Starwood Hotels & Resorts (HOT)

Businesses and travelers alike are cutting costs because of the economic slowdown that started with the 2007 subprime crisis. Businesses are more likely to use alternative methods of hosting meetings and conferences (like video or teleconferences) and consumers have much less money to spend. This means less customers are willing to pay a premium for Starwood's luxury hotels and less revenues for the company.

Bookings made by internet reservation channels like Expedia and Travelocity are growing at up to 20% per quarter. The sheer volume of bookings that these websites make gives them the ability to to obtain higher commissions, reduced room rates, or other significant concessions from Starwood - this means significantly lowered profit margin for HOT.

Additionally, these websites make brand names obsolete. Starwood relies heavily on its brand names to attract customers but internet reservation channels book hotels based on lowest available price. This means that Starwood will have trouble distinguishing itself from its cheaper competitors and lose customers to them.

Although China was booming throughout the '00s, the Chinese economy has been hit hard by the 2008 financial crisis - in 2008 Quarter 4, China's GDP growth was half what it was a year before, thousands of factories shut down, and millions of migrant workers lost their jobs.^[1] HOT has big Chinese and Asian expansion plans for 2009 through 2012 that include building 63 new hotels in China,^[2] ultimately doubling its properties in the country.^[3] It is unlikely that the Chinese economy will see the growth it did years ago but Starwood's expansion strategy is made to capture Chinese economic trends. As a result, Starwood's new hotels inn China will probably yield much less income than originally expected and, if HOT changes its plans and decides to cut back Chinese expansion, it will probably sink millions of dollars in construction costs before doing so.

HOT has begun to cut its workforce in response to plummeting tourism, including the layoff of 18% of its employees at the Westin and Sheraton Grand Bahama Our Lucaya Resort in January 2009.^[1] After these layoffs, Starwood stated that its hotel bookings are sliding "with no evidence of improvement."^[1] Only a day after that announcement, the company announced the opening of its 1000th hotel will occur during 2009, part of its expansion plan that includes opening 100 hotels during 2009.^[2] HOT appears quite unable to cut its costs at existing hotels quickly enough to counteract weakening demand as the world economy declines; to continue expanding under these conditions seems incredibly foolish. These indicators suggest that, because of the economic crisis hanging over into 2009, HOT is going to lose big.