Starwood Hotels & Resorts Worldwide (HOT)

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See all Bulls Reasons Bulls: Reasons To Buy Creating a global brand name to drive customer loyalty 0% agree Creating a global brand name to drive customer loyalty Starwood is trying to create a global brand name so that it can provide similar services to its customers across the globe, which will enable the company to form a loyal customer base. View or Edit Reason 0 votes 0% agree Minimally affected by increased airfares 0% agree Minimally affected by increased airfares Since Starwood targets the high-income group as its customers, an increase in airfares has a minimal effect on its global occupancy rates. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Low revenue per employee 0% agree Low revenue per employee Starwood’s revenue per employee (USD 46,573) is less than the industry average of USD 189,759 per employee, which indicates low per-employee productivity for Starwood. View or Edit Reason 0 votes 0% agree Unstable political environment reduces demand 0% agree Unstable political environment reduces demand Acts of terrorism, wars, and outbreaks of contagious diseases have a severe impact on the demand for hotels and related services. View or Edit Reason 0 votes 0% agree Faces challenges in internet reservation channels 0% agree Faces challenges in internet reservation channels Internet reservation channels are a challenge for the company as these channels demand higher commissions and lower room rates, adversely affecting the company’s revenues as well as margins. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Starwood Hotels & Resorts Worldwide (NYSE:HOT) is one of the leading hotel and leisure companies in the industry. It operates a diversified portfolio of business hotels and high-end resorts.

Since 1999, the hotel industry has been witnessing a trend of mergers and acquisitions. M&As amounting to approximately USD 23 billion were undertaken in this industry in 2005. In line with the industry trend, Starwood has also been aggressively acquiring smaller firms worldwide, resulting in an average revenue growth of 7 percent during 2002-06. Moreover, the company has been focusing on acquiring hotels in developing markets as the frequency of travel in these countries is increasing. It has purchased hotels in countries, such as Israel and China and is also planning to build hotels in India.

Starwood has also made a shift in its growth strategy. Instead of acquiring and owning more real estate, the company is now spreading its operations through franchisees. This enables the company to earn revenues (in the form of franchisee fee) without having to incur any additional costs to purchase real estate and construct hotels. Its recent acquisition of the Le Meridian brand along with its management and 130 hotel and resort franchisees spread across the globe is a step in this direction.

Starwood is trying to create a global brand of hotels that will offer a similar/high level service in all hotels across the world. This will increase customer loyalty, i.e., if a customer is satisfied with the services of Starwood in a country, he/she would prefer to use the services of Starwood in other countries as well.

However, there are some concerns as well. Internet reservations have led to a decline in profit margins for the hotel industry. Owing to the sheer volume of bookings they make, these intermediaries are capable of getting higher commissions and reduced room rates, which has a negative impact on the profitability of the hotel industry. Increasing airfares are another area of concern as it reduces the customer’s ability to spend on a hotel room, resort or other services. However, as Starwood targets customers in the high-income group, it is less susceptible to this trend as compared to a hotel that targets low-medium income groups.

Besides these business concerns, there is a looming threat of terrorism, wars, outbreak of contagious diseases. Owing to these problems, people either stop traveling to those areas or choose alternative destinations for travel, which has a negative impact on the hotel and tourism industry in the affected area.

[edit] Company Description

Starwood primarily operates in Europe, Africa, the Middle East, Latin America and the Asia-Pacific region.

The company is trying to expand rapidly across the globe with the help of mergers and acquisitions, primarily in developing countries. Starwood acquired the Moria chain of hotels in Israel, Sheraton Hotels in China and Toronto in addition to entering into agreements with Indian companies, such as Vatika Group to develop new hotels in India. Recently, the company also announced the acquisition of Le Meridian.

The company’s revenues increased from USD 4.6 billion in 2002 to USD 6 billion in 2006 at a compounded annual growth rate (CAGR) of 7 percent.

[edit] Business Drivers

The main drivers of revenues in the hotel industry are the number of hotel chains, number of rooms, the quality of service, and the company’s brand value in different geographies.

The following table depicts Starwood’s past performance relative to the above-mentioned industry drivers.

Starwood has been continuously increasing the number of hotels it owns (including owned as well as franchised hotels). The company owned 845 hotels across the globe at the end of 2005.

The company is focusing on expanding its operations in developing markets, such as India and China, and has made a number of acquisitions in addition to entering into agreements with over 100 hotels in the Asia-Pacific region to achieve this objective.

Starwood has hotels spread across various geographies, including major commercial cities, such as Shanghai, Paris, and Las Vegas. These cities have a high demand for hotels and related services throughout the year. This widespread geographical presence enables the company to reduce the risk of falling demand in a particular city or country.

As this industry is labor intensive, the increasing cost of labor, especially in developed countries, such as the U.S and U.K has a significant impact on the profitability of the players operating in this industry. Further, the increasing cost of land makes the acquisition of land for constructing new hotels expensive for the company.

The emergence of Internet reservation channels has posed a set of new challenges for the industry. These intermediaries have become the preferred channel for customers and provide a large volume of business to hotels. As a result, they are capable of charging higher commissions and demanding reduced room rates from hotels. This has a negative impact on the profitability of the hotel industry. Moreover, as the customers prefer the Internet reservation channel (instead of looking at the quality of services provided by the hotel), it becomes difficult for hotels to form a loyal customer base.

[edit] Business Segments and Products

Starwood’s operations are grouped into two business segments – hotel operations and vacation ownership resorts operations. Vacation ownership resorts operations primarily include the selling of ownership rights of a fully-furnished resort to a buyer for a limited period on specified terms (also known as Vacation Ownership Interests – VOIs).

The hotel segment contributes the largest share of revenues (approximately 85 percent in 2005) for the company. Revenue from the hotel segment includes income from owned hotels, management contracted hotels and franchises and other fees. The company operates under the brand names, Sheraton, W Hotels, The Luxury Collection, Westin, Four Points by Sheraton, St. Regis, and Starwood Vacation Ownership.

[edit] Customer Demand

Customers for the hotel industry include tourists as well as business travelers. Tourists may be further categorized into low-medium income groups and high-income groups as the income of a person will determine the kind of hotel he/she chooses. For example, people with high income are more likely to stay in an upscale luxury hotel, which a person with a low-medium income may not be able to afford. Starwood operates luxury and upscale full-service hotels that target customers with higher income.

The demand from low-medium income customer is primarily affected by an increase in airfares. These customers generally have a fixed budget when they plan their vacations. Thus, if they are forced to spend more on airfare, their ability to spend on a hotel room, resort or other services declines. However, as Starwood targets customers in the high-income group, it is less susceptible to this trend as compared to a hotel, which targets low-medium income groups. On the other hand, an economic slowdown would have a more significant impact on the volume of business travel as compared to the impact of increase in airfares.

In addition to these factors, certain events, such as acts of terrorism, wars, and outbreaks of contagious diseases have a severe impact on the demand from all customer segments as individuals are never willing to expose themselves to any event that will threaten their personal safety. Thus, when there are events such as 9/11, the invasion of Afghanistan, the outbreak of Severe Acute Respiratory Syndrome (SARS), or the tsunami in the Indian Ocean, people either stop traveling to those respective countries or choose alternative destinations for travel, which has a negative impact on the hotel and tourism industry in the affected area.

[edit] Competitive Landscape

Starwood competes with global players, such as Marriott International, Trump Entertainment Resorts, Hilton Hotels, InterContinental Hotels, Orient-Express Hotels (OEH), and the France-based ACCOR Group.

Players operating in this industry generally compete on the basis of quality and consistency of rooms, restaurants, meeting facilities and services; other factors include attractiveness of locations, availability of a global distribution system, price, etc.

Starwood’s global presence enables the company to offer services to its customer base across the globe. To enable this, Starwood is trying to create a global brand of hotels, which will offer a similar quality of service to its customers in all hotels across the world. At present, the number of hotel brands is limited, and customers prefer to choose a hotel based on the cost of stay in the hotel rather than the brand image associated with it. However, Starwood is trying to change this perception by creating a global brand of hotels, such that, if a customer is satisfied with the services of Starwood in a country, he/she would prefer to use the services of Starwood in other countries as well.

Further, Starwood has now made a shift in its growth strategy. Instead of acquiring and owning more real estate, the company now focuses on spreading its operations through franchisees. This enables the company to earn revenues in the form of franchisee fee without having to incur any additional costs to purchase real estate and construct hotels. Its recent acquisition of the Le Meridian brand along with its management and 130 hotel and resort franchisees spread across the globe is a step in this direction. This strategy further enables the company to concentrate its efforts towards building a strong brand image.

The following table compares the Starwood’s performance to its competitors in 2006.

The hotel industry is a labor intensive industry and the cost of labor has a direct impact on the profitability of the players operating in this industry. Starwood’s revenue per employee (USD 46,573) is less than the industry average of USD 189,759 per employee, which indicates low per-employee productivity for Starwood.

 Starwood Hotels & Resorts Worldwide

	Select All  |  Select None Metrics Number of Rooms Number of Properties Number of Company-Operated Hotels Number of Vacation Rentals & Time Shares Revenue from Vacation Rentals & Time Shares Revenue from Company-Operated Hotels Operating Income Occupancy Number of Franchised Hotels Net Income Average Daily Rate - Hotels (ADR) Cancel

	Select All  |  Select None Companies Starwood Hotels & Resorts Worldwide (HOT) Marriott International (MAR) Choice Hotels International (CHH) Home Inns & Hotels Management (HMIN) Intercontinental Hotels Group (IHG) MeriStar Hotels & Resorts (IHR) Marcus (MCS) Morgans Hotel Group (MHGC) Orient-Express Hotels (OEH) WestCoast Hospitality (RLH) Sonesta International Hotels (SNSTA) Wyndham Worldwide (WYN) Cancel

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Company	Data From	Net Income	Occupancy	Average Daily Rate - Hotels (ADR)	Number of Franchised Hotels
Choice Hotels International (CHH)	2006	$113M[1]	58%[2]	$69.7[2]	5.38K[2]
Marriott International (MAR)	2006	$608M[3]	73.2%[4]	$153[4]	1.78K[5]
Orient-Express Hotels (OEH)	2006	$39.8M[6]	63%[7]	$382[8]	Add
Starwood Hotels & Resorts Worldw… (HOT)	2006	$1.04B[9]	71.2%[10]	$192[10]	360[11]
Wyndham Worldwide (WYN)	2006	$287M[12]	53.7%[13]	$65.4[13]	6.5K[14]

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[edit] References

1. ↑ CHH, 2006, Item-8, PG 54
2. ↑ ^{2.0 2.1 2.2} CHH,2006,10-K,Item-1,PG-8
3. ↑ MAR,2006,10-K,Item-6,PG-23
4. ↑ ^{4.0 4.1} MAR,2006,10-K,Item-7,PG-37
5. ↑ MAR,2006,10-K,Item-1,PG-6
6. ↑ OEH,2006,10-K,Item-6,PG-38
7. ↑ OEH,2006,10-K,Item-7,PG-40
8. ↑ OEH,2006,10-K,Item-1,Introduction,PG-5
9. ↑ HOT,2006,10-K,Item-15,F-4
10. ↑ ^{10.0 10.1} HOT,2006,10-K,Item-20,PG-20
11. ↑ HOT,2006,10-K,Item-1,PG-20
12. ↑ WYN,2006,10-K,Item-6,PG-41
13. ↑ ^{13.0 13.1} WYN,2006,10-K,Item-1,PG-11
14. ↑ Wyndham Worldwide

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