New York Hospitality by Vijay Dandapani

Unfortunate brand names

The hotel industry has mercifully been spared when it comes to choosing unfortunate brand names that, in some instances, have had decidedly deleterious outcomes for the owners. In the latter category General Motors' Nova is one of the more prominent ones as nova in Spanish could translate into "won't move". The most colossal misnomer for the industry occurred in the eighties when the grandiloquently named Allegis corporation was slated to become a travel powerhouse that included Westin, Hilton International, Hertz and United Airlines. It perished in short order.

Lately, the industry has been on a tear with new names with appeal with a capital A including Aloft, Andaz and Ascend besides Element, NYLO and a host of others. However, the founders of one of the most successful distribution channels in the age of the internet have launched a high profile new venture that they have chosen to name Getaroom.com. The model is arguably suspect for more than its unfortunate choice of a name. The Urban Dictionary defines "get a room" roughly as a social situation that compels a couple to find a hotel room as a consequence of their behavior.

The larger issue, though, is the business model of Getaroom. The company states that it sets itself apart from its competitors in that customers know the hotel in advance but not the discounted price which they get from reaching a proprietary call center. But apart from the many teething problems it faces, the model is built around price opacity. The site's founders are quoted as saying "Hotels don’t want their rates published. Occupancy is weak across the board, but hotels don’t want to lower their price across all distribution channels." The last part is true but other room suppliers can easily observe competitors' prices through a number of informational sources including direct observation. The ostensible edge they have is likely to get steadily eroded as both hotels other distribution channels get a measure of the discounts.

Apart from spurring an unsustainable race to the bottom for hotels, the model likely does little for the consumer and even less for hotels.

Hotel debt: Downward spiral?

Hotel loans and portfolios can't seem to get enough of bad news with the latest being Barron's downgrading Starwood Hotels to underperform from Neutral. In doing so, Barron's analyst noted that it was "in conjunction with our industry note in which we are lowering estimates across our hotel coverage. We are updating our view and now expect the hotel recovery to manifest itself in the second half of 2010 versus our previous assumption of late 2009." Somewhat scathingly, if unfairly, the downgrade opines that "Starwood's former strengths are now weaknesses. During the boom Starwood's world-class real-estate holdings, higher-end brands and international growth allowed significant multiple expansion. Today, each of these former positives exposes the company to higher-than-average risks, for which we do not believe investors are compensated at present levels."

The news on the debt front for hotels also seems unremittingly bad with a spate of announced defaults that began with Extended Stay of America's Chapter 11 bankruptcy filing last month followed by the technical default of Red Roof Inns on its conduit loans. Days later, the Washington Post reported that the owners of the landmark Watergate hotel in Washington D.C. "defaulted on a $70 million loan that came due this week, another fallout from the real estate crash and the collapse of Lehman Brothers, a partner and equity investor in the property." San Francisco Business Times reported yesterday that the Millenium partners, owners of the Four Seasons in San Francisco treaded the path taken by Red Roof Inns and "purposefully stopped making debt payments as a strategy to jump start renegotiating the debt with the special servicer."

The spate of bad news on hotel assets and their debt does have a silver linging. Reading between the screaming headlines of distressed debt Red Roof and the Four Seasons in San Francisco, it is obvious that both owners resorted to a deliberate strategy of default with a view to renegotiating their debt for what are evidently cash flowing assets in these troubled times involving CMBS loans. With no go to loan officer as in traditional debt, it seems as if the best way to get the attention of the servicer.

But even in traditional debt that is in default the FT reports that there is a resumption of debtor-in-possession (DIP) financing, heretofore shunned by investors and lenders. DIP financing has historically played a key role in repositioning hotels in bankruptcy with the "new" lender" getting to supercede all prior (defaulted) debt in hierarchy thereby providing much needed funds for cash flow and FF&E upgrades necessary to reposition the hotel. That may be particularly critical for smaller single asset bankruptcies involving hotels that are likely to come up in the near term.

Ranking cities - America's favorite

The San Francisco Examiner reports on a survey by Tripadvisor.com which states that "New York is America’s favorite city". Not entirely unexpectedly enough TA members voted the Big Apple as also the “Friendliest and Most Helpful” as well as the “Least Friendly and Helpful” city.

However, the Financial Times reported earlier in the week that these rankings are subjective and depend on one's preferences and, more relevantly, that many of the ostensibly liveable cities such as Vienna, Austria and Zurich, Switzerland had fewer than half a million residents.

Nevertheless, rankings matter for perceptions develop around them and can help make or break businesses, including hospitality given its dependence on transient visitors that come to savor the best. Mercer consulting's quality of living ranking covers 215 cities and is "conducted to help governments and major companies place employees on international assignments. Curiously Mercer's ranking is based on a point scoring index where all cities are ranked against New York which is their base city with an index score of 100. In 2009 Mercer rated Vienna at 108.6, and Baghdad 14.4.  The Economist Intelligence Unit also rates cities using a "liveability rating" and in its recent listing Vancouver, Canada was top dog.

None of the indices, with the exception of the TripAdvisor survey, seemed to have considered the quality and/or quantity of hostelry as a factor in their list.  It can't hurt if the hospitality industry insinuated itself in the process by making itself more visible to the rankers.

Digital media's impact on franchises

Steve Ballmer, CEO of Microsoft noted at the recently held meeting of world leaders in advertising in Cannes, France, that traditional media will not bounce back. The UK's Guardian newspaper carries a report where Ballmer says that the "global advertising economy has been permanently reset at a lower level meaning that there is no recovery to pre-recession levels".  At the same event an FT report has Google's Eric Shmidt noting what is glaringly obvious to most that they have not "needed to advertise" as they "pretty much operate from an end-user referral basis." 

Many hotel companies have already made the shift to both digital media while moving to leverage user generated conent like tripadvisor.com, which can lead to end-user referral. The former is evidenced by the rapid decline in ads in mainstream newspapers from hotels, major and minor. TV advertising, traditionally a big part of the advertising and marketing budget of the majors is being steadily replaced by online where absolute costs could be as little as 10% of that for TV ads.

While no numbers are available in the public domain, TV spending continues to be a significant part of hospitality majors. For franchisees who, in some instances, contribute as much as 35% of their franchise fees for marketing fees to cover the cost of brandwide advertising and marketing, to a franchisor, it could have a meaningful outcome were the savings passed through. Greater franchisee input on media outlays, should at a minimum, be at the forefront of franchisee concerns.

Hotels going to the dogs

Pet friendly hotels have been around for years with a growing number of sites pointing to hotels that are pet-friendly. But lush hotels designed and operated exclusively for pets seem to be a new frontier in hospitality according to a report in the Chicago Tribune.

The report features the Paradise 4 Paws resort run by Mr. Saq Nadeem noting that "with the travel industry plummeting last year, entrepreneur Saq Nadeem couldn't have picked a worse time to open a luxury pet hotel. The "resort is complete with splashing pool, indoor grassy play area, flat-screen TVs, Webcam access and private rooms with attached patios. It opened near Chicago's O'Hare Internatonal airport in May of last year just as the travel industry was descending rapidly due to the economy."

Its success has led the entrepreneur to plans for another location near Chicago's other airport, Midway with larger plans to open in 10 cities  over the next five years subject to raising funds.

Others have preceded Paradise 4 Paws and include Waghotels in California whose first quadriped hostelry opened as far back as 2006. There are plenty of others in the competitive mix including pet retailer petsmart with as many as 152 petshotel locations nationwide. What sets apart paradise 4 paws is, unsurprisingly, the three words that are dinned into every hotelier: location, location, location. By situating themselves at airport locations, paradise 4 paws seems to have melded convenience with costs as real estate prices are likely to be lower there than in the heart of cities.