally.Vertical spas are most often built in environ-ments where land is scarce or the allocatedfootprint for the spa is too small for one floor.Vertical construction always raises the priceper square foot, as load distribution, drainage,and the weight of equipment and water mustbe factored into the construction design andbudget. The cost to construct a resort or des-tination spa can range from as low as $200 persquare foot to over $450 per square foot. Highland-value areas and plumbing-rich designschemes will send cost dramatically abovethis range.

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most spas dictates how the space is allocatedand where the income is generated. Spasshould aim to have at least 50 percent of theirtotal space—their prime real estate—producedirect revenue. Secondary real estate is thesupport and public areas necessary for atmo-sphere and supporting functions that assist indelivering the spa services. Secondary spa realestate includes areas where people can pre-pare for or relax from their spa treatments.These secondary areas are an important com-ponent in the spa development plan, as theyallow guests to prolong their experience,which enhances the perceived value. If guestsare hurried from their massage or facial out ofthe spa and back onto the street, the magicthat is created can be abruptly snapped andthe overall spa experience is compromised.Conversely, if a guest is allowed to soak andrelax for hours after a body wrap is com-pleted, emotionally speaking, the cost of thebody wrap is amortized over the entire spaexperience and not just for the time the clientwas enjoying the body wrap in the spa’s primereal estate.

Combination rooms account for about 36percent of North American spa spaces, butbecause of the various treatments offered inthem, a revenue percentage generated fromthese spaces is hard to predict. Combinationspaces allow the spa to address surges in de-mand for specific treatments and at the sametime be flexible and respond to global marketchanges. Massage rooms account for approxi-mately 27 percent of the total space in NorthAmerican spas but 47 percent of the spa rev-enue. Given these factors, an operator wouldneed a compelling reason to not include mas-sage on the spa menu. Facial treatment areasreflect 19 percent of the total spa space andresult in about 33 percent of the spa’s overallrevenue. Wet rooms, often the most underuti-lized portions of the spa, account for 7 per-

� Day SpasDay spas often lack the grand infrastructureassociated with resort spas, and for this reasonthe ratio of spa revenue to treatment roomspace is much closer. In terms of number ofsquare feet, day spa revenues account for 43percent of the total spa space and provide ap-proximately 52 percent of the total day sparevenues.The remaining 57 percent of the dayspa environment is allocated to guest flow,check-in desk, retail, back-of-the-house sup-port, and, on some occasions, food and bever-age areas.

� Medical SpasHistorically, medical spas have placed lessemphasis on the aesthetics of the spa experi-ence and more on the treatment provided.Therefore, it is not surprising that 45 percentof the medical spa space provides 63 percentof all medical spa revenue. Retail sales arelimited in medical spas, as outside of cosmet-ics and prescriptions there are limited brand-ing opportunities. While resort spa goers areanxious to wear a sweatshirt or ball cap thatannounces to the world where they last vaca-tioned, most medical spa clients do not sharethe same need or enthusiasm about their re-cent microderm abrasion or rhinoplasty. Med-ical spas may require the use of pharmacies tofill patient’s prescriptions, which from a busi-ness model could be considered part of theirtreatment-related retail sales.

� Treatment Type VersusRevenue

To this point, we have evaluated the econom-ics and use patterns of spa types. The focus of

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cent of the space and revenue. Because manyspa modalities involve water therapies, manyspa developers and owners believe that wetrooms are essential, even if they seem under-utilized. Because wet rooms are one of themost expensive components of a spa, it is es-sential that they be utilized to their fullest ex-tent. Packaging wet room treatments withother spa services is one way to better utilizethe space and create value for the spa.

� SPA TRENDS� On-Site Industry TrendsAnti-aging treatments and products are driv-ing much of spa menu and retail develop-ment. This calls for devoting a treatmentroom to outpatient medical procedures. Pro-gramming and spa menu items include sundamage treatments, chemical peels for skinrenewal, and other rejuvenation techniquesthat build on repeat procedures. Commensu-rately, spas are developing retail product linesthat can take the spa experience home andcontinue the wellness regime.

Gift card sales are driving new users tospas. In the friends and family sector as wellas the corporate gift-giving world, day spacertificates are creating demand that is not di-rectly user driven. Third-party purchasingbrings to spas clients who may not normallyhave chosen the location or treatment, creat-ing a large but undefinable market demand.

Regional specialties that relate to indige-nous and climatic influences continue to cre-ate unique spa experiences based onsite-specific supply. This has excellent lever-age potential for spa operators working to dif-ferentiate their product matrices in denselyoperated areas.


Increased stress management. It is impor-tant to position services for stress relief, espe-cially to the male business traveler. Spaprogramming that requires a limited amountof special equipment and minimal changes toa property’s infrastructure can do this.

Impulse appointments. “Life is uncertain,but I want a massage (reflexology appoint-ment, yoga class, etc.) now!” This trend mayresult in developing adjunct programs for on-call staff resources. The as-needed portion ofthe program limits a hotel’s payroll burdenand other related fixed costs. Of course, thisimplies existing core programs and facilitieswhere these programs can be developed andsupported.

Shift in perspective. Self-indulgence, pam-pering, and luxury are being reevaluated andrepackaged with a new, broader emphasis onself-care, stress relief, and emotional balanc-ing. This is reflected in spa programming, themenu of services, food and beverage outlets,and spa-related retail. The retail positioningand spa programming components representhuge untapped revenue opportunities.

Changes in demographic use profile. His-torically, the greatest segment of spa goers waswomen between the ages of 35 and 55. Morecouples and families are expected to visit the spa together as an alternative social/recreational activity. This trend has the poten-tial to extend business-related stays, fill busi-ness hotels on the weekend, and createdemand for destinations. It is important to un-derstand this trend when evaluating ways to in-crease market penetration in a down market.

Medical affiliations. For some markets, anaffiliation with a medical center or group inthe area can be established to provide treat-ments such as acupuncture, nutritional assess-ment, laser therapies (hair removal andwrinkle reduction), Botox injections, collagentreatments, chemical peels, laser resurfacing,

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body contouring, microderm abrasion, andvascular procedures. When creating thesetypes of relationships, it is essential that spaowners thoroughly investigate the legal dis-closure and liability implications of being anaffiliated medical service provider.

Green environments. A spa can be ecolog-ically sensitive by incorporating environmen-tally friendly features into the operation. Byproactively supporting programs and prod-ucts that are earth friendly, the spa doessomething good for the environment, pro-vides a service to the community, and createsa competitive advantage and a unique sellingpoint that may provide significant returns, es-pecially in a highly competitive market.

� Global Industry TrendsTrends in day, destination, and amenity spasinfluence each other. According to Susan El-lis (2004), president of Spa Finder, a spa mar-keting company, after the rise of the medicalspa and broadening spa participation by menand teens, spa use is expected to becomemore popular in 2005 and beyond. SpaFinder’s trends to watch for are abstracted below:

• Those personal elements that make thespa experience special will find their wayinto the design of personal living spaces inprivate homes.

• Private, gated living communities will de-velop around central spa facilities, muchlike golf and fly-in communities.

• Some spas will compete on the far outerreaches of luxury, with ever-increasingrare and proprietary products and ser-vices.

• Spas will make house calls. Legitimatespas will offer out-call services where spa


technicians travel with appropriate equip-ment and personnel to a client’s home, of-fice, or hotel room.

• Destination spas and resorts will developmarket segments focused on personalgoals—everything from spiritual aware-ness to sexual health to detoxification.

• The spa travel segment will grow, withmore clientele booking through onlineportals.

• Medical spas will continue to be popularand will add alternative therapies andcouple traditional medical treatment withspa luxury and innovation.

• Day spas will not grow their exotic menusmuch more but rather focus on the tradi-tional; destination/resort spas will be thebusinesses that experiment with more ex-otic services and products.

• Specialized cuisine developed for spaguest consumption will find its way intomainstream grocery/specialty food offer-ings. Restaurants may also add lines ofhealthy spa cuisine to their menus.

• Eco spas—those designed and operatedaround green principles of manage-ment—will become a growing segment ofthe industry.

� CONCLUSIONThe foregoing discussion and explanation ofthe service and amenity potential of spas ofvarying types strongly suggests that they willcontinue to maintain a position of importancein the inventory of hotel services. Even themost modest of spa offerings can enhance ahotel guest’s lodging experience. Someday ba-sic spa services may be arranged for at evenmoderately priced lodging properties.

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� BUSINESS PROBLEMANALYSIS

Mitch Jucha (2004), spa director,Westin Cen-tury Plaza, Los Angeles, California

� PROBLEMSpa Mystique, a 35,000-square-foot spa, is notturning a profit. It is a newly built, state-of-the-art spa facility located adjacent to a 728-room full-service conference center hotel.The property is located in an affluent com-mercial and residential area of West Los An-geles with direct access to major surfacearterials and freeways.

� BACKGROUND/STATUSQUO

The Westin Century Plaza, a Commercialand Convention Property• 728 rooms

• Occupancy level: 55–58 percent average(weekends 30–40 percent average)

• Primarily business hotel catering to largegroups and transient business travelers

• The largest hotel ballroom in Los Angeles

• Breeze Restaurant

• Where U.S. presidents stay in Los Ange-les since President Ford began using thehotel during his term

• Was once called the West Coast WhiteHouse due to President Reagan’s patronage


Facilities of Spa Mystique of the WestinCentury Plaza• 35,000 square feet

• Café Mystique, state-of-the-art fitnesscenter, Yamaguchi Salon, boutique

• Designed by Silvia Cipieli

• 28 treatment rooms

• 4 outdoor massage cabanas

• Separate entrance for members and localguests with valet

• Tranquility lounge

• Separate locker rooms for men andwomen

• Signature massage, facial, and body treatments

• Spa membership available

Guest Utilization Data• 22 percent hotel guests

• 77 percent local guests

• 6 percent group guests

• 1 percent hotel employees

• Based on the guest type distribution, mar-keting budget was redirected to local dayspa guests.

• Additional internal marketing completedto increase in-house usage.

The Problem• Many of the decisions herein were based

on an analysis of the profit and loss state-ment and the general ledger.

• Allowed comparisons to industry av-erages.

• Examination results:

Retail sales were below average.

Cost of sales was too high.

Payroll was too high.

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Breakeven was roughly $150,000.

Industry average profit would not be metunless $330,000 in revenue was produced.

� SOLUTIONSAfter a Sales and Marketing Evaluation• Redirected marketing efforts to local day

spa guests.

• Created departmental marketing budget.

• Placed advertisements in local papers andmagazines.

• Completed renewed efforts on in-houseguests.

• Increased hours.

Increased hours of operation of Sundaysto include two additional bookable hoursto increase revenue and meet demand.

More recently, extended treatment hoursto 8:00 each night of the week, resulting in50 additional services per week.

The increased hours are expected to yield$260,000 annually.

• Pursued corporate business.

Marketed to local corporate offices by offering midweek discounts to their employees.

Entered into a corporate membershipagreement with MGM building em-ployees.

• Modified spa menu.

Created 25-minute services.

Filled 30-minutes gaps and maximizedutilization.

Catered to transient business travelersand group guests of hotel.


• Created treatment enhancements, whichallowed price increases without treatmenttime increases.

• Added corporate spa memberships.

• Create a limited spa membership that uti-lized spa during low demand.

Evaluation of Competitors’ Price Structure• Performed competitive price survey.

• Survey determined that spa prices werebelow competition.

• Consequently, increased all spa prices by20–25 percent.

• Implemented discounted pricing and pro-motions during low demand periods.

• Restructured package pricing.

Modified Staffing• Rectified overstaffing of the locker room

attendants and fitness attendants.

• Added spa group coordinator or spa salescoordinator position.

• Realigned technicians’ schedules to elim-inate overlapping shifts.

Overlapping shifts created an inefficiencyin utilization of treatment rooms.

Without overlapping, treatment roomsare able to be fully utilized.

Prior to this change, maximum utilizationtopped out at 70 percent.

Performed Wage Audit• Restructured spa technicians’ wages be-

cause paying the technicians an hourlyrate created an inverse payroll burdenduring low demand.

• Removed hourly pay and created a flat-rate commissionable salary structure.

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• Brought pay structure in line with spa in-dustry standards.

• Instituted system at the top of the com-petitive set.

• Provided an opportunity to issue annualwage increase based on performance.


After implementation of the above tacticsand strategies, Spa Mystique more than dou-bled revenues from the previous reportingperiod. The changes were considered a suc-cess, and the spa is now profitable.

R E F E R E N C E S

Audi, Lisa, and Brian Wright. 2004. CompensationWorkbook for the Spa Industry. Chicago:Compensation Consulting Consortium, pp. 9,11, 14, 64–77, 86–89.

Billing, M. 2002. “Another Owner Takes on Mar-riott.” Hotel Business 11(18):1, 44.

Eisenberg, David M. 1997. “Advising Patients WhoSeek Alternative Medical Therapies.” Annalsof Internal Medicine 127(1):61–69.

Eisenberg, David M., Ronald C. Kessler, CindyFoster, Frances E. Norlock, David R. Calkins,and Thomas L. Delbanco. 1993. “Unconven-tional Medicine in the United States—Preva-lence, Costs, and Patterns of Use.” NewEngland Journal of Medicine 328(4):246–52.

Ellis, Susan. 2004. “Top 10 Spa Trends to Watch in2005.” Spa Finder, December 16.

___________. 1999. Trends in the Hotel Industry.San Francisco: PKF Consulting, HospitalityResearch Group.

Gomez.com. 2000. State of Online Travel.Waltham, MA: Gomez.

Hensdill, C. 1998. “Electronic Distribution: Devel-oping Paths of Least Resistance.” Hotels Feb-ruary: 41–46.

Jucha, Mitch. 2004. Private communication. WestinCentury Plaza, Spa Mystique, Los Angeles.

Lewis, Robert C., and Christopher Roan. 1986.“Selling What You Promote.” Cornell Hoteland Restaurant Administration Quarterly27(1):13–15.

O’Connor and Horan.PhoCusWright. 2001. Online Travel Marketplace

2001–2003. New York: PhoCusWright.Preferred Research (proprietary).PricewaterhouseCoopers, January 2000.“Forecasts

and Analyses for the Hospitality Industry.” InHospitality Directions—Europe Edition.

Thacker, Geoff. 2004. “Spa Industry Study: A Pro-file of the Spa Industry in the United States andCanada.” Toronto:Association Resource Cen-tre, Inc., Research and Strategy Division, pp.6–22, 23, 30, 34–50, 60–67.

Travel Industry Association of America. 2001.Travelers’ Use of the Internet. Washington,DC: TIAA.

Travel Research International. 1999. The Euro-pean Hotel Industry. Staff Report.

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BooksGomes, Albert J. 1985. Hospitality in Transition.

Houston, TX: Pannell Kerr Forster.Hilton, Conrad. 1957. Be My Guest. Englewood

Cliffs, NJ: Prentice Hall.Jarman, Rufus. 1952. A Bed for the Night:The Story

of the Wheeling Bell Boy: E.M. Statler and HisRemarkable Hotels. New York: Harper andRow.

Rushmore, Stephen, Dana Michael Ciraldo, andJohn Tarras. 2000. Hotel Investment Hand-book. New York: West Group.

ArticlesBrown,Terrence E., and Michael M. Lefever. 1990.

“A 50-Year Renaissance: The Hotel Industryfrom 1939 to 1989.” Cornell Hotel and Restau-rant Administration Quarterly 31(1):18–38.


Greger, Kenneth R., and Glenn Withiam. 1991.“The View from the Helm: Hotel Execs Ex-amine the Industry.” Cornell Hotel and Restaurant Administration Quarterly 32(3):18–35.

Lee, Daniel R. 1985. “How They Started: TheGrowth of Four Hotel Giants.” Cornell Hoteland Restaurant Administration Quarterly May.Vol. 26, No. 1.

Page, Gary S. 1984. “Pioneers and Leaders of theHospitality Industry.” In Introduction to Hoteland Restaurant Management, Robert A.Brymer (ed.). Dubuque, IA: Kendall/Hung,pp. 21–29.

Staff article. 1985. “The Evolution of the Hospital-ity Industry.” Cornell Hotel and RestaurantAdministration Quarterly May:36–86. Vol. 26,No. 1.

S U G G E S T E D R E A D I N G S

S O U R C E N O T E S

Chapter 1.2,“The Hotel Development Process,” byJohn Dew.

Chapter 1.3, “How Well Does the Branded Distri-bution Company Allow Independent Hotelsto Compete with the Chains?” by Peter Cass.

Chapter 1.4, “The Art and Science of Opening aHotel,” by Tom Dupar.

Chapter 1.5, “On-line Pricing: An Analysis of Hotel-company Practices,” by Peter O’Con-nor, is reprinted from the February 2003 issueof Cornell Hotel and Restaurant Administra-tion Quarterly. © Cornell University. Used bypermission. All rights reserved.

Chapter 1.6, “Customer Relationship Manage-ment—A Driver for Change in the Structureof the U.S. Lodging Industry,” by Gabriele Pic-coli, Peter O’Connor, Claudio Capaccioli, andRoy Alvarez, is reprinted from the August2003 issue of Cornell Hotel and RestaurantAdministration Quarterly. © Cornell Univer-sity. Used by permission. All rights reserved.

Chapter 1.7, “Spas and the Lodging Industry,” byPeter C. Anderson.

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hotel development

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