A history lesson in hotels
 
A history lesson in hotels
23 AUGUST 2013 8:47 AM

With a century and a half of experience under their belts, Rick Kelleher, Joe McInerney, Ed Fuller and Michael Murphy look back on key changes in the hotel industry.

MEMPHIS—A panel of hotel industry veterans who have seen plenty of changes during the past 50 years agreed not only is time flying faster than they imagined, but the speed of information dissemination is among the most mind boggling of those changes.

Speaking during Wednesday’s Southern Lodging Summit in Memphis event, four of the industry’s most notable elder statesmen appeared to relish the rapid changes the hotel business has undergone. And the panelists said they don’t expect the pace to diminish.

“You’re going to see it change even more … the velocity of information getting to us,” said Rick Kelleher, principal and CEO of Pyramid Hotel Group, who began developing hotels in 1983 after starting his career in the consulting world. “Today it can get pretty precise in what’s happening in the market.”

The evolution of the industry’s chief business model has had a huge impact, going from predominantly an independent, family-owned model to a franchising/branded model that spans the globe.

“Franchisee-franchisor relationships have evolved with tremendous velocity in the last 10 to 15 years,” Kelleher said.

“The change in the industry of going from the independent property … the relationships with the franchisees was a lot different,” said Joe McInerney, president and CEO emeritus of the American Hotel & Lodging Association, who started his career in the hotel industry in 1961.
“It has changed for the better. As much as everybody complains about the (franchise) fees they pay, you’re getting a lot better services than you could on your own.”

Michael Murphy, the head of lodging and leisure capital for First Fidelity Companies, who started his career with Holiday Inn 40 years ago, said the sea change in the hotel business happened when Marriott became like a manufacturing firm. “They did well. They created an inventory of assets for sale to institutions or by putting them together in limited partnerships.”

Ed Fuller, chairman and co-founder of Laguna Strategic Advisors, who spent 40 years as a top executive with Marriott International, said a key turning point came when Marriott worked out long-term management contracts with itself on properties it owned, then sold the properties.

“We had the ability to get these long-term properties in place,” he said.

However, it wasn’t always rosy for the company—especially when recession hit in the late 1980s and early 1990s.

“We hit the wall in 1990, which was the critical time our model failed because we were sitting on $4 billion in 1990 dollars,” Fuller said. “Then we got short-term deals. Everything was thinking in terms of five years (instead of 30-year management contracts).”

The result of that was the 1993 formation of Host Marriott Corporation, which today is known as Host Hotels & Resorts. In October 1993, Marriott Corporation split into two separate companies. Marriott Corporation became Host Marriott Corporation, which retained ownership of 24 full-service hotels, 102 limited-service hotels, 14 senior living communities and the Host Marriott Operating Group, an entity that provided food, beverage and merchandise in airports and toll roads.

Kelleher said multi-unit owners have the ability to affect brand standards in ways that didn’t exist 30 years ago.

“Brands are extremely valuable to a real estate owner,” he said. “They’re going to get stronger.”

However, Kelleher cautioned that the delivery of business to hotels was forever altered by the emergence of online travel agencies during the early 2000s.

“We don’t have giant reservations offices anymore,” McInerney said.

The technology revolution
Murphy said technology has changed everything in the hotel industry.

“When we started there weren’t formal feasibility studies,” Murphy said. “Guys that would apply for franchises might sit in their cars all night counting cars at their competition to see if there was a need for another hotel.”

Manual calculations for everything from daily performance metrics to determining the capital stack were the norm, and in a lot ways helped people learn the industry’s nuances in ways that don’t happen today, Murphy said.

“The brands that have survived and the businesses that have survived have had to change how they did business,” Fuller said. “The dramatic change has been going from ownership to management to franchising. Holiday Inn went quickly, and the rest were later to the game.”

Fuller said during his years leading the international lodging arm of Marriott International, he was amazed by the number of franchisees who didn’t take advantage of the systems Marriott had in place.

“The winner is the one who learns how to use the brand’s tool effectively,” Fuller said. “Too often I find franchises trying to create their own systems and being creative instead of looking inside the franchise companies (for support).”

Capital ideas
Capital sourcing and capital stacks have seen dramatic changes over the years as well.

Murphy said in the 1970s and 1980s, the only sources for development capital were a small group of life-insurance companies, including Metropolitan, Prudential, Travelers and Cigna.

“That kept supply down to some extent,” Murphy said. “There was no (mezzanine) and no CMBS in those days.”

“The financing markets have changed—the (real estate investment trust) industry has had a dramatic impact on financing,” Kelleher said.

Some things haven’t changed
Of course, not everything has changed. Kelleher emphasized several times that location remains the top priority for any hotel endeavor.

“If you’ve got a good location around good demand generators, you’re going to be in a position to win,” he said.

One other fundamental element that remains regardless of the era, according to Kelleher: “You have to have enough equity in, and you can’t spend more than the real estate will return.”

The veterans lamented the fact that hotels have, in many cases, evolved into short-term business.

“What we have today is these geniuses that come and go into different asset classes … they’re focused on short-term horizons,” Murphy said. “The short-term nature is just the way it is.”

Kelleher said that might work in the investment world, but definitely not in the operations side of the business.

“You can manage a hotel short-term, but you’ll end up paying for it,” he said, adding managing properties in workout situations is the exception. “Stewarding the asset creates more value short-, medium- and long term than taking a knife out (and cutting operational things just to get to a budget number). The best way to manage them is to manage them long term.”

China’s big impact
In addition to their trip down memory lane, the executives looked ahead and said international travelers will be a big piece of the hotel puzzle in the future.

Fuller said the business opportunities coming from China represent the model with the most volume for hoteliers.

“Today there are half a billion middle class Asians … in five years it is projected to be 1.75 billion,” he said.

He also pointed to the increased hotel investments by Chinese owners and said those investors are now looking for middle-market brands and assets to acquire in the United States.

“There’s a lot more Chinese money coming in and buying interests in management companies or private hotel companies (in the U.S.),” McInerney said. “And Chinese are the biggest investors in Africa today.”

Fuller added Chinese brands will begin expanding around the world, and Jin Jiang Hotels—already a co-owner in U.S. management company Interstate Hotels & Resorts—“will be the first Chinese firm to bring a Chinese brand to the world.”

3 Comments

  • Anonymous August 23, 2013 5:13 PM

    Sounds like a pretty cool panel. It would be great to see it repeated at another conference.

  • adamzembruski September 1, 2013 4:28 PM

    Excellent recap Jeff. I love this quote from above and agree wholeheartedly: “The winner is the one who learns how to use the brand’s tool effectively,” Fuller said. “Too often I find franchises trying to create their own systems and being creative instead of looking inside the franchise companies (for support).” Great article, as always, Jeff.

  • EFM September 3, 2013 3:58 PM

    Glad to see Murphy as an elder statesman...now they is us!

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