Since Choice is primarily a leisure company, are you finding that business is returning and what are you doing to stimulate that business?
Pepper: Many of the mid-scale chains have held up a lot better during this downturn than has luxury. The leisure business will strictly be determined on what happens with employment. There is a correlation between unemployment and hotel demand, especially in leisure. When employment numbers go up, we’ll see the recovery kick in. So far, 2010 doesn’t look like great numbers for employment. We need to start pushing the government to push the employment numbers up. Once the employment numbers go up, demand will pick up, and that’s when we’ll have our pricing power.
Stamoutsos: One silver lining is the savings rate. One of the things that have occurred during this economic cycle is people are saving money. There is pent-up demand, and because they’ve saved money people may travel even if unemployment rates stay around that 10-percent mark. That might outweigh some of the effect unemployment has had on the economy.
When do you see group and transient business turning around?
Anhut: There is no doubt group business is off. However, we’ve seen advance bookings come back, not as robust as you would like, but they’re coming back. Interestingly, the consumer is sensing the trough and getting pretty aggressive in their demands in terms of pricing. While some of the advance bookings are coming back, planners are negotiating for much longer terms. As they anticipate demand coming back, they don’t want to lock-in just 2010 rates but also 2011 or as far out as 2012. They’re taking advantage of the pricing leverage they have now. The good news is that it’s coming back. Corporations have been down for so long and many of them haven’t had sales meetings for a long time. And you can only go so long without providing incentive trips for people that do a wonderful job for you. And in many cases, recognition travel and bringing people together can be less expensive for companies than bonuses or raises. We added about 30 percent more people to our global sales team last year, and the impact of that has been pretty significant.
Sacco: One of the good things this economy has taught us and forced us to do is to get out and talk to one another. Travel planners are beginning to realize that while in 2009 they cut meetings, in 2010 they need to start booking again because companies need meetings. We expect an uptick in that as well.
Starwood is heavily involved in the lifestyle business. Have you seen any change in the psychographics of those travelers during this downturn?
Sacco: It’s a stylistic thing. It’s the same traveler, but over the past five to seven years, consumer tastes have evolved and lifestyle branding has become a way of life now. The traveler expects a certain level of branding. They’re looking for that innovative, differentiated type of stay.
Anhut: We’ve observed an interesting juxtaposition in some of the InterContinental Hotels lobbies in the last six or seven months. It’s a confluence of briefcases and beachbags. The upside we see is that we’ve attracted new consumers. We’ve seen some people in those hotels that we didn’t see before because they’re now able to negotiate a better price and eventually we’ll be able to elevate those prices back. The silver lining is we’ve reached some people who we hadn’t touched before because they couldn’t afford to stay with us.
Where are the opportunities for growth for your brands?
Stamoutsos: Conversions will be a large part of our growth strategy for 2010 and most likely for 2011 as well. You’ll see a lot of conversions of independents to brands as people try to reposition themselves through this last cycle of financing. Some people say they have a lot of money on the side, waiting for opportunities. Then you meet some people who’ve been devastated by this cycle. But the new money can buy an asset at 30 to 40 cents on the dollar, put an investment into it rather than to build new. One fortunate thing is because we play in a large portion of the economy and mid-scale segments, there is still some financing out there for those products. Local banks are still out there. It’s difficult but there are some opportunities. We’re working with our franchisees and developers to find those financing resources. Hopefully, between those two things that will be our growth in the next several years.
Wilner: All of us agree acquisitions are where the opportunities are. Investors are coming in, buying 30 cents on the dollar and repositioning. So far this year we’ve already signed several new-construction franchise agreements. Individuals are doing that with expectation of locking up a market but anticipating they won’t be breaking ground for another 12-14 months, hoping financing loosens up by then. They’re taking advantage of today’s lower land costs and lower construction costs. There are some pockets geographically—such as parts of Texas and the Southwest—that haven’t seen as much a downturn as the rest of the country. There are still opportunities for new construction in certain pockets of the country.
Magnuson: We’re on track to have 2,000 hotels by year-end. That growth is largely coming from owners who are finding they don’t need to affiliate with a major chain or franchise to gain access to revenue managers, brand marketing and worldwide reservations systems. The real growth is from the owners. When they operate in environments of really good times they can absorb a lot of costs, but when they get to environments where foreclosure is knocking at the door they look a lot more closely at what are essential operating costs. Bringing our model forward has helped us grow our numbers corporately, but it’s also helped a lot of our owners survive who might have been in trouble without it.
Pepper: New construction financing is pretty much dormant today. We can talk about executed agreements but actually getting products done—we’re looking at 1.6 percent growth in supply this year and maybe .08 percent in 2011—won’t happen until we get demand and pricing power back. We’re seeing a lot of conversion activity. There’s some financing for new construction, mostly SBA for smaller deals like Sleep Inn or some of our other smaller products. But the acquisition money is beginning to loosen up a bit. There is some financing for that. There’s still a big problem on bid and ask in regards to product actually moving. You’ll probably see more foreclosures this year so there will be some opportunity to pick up assets and do some conversions but other than that, you’ll probably see most of the growth come internationally. GDP in India was up nine percent last year; in China, it’s still double-digit. There is good growth there. These are emerging markets with new infrastructure beginning to be put in place and a lot of demand for hotel rooms. A lot of the brand companies will shift focus to the international markets this year. In the states, it will be more conversion activity.
Sacco: Starwood will have strong growth internationally but also strong growth here. Emerging markets like Brazil, as well as India and China, will be very strong markets across all segments. Here in the U.S., there will be deals signed, but when they get done all depends on financing, and when they actually break ground is a question mark. Downbranding and upbranding is where most of the deals will be done in North America.
Anhut: In a lot of instances, owners are looking for alternatives to their current management or affiliation in order to shake things up. Growth will probably come from some recipe that’s a pinch of this and a pinch of that. The last five to seven years have been dominated by new builds and that will continue though a good part of 2010 but then will seize because financing wasn’t done in 2009. Overseas we have a huge global footprint. Also what will help are alternative fee streams that provide growth to the bottom line. Holiday Inn Club Vacations is an example where we have no capital investment but we made our way into the timeshare business. You need to get creative in an environment like this. There are a lot of different ways to solve the revenue dilemma, and there are a lot of different ways to solve the growth dilemma. Regionally, there are huge opportunities south of the border in places like Colombia and Brazil. Hospitality is universal and many of the brands, like us, are ubiquitous globally.
Pohl: We launched the Atrea design year in a tough year to launch, but we opened up five hotels in the upper midscale part of the market. We have another 25 Atreas in the pipeline, and many of them have broken ground. We’re encouraged by that, yet conversions will be the largest portion of our growth in North America. Internationally, we’re seeing some good development in Asia, Australia and Germany. Asia is new construction but Australia and Germany are primarily conversions. We’re pacing the North American development almost the same as overseas. We have 1,800 properties overseas.
How do you hope to get critical mass for a new product like Atrea or Cambria Suites in a development environment like this?
Pohl: Best Western is very diverse. We don’t have a prototype box and never had in the past. We needed a product to put into primary and secondary markets to attract more corporate travelers. We’ve primarily been a leisure brand. It’s chicken or the egg. You want to attract the corporate traveler but you have to have the locations to do it. Even with the first five Atreas, we’ve proven we can drive the average rate to provide the return on that product. We’re confident the return will be there.
Pepper: In the upscale select-service segment we need to get to about 150 to 200 hotels to get to critical mass, to where people can say, “I know what a Cambria Suites is.” Even though we’re attached to the Choice distribution system and driving a lot of res volume we still want to have the name recognition, not just with owners but mostly with consumers. The company has got to invest in it. That’s the only way for new brands to be successful is for the company to put their balance sheet behind it. With Cambria, we created a mezz program as well as some credit enhancements and loan guarantees. We hired a site team and we’re actually buying sites. We’re buying sites at 30- to 40-percent discounts. There is a once-in-a-lifetime opportunity to buy sites at rock bottom prices. Our view is to flip them to developers, but with this financing environment we’re looking to take down sites and hold on to them and when the market comes back we’ll have sites in the best locations at rock-bottom prices. We’ll flip them to developers to build Cambrias and that will really help their returns because the prices will be so low. Choice has really got to put its balance sheet behind Cambria, which is what we’re doing. That’s probably going to be true for any of the brands that have been launched in the last couple of years.
Anhut: This has got to be the toughest environment to start a new brand or nurture a recently launched brand. This is where the faint of heart will fail. As a franchisor, we made a commitment to our franchisees, but if you don’t stick it out as a brander these fledgling brands will stall, especially the new-build stuff. The parents who launched those brands had better figure out how to stick it out because the largest, most popular brands are now 30 or 40 years old, and they all went through periods like this. In some cases, you saw companies give up on them and they stalled forever. And you saw other companies figure out how to drive revenues and support those brands. There was a big upheaval in the real estate market in the mid- to late-980s, just as some of today’s most popular and powerful brands of today were started.
Sacco: There are other ways to show your franchisees you’re sticking it out. One of the things we’ve done for our Aloft, Element and Four Points segment is to create an organization within Starwood that focuses on select service from a field marketing perspective, a branding perspective and a franchise operations perspective. It’s a very focused, dedicated effort specifically for that segment. And we’ve formed an owners advisory board. We’re meeting with our owners, dealing with issues, listening to ideas and implementing ideas and solutions. So having a very focused dedicated effort from a marketing, branding and operations perspective toward these brands that we launched was key for us.