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Hilton Elevates Its Game

In light of the aggressive growth strategy of Hilton Hotels Corp., the observation could be made that the only place it's not planning to plant a flag may be the moon. The venerable hospitality chain just celebrated the opening of its 1,000th hotel in September — an Embassy Suites in Fort Myers, Fla. — a milestone since its purchase of Promus Hotel Corp. for $3.7 billion in 1999. The newly christened hotel serves as a microcosm of the company's larger objective: to edge out competitors and bolster brand loyalty worldwide.

Hilton has 730 hotels comprising some 100,000 rooms in its development pipeline, the largest ever for the 87-year-old franchisor of Homewood Suites, Hilton Garden Inn, Hampton Inn and other well-known flags. This year, the company expects to add 36,000 rooms in 225 hotels to its 2,800-hotel system. That's an increase over 2005 levels, when Hilton added 24,600 rooms in 175 hotels.

Company executives predict that they can generate $650 million by “cross-selling” this year, that is, putting a customer whose first Hilton lodging choice is unavailable into a different Hilton brand nearby. In 2005, cross-selling generated $550 million in revenue.

“We don't want to lose customers to the competition,” explains Bill Fortier, senior vice president of franchise development at Hilton. “You can only do that if you have shelf space, and the only way to have shelf space today is to have a number of different brands in different segments.”

Cross-selling is hardly a new concept, but it's importance has been magnified. Six years ago, Hilton launched a marketing strategy built around a Web and phone reservation system staffed by operators trained to cross-sell. That, along with the Hilton rewards program, has improved customer brand awareness, Fortier says. In fact, cross-selling revenue in 2000 totaled about $60 million. “Our customers are telling us that they don't want to travel out of their way to get to our hotels,” he says. “So wherever our customers want to be, that's where we'll be.”

Strategy tweaks

Among other initiatives, Hilton is promoting its Doubletree flag as the ideal brand to developers who buy, renovate and reposition existing full-service hotels. Typically, developers add value to the hotels and reopen them under new flags.

This summer, Boston-based AEW Capital Management launched plans to transform a newly acquired 284-room Renaissance Hotel in nearby Bedford, Mass., into a Doubletree. Merrill Lynch Capital provided a $23.4 million acquisition and construction loan to fund the project. All told, Hilton has added roughly 30 Doubletrees comprising more than 7,200 rooms — primarily through conversions — since the beginning of 2005.

Hilton also is rolling out a smaller Embassy Suites prototype sans the product's signature atrium and shotgun alignment of the two-room suites, dubbed “Design Option III.” The modified property costs about $120,000 a room to build, some 30% cheaper than the original, and features 120 to 180 suites with the rooms in a side-by-side configuration as opposed to the original 260-suite prototype. So far, nine are under development, says Fortier.

Meanwhile, the company has sold more than 25 Hilton-owned hotels for upwards of $1.5 billion since launching its disposition strategy in late 2004. The goal is to take the emphasis off real estate and to become more fee-driven.

“Certainly, one way to do that is to grow units, which we are doing in a very big way,” Hilton CFO Robert LaForgia told analysts earlier this year. “And the other way is to sell the assets and take back contracts.” Indeed, Hilton retained the hotels it has sold in its system through long-term management or franchise agreements.

Pipeline muscle

Hilton is hardly the only hotel chain intent on expanding brands via robust development goals or product innovations. Washington, D.C.-based Marriott International's development pipeline was 80,000 rooms at the end of June with a quarter of those slated for Europe, Asia, India and other overseas markets. White Plains, N.Y.-based Starwood Hotels & Resorts also reported a pipeline of 80,000 rooms at mid-year, about half pegged for overseas.

Some hotel experts take a skeptical view of the big pipeline. “I think there's a lot of fluff in some of those numbers,” says Chris Bills, COO of Sioux Falls, S.D.-based Summit Group, a hotel developer, owner and manager that has a portfolio of more than 60 properties in 20 states.

Fortier and industry insiders acknowledge that some rooms will fall by the wayside — Hilton experiences a roughly 10% annual attrition rate. But the company's 100,000-room pipeline includes hotels under construction and projects on the drawing board, as well as conversions, he adds. In all cases, a franchisee has plunked down a non-refundable fee between $50,000 and $85,000, depending on the brand and size of the hotel.

The majority of projects within Hilton's pipeline are slated to rise on domestic soil, but that is expected to change. The company acquired U.K.-based Hilton International for $5.7 billion in February and is formulating plans to bulk up an overseas portfolio (see sidebar).

Heady days

Hotel chains couldn't have picked a better time to get aggressive. Quite simply, the debt and equity markets are hot for hotels. The Mortgage Bankers Association reports that hotel loan originations soared 71% in the first half of 2006 compared with the same period a year ago, a percentage increase second only to health care properties. “Developers are not running into a problem where they can't find money,” says Neale Redington, national director of hospitality services in Deloitte & Touche's Los Angeles office.

For developers, the confluence of brand expansions and eager capital provides a chance to bolster their market positions. Case in point: Summit Group is building a Hampton Inn & Suites on ground it owns adjacent to its Comfort Suites hotel in Dallas-Ft. Worth. Summit Group waited until a nearby, but older, Hampton Inn's franchise expired to develop the ground, Bills says.

While Hilton plants a flag on a brand new property in an established market, Summit Group defends its turf. Similarly, the company is adding lodging properties alongside hotels it owns in Boise, Idaho, and Jackson, Miss. “It all comes down to the lending community, and hotels are still on the ‘A’ list,” says Bills.

Hungry capital

So what's attracting lenders? Growing revenues and constrained growth after a near post-9/11 depression. Hilton's fundamentals, however, in most cases are outperforming the industry.

The hotel chain's revenue per available room (RevPAR) grew 9.3% to $88.82 across all brands worldwide in the first six months of 2006. Across the industry, RevPAR climbed 8.5% to $62.57, according to Hendersonville, Tenn.-based Smith Travel Research. Many experts anticipate 5% to 7% annual RevPAR gains in the industry through 2007 before slowing.

Yet, occupancy gains have been modest at best throughout the industry. Hilton, for example, reported an occupancy increase of only 1.5 percentage points to 72.5% year-to-date through June.

Rising construction costs that have restrained development, however, should keep new supply in check, experts contend. According to PKF Consulting and Torto Wheaton Research, the number of hotel rooms will grow by about 2.5% annually through 2008, compared with almost 4% annually during the 1990s.

Costly reactions

Hilton's Fortier sees another silver lining to rising construction costs. If developers want to move forward with a project, their best chance is with a major brand. “Only the strong brands are able to deliver room rate and occupancy increases — and therefore RevPAR increases significantly above inflation rates,” he says. “Those owners are able to get comfortable with their construction costs, even though they're high.”

Brand affiliation is critical to lender support, too, says Steven Gold, chairman of Hotel Financial Strategies, a hotel investment banking firm in Beverly Hills. “The bottom line is that unless you're building in Manhattan or Beverly Hills, lenders want to see a brand pretty much across the board,” he says.

On the other hand, Hilton is also confronting rising cost issues head-on. Hilton introduced the latest Embassy Suites design in response to developers who had struggled to build the conventional suites property in the face of higher construction and land costs, Fortier says.

Memphis, Tenn.-based Cooper Cos., which owns and manages 21 hotels primarily in the Southeast, is spending $5.8 million to convert a 1980s vintage Hilton Suites into the new prototype at Detroit Metro Airport. Cooper Cos. paid $7.1 million for the property in January. “There are about 19 hotels in that market,” says Pace Cooper, CEO of Cooper, “and we expect to be one of the top two or three after our repositioning.”

Ultimately, Hilton executives have similar aspirations: They want to become the top global hotel chain and maintain they have the diversity of brands to do it.

“We can have five different hotels in a city with each one serving a different segment,” Fortier says. “If those five hotels were only one brand that serves only one segment, you'd be running into a lot of problems.”

Joe Gose is a Kansas City-based writer.

Hilton builds brand awareness worldwide

When Hilton Hotels Corp. paid $5.7 billion in February to acquire Hilton International, a division of U.K.-based Hilton Group that owned or managed some 320 hotel properties and health clubs across Europe, it aimed to create a truly global company and expand Hilton brands to Asia, Europe and the Middle East.

Although Hilton has yet to announce a formal strategy to tackle markets abroad, the move follows similar strategies by other major hotel chains, which are aggressively pursuing international growth.

Hilton already is indicating its intentions. In China and India, Hilton anticipates partnering with companies to convert underutilized office and retail buildings into Hilton Garden Inns, Hampton Inns and Doubletree Hotels, particularly for the 2008 Olympic Games in Beijing, says Bill Fortier, senior vice president of franchise development for Hilton.

In Europe, the company sees development opportunities in the limited-service sector, where comparable product is virtually non-existent. Like in the U.S., the chain has also earmarked its Doubletree flag as the prime conversion brand for independent hotels.

About 50 of the 730 hotels in Hilton's pipeline are overseas, but the company aims to increase its international presence in five to 10 years. “If we're doing 680 hotels in the U.S., there's no reason we shouldn't be doing close to that many outside the U.S.,” Fortier says.

All the major chains see development opportunities across the service spectrum. But limited-service hotels could do the most to create brand demand and loyalty among European travelers, says Russell Kett, a managing director in the London office of lodging consultant HVS International. Except for resorts, many Europeans are unaccustomed to staying in hotels and perceive them as expensive, even snooty. Some Europeans consider doormen hired guns to keep out riff-raff.

“A lot of the limited-service hotels are just like an extension of the home,” Kett says, “and don't have such an imposing exterior and sense of arrival like walking into a grand hotel.”
— Joe Gose

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