Starwood's Chief: The Freefall Is Over

The scene inside the new W hotel is happily chaotic. It's the grand opening of the 29th property in the 10-year-old hip and luxury offshoot of Starwood Hotels & Resorts. This one is in Hoboken, New Jersey, and the skyscrapers of Manhattan are just across the Hudson River. Hundreds of revelers are packed into the lobby and the restaurant for what's billed as a 40s-theme party (even though disco from the 70s and early 80s is the music of choice). The booze is flowing, the hors'dourves don't stop.

Sitting in a corner banquette is Frits van Paasschen is Starwood's president and chief executive officer. A relative newcomer to the hospitality industry--he's been with the company for two years, after a two-year stint as was a senior executive at Nike for seven years before spending two years as president and CEO of Coors Brewing Co. and seven years as an executive with Nike--van Paasschen took time out from his party to speak with me about the state of the lodging business, the push to get business travelers back on the road, and whether the market has too many niche hotel brands.

 
Q: Make the case for business travel. Why people should be out on the road now?

A: One of the things we've been talking about is that business travel itself is a great way to get the economy back on its feet--the relationships that you make, the deals that you close, the sales calls you make, the training sessions, the product launches, the conventions, incentive trips--all things that lubricate the wheels of commerce. So in that aspect, business travel is essential to getting the economy back on its feet. In addition to that, the travel industry is a tremendous source of jobs and tax revenue.

We've been active in a number of ways to do that. As I'm sure you've seen, we went to Washington and continued our outreach to lawmakers to make sure they recognize the impact of their rhetoric on business travel and on the sense of fear that somehow it would be bad to be seen holding a meeting and we got what I believe are some very encouraging results from that, right up to the president.

Q: Has the tone changed or softened since the time when people where talking about the AIG effect and the excessive -and I'm putting that in quotes--the excessive nature of some trips?

A: I would describe it this way. I think the pendulum has begun to swing back in the other direction. That doesn't mean we're anywhere near where we'd like to be, but I think the real demonizing rhetoric that we saw a few months ago has been retracted or softened and I think that's an important first step.

Q: Do any of these negative viewpoints have validity?

A: We've been very clear. We understand and appreciate the need for a government that's using taxpayer money to tell people using it that they shouldn't use it for extravagant purposes. We can all fully appreciate that.

Where we felt things got out of hand is where meeting planners and business that were unrelated to TARP or taxpayer funds felt uncomfortable using their own resources to have meetings and we saw this even to the extent that people would move their meeting venues from Las Vegas to San Francisco, leave the deposit for the Las Vegas meeting, spend more money to have the meeting in San Francisco only because they didn't want to be seen as a having a meeting that was seen as a junket or as excessive.
Where we see it, candidly, is that the vast majority of business travel is used for productive, important business purposes.

Q: What's happening with your business. Are you still seeing as many cancellations as you have been?

A: We're in what we call our quiet period right now so I'm not going to make very specific comments about the performance of our business. What I can tell you is, what we're seeing is, we're no longer in the freefall that we saw in the fourth quarter of 2008 and in the first few months of 2009. That isn't to say we're at the bottom, it doesn't even mean that we we're not continuing to see declines, but the rate of decline has lessened.

Q: That's quite a commentary on our times, when we rejoice over saying things are getting less bad.

A: It's not just true in our industry. I think it's true in the psychology of consumers and the economy today, which is after months of continuing bad news and a seemingly endless series of realizations that the economy kept getting worse, that a sense that we've reached a plateau is consoling.  And I think for a while all of us had no idea whether this freefall would just continue and that was a very frightening thing. 

Now I've also wanted to be clear saying that I don't know if this is the bottom, or if we're approaching the bottom, or if this is another plateau and I think if we've learned anything from 2008 is that it's very difficult to predict these things. If the right things continue to happen, this could be the bottom and that would be a great thing. That's certainly where the consensus of opinion is. And it's also what we're starting to hear our customers say also.

We're seeing more confidence in, if not actual bookings, at least a willingness to talk about meetings and conventions in 2010 and 2011. I think we've all seen a shortening of the booking window, which is a function of people saying I'm not going to commit to travel out six months because I don't know what the world looks like then but I know I have to take that trip next week and I can do it."

Q: Can you tell me if one brand is doing better than another, or go deeper into exactly how the economy has affected you?

A: Without getting too specific, I don't think it would be a surprise to anyone that luxury brands are taking a bigger hit than more moderate price points and that markets in resort locations or in New York City are hit more hard than some other markets. It's the same thing you see on the retail sides so it's why Wal-Mart is potentially flat and Saks is down by 25 percent. And I think that's what we're seeing in the travel business. So rather than any specific brand, I can tell you by segment that's certainly our experience and you see that across the industry.

Q: Hotels that normally discount are now offering deals - a free night after you buy three nights, a $1,000 credit on package deals. How creative are you being?

A: Let me start with a more general observation. Since 9/11, the industry has gotten more sophisticated in managing its pricing behavior and the science of revenue management because of that that sophistication has told us when to be more aggressive with pricing and when we don't.

The other thing we learned from 9/11 is when you drop all the way down, it's very difficult to come back up so we're being very disciplined of where we're offering discounts. But to answer you question more directly, we are being creative and I think the SPG (Starwood Preferred Guest) free weekends campaign and promotion is a great example of that. This is probably our most generous offer ever. And what it basically says is if you stay with us twice, you'll get a free weekend night. And the whole point is to try to get people back out and traveling again.

Q: You've got multiple brands, with very ambitious expansion plans in the past. How has the economy impacted those? Has it caused you to step back and slow down? (W has plans to open 28 more properties between now and 2011).

A: Fundamentally we still believe in the long-term growth story for the industry and for Starwood. And the entrance of 2 or 3 billion people into the global economy and into the middle class that you're seeing around the world and that growth and prosperity is for us an unbelievable one-time, generational, growth opportunity. That having been said, the current economic meltdown has slowed that down. We see that as a temporary set back, not a fundamental long-term one. The other thing that's interesting is so many of the deals that we've singed two or three years ago are now coming to fruition so we estimate that we'll open between 80 and 100 hotels this year. They're obviously deals that were financed and planned in a different time, and when one gets far along in the development of a property, one doesn't stop. At the same time, the opportunity to sign a lot of new deals right now--particularly in North America--has been hampered, so the economy is absolutely having an impact.

Q: Well, here we are, sitting in this beautiful hotel, looking out across the Hudson, and you've got a jam-packed opening. It seems a little strange that you're doing this when the economy is in such a state.

A: This is a great hotel and a great addition to the brand. We look at it as a giant billboard looking out onto Manhattan. Another thing this is a branded property, and it's a newly built property. As W has gone global, we've come back to its birthplace and put in a great property. So we're really happy with it.

Q: Starwood recently filed a lawsuit against Hilton over its plans to add a new brand to its lineup. Care to use this as an opportunity to talk about that suit?

A: The short answer is I really don't want to comment on that right now.

Q: Speaking more generally about brands, this is just one of Starwood's brands, and you opened two new types of hotels last year. Is there a point where you have too many, where you give travelers too many choices?

A: I have a theory about that. In my view, if you go back a generation it used to be that a brand was a guarantee of quality. It was a promise that you were going to deliver a product that people were going to like and that was sufficient to create demand and I think as time has gone on the economy, broadly speaking, has gotten so good at giving people what they want that we no longer look to the brand just as a guarantee of quality. We look to a brand that we can have a relationship with and we can identify with. So the proliferation of brands--whether it's in sneakers, or beer, or hotels--to me is a social and economic phenomenon of wealth and plenty.

What Element and Aloft, for example, are providing is a finer segment of what people are looking for. So what we've done with Aloft is we've created an environment that's like a W hotel at a different price point and in locations where we'd never open a W hotel and our recognition of formalities that you have with a W can be recreated. It creates an opportunity to reach out to a new type of traveler.

With Element, we've been able to launch a brand in an extended-stay area, which is a really profitable and interesting area to being with, and as an extension of Westin with an environmental angle, so again it's what I think people will resonate with. And it goes beyond the expectations that if I check in, I get a nice room and clean bed. It's if I check in, I get a whole experience so if I have to be on the road, I'm going to be happy to be here. Or if I'm on vacation, it really makes me feel that I'm at home with friends.

Q: Do you see brands dying as new ones come in.

A: I don't see them going away. I think it's a great question because with Sheraton, we've made a significant investment and spent a great deal over the past several years to breathe life into the brand and give it a contemporary feel. Longstanding brands have a level of recognition and approval from people that's very hard to replicate and so it becomes an easy economic argument to upgrade Sheraton hotels because people recognize the name, and as we've done that, people increasingly believe in the great experience they're going to have there.