Hotel_Management_and_Operations_by_Denney_G_Rutherford,_Michael

HOTEL MANAGEMENT
AND OPERATIONS

fourth edition

Edited by

Denney G. Rutherford, Ph.D.

Endowed Chair Emeritus
School of Hospitality Business Management
Washington State University

Michael J. O’Fallon, Ph.D.

Hospitality and Tourism Management
College of Business
James Madison University

JOHN WILEY & SONS, INC.



HOTEL MANAGEMENT
AND OPERATIONS

fourth edition

Edited by

Denney G. Rutherford, Ph.D.

Endowed Chair Emeritus
School of Hospitality Business Management
Washington State University

Michael J. O’Fallon, Ph.D.

Hospitality and Tourism Management
College of Business
James Madison University

JOHN WILEY & SONS, INC.

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Library of Congress Cataloging-in-Publication Data:

Hotel management and operations / edited by Denney G. Rutherford, Ivar Haglund, and

Michael J. O’Fallon. — 4th ed.

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-0471-47065-6

ISBN-10: 0-471-47065-1 (pbk.)

1. Hotel management. I. Rutherford, Denney G., 1942– II. Haglund, Ivar.

TX911.3.M27H663 2007

647.94Ј068—dc22 2005011811

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

DEDICATION
The fourth edition of Hotel Management
and Operations is hereby dedicated to all of
those hospitality students who have enriched
the lives of their guests by continuing to
learn beyond their formal education. It is
these professionals who constantly strive
to find even better ways to give the gift of
friendship. All the best to you.

D.G.R. and M.J.O’F 2005



CONTENTS

Preface xi
Contributors xiii
Acknowledgments xv

chapter 1 O V E R V I E W I

1.1 Introduction 1 1.6 Customer Relationship Management—A

1.2 The Hotel Development Process 5 Driver for Change in the Structure of the
John Dew
U.S. Lodging Industry 36

1.3 How Well Does the Branded Distribution Gabriele Piccoli, Peter O’Connor,

Company Allow Independent Hotels to Claudio Capaccioli, and Roy Alvarez

Compete with the Chains? 14 1.7 Spas and the Lodging Industry 50
Peter C. Anderson
Peter Cass

1.4 The Art and Science of Opening 21 References 67
a Hotel Suggested Readings 68
Tom Dupar Source Notes 68

1.5 On-line Pricing: An Analysis of 26
Hotel-Company Practices
Peter O’Connor

v

vi Contents

chapter 2 O R G A N I Z AT I O N 69

2.1 Introduction 69 References 88
73 Suggested Readings 88
2.2 Organizational Design Source Notes 88
Eddystone C. Nebel III 86

2.3 As I See It: Hotel Organization
Structure
Mark Conklin

chapter 3 G E N E R A L M A N A G E R S : A V I E W
AT T H E T O P 89

3.1 Introduction 89 3.5 A Day in the Life of a Hilton Hotel

3.2 A Conceptual Framework of the Hotel General Manager 113

General Manager’s Job 91 Robert O. Balmer, CHA

Eddystone C. Nebel III and Ajay Ghei 3.6 A Day in the General Manager’s Life 115
Bob Peckenpaugh
3.3 Grooming Future Hospitality Leaders:

A Competencies Model 101 3.7 Mini Case: Sunset Hotels and Suites 118

Beth G. Chung-Herrera, Cathy A. Enz, References 118
Suggested Readings 120
and Melenie J. Lankau Source Notes 120

3.4 As I See It: What I Do 111
Emilio Fabico

chapter 4 O P E R AT I O N S : R O O M S 121

4.1 Introduction 121 4.5 Concierge (cone-see-air-j) 143
Mario Arnaldo
4.2 The Electrifying Job of the Front Office 149
4.6 As I See It: Management of the 161
Manager 124 Front Office 162
Oliver Meinzer
James A. Bardi
4.7 Mini Case: The New FOM
4.3 A Day in the Life of the Front Office
4.8 To Change or Not to Change:
Manager 127 A Case Study at the Front Desk
Nancy Swanger
Garry Dickover
References 163
4.4 Yield Management: Choosing the Most Suggested Readings 164
Source Notes 164
Profitable Reservations 131

William J. Quain and Stephen M. LeBruto

Contents vii

chapter 5 O P E R AT I O N S : H O U S E K E E P I N G ,
E N G I N E E R I N G , A N D S E C U R I T Y 167

5.1 Introduction 167 5.6 The Engineering Department and
Financial Information
5.2 A Day in the Life of a Director 173 Agnes Lee DeFranco and 199
of Rooms Susan B. Sheridan
Kurt Englund 205
5.7 The Legal Environment of Lodging 217
5.3 Housekeeping Organizations: Their 175 Operations 227
History, Purpose, Structures, and Melissa Dallas 230
Personnel
Thomas Jones 5.8 Asphalt Jungle
Je’anna Abbott and Gil B. Fried
5.4 On Being an Executive Housekeeper 188
John Lagazo 5.9 Workplace Violence in Hotels
Mark Beattie and Jacinta Gau
5.5 The Hotel Engineering Function:
5.10 Case Study: Housekeeping,
Organization, People, and Issues in the Engineering, and Security

Modern Era 191 References 231
Suggested Readings 233
Denney G. Rutherford Source Notes 234

chapter 6 F O O D A N D B E V E R A G E D I V I S I O N 235

6.1 Introduction 235 6.7 A Day in the Life of an Executive
Director of Catering Sales and
6.2 Managing Food and Beverage Convention Services 287
Operations in Lodging Organizations 239 Rich Benninger
Robert H. Bosselman

6.3 As I See It: Hotel Director of Food and 6.8 The Organization and Management of

Beverage 251 Hotel Beverage Operations 291

Dominic Provenzano Valentino Luciani

6.4 Best Practices in Food and Beverage 6.9 Case Study: Crisis in the Food Court 298
Nancy Swanger
Management 253

Judy A. Siguaw and Cathy A. Enz 6.10 Case Study: Outside the Box in the Food

6.5 Strategic Alliances Between Hotels and and Beverage Division 299

Restaurants 265 References 300
Suggested Readings 301
Robert W. Strate and Clinton L. Rappole Source Notes 302

6.6 Contemporary Hotel Catering 282

Patti J. Shock and John M. Stefanelli

viii Contents

chapter 7 M A R K E T I N G A N D A S S O C I AT E D
A C T I V I T I E S 303

7.1 Introduction 303 7.6 Hotel Sales Organization and
Operations
7.2 Building Market Leadership: Marketing Margaret Shaw and Susan V. Morris 348

as Process 305

Fletch Waller 7.7 Putting the Public in Public Relations:

7.3 Consumer Decision Rules and Implica- The Case of the Seattle Sheraton Hotel

tions for Hotel Choice 321 and Towers 353

Bianca Grohmann and Eric Spangenberg Louis B. Richmond

7.4 Hotel Pricing 334 7.8 Mini Case: Revamping the Marketing Re-

Marta Sinclair and Carl R. Sinclair search Department 360

7.5 A Day in the Life of a Regional Revenue References 361
Suggested Readings 362
Manager 345 Source Notes 362

Paul Chappelle

chapter 8 F I N A N C I A L C O N T R O L A N D
I N F O R M AT I O N M A N A G E M E N T 365

8.1 Introduction 365 8.5 The Hotel Purchasing Function 391
C. Lee Evans
8.2 The Lodging Chief Financial
Executive 368 8.6 Data Mining for Hotel Firms: Use and
Raymond S. Schmidgall
Limitations 399

8.3 Budgeting and Forecasting: Current Vincent P. Magnini, Earl D. Honeycutt Jr.,

Practice in the Lodging Industry 377 and Sharon K. Hodge

Raymond S. Schmidgall and References 412
Suggested Readings 414
Agnes Lee DeFranco Source Notes 414

8.4 As I See It: The Hotel Controller 387
Michael J. Draeger

Contents ix

chapter 9 H U M A N R E S O U R C E S P O L I C Y
M A N A G E M E N T 415

9.1 Introduction 415 9.5 The Strategic and Operational Roles

9.2 Driving Hospitality Into the Future 417 of Human Resources—An Emerging
Christian Hardigree, Ellis Norman, Gail
Sammons, Vince Eade, William Werner, Model 446
Robert H. Woods, and Cheri Young
J. Bruce Tracey and Arthur E. Nathan

References 457

9.3 The Causes and Consequences of
Turnover in the Hospitality Industry 429
Carl D. Riegel

9.4 Current Issues in Hospitality

Employment Law 436

Suzanne K. Murrmann and Cherylynn

Becker

I N D E X 461



PREFACE

As Denney would tell you, the first edition of mote the idea of critical thinking among stu-
this textbook project was originally born out dents of hotel administration. Critical think-
of a range of frustrations. While there are ing refers to that process whereby the student
many outstanding textbooks in the hotel man- is exposed to a number of different view-
agement field that dealt with significant por- points within a theoretical structure, and from
tions of operations, particularly housekeeping, analysis of those viewpoints, becomes better
front office, and food and beverage, there are able to synthesize a viewpoint about hotel op-
very few that try to treat, in a balanced and in- erations that will enable them to intelligently
depth way, each department in the hotel. One approach whatever practical situations they
frustration was that some texts that dealt with may find themselves confronted with in the
these departments spent an inordinate “real world.”
amount of time focused on one aspect of the
hotel operations—usually either front of the There is a conventional wisdom that goes,
house, food and beverage or marketing. Other “something may be okay in theory but it
departments, for better or worse, were treated doesn’t work in practice.” Like economist
as minor players. Consequently, students and Milton Friedman, we reject that statement. If
readers of such texts were given only a cursory theory doesn’t work in practice, it is lousy the-
introduction to the intricacies of these “mi- ory. What professors need to guide students in
nor” departments, their management, their understanding is that theory, (in the word of
people, and their interactive functions in the Friedman) explains, predicts, or controls, and
overall hotel organization. does this in different ways given different
variables in different organizations. This is an-
Another frustration he encountered was other issue or frustration that subsequent edi-
using then currently available material to pro- tions have been designed to further address.

xi

xii Preface

As we went about planning and designing think about a topic, in this case, a hotel de-
the fourth edition of Hotel Management and partment, a student or hotel professional can
Operations (HMO IV), we felt the need to feel better prepared to find ways to apply the-
continue to remind ourselves of the lessons of ory in a practical setting or situation. In the fi-
the frustrations listed above. We wanted to nal analysis, it is up to you to make the best
make sure the original idea behind this book use of HMO IV, because like we state above,
did not get lost. By helping the reader gain an none of us knows it all. Good luck, it is our
appreciation of what a variety of observers, pleasure to do this work for you.
thinkers, researchers, and commentators

CONTRIBUTORS

Je’anna Abbott, University of Houston Peter Cass, Crystal River, Florida
Roy Alvarez, Senior Lecturer, Cornell Uni- Paul Chappelle, Brand Revenue Manager,

versity School of Hotel Administration Red Lion Hotel and Inns, Vancouver,
Peter C. Anderson, Anderson and Associates Washington
Mario Arnaldo, Instructor, Travel Industry Beth G. Chung-Herrera, Associate Professor,
College of Business, San Diego State Uni-
Management, Hawaii Pacific University, versity
Honolulu, HI Mark Conklin, Area Vice President, Western
Robert O. Balmer, General Manager, Dou- Europe, Marriott Hotels, Resorts, and
bletree Hotel, Bakersfield, California Suites, Frankfort, Germany
James A. Bardi, Penn State Berks–Lehigh Melissa Dallas, Florida Atlantic University,
Valley College College of Business
Mark Beattie, Doctoral Student, Gonzaga Agnes Lee DeFranco, University of Houston,
University, Liberty Lake, WA Conrad N. Hilton College
Cherylynn Becker, Richmond, Virginia John Dew, Executive Consultant, Bellevue,
Rich Benninger, CMP, Executive Director of Washington
Catering of Catering and Convention Garry Dickover, General Manager, Conven-
Services, Caesar’s Palace tion Center Courtyard by Marriott, Las
Robert H. Bosselman, Dedman Chair of Hos- Vegas, Nevada
pitality Administration, Florida State Michael J. Draeger, Controller, Dayton De-
University, Dedman Department of Hos- pot Casino, Dayton, Nevada
pitality Administration Tom Dupar, Dupar Dynamics, Bellevue,
Claudio Capaccioli, Deloitte and Touche Washington
Business Consulting Manager, Milan, Italy
xiii

xiv Contributors

Vince Eade, University of Nevada, Las Vegas Vincent P. Magnini, Ph.D. candidate, Old Do-
Harrah School of Hotel Administration, minion University
Las Vegas, NV
Oliver Meinzer, Director of Operations, New-
Kurt Englund, Resort Manager, Four Seasons port Beach Marriott Suites, Newport
Resort Costa Rica at Peninsula Papagayo Beach, CA

Cathy A. Enz, Louis G. Shaeneman Professor Susan V. Morris, Vice President, HQ Global
of Innovation and Dynamic Management, Workplaces, Dallas, Texas
Cornell University School of Hotel Ad-
ministration Suzanne K. Murrmann, Virginia Polytechnic
Institute and State University, Department
C. Lee Evans, Director of Purchasing, The of Hospitality and Tourism Management
Oasis Resort; Casa Blanca Spa and Golf
and Virgin River Hotel and Casino Arthur E. Nathan, New Product Thought
Leader, Mellon HR Solutions
Emilio Fabico, Walt Disney World, Orlando,
Florida Eddystone C. Nebel III, Purdue University,
Emeritus
Gil B. Fried, Gil B. Fried and Associates,
Risk Management Consultants, New Ellis Norman, University of Nevada, Las Ve-
Haven, CT gas Harrah School of Hotel Administra-
tion, Las Vegas, NV
Jacinta Gau, Doctoral Student in Criminal
Justice, Washington State University, Pull- Peter O’Connor, Associate Professor,
man, WA France’s Institute de Management Hote-
lier International, Essec Business School,
Ajay Ghei, The World Bank Group France
Bianca Grohmann, Assistant Professor of
Bob Peckenpaugh, Hotel Manager, Rancho
Marketing, Concordia University Bernardo Inn, San Diego, California
Christian Hardigree, University of Nevada,
Gabriele Piccoli, Assistant Professor, Cornell
Las Vegas Harrah School of Hotel Ad- University School of Hotel Adminstra-
ministration, Las Vegas, NV tion
Sharon K. Hodge, Assistant Professor, Love
School of Business, Elon University Dominic Provenzano, Director of Opera-
Earl D. Honeycutt Jr., Professor, Love School tions, Cleveland Marriott Downtown at
of Business, Elon University Key Center, Cleveland, Ohio
Thomas Jones, University of Nevada, Las
Vegas William J. Quain, Florida International Uni-
John Lagazo, Director of Operations, The versity, School of Hospitality Manage-
Madison Hotel, Rockville, MD ment
Melenie J. Lankau, Assistant Professor, Terry
College of Business, University of Geor- Clinton L. Rappole, University of Houston,
gia Conrad N. Hilton College
Stephen M. LeBruto, University of Central
Florida Louis B. Richmond, President, Richmond
Valentino Luciani, Instructor, University of Public Relations
Nevada, Las Vegas
Carl D. Riegel, Florida Atlantic University,
Graduate School of Business

Gail Sammons, University of Nevada, Las Ve-
gas Harrah School of Hotel Administra-
tion, Las Vegas, NV

xvContributors

Raymond S. Schmidgall, Michigan State Uni- Robert W. Strate, National Aeronautics and
versity, School of Hospitality Business Space Administration

Margaret Shaw, University of Guelph, School Nancy Swanger, Washington State University
of Hotel & Food Admin., Guelph, ON J. Bruce Tracey, Associate Professor of Man-
N1G 2W1 CANADA
agement, Cornell University School of
Susan B. Sheridan, Owner, Taughannock Hotel Administration
Farms Inn, Trumansburg, New York Fletch Waller, Principal, FCW Consulting,
Seattle, Washington
Patti J. Shock, University of Nevada, Las William Werner, University of Nevada, Las
Vegas Vegas Harrah School of Hotel Adminis-
tration, Las Vegas, NV
Judy A. Siguaw, Cornell University, School of Robert H. Woods, University of Nevada, Las
Hotel Administration Vegas
Cheri Young, University of Nevada, Las Ve-
Marta Sinclair and Carl R. Sinclair, Griffin gas Harrah School of Hotel Administra-
University, Toowong, QLD 4066 Australia tion, Las Vegas, NV

Eric Spangenberg, Associate Dean, College
of Business, Washington State University

John M. Stefanelli, University of Nevada, Las
Vegas



ACKNOWLEDGMENTS

I sort of thought that by the time I reached friends, colleagues, and former students could
the fourth edition, the project would have be- devote the time they did to contribute to this
come easier. Well, it hasn’t. The challenges of project. My badgering, cajoling, begging, and
continual improvement—finding challenging bribing aside, I think we’re all still friends.
and interesting material, presenting it in in-
teresting ways, and trying to choose material I want to particularly salute those who
that will transcend unanticipated events—get crafted custom pieces for this edition and
harder, not easier. While making the book those professionals who contributed “Day in
was a team effort involving a wide range of the Life” and “As I See It” pieces. They have
professionals, all of its flaws, and there proba- made this edition a richer and more user-
bly are more than a few, are solely my friendly book. They also add a view of the real
responsibility. world that has been missing.

First of all, the authors of the various The support and encouragement of my
pieces included here who knowingly or un- colleagues at Washington State University
knowingly have contributed their thoughts, was critical. Terry Umbreit, Director of the
research, ideas, opinions, and expertise to this School of Hospitality Business Management,
exercise in critical thinking about hotel de- and a whole bunch of students all contributed
partmental operations deserve recognition. to the success of this project with advice,
Without the rich mixture of interest and tal- counsel, and suggestions.
ent extant in the hospitality profession and its
educational establishment today, this collec- My good friend, colleague, and production
tion of readings would not have been possi- assistant, Lillian Sugahara Jesse, helped me
ble. It is my great good fortune that my tremendously. Her magic with the computer
literally saved this project by translating many
files created in Adobe PDF or PageMaker for

xvii

xviii Acknowledgments

Macintosh to something I could edit in Word. University after 26 years in May 2004. We are
Because she kept accurate files of the manu- in the process of building our retirement
script of previous editions, we were able to home in Port Townsend, Washington, and will
overcome the problems attendant to the be moving in July 2005, shortly after the book
transfer of the project from Van Nostrand is due at the publisher. Building a house long
Rinehold to John Wiley & Sons. Lillian, you distance has its own challenges, and with “the
are the greatest. book,” we have had to rely on Sandy for a lot
of decisions. I love you, Sandy.
Melissa Oliver, my editor at Wiley, pro-
vided needed support regarding material pre- I also want to acknowledge the capable
viously published by Wiley, and her assistance of my colleague and former stu-
willingness to discuss some of my off-the-wall dent, Michael O’Fallon. He is the author of
ideas have truly made this a better project. the instructor’s manual. Michael will co-au-
Thanks, Melissa. thor this and the next edition, after which the
project will be all his.
My wife and best friend, Sandy Sweeney,
continues to provide the encouragement, sup- Denney G. Rutherford
port, and understanding she always does on
big writing projects. Her understanding is par- Spokane/Port Townsend, Washington
ticularly important when I disappear to work 2005
on “the book” when we could be doing other,
more fun things. As with past editions, she
does understand the rhythms of an author’s
life and endures losing me to “the book” with
style and grace. The last two times I did this,
we were moving—and surprise—it is happen-
ing again. I retired from Washington State

chapter one

OVERVIEW

1.1 I N T R O D U C T I O N

The vast majority of research articles and es- among the country’s living patterns. People
says in this book deal with one or more as- and industry have moved from the so-called
pects of what has been called the art and rust belt to the sun belt. The hotel business
science of modern hotel management. It has been active in reborn and reconstructed
should be noted that the word modern can be central cities. The explosion of technology
loaded with the potential of much misunder- and information-based companies has con-
standing. Hotels are changing and will con- centrated human endeavor in technological
tinue to change. As a result, the techniques of corridors in California, Massachusetts, Wash-
management of modern hotels must adapt to ington, Texas, and North Carolina, to name a
changing circumstances. Subsequent sections few such places. It can be safely said that
of this book are designed to help the student where jobs are and major concentrations of
and practitioner discover information, meth- economic activity occur, hotels will follow.
ods, and techniques for dealing with these
changing circumstances. Among other current and ongoing influ-
encers of hotel design, construction, market-
᭤ INFLUENCES ing, and operation are the following. Note:
This list is neither exhaustive nor exclusive.
Like many other American businesses, hotels
• Demographics play a major role and will
have been affected by shifts in emphasis continue to be influential in the foresee-
able future. As the baby boom generation

1

2 Chapter 1 ᭿ Overview

and its children mature, the population of sorts—a modern incarnation of the time-
the country will for many years be older, share properties of several decades ago.
healthier, and better educated than previ- Because these are being developed and
ous generations. These facts will present operated by name hotel companies and
new challenges and opportunities to all are marketed to the affluent, healthy,
business managers. well-educated population segment, resort
managers have had to absorb new mana-
• Technology—in the form of computers, gerial realities.
communication, personal devices, and
laborsaving mechanical equipment—has • The well-documented change in the com-
had and will have a major effect on the plexion of the national economy from one
way in which hotels are managed and op- that emphasizes goods and, to a lesser ex-
erated. The speed with which information tent, natural resources to one that empha-
is accumulated, stored, manipulated, and sizes services has kindled new ideas about
transferred is such that today most travel- the way in which we manage the design
ers expect that the hotel rooms they rent and delivery of these services. Hotels,
will allow them to be as productive as restaurants, and travel services are now
they are in the office or at home. Increas- seen as unique entities that dictate special
ingly, with portable computing, personal kinds of managerial techniques and
data assistants (PDAs), wireless commu- strategies.
nication, and virtually everything some-
how connected to the Internet, hotels • Changes in people’s travel patterns have
must provide services and access that al- altered the way we manage our hotel
low guests seamless transition from the properties. Deregulation of the airlines
business, travel, or home environment to has driven a change in the way millions of
that of the hotel. Increasingly, entertain- people travel each year, given the hub-
ment must be fused with communication and-spoke design of airline services.
and productive processes. Many hotel companies are now locating
major hotel properties adjacent to hub air
• The concept of market segmentation, or transport facilities, taking advantage of
ever-increasingly finely tuned market def- the fact that business travelers may not
initions, will dictate hotel structures and need to travel to a central business district
organizations, and management tactics (CBD) to accomplish their purpose in a
designed to address those market seg- given area. Meetings and conferences can
ments have become even more important now be scheduled within a five-minute
to the management of hospitality service limousine ride from the air terminal, and
businesses. With the increased power in the business traveler can be headed for
the information and data manipulation his or her next destination before the day
realm, hotels have available to them ever- is over without having to stay overnight in
expanding databases about guests and are a CBD hotel.
creating new products to attract those
markets. • New patterns of investment in hotel facili-
ties have emerged in the last two decades,
• One of the effects of the aging demo- and more attention is now paid to achiev-
graphic is the emergence of vacation re- ing optimum return on investment. Be-

3Section 1.1 ᭿ Introduction

cause people from outside the hotel in- stable, consumer spending patterns and high
dustry are now participating in its finan- employment growth had not materialized,
cial structuring, hotel operations are no particularly in light of corporate layoffs and
longer dependent on the vision of a single the ongoing nervousness of consumers about
entrepreneur. Managers now must design whether or not their financial wherewithal
tactics and strategies to achieve hereto- was safe.
fore unanticipated financial goals. The
same trend has also altered the complex- Now consider late 2000, when the third
ion of management and organization of edition of this book was being written. Unem-
the modern hotel. This is especially true ployment was at an all-time low; the Dow
of publicly owned hotel firms, where Wall Jones Industrial Average was between 10,000
Street stock analysts heavily influence and 11,000; hotel occupancies had stabilized
stock prices through expectations of nationally in excess of 70 percent; and the fed-
quarterly revenues and profits. This puts eral government was running a surplus for the
pressure on hotel companies and their first time in the memory of most.
operations managers to perform, on a
quarterly basis, in a way contrary to many Then what happened? The terrorist at-
managers’ instincts. tacks in New York and Washington, D.C., in
2001 changed the face of all business and
Most of the foregoing issues and influ- travel, immediately and probably for the fore-
ences still operate (to a greater or lesser ex- seeable future as well. Major airlines are in
tent) on the organizational structures and bankruptcy; hotels are struggling to achieve
strategies of the modern hotel. Since the last profitable occupancies; business travel is
edition of this book, however, other phenom- down; the high-tech stock market bubble
ena of an economic, cultural, and social na- burst; the country is at war in a number of lo-
ture have come to the fore, complicating our cations; security has made travel more diffi-
view of hotel management. This furthers the cult, if not actually annoying; and people are
argument that the hotel industry is a part of nervous. Join this with an imbalance of trade,
the greater economy and at the mercy of ele- the outsourcing of jobs, and the largest federal
ments often completely out of its control. deficits in history, and the face of the economy
is challenging. This translates directly not only
The cyclical nature of the U.S. and inter- to business travel but personal and recre-
national economies has recently affected ational travel as well. Finding ways to operate
significantly hotels’ ability to respond to profitably in such an environment is the job of
changing circumstances. In early 1993, for in- the next generation of hotel operators.
stance, employment growth was stagnant; cor-
porate profits were low; the expansion of the Among the predictions I made in the pre-
gross national product (GNP) was only a mar- ceding edition was that cultural diversity will
ginal percentage above previous years; and play a role in the management and organiza-
travel in most segments was down due to cor- tional structure of the modern hotel in the
porate restructuring, downsizing, or reorgan- United States. As surely as living patterns,
izing. Vast layoffs in the hundreds of economic cycles, and market segmentation
thousands had been announced every month. have influenced the hotel industry, so will the
While fuel prices continued to be relatively change in ethnicity of the workforce. The cul-
tural backgrounds that an increasingly diver-
sified workforce will bring to hotel operations

4 Chapter 1 ᭿ Overview

may be seen as a problem or a challenge—or John Dew, formerly president of Inn Ven-
both. To most operators, it will be seen as an tures, a regional hotel management and de-
opportunity to demonstrate to an increasingly velopment company that has built and
diverse clientele that hotel companies are operated many Marriott products, in addition
committed to hiring and training a workforce to a proprietary hotel product, provides an in-
structure that mirrors society. I see no reason sider’s view of the steps needed to bring a ho-
to change that prediction now; if anything, ac- tel from conception to construction and
culturation of the hospitality business will operation. This unique view of hotel opera-
accelerate. tions connects the concept of hotel develop-
ment with the realities of day-to-day
The legal and regulatory environments operation. It should help aspiring managers
are increasingly important to all business understand how the intricacies of the devel-
managers, and hotel operators are no excep- opment process may influence the marketing
tion. Increasingly, operators must be aware of and management of the hotel.
and alert to realms of risk that can engender
lawsuits against them. Several articles and es- Peter Cass offers the reader insights,
says in this edition highlight these threats to heretofore unavailable in books of this nature,
hotels and their guests. It should be noted that into independently branded hotels that associ-
present-day security concerns also have sig- ate to provide market strength. He makes the
nificantly affected the ways in which hotels case that the future success of independent
are operated. Awareness of the risk environ- hotels is linked to their ability to find ways to
ment and the regulatory realm are factors maintain their independence while sustaining
that affect a hotel’s ability to compete in the competitive advantage in the luxury segment.
early part of the twenty-first century. Essays
and articles in the security section and the hu- Because new construction of hotels di-
man resources section address this issue. minished greatly after 9/11 but firms still
needed to grow, rebranding existing proper-
᭤ INTRODUCTORY ties generated a lot of growth activity. Re-
READINGS branding is a complicated process that must
be accomplished within critical time frames to
I have attempted in this edition to present coincide with marketing, financial, and opera-
tional variables. Tom Dupar is a seasoned vet-
new and (sometimes) different takes on the eran at this fascinating and important activity
hotel business. This section is also used to ex- and has participated in rebranding operations
plore ideas that are new to the management around the world. His essay on the intricacies
process, and that—who knows?—may never of rebranding was a mainstay in the previous
completely catch on. Rather than focus exclu- edition of this book. Today’s economic cir-
sively on the operations of the major chains, cumstances are different, and Dupar’s busi-
the readings here are from the perspectives of ness has changed its focus to opening new
operators, leaders, and experts such as re- major projects. His piece serves as a useful
gional operators, major industry consultants, companion to that of John Dew, and the two
and independent branded hotels. should be read together, with an eye toward
comparing Dew’s smaller project focus and
Dupar’s large projects.

5Section 1.2 ᭿ The Hotel Development Process

Perhaps proving the axiom that “every- suggested readings for the student who would
thing old is new again,” the concept of health like to gain more in-depth knowledge about
and wellness spas as a hotel and resort prod- the hospitality industry as a whole and spe-
uct has enjoyed a resurgence. Once the cific historical antecedents. In particular, the
province of high-end hotels and resorts, the books by Hilton and Jarman look closely at
idea of being pampered in a spa has been the intermachinations of the establishment by
added to the service mix in many more mod- two early pioneers of the industry, one of
est hotels and resorts. While the big-name whom, Conrad Hilton, lives on in an interna-
spas at five-star properties still set the stan- tional, publicly traded company operated by
dard for pampering and pricing, the comfort one of his sons. E.M. Statler’s contributions to
of personal service in less lavish spas seems to the modern hotel business are legendary in
appeal to the modern traveler as well. Peter that he is generally credited with founding
Anderson’s overview of the spa industry pro- and operating the first commercial hotel con-
vides insights into this fascinating service cept that recognized the realities of the early
product. business traveler at the beginning of the twen-
tieth century. The suggested articles are
In addition to products, building, and re- drawn from recently published historic
branding, I have also chosen to include in the overviews of the hotel side of the hospitality
section two recently reviewed and studied industry in the United States. They also high-
ideas that may or may not be adopted across light other major forces in the development of
the industry. the modern hotel business.

At the end of this section are a number of

1.2 T H E H O T E L D E V E L O P M E N T P R O C E S S

John Dew

᭤ INTRODUCTION • Who owns it?
• Where did they get the money to build it?
The bulldozers are working and a construction • How long does the process take from idea

crane is being erected on that vacant lot you to grand opening day?
pass each day going to and from home. The • Who selects the architect, the engineers,
sign on the fence states that a new hotel is be-
ing built with a planned opening date of spring and the interior designer?
2007. If you have ever wondered just how that • Who manages the myriad details that go
hotel was created, you may have wondered
about some or all of the following questions: into the development of a new hotel?
• Who will manage the hotel once it’s
• How did someone select that particular
vacant lot? open?

• Who actually creates a new hotel? We hope to address these and other ques-
tions you may have in this chapter.

6 Chapter 1 ᭿ Overview

᭤ THE DEVELOPMENT analysis of the site by an objective third party.
COMPANY Companies offer hotel feasibility studies for a
fee and are experts in a particular market, or
The developer is the entrepreneur, the risk developers may use the consulting group of
one of the major public accounting firms.
taker, who originates the idea for the hotel. De-
pending on the business structure selected, the The company retained to do the feasibil-
developer often puts his or her personal wealth ity study can spend up to several months gath-
at risk when engaging in a hotel project. The ering detailed data to see if, in their opinion, it
developer, along with a small staff of people, makes economic sense to build the hotel.
networks with commercial real estate agents Their conclusion offers an objective third-
on the lookout for a suitable hotel site. De- party opinion as to whether the project is
pending on the type of hotel to be developed, a feasible, hence the term feasibility study. Gen-
site of at least two to four acres is required (for erally, the feasibility study considers, evalu-
comparison, an acre is roughly the size of a ates, and makes recommendations about the
football field). This property must be zoned by project based on the following variables:
the city for a hotel, be visible from a freeway or
major street arterial, and have city approval for The Site
such construction activities as curb cuts, left- • Proper zoning
hand turn lanes, and delivery truck access. • Size in square feet/acres
Commercial realtors offer sites for the devel- • Visibility from arterials/freeways
oper’s consideration that include maps, aerial • Traffic counts/patterns
photos, and proof of hotel zoning. • Accessibility from streets, freeways, air-

Sometimes the developer views potential ports, train stations, etc.
sites by driving around the neighborhood • Proximity to where potential guests live,
within five miles of the site or touring multi-
ple sites by helicopter, noting where the po- travel, or work
tential guests live and work and where • Barriers that discourage competition
potential competing hotels are located.
coming into the market, if any
The price per square foot of the land is • How adjacent property and businesses
considered. The higher the cost of land, the
higher the rates the hotel will need to charge. are utilized
Is the price too high for the average daily rate • Master area development plans
(ADR) in this particular market? Is it too • Local permitting process and the degree
low? Or is it acceptable? This is determined
when the hotel financial pro forma budget of difficulty for that particular city
document is created. • Impact fees charged by the city

᭤ THE FEASIBILITY STUDY The Economy of the Area
• Major employers, government agencies
When the developer selects a site, a feasibil- • Business trends for each employer/agency
• Hotel needs and the demand for each
ity study is often commissioned to obtain an • Leisure travel demand in the area

7Section 1.2 ᭿ The Hotel Development Process

• Nearby tourist attractions Ten-year Projection
• Visitor counts • Occupancy projection by year
• Conventions, trade shows, and meetings • ADR by year
• Estimated cash generated for debt
history • Estimated cash generated for distribution

The Hotel Market to investors
• The competitors, both existing and • Estimated cash-on-cash return (after-tax

planned income divided by equity invested)
• Historical occupancy of hotels in the area • Overall projected yield
• Historical average rate • Projected internal rate of return
• Proprietary data on area travel • Net present value of the project over each

Identification of Which Hotel Market of the next ten years
Segment to Serve
• Full service Once the feasibility study is completed,
• Limited service the developer is prepared to move forward
• Extended stay with the project. Often, at this stage of the
• Luxury process, the developer purchases an option on
• Midprice the land to tie it up until the remaining devel-
• Economy opment steps can be completed—and to pre-
• Budget vent the competition from purchasing it.

Selection of Appropriate Hotel Design ᭤ CREATION OF THE
• High-rise OWNERSHIP ENTITY
• Midrise
• Garden apartment style An ownership entity (note that this is differ-
• Hybrid design
ent than and separate from the development
Selection of Appropriate Hotel Brand company) must be created to hold title to the
• Franchised (Marriott, Sheraton, Hyatt, land—and the hotel, once it’s built. Consider-
ing the limitation of liability to the investors,
etc.) tax consequences, estate implications for the
• Licensed (Best Western, Guest Suites, investors, and potential requirements of the
mortgage lender, a business structure is se-
etc.) lected, normally in one of the following forms:
• Independent
• Independent with strategic market affilia- • Limited liability company (LLC)
• Limited partnership (LP)
tion (Luxury Hotels of America, Historic • S corporation (formerly known as a
Hotels of America, etc.)
Sub-S corporation)
• C corporation

8 Chapter 1 ᭿ Overview

᭤ THE DEVELOPMENT franchise fees, royalty fees, and marketing/
AGREEMENT miscellaneous fees as part of its agreement
structure with the operating company. Con-
The newly formed entity now enters into a sideration must also be given to the brands al-
ready represented in the target market that
development contract with the development may be available for franchise. The franchise
company to take the project to completion. company is approached and a franchise is re-
The development company charges a fee, ap- quested, with the feasibility study offered as
proximately 3 percent of the total project backup for the request.
cost, for this service. The agreement generally
covers such variables as: The next step is for the franchise com-
pany to conduct an impact study of the mar-
• Selection of architect/engineers ket. This considers such matters as possible
• Selection and supervision of a general negative impact on existing hotels that carry
the franchiser’s flag. If the impact is judged to
contractor be insignificant, a franchise is usually granted
• Processing all building and occupancy to the ownership entity for a one-time fee of
about $400 per room, depending on the fran-
permits chise selected, with continuing royalty and
• Raising all the equity money from in- marketing, usually based on a percentage of
hotel revenue.
vestors
• Securing a construction mortgage loan ᭤ SELECTING AN
• Selecting a franchise company ARCHITECT
• Securing the franchise
• Selecting an interior designer that meets Because the final product of this process is a

franchise company requirements building the operator has to run as a hotel,
• Purchasing all opening furniture, fixtures, the architect’s experience in designing hotels,
his or her experience with the prototypical
equipment drawings of the franchise selected, the fee,
• Selecting a management company to op- and his or her on-time record must be con-
sidered. Architect fees can run up to 5 per-
erate the hotel cent of the total project cost but are often
• Liability for cost overruns negotiated down, if the project is big enough.
The firm’s experience and record on similar
᭤ SELECTING A FRANCHISE projects are critical. The architect does not
have to operate the hotel when it is com-
Depending on the type of hotel to be built pleted. The developer wants the architect to
design a hotel that will be easy to operate and
(based on the feasibility study), the developer maintain.
recommends a franchise company to the ho-
tel owner. A major consideration is the best
franchise brand for the market segment to be
served. Each franchise company has different

9Section 1.2 ᭿ The Hotel Development Process

᭤ SELECTING A GENERAL and conditions of a construction loan can vary
CONTRACTOR widely depending on the individual lender.
Important terms that can affect the cost of the
Major consideration are the quality and reli- loan include:

ability record of the general contractor and • Personal guarantees by developers and/or
the firm’s use of and relationships with the equity partners/investors
many subcontractors needed for a project as
complex as a hotel. Again, experience in • Loan origination fees
building the hotel type is important. It is
hoped that the general contractor has learned • Interest rate
from any mistakes made in building similar
hotels. The general contractor and architect • Required loan-to-value ratio
often bid the project as a team; this helps the
developer determine the final cost. Often, up • Terms of repayment
to a 10 percent contingency cost that allows
for unforeseen circumstances is built into the • A requirement that interest/taxes be held
project bidding process. in reserve

᭤ FINANCING THE • Required debt service coverage ratios
PROJECT
• Length of the construction loan; length
The following variables must be determined and costs of extensions

to qualify for financing: These are only a few of the considerations
that must be analyzed when selecting a
• The cost of the land lender. The developer, on behalf of the own-
ing entity, then approaches a number of lend-
• Design and construction cost of the ing institutions. The lending institutions
building analyze the deal and offer a proposed term
sheet that answers all of the borrowers’ ques-
• The cost of furniture, fixtures, equipment, tions. This allows the borrowers to select the
and opening supplies lending institution with which they wish to
work. The lender then commissions an ap-
• Pre-opening marketing and labor costs praisal of the project by an independent
appraisal company such as Hospitality Valua-
• A six-month operating capital cash tion Services (HVS). Based on the appraisal,
reserve the lender issues a loan commitment for the
project that usually offers up to 60 percent of
The sum of these constitutes the total the project cost. The balance must be raised as
cost of the project for purposes of securing equity from investors.
financing.
᭤ RAISING THE EQUITY
With this information, the ten-year oper- INVESTMENT FUNDS
ating pro forma budget is updated to reflect
actual costs. It’s now time to go to the money With the bank committed to about 60 per-
markets for construction financing. The terms
cent of the cost, the remaining 40 percent

10 Chapter 1 ᭿ Overview

must be raised in equity commitments by in- ᭤ SELECTING THE
vestors. To pursue these, the developer pre- MANAGEMENT
pares an offering solicitation document that COMPANY
meets current securities and exchange law.
The nature of this document depends on the Often even before the construction activity
type of business entity that was formed. For
limited partnerships or limited liability com- commences, the owning entity selects an ap-
panies, a private placement offering circular propriate management company to manage
and project description is prepared. For S or the pre-opening, marketing and sales, selec-
C corporations, stock offerings are prepared tion and training of the opening staff, prepara-
for sale consistent with applicable federal and tion of the operating budget, and day-to-day
state securities laws. operations once the hotel is opened. Manage-
ment companies charge 3–5 percent of rev-
The developer now contacts money enue for this service. In recent years,
sources that have risk capital available to in- management companies have charged 3–4
vest. These can include: percent of revenue and 2–3 percent of gross
operating profit so they can be measured and
• Individual investors evaluated on both sales and profitability.

• Private asset managers The franchise company may offer to pro-
vide management services to franchisees.
• Opportunity fund managers Marriott International, Inc., for example,
manages about 50 percent of all hotels that
• Venture capital fund managers carry the Marriott flag under 20-year con-
tracts. Independent management companies
These potential investment sources are manage the remaining hotels under long-term
offered the opportunity to invest in the hotel. management contracts of up to ten years’ du-
Based on their study and evaluation of the re- ration, often with several five-year renewal
ports, documents, and studies detailed above, options.
they decide whether or not to offer funding to
the developer. ᭤ CONCLUSION

Once the loan is secured, the equity This is a largely linear explanation of the
raised, and the building permit issued by the
city, the land purchase option is exercised and complicated process that a developer goes
the purchase is completed. Then the 12–16- through in order to create a hotel. It has been
month construction process begins. If the ar- described in a step-by-step process, but in re-
chitect’s plans work as intended, if the general ality, many of the steps are carried out con-
contractor has no problems with subcontrac- currently to save time (and money).
tors, unions, or permits, if all the furnishings, Nevertheless, the hotel development process
fixtures, and equipment arrive on time, if the takes about three years from original concep-
weather cooperates, and if the employment
market is such that human resources are suf-
ficient to open a hotel, then congratulations!
The hotel will open on time.

11Section 1.2 ᭿ The Hotel Development Process

tion to first guest. It is important to remember the area. The RFP was sent to many major ho-
that during the initial stages of the process, tel companies and commercial real estate
the developer can have as much as $1 million brokers, asking prospective buyers to submit
(U.S.) or more at risk in the process before a a purchase price bid along with a statement of
final go/no-go decision is reached. Only after the buyer’s development history and ability to
the project is approved and all financing is in develop a hotel of the type envisioned by the
place can the developer start to recover up- Commission. It listed a closing date by which
front costs and collect development fees. all bids had to be submitted.

Hotel development with its component An area commercial real estate broker
parts of hotel feasibility studies, hotel ap- contacted a hotel development and manage-
praisal, hotel real estate finance, and hotel ment company with a long history of devel-
management are all among the career oppor- oping and managing extended-stay hotels in
tunities available to hotel and restaurant ad- the Pacific Northwest, including a property
ministration graduates. located in a similar setting to that being of-
fered for sale. The commercial realtor offered
᭤ PUTTING IT ALL to represent the developer in negotiations
TOGETHER—THE STORY with the City Development Commission,
OF AN EXTENDED-STAY which would be paying the real estate com-
HOTEL DEVELOPMENT mission on the sale. An agreement was
PROJECT reached with the commercial real estate bro-
ker to represent the buyer to the seller, and
The City Development Commission in a Pa- the developer went to work in preparing a
proposal.
cific Northwest community purchased a 1.55-
acre parcel of riverfront land in the The developer conducted a feasibility
downtown area. The land was previously con- study to see all of the conditions in the mar-
taminated with industrial pollutants that ketplace that would be encouraging or dis-
made the parcel unsafe for habitation and couraging to this development project.
construction. The City Development Com- Studies were conducted to estimate how
mission used state, local, and federal grants to many room-nights were being sold within a
have the land decontaminated, created a mas- five-mile radius, how many extended-stay
ter plan for the area, and then offered the par- room-nights were available in the market,
cel for sale and development. how many hotel rooms existed, and how
many were being planned over the following
The City Development Commission is- five years. From this, the developer was able
sued a request for proposal (RFP) that out- to estimate the number of extended-stay
lined the asking price of $2,076,240 ($30/sq. room-nights available needed to produce an
ft.) for the land and the design requirements 82 percent occupancy with an average daily
set down by the Commission for a building room rate of $141 when the hotel achieved
that would fit the intended look and feel of stabilization three years after opening. That
provided the basis for a ten-year revenue
estimate.

12 Chapter 1 ᭿ Overview

The developer proposed a nine-floor, 258- day operation of the hotel once it was
suite extended-stay hotel with an indoor pool, opened. The arrangements called for the man-
spa, and exercise facility, a guest laundry, of- agement company to be paid 3 percent of rev-
fices, meeting facilities, and a three-floor enue and 2 percent of the net operating
parking garage with parking for 193 automo- income for management services.
biles, all at a total cost of $38 million, or
$147,286 per suite. The ownership LLC then contacted a ma-
jor hotel company and applied for a franchise
The $38 million construction budget was to allow the development and operation of an
broken down as follows: extended-stay hotel. A 20-year franchise was
granted with a fee of $400 per suite or,
Land 6.0% $102,800. This was to be followed by a 5 per-
Construction 66.0% cent royalty and a 3 percent advertising fee
Office Equipment once the hotel was open and operating.
Furniture, Fixtures, Equipment 1.4%
Architecture/Engineering 7.4% The developer, acting as agent for the
Permits/Fees/Environmental 2.8% owner, prepared a private placement memo-
Appraisal/Legal/Tax/Insurance 2.8% randum document seeking investments from
Pre-Opening Expenses 1.3% accredited investors. These investors were pri-
Construction Loan Fee 1.3% marily defined as people with a net worth of
Developer Fee 1.1% $1 million, or those with an income in excess
Construction Interest 2.8% of $200,000 over the previous two years and
Working Capital 2.8% expecting an income in excess of $200,000 in
Contingency 2.1% the current year. (Note: Additional entities
2.2% may also be defined as accredited investors by
Total the Securities and Exchange Commission.)
100%
The private placement memorandum of-
The opening date for the hotel was pro- fered $100,000 units of ownership to accred-
jected at 27 months from the date of proposal ited investors, guaranteeing a 9 percent priority
acceptance. return on the investment and a combined 50
percent ownership in the hotel. A group of ini-
The City Development Commission tial investors retained the other 50 percent in
awarded the project to the developer, and exchange for putting the project together. This
work began. effort was successful in raising 40 percent of
the total cost of the hotel in anticipation that a
First, an ownership limited liability com- lender would provide the remaining 60 percent
pany (LLC) was formed as the ownership en- in the form of a construction loan. In addition
tity that would hold title to the hotel. to the priority return, investors could expect to
participate in any future capital gain realized
The LLC, in turn, entered into a develop- should the hotel be sold.
ment and construction management agree-
ment with the development company to The development company, continuing
manage the arrangements for financing and to function as agent for the owner, then
construction of the hotel. sought a commercial bank to provide three-
year construction financing for the project.
The developer, as agent for the ownership
LLC, also entered into a hotel management
contract with a management company to
manage the pre-opening marketing, pre-
opening hiring and training, and the day-to-

13Section 1.2 ᭿ The Hotel Development Process

As $22,800,000, or 60 percent, of the $38 mil- ᭤ POSTSCRIPT
lion development cost was to be borrowed,
only major banks were considered as Three years after the hotel opened, the own-
prospective lenders. The size of the construc-
tion loan was above the lending limits of ership LLC had the obligation to secure per-
most small regional banks. After a precon- manent financing on the hotel to replace the
struction appraisal by a third-party appraisal construction loan. The September 11, 2001,
firm chosen by the lender confirmed the terrorist attacks on the World Trade Center
value at $38 million upon completion of con- and the Pentagon slowed travel throughout
struction, and for an origination fee of the United States. As a result, the hotel did
$400,000, a three-year construction loan was not achieve the projected occupancy or av-
secured. The terms allowed the developer, as erage daily rate during the three-year con-
agent for the owner, to draw down the loan struction loan period. An appraisal that was
every 30 days after providing proof that primarily based on the hotel’s trailing 12-
funds had been properly disbursed in the month net operating income produced a
construction process. The loan documents set value about $2 million below the original
an interest rate and also required that the construction cost. The bank that had pro-
ownership LLC seek a permanent mortgage vided the construction loan notified the
prior to the three-year expiration date on owners that they did not wish to provide
the construction loan. permanent financing under these circum-
stances. The owners were forced to conduct
The development company then negoti- a search for a new mortgage bank. They
ated with and selected a general contractor were able to find a mortgage, but only after
with significant hotel construction experience buying down the loan by $2 million to bring
who acted on behalf of the developer, as the loan-to-value ratio back to 40 percent
agent for the owner. The general contractor equity and a loan at 60 percent of the ap-
then selected design-build subcontractors and praised. This illustrates the risk that devel-
an interior designer to select colors, fabrics, opers face when entering into a hotel
furniture, fixtures, and equipment to meet the project.
hotel franchise design requirements.
However, as hotel values historically peak
Building permits were applied for, and and decline on about a ten-year cycle, the
the building design was presented to the City owners look forward to the option of selling
Development Commission for its approval, the hotel on the next peak, which will allow
along with other groups with a stake in the them to capture the original projected return
appearance of the finished building in rela- through capital appreciation. Hotel develop-
tion to the area and neighborhood. With all of ment and ownership is a high-risk, high-
these approvals in place, construction com- reward enterprise.
menced, and the hotel opened two years later.

14 Chapter 1 ᭿ Overview

1.3 H O W W E L L D O E S T H E B R A N D E D
DISTRIBUTION COMPANY ALLOW
INDEPENDENT HOTELS TO COMPETE
WITH THE CHAINS?

Peter Cass

Dramatic changes have affected the hotel in- • The rapid advancement and availability of
dustry over the past 30 years. These changes technology. This includes internal hotel
have had a disproportionately high bearing operating systems, revenue management,
on the independent hotel owner, who, in the direct-to-consumer communications and
face of increasing pressure from large, well- booking technology (Internet), marketing
funded chains, struggles to maintain inde- technology (customer databases), and
pendence and to compete on the basis of telecommunications and automated sales
distinctive hospitality and character. systems that enable central sales offices to
become revenue producers.
Several organizations provide indepen-
dent hotels and resorts with reservations and • The growth and importance of global
sales services. As competition has evolved and brands. Recognized brand names and
intensified, some of these organizations have brand attributes are important in reach-
modified their structure and enhanced their ing diverse customer segments and in cre-
services to meet the changing needs of inde- ating customer loyalty.
pendent hotels and competitive market dy-
namics. Today, independent hotels may choose • Consolidation of multiple brands under a
from among more than 20 such organizations single global management. The manage-
delivering varying degrees of competitive ad- ment and leveraging of multiple brands
vantage and ownership independence. use similar technology platforms and
shared sales and marketing infrastruc-
᭤ A NEW MARKET MODEL tures to consolidate and direct consumer
demand.
In the new millennium, the face of the global
Some established ways of doing busi-
hospitality market continues to change at a ness—long-term, high-fee management con-
rate never before seen. Four factors con- tracts and franchises, a focus on traditional
tribute to this rapidly changing environment: distribution channels, and traditional hospital-
ity industry marketing techniques—are no
• The broadening and diversification of the longer effective in the new consumer-focused
global consumer market. Both the demo- market. More and more hospitality marketing
graphic and psychographic characteristics budgets are being directed toward technology-
of the global consumer market are grow- enabled customer booking and communica-
ing and changing radically. tion; this shift away from traditional hospitality
marketing techniques is expected to evolve

15Section 1.3 ᭿ How Well Does the Branded Distribution Company Allow Independent Hotels to Compete?

over several years and involve millions of U.S. brand name and established facility and ser-
dollars in telecommunication, e-commerce, vice standards as well as trained operations
data warehousing, and one-to-one marketing management and reservation and marketing
investment. The independent hotel or resort services—for a significant fee, usually a per-
and many small branded management compa- centage of gross sales. The pressure to grow
nies may not be able to fund this requirement. also fostered the development of the fran-
chise concept and franchise system in North
However, this shift will not affect all inde- America. The franchise differs from the man-
pendent hotels and resorts simultaneously. agement contract in that the owner is respon-
The first wave of change will hit the global sible for operations, including meeting the
business and city hotel market. This is prima- franchise standards.
rily because of brand competition and the fact
that the business travel distribution network The growth of management and franchise
is more structured and driven by multina- contracts has been remarkable, and today, ac-
tional corporations desiring lower and more cording to a recent study, 75 percent of the
predictable costs. The second wave will affect hotel rooms in North America are covered by
the leisure market, and the changes could fol- some form of branded franchise or profes-
low quickly. Leisure travel content, including sional management agreement (Travel Re-
packaging on the Internet, will increase rap- search International, 1999).
idly as the presently fragmented leisure travel
distribution network becomes more unified These new business structures continued
and efficient through consolidation. to threaten the traditional independent owner
by accelerating the growth of the chains’ share
The emergence of e-commerce modes in of the lodging market. In response, the mar-
the hospitality industry is not eliminating the keting/referral organizations formed in the
intermediary and empowering the individual 1960s began to offer a wider range of services.
property, as once thought; instead, it is creat- While these additional offerings leveraged
ing new, more powerful intermediaries. Some linkages to the global distribution systems and
of these evolve from the hospitality industry, led to strong relationships with travel agents,
while others are opportunistic e-commerce the consumer was largely ignored, and the or-
companies. ganizations did little to generate consumer
brand awareness.
᭤ MANAGEMENT
COMPANIES AND In the United States, strong consumer
FRANCHISES branded operators are attracting increasing
amounts of capital to fund their growth at the
In the 1970s, hotel chains continued to evolve expense of unbranded operators (Pricewater-
houseCoopers, 2000).
as the need for capital to invest in additional
properties restricted growth opportunities. ᭤ BRAND DEVELOPMENT
This pressure bolstered the proliferation of
the management contract, whereby the chain As the consumer market became more
offers the hotel owner the rights to use its
diverse and the hospitality product more

16 Chapter 1 ᭿ Overview

segmented, branding became increasingly im- ships operated best in a market environment
portant. By the late 1980s, without a recog- that was stable, somewhat homogeneous in
nized brand affiliation or a close relationship terms of demographic market segmentation,
with the lending community, owners/develop- and where travel influencers played a domi-
ers found it difficult to obtain permanent fi- nant role in transient business, group, and
nancing on a new hotel or resort. Lenders, leisure travel. Reservation affiliations are
believing that an established brand provided most effective in regional hospitality markets
greater economies of scale and established in- that do not have multiple brand competition
frastructure, opted for the lower-risk alterna- and when the goals and objectives of the
tive. In this brand-driven environment, the reservation organization are in alignment
independent hotels’ distinctive style and char- with the goals of the independent hotel own-
acter became a competitive advantage, but ers. A contributing element to the attractive-
only if they were able to meet recognized stan- ness of reservation affiliations has always
dards. As a result, the need for independent been the networking and camaraderie oppor-
hotels to be associated with a clearly defined, tunities for the professional management at
trusted brand became more critical than ever. independent hotels.

In the late 1990s, independent hotels, par- Reservation affiliations focus on tradi-
ticularly those in Europe, began to face the tional channels of distribution. Access to the
daunting costs of upgrading their technologi- Global Distribution Systems (GDS) is no
cal infrastructure and facilities to accommo- longer a competitive advantage; the GDS is a
date changing consumer needs. Such upgrades universal pipeline. The new competitive play-
as new property management systems, high- ing field is proprietary distribution channels
speed Internet access, two-line phones, in- leveraged by consumer segmentation, e-com-
room faxes, and leisure and health facilities merce technology and partners, and innova-
became critical to maintaining competitive- tive customer management programs.
ness. When coupled with ever-increasing costs
of consumer marketing, these costs put un- In the new technology-driven and con-
precedented strains on independent hotels’ fi- sumer-empowered global market, the strength
nances. As a result, these hotels became and effectiveness of reservation affiliations
increasingly focused on leveraging greater re- are challenged by new market and operating
turns from their reservation affiliation. imperatives. The cost to compete against
chains will grow exponentially. As competition
᭤ RESERVATION intensifies, it is probable that local and re-
AFFILIATIONS—A gional market share at independent hotels and
CHALLENGE TO resorts will be drawn off by local and regional
EFFECTIVENESS licensees of strong global brands. Independent
hotels, therefore, need to draw more national
The relationship of independent hotels and and international business to fill occupancy
gaps. This requirement runs counter to the es-
resorts to reservation affiliations has been tablished business model and capabilities of
long and generally successful. These relation- reservation affiliations.

The average room-night contribution of
reservations companies to affiliated inde-

17Section 1.3 ᭿ How Well Does the Branded Distribution Company Allow Independent Hotels to Compete?

pendent hotels is less than 5 percent of avail- necessary to increase average room-night
able rooms (Preferred Research). contribution to affiliated independent hotels
to 15 percent—an average growth per mem-
At least four emerging factors are chal- ber hotel of at least 200 percent over present
lenging the effectiveness of traditional reser- performance levels (Preferred Research).
vation organizations:
In response to this competitive environ-
1. The growing demographic and psycho- ment and the need for more cooperative and
graphic complexity of the global con- focused business relationships, a new hospi-
sumer market requires significant new tality business structure is evolving for all
expertise and resources in the area of seg- scales of hotels: the branded distribution
mentation and analysis. company.

2. The emergence of consumer direct-book- ᭤ CHARACTERISTICS OF A
ing Internet technology requires signifi- BRANDED DISTRIBUTION
cant new and ongoing investment. COMPANY

3. The new marketplace requires innovative The ideal branded distribution organization is
global brand management together with
resources to establish and maintain a a conventional equity company with owner-
brand in the face of intense competition. ship shared (in some cases) by the individual
To be competitive, a brand must attract hotel owners, who have direct input into the
new development and must therefore be corporation through an elected board of di-
strong enough to convince lenders to rectors. This ownership structure creates a
commit to permanent financing. Brand true operating partnership and a sharing of
management also includes loyalty pro- energies toward the common goal of creating
gram management and the development value through increased brand awareness and
of regional and global partners to room sales. Corporate profits must be ade-
strengthen and extend the effectiveness quate to maintain technical and managerial
of the brand. leadership and to support the shareholders’
investment.
4. The corporate objectives and governance
policies of traditional reservation organi- Unlike a reservations and representation
zations are influenced by the need to grow company, a branded distribution corporation
and meet shareholder profit require- owns and builds a branded distribution net-
ments. These goals for growth can be at work asset that, in turn, provides services as
odds with the goals and expectations of in- set out in the diagram below. The sole focus is
dependent hotel and resort members. performance for the affiliated independent
hotels and resorts.
The traditional reservation affiliations
must change not only their focus but also Joining such an organization is appropri-
their structure if they want to succeed in this ate for independently owned and managed
new competitive world. hotels and resorts that want to keep owner
control but require effective and low-cost
The traditional reservation organization
must be prepared to respond to competitive
challenges by expanding resources and skills

Table 1.1 Hospitality Structures and Corresponding Brands

Types of Representation Reservation Reservation/ Branded Flagged and
Business Firms (Group Services Sales Distribution Franchise
Structure Only Companies
Meetings Only) Affiliations Management
Companies

General • Primarily Trade-Focused • Consumer & Trade-Focused
Attributes • Primary Reservation Technology • Performance Focused
• Disparate range of abilities in: • Brand Management
• —Management Expertise and Depth • Quality Standards and Assurance
• —Marketing, Sales, and Reservation Support • Multiple Technologies
• Integrated Marketing and
• Technology Solutions
• Customer Recognition and
• Loyalty Programs
• Full-Service Provider
• —Purchasing, Technology
• —Recruitment, Training
• —Consultative & Design Services
• Management Expertise and Depth

Examples of ALHI Utell Flag Int’l Concorde Preferred Hotels Accor brands
Organizations, David Green Lexington Golden Tulip and Resorts Bass brands
Brands, and Helms Briscoe Pegasus/ Historic Hotels Worldwide Carlson brands
Management Hinton/Grusich Rezsolutions Leading Hotels (for profit) Cendant brands
Companies Krisam Supranational of the World Best Western Choice brands
TRUST Relais and Chateaux (not for profit) Four Seasons
Small Luxury Hotels Summit Hilton brands
Sterling Hyatt
SRS Hotels Mandarin
Steigenberger Marriott brands
Starwood brands
Wyndham

Relationship Client Client Member (some Member-Owner Licensee
of Hotel are Owners)
Owner to
Structure

Owner High High High High Low
Control

Room-Night Low Low Low-Medium High High
Production

Consumer Low Low Low High High
Focus

Overall Low Low Low Low High
Fees

18

19Section 1.3 ᭿ How Well Does the Branded Distribution Company Allow Independent Hotels to Compete?

distribution, global consumer brand aware- livery of an exceptional hospitality
ness, and group purchasing benefits without experience.
the encumbrances and costs of a traditional
hotel chain franchise or management con- • Common objectives: Both the owner and
tract. Above all, it promises the independent the branded distribution company enter
hotel awareness of, and access to, their target into the agreement with the same primary
consumer and rapidly emerging technology objective: revenue. The branded distribu-
through cooperative ownership. tion company receives no revenue if it
does not deliver to the hotel or resort.
Table 1.1 shows a summary of the key This shared goal strengthens and ener-
characteristics of the various marketing busi- gizes the relationship between the two
ness structures and suggests examples of cor- partners.
responding brands.
From a branded distribution company’s
᭤ THE BENEFITS OF A standpoint, this structure allows the brand to
BRANDED DISTRIBUTION expand faster because capital is not used to
COMPANY subsidize additional construction or to sup-
port an older business model. Instead, funds
This new business structure is attractive from are used to build and maintain an up-to-
date global distribution network and infra-
an owner’s or a developer’s standpoint for a structure composed of telecommunications,
number of reasons, including: e-commerce functions, reservations software,
data warehousing capability, and sales and
• Costs: First, it requires less up-front cash; marketing. The efficiency of the operation is
second, ongoing fees and reservation assured by a focus that is almost entirely on
commissions are significantly lower than the most important part of this business rela-
with either a pure franchise or manage- tionship—the generation of brand awareness
ment agreement. For example, a 9 or 10 and measurable room-night revenue for each
percent franchise fee in many cases affiliated hotel or resort.
equals 50 percent of gross profits.
Unlike hard flags, which focus primarily
• Contract terms: The terms are typically on hotel operations and asset management
shorter, easier to negotiate, and allow for such as the Marriott or the Westin, and reser-
substantial owner control over the opera- vation affiliations, which focus on professional
tion, style, and character of the hotel. As a camaraderie and traditional distribution chan-
result, conflicts can be avoided, and the nels such as the Best Western, the branded dis-
branded distribution contract can be tribution company is primarily market-
completed and signed in as few as 45 days. focused; its full attention is on customer and
travel influencer communication, relationship
• Marketing: It frees hotel management technology, and revenue streams. (Note: Travel
from the daunting and increasingly ex- influencers are the intermediaries between
pensive task of acquiring profitable new consumers and the travel product and include
customers and allows them to focus their travel agents, etc.)
attention and operating skills on the de-

20 Chapter 1 ᭿ Overview

In contrast, asset management, profitabil- ties may have to adopt and maintain specific
ity, and operating efficiency are the major quality standards. In addition, they may also
concerns of management companies, which be required to demonstrate their affiliation
tend to be public companies with stockholder with the branded distribution company
expectations that must be met. It is often the through using its logo on marketing materials
case that strategic asset management con- as well as participating in e-commerce and in-
cerns conflict with day-to-day tactical operat- ventory management initiatives.
ing needs. This is evident in Marriott’s recent
move to separate its ownership and operating However, these drawbacks can actually
divisions, to the benefit of both. enhance a hotel’s operations and market po-
sitioning while allowing the hotel to maintain
The same conflict can arise between the independent ownership and management.
independent owners of a hotel property, who
are focused on real estate concerns, and the ᭤ ENSURING COMPETITIVE
management company they hire. Such misun- ADVANTAGE
derstandings can sour what should be a mutu-
ally supportive relationship. The fact that Independent hotels face significant risk in to-
management contract fees are charged and
collected, even when the cash flow is negative, day’s marketplace. Given the advances in
does not create owner confidence in the part- technology and the profitability pressures put
ner. A franchise relationship can cause a sim- upon chain hotels by shareholders, competi-
ilar conflict and put a financial and operating tion for customers is intensifying. Keeping in
burden on an owner. step with competitive chain hotels presents a
significant challenge to independent owners.
In contrast, participation of independent To address this, they currently have several
owner/operators as shareholders in a branded options outside of the branded distribution
distribution company enables them to move company, including representation firms,
beyond these concerns and focus on their op- reservations services, flagged chains, and fran-
eration and the consumer—the source of chise management companies. However,
their revenue and the basis of their success. given the economic, societal, and technologi-
cal trends that are dramatically changing the
᭤ ARE THERE ANY hospitality industry, several of which are ana-
DRAWBACKS TO A lyzed in this book, many of these old-
BRANDED DISTRIBUTION economy options can offer only short-term
COMPANY? solutions to long-term competitive pressures.

The owners of property within a branded dis- A branded distribution company has an
inherent advantage going into this new com-
tribution company must relinquish a minimal petitive arena. Its sole focus is on customer
amount of control and decision making, acquisition and management, achieved
mainly in the areas of branding and quality through the development of new technolo-
assurance. In certain cases, member proper- gies. This competitive advantage extends to
the independent hotel aligned with a branded

21Section 1.4 ᭿ The Art and Science of Opening a Hotel

distribution company. By providing the inde- operating cultures in a cooperative business
pendent owner with a global brand and the relationship provides a model and formula
technology and expertise to acquire prof- for success.
itable new customers, the branded distribu-
tion company enables the hotel management Independent hotels and resorts that align
to focus its attention on the delivery of excep- themselves with a branded distribution com-
tional service and profits to the owners. This pany will not only continue to operate prof-
separation of skills, expertise, resources, and itably in the new global marketplace, but will
also flourish.

1.4 T H E A R T A N D S C I E N C E O F O P E N I N G
A HOTEL

Tom Dupar

If you ever have the chance to be involved The OPM oversees the following aspects
with opening a hotel, jump at the opportunity. of a project:
Opening a hotel is one of the most rewarding
jobs in the hospitality industry despite its frus- • Reviewing blueprints and specifications
trating and exhausting aspects. for the entire building

Walk into any hotel, anywhere, and look • Assisting with the creation of a model
around. Everything you see, hear, and feel, room
every detail, involved many people and
countless decisions. I have been an operations • Developing the pre-opening staff plan
project manager (OPM) since 1989 and have • Developing and managing the pre-open-
opened over 40 three-, four- and five-star ho-
tels around the world. From Guam to Malta, ing budget
Berlin to St. Louis, each project has been • Developing the operational supplies and
unique, each project has been the same, and
each has been professionally rewarding. equipment budget (OS&E)
• Overseeing the purchasing, warehousing,
The OPM is the third person hired, after
the general manager and the director of mar- delivery, and installation of the OS&E
keting. The role of an OPM is to pull together • Developing the interior graphics package
the visions of the architect, interior designer, • Coordinating the installation of third-
owner, operator, and others. When these vi-
sions are successfully melded, the hotel guest is party vendors
satisfied, the owner makes money, and the ar-
chitect and interior designer can add the proj- ᭤ BLUEPRINTS
ect to their list of successful accomplishments.
The OPM’s responsibilities start with the ar-

chitectural blueprints. The focus is to ensure a
good flow for guests, staff, and goods.

22 Chapter 1 ᭿ Overview

The bellperson bag storage room should on the outside of the room, which must meet
be located between the porte cochere (entry) ADA standards!
and the elevators and contain 1 square foot of
space for each guest room. ᭤ MODEL ROOM

If valet parking is offered, ensure that a Build a typical king and double/double guest
convenient cashier’s station is located near
the porte cochere. Arrange for a key rack to room close to the site so you can review every
hold the keys for each valet parking stall. single item in them. Are ample electrical and
telecom outlets placed exactly where the TV,
Given a 10,000-square-foot ballroom, the lamps, clock radio, mini-bar, coffeemaker, hair
catering department can sell functions for dryer, Internet access, and telephones are lo-
800ϩ for dinner. This requires 80 6-foot round cated so the cords are hidden? Are spare out-
tables, 800 chairs, a dais for the head table, a lets offered for guest use (computer, iron,
dance floor, and staging for the band. If sold etc.)? Is the closet rod hung so the ironing
for a 700-guest all-day meeting, the classroom board organizer and iron board fit in the
setup requires 1,400 linear feet of narrow ta- closet? Is the thermostat location convenient
bles and 700 chairs. A short theater meeting for guest access?
setup for 1,000 requires 1,000 chairs, a
podium, staging, and audio visual equipment. Are the case goods (dresser, nightstands,
The same space accommodates a cocktail re- headboards, chairs, etc.), designed for com-
ception for 1,400 guests; this requires cocktail mercial heavy-duty use? Will they hold up to
tables, portable bars, buffet stations, and so abusive use? Do they have sharp corners that
on. This all boils down to ensuring ample will snag guest clothing? Does the bedskirt
storage space for equipment not being used— hang 1⁄2 inch off the floor? Do the bedside
at least 1,500 square feet. lamps give off enough lumens so guests can
read in bed? Does the room meet or exceed
Moving goods from the back of the house every operator brand standard?
to the front requires careful planning to en-
sure that precious labor dollars are used effi- These model rooms serve as sales tools
ciently. Are the rollaway beds, cribs, and high for the sales and marketing staff selling group
chairs stored near an elevator for quick deliv- rooms up to three years before opening.
ery? The housekeeper closets should be cen-
trally located on guest room floors to cut ᭤ PRE-OPENING STAFF
down on access time. A 6-foot, 2-cubic-yard PLAN
garbage cart will not work if the elevator is
only 5 feet deep. The pre-opening staffing begins with an orga-

If ice machines are offered for guest self- nizational chart with all positions. Once the ti-
service, they must produce an ample supply tles and staff counts by position are finalized,
(10 pounds per room per 24-hour period) for then spreadsheets are created to include the
the number of guest rooms on that floor or position titles, start dates, pay rates, bonus,
floors. The ice machine room requires the transfer allowances, and number of full-time
proper utilities, including electricity, plumb- equivalents (FTEs) for all positions.
ing, lighting, and HVAC. Don’t forget the sign

23Section 1.4 ᭿ The Art and Science of Opening a Hotel

The pre-opening staff plan is a compre- ᭤ OPERATIONAL SUPPLIES
hensive document that states who is hired, AND EQUIPMENT (OS&E)
when they start, how much they are paid, and
whether or not they are allocated a relocation The largest and most complex aspect of the
allowance and benefit costs. Each of these
pieces is used to build the pre-opening staff OPM’s responsibility is specifying, quantify-
plan budget. If hiring has already begun and ing, and budgeting for the operational sup-
the opening date changes, the budget must be plies and equipment (OS&E) list. This budget
amended. Hiring a position that does not con- typically pencils out to $8,000 to $10,000 per
form to the plan, such as bringing on a guest room for a typical four-star property.
renowned chef one month earlier than The list of goods typically exceeds 2,500 line
planned, also requires the budget be modified. items. Add a little more for a full-service re-
sort; deduct a little for an in-city business
᭤ PRE-OPENING BUDGET hotel.

The OPM develops and manages the pre- The OS&E comprises all of the items that
are not nailed down, with the exception of the
opening budget. This budget typically consists furniture, fixtures, and equipment (FF&E).
of three major categories; labor cost (40 per- The FF&E is typically specified and ordered
cent), sales and marketing efforts (40 per- by the interior designer.
cent), and miscellaneous (20 percent).
Typical guest room items include bedding
The labor cost is taken directly from the (frames, box springs, mattresses, mattress
pre-opening staff plan. pads, sheets, pillows, pillowcases, towels, etc.),
clock radios, hangers, laundry bags, laundry
Sales and marketing activities comprise tickets, iron, ironing board, ironing board or-
advertising, collateral, public relations, and ganizer, luggage rack, guest amenities (soap,
travel to see clients. shampoo, lotion, etc.), hair dryer, shower cur-
tains, and shower curtain hooks.
Rounding out the budget are all of the
miscellaneous items. These include office Housekeeping equipment includes vacu-
space rental before moving into the hotel, ums (guest room and wide-area units), carpet
utilities (power, water, Internet, and tele- shampooers, carpet extractors, housekeeper
phone), human resources recruitment (ads, carts, laundry bins, garbage trucks, valet deliv-
headhunters, drug testing, etc.), training mate- ery carts, and shelving, to name a few of many
rials, association dues, and licenses and per- items. Housekeeping must also keep an in-
mits (business, liquor, sales tax collection, ventory of guest request items including hu-
etc.). midifiers, dehumidifiers, cribs, high chairs,
rollaway beds, bedboards, spare pillows, tow-
If the hotel opening date is delayed for els, amenities, refrigerators, laundry soap, and
any reason, the pre-opening budget is af- so on.
fected. Additional costs include labor, office
rent, utilities, and marketing efforts. If the Food and beverage front-of-the-house
opening date changes within three weeks of items include flatware (knives, forks, and
the original plan, major costs are encoun- spoons), hollowware (serving trays, serving
tered, as most of the staff is already hired. utensils, chafing dishes, sugar bowls and sauce

24 Chapter 1 ᭿ Overview

boats, punch bowls), glassware, table linen, Once these questions are answered, then
napkins, skirting, salt and pepper shakers, the selection process begins. Operations and
china, plate covers, espresso machines, menu the interior designer review the look and feel
covers and the list goes on and on. the options available. Each position (house-
keeper, bellperson, etc.) or similar position
Banquet items include all of the above (front desk clerk/concierge) has different re-
plus tables, chairs, staging, staging steps and quirements. Housekeepers and bellpersons
railings, dance floors, carts, carving boards, ice require durable uniforms that breathe and
carving trays, flags, podiums, portable bars, ice can handle lots of bending and stretching. The
bins, pianos, and tray jack stands. uniforms of the culinary and engineering
staffs are often stained and must hold up to
The largest purchase order—typically numerous launderings.
over 100 pages long—is for a full-service
kitchen and includes everything a chef needs The uniform order is placed 90 to 120
to produce the menus being sold at the hotel. days before the first uniformed staff is hired.
Every utensil, pot, pan, dish, and glass rack, To quantify the sizes required, a typical bell
warewashing chemicals, mops and buckets, chart sizing curve is used for the particular
specialty items (roller-docker, anyone?) must country or region of the hotel. The uniforms
be reviewed by the chef, purchased, and deliv- are delivered and sorted prior to the individ-
ered the day before the chef starts burning in ual fitting process. On the line staff’s second
the kitchen. day on the job, each individual is measured
for uniforms. An army of seamstresses then
On the hotel administration side, the takes the pants, jackets, and dresses and alters
OPM specifies the office desks, chairs, cork each piece for each associate. The fitted uni-
and dry-erase boards, conference tables, filing forms are issued a few days before opening
cabinets, safes, bullet-proof window for the day.
general cashier’s office, fax machines, copiers,
currency and coin trays, and a set of flags for ᭤ PURCHASING,
the exterior flagpoles. WAREHOUSING,
DELIVERY, AND
One of the largest and most complicated INSTALLATION OF THE
purchase orders is for staff uniforms. My re- OS&E
cent Kona, Hawaii, project uniform purchase
order was 68 pages long. The invoices covered In an ideal process, the 500 purchase orders
over 100 pages!
are issued beginning six months prior to
Before quantifying uniform needs, many opening. Each order is tracked to ensure it is
questions are asked. Do we need summer and delivered to the proper location on the de-
winter uniforms? Will the uniforms be laun- sired date. Most goods are delivered to a local
dered by the hotel or the hotel associates? warehouse and pulled for delivery to the site
How many extra servers are needed for a ca- as the general contractor completes construc-
pacity dinner function in the ballrooms? Is
the intent to have a large percentage of part-
time staff? Which uniforms need custom em-
broidery (restaurants, culinary, engineering,
etc.)? What percentage of spare uniforms are
needed in reserve?

25Section 1.4 ᭿ The Art and Science of Opening a Hotel

tion and turns over areas. Some goods are direct guests and staff in front and back of the
shipped directly to the site to eliminate dou- house areas. The recent Kona project in-
ble handling. These large orders include bed cluded 1,600 signs, 98 percent of which were
sets (21 40-foot shipping containers for the one of a kind. The text must be correct, the di-
Kona project), televisions (3 containers), ban- rectional arrows must point the correct way,
quet chairs (2 containers), banquet tables (3 and most are required to include raised
containers), and guest room safes (1 con- Braille text, per the ADA.
tainer). The linen order for guest rooms and
F&B are shipped to an off-site laundry facil- The OPM works with the marketing de-
ity for initial washing. partment to develop the identity for the
unique areas within a property. These include
Once the goods are on site, they are typi- the restaurants, bars, pools, spa, and retail ar-
cally staged in the largest ballroom for un- eas. These logos are incorporated into the sig-
packing and distribution. The unpacking nage package, collateral (cocktail napkins,
process requires a plethora of workers. For menus, check presenters, etc.), and uniforms.
example, each clock radio must be unpacked,
the electrical twist tie removed, the 9-volt bat- ᭤ THIRD-PARTY VENDORS
tery installed, and the time set. Then the unit
is placed in a guest room on the nightstand. Many third-party vendors must have access
For the 525-room Kona project, this task re-
quired two people for three eight-hour days. to the property prior to opening. The project
Once they completed this task, they spent the manager schedules and directs all of these
next five working days installing the 7,000ϩ vendors, including the soft-drink vendor (who
shower curtain hooks, 525 shower curtains, installs soda guns for the bars and vending
and 525 shower liners. Then they unboxed machines for the guest floors), the coffee
30,000 glasses and placed them in glass racks company (which must install and test equip-
for washing. These kinds of tasks must be car- ment), the pay-per-view TV vendor (who
ried out for each of the 2,500 line items. must connect every television in the building
and test the signal strength), the warewashing
Once receiving and distribution begins on chemical vendor (who must install and cali-
site, another element comes to the forefront: brate the dishwashing machines), and the of-
garbage. During the five-week Kona installa- fice furniture installer (who must assemble all
tion process, over 3 tons of packing material office equipment). Among the other vendors
were generated every day! Making friends with are those dealing in copier services, postage
the local waste-hauling service is a priority. machines, telephones, fitness center equip-
ment, security systems, and first aid supplies.
᭤ INTERIOR GRAPHICS
PACKAGE These vendors are constantly informed
when they can install their equipment based
The project manager reviews the interior on the general contractor’s completion dates.
When the construction schedule changes, ven-
graphics package for errors and omissions. dors must be updated so they show up when
This package includes every sign needed to the area they need access to is ready.

26 Chapter 1 ᭿ Overview

᭤ HUMAN RESOURCES Departmental training includes teaching
staff to make beds, clean a room, cook every
The OPM assists the human resources per- menu item, the most efficient route to each
guest room, and what to tell the guest en
sonnel during the last two months of pre- route to the room.
opening so that they have all of the tools they
need to recruit and hire the staff. On average, ᭤ OPENING DAY
the HR department interviews at least five
applicants for every position. This works out The activity during the last 72 hours before
to over 1,000 applicants for a typical 300-
room four-star hotel. This process is referred the opening ceremonies is chaotic. This is the
to as the mass hire. time that all hands are on deck. Sixteen-hour
days are the norm. Rooms are cleaned.
The mass hire is typically conducted over Housekeeping closets are stocked. Liquor
a two- or three-day period six weeks before and food storerooms are filled. The general
opening. To interview this many job seekers, contractor completes all small details such as
HR requires office space, reception space for paint touch-ups. Artwork and furnishings are
up to 200 at one time, rest rooms, and break installed in the public areas. Rehearsals are
rooms for the interviewers. The OPM coordi- conducted for all aspects of the operation, in-
nates all of these details so that the operations cluding serving test meals and cocktails, guest
team can focus on the recruitment. check-ins and check-outs, and even such easy-
to-overlook activities as valet parking and
Once the offer letters are accepted, all vacuuming the pool.
line associates start work about three weeks
out. The first few days on the job are dedi- As soon as the general manger cuts the
cated to group training, operational philoso- ceremonial ribbon, the OPM knows what
phies, code of conduct, and other general kind of job has been done. The next step is to
policies. On day three, divisional training find the next project and do it all again!
takes place. In the second week of training,
the staff is broken out into departmental or
job-specific duties.

1.5 O N - L I N E P R I C I N G : A N A N A LY S I S O F
HOTEL COMPANY PRACTICES

Peter O’Connor

The importance of electronic hotel-distribu- shift in sales going almost exclusively to elec-
tion routes has grown substantially in recent tronic channels (O’Connor, 2001, 70–93).
years. According to statistics quoted in the While hotels continue to make extensive use
Horwath Worldwide Hotel Industry Studies, of travel-agent-oriented global distribution
direct reservations fell from approximately 39 systems (GDSs), consumer adoption of the
percent in 1995 to 33 percent in 1999, with the Internet as a reliable and secure commerce

27Section 1.5 ᭿ On-Line Pricing: An Analysis of Hotel Company Practices

medium has prompted a change in the way in who haven’t bought on line were asked what
which hotel rooms are being distributed. would encourage them to do so, 64 percent
said that saving money would make them
The Internet has dramatically changed more interested. No other benefit—whether
the way people communicate, research infor- saving time, getting bonus loyalty-club points,
mation, and buy goods and services. Travel more control, or obtaining better informa-
products in particular have proven to be suit- tion—came close to this level of response.
able for sale on line. The typical Internet
user—an affluent, frequent traveler who ᭤ HOTEL PRICING ON
spends more than the average on leisure and THE WEB
entertainment—is an attractive market for
travel suppliers (NFO Plog Research, 2000). Yesawich, Pepperdine, and Brown found in a
Furthermore, from a consumer’s perspective
purchasing travel products on line has, in 2000 study that almost six out of ten leisure
many instances, become faster, easier, and travelers now actively seek the “lowest possi-
more convenient than contacting a travel ble price” for travel services (Yesawich, Pep-
agent or telephoning a supplier directly. As a perdine, and Brown, 2000). Similarly, a 2001
result, on-line travel-related revenues are Forrester Research study found that 66 per-
forecast to grow sharply. For example, accord- cent of all buyers had used an on-line dis-
ing to a recent report by Jupiter Media count in the previous 12 months to buy travel
Metrix, on-line travel sales will more than on line (Forrester Research, 2001), and a
triple in the next five years—from US$18 bil- study by the Joint Hospitality Industry Con-
lion in 2002 to US$64 billion in 2007 (Jupiter gress found a real expectation among con-
Media Metrix, 2001). sumers that Internet prices would be lower
than those available in the “bricks and mor-
Booking volumes are also forecast to tar” world (Joint Hospitality Industry Con-
climb. The Travel Industry Association of gress, 2000).
America (TIAA) estimated that by the end of
2002 between 6 percent and 10 percent of all Such a perception has developed for sev-
travel reservations would originate on the eral reasons. First, many of the best-known In-
web (TIAA, 1998). If Jupiter’s 2007 predic- ternet retailers (such as, for example,
tion comes true, travel will be the biggest sell- Amazon.com) initially competed with tradi-
ing on-line product, with a volume nearly tional outlets based, to a large extent, on price.
double that of the current leading product, Second, savvy consumers are aware that web-
PC hardware (Forrester Research). based distribution costs are lower than those
of other channels (Nua, 1998). As Jack Ged-
Price is key to selling successfully on line. des, Radisson Hotels Worldwide’s managing
Studies by Internet analysts Gomez and director, sales and marketing Asia, has pointed
PhoCusWright, and also a study by TIAA, all out: “Consumers now understand that suppli-
identified price as being one of the key moti- ers are cutting costs through this channel and
vating factors that encourages consumers to expect savings to be passed on to them, as well
purchase travel on line (Gomez.com, 2000; as being rewarded for making the booking
PhoCuSWright, 2001; TIAA, 2001). For exam- themselves” (Muqbil, 1998). Such expectations
ple, the PhoCusWright study found that com-
petitive pricing is the best way to attract
customers (Pastore, 2001). When travelers

28 Chapter 1 ᭿ Overview

are being reinforced by the budget-airline sec- These factors have combined to make
tor, which offers substantial discounts for on- consumers associate on-line booking with
line bookings. Companies such as EasyJet, good value, which in the consumer’s mind
RyanAir, and Buzz estimate that by avoiding translates into low prices. However, in the
telesales and travel agents, they can achieve case of hotel brands’ own web sites, industry
savings of up to 30 percent—which they pass practice frequently seems to be the opposite
on to customers in the form of lower fares of theory. In a 1999 survey, for instance, a col-
(Cooke, 2000). Similar or even greater levels league and I found that rates obtained from
of savings can be made by hotel companies, as the web site were usually substantially higher
can be seen from the internal Accor figures in than those obtained by contacting the central
Table 1.2, which show how an 80- to 90- reservations office (O’Connor and Horan,
percent savings in transaction charges can be 1999). That study was limited, however, in
achieved by selling directly to the consumer that it focused only on direct sales over hotel
on line. Finally, many hotels (and airlines) use chains’ own branded web sites. Electronic
the web to sell last-minute deals—packages at distribution is rapidly evolving for hotels, and
relatively low prices but with short lead times. a large number of other on-line consumer-
While such promotions can help dispose of focused channels are now available, with
unsold inventory, they have also resulted in most chains using multiple routes to reach
the public’s associating rooms sold over the the consumer (Castleberry et al., 1998,
Internet with lower prices. 19–24).

Table 1.2 Reservation Cost by Distribution Channel

Route Transaction Fee Total
Cost
Traditional
route Customer Traditional GDS Switch CRS Hotel
Customer travel $3.20 $0.20 $4.20
Online agent $13.50
intermediary $5.90 CRS
route $4.20
Direct Online GDS Switch Hotel
online route travel $3.20 $0.20
agent $10.50
$3.00

Customer Hotel company website Hotel
$1.50
$1.50

Source: Dresdner Kleinwort Benson/Accor, quoted in Travel and Tourism Intelligence, The
International Hotel Industry: Corporate Strategies and Global Opportunities (London: Economic
Intelligence Unit, 2001).

29Section 1.5 ᭿ On-Line Pricing: An Analysis of Hotel Company Practices

The availability of numerous points of of and attitudes toward the Internet. Web-
sale poses some interesting questions. Fore- reservations facilities were investigated in de-
most among these is: Is there consistency be- tail in the co-authored paper that I mentioned
tween the room availability and prices being above (O’Connor and Horan, 1999). How-
offered over each of the channels? Unlike in ever, the issue of pricing over several distri-
the physical world, where a potential cus- bution channels does not appear to have been
tomer would have to telephone or visit sev- the subject of extensive systematic research
eral suppliers, comparison shopping on the to date. The objective of this study, therefore,
web can generally be accomplished relatively was to analyze the room rates being offered
quickly. Research has shown that consumers to consumers over multiple electronic distri-
shopping for travel on line almost always bution channels.
check more than one site before purchasing.
According to Jupiter Media Metrix (2001), An exhaustive analysis of the rates being
just 10 percent of would-be guests visit only offered by all hotels would be virtually impos-
one site to book a hotel room, another 43 per- sible. Those rates are constantly in flux, as
cent visit two or three sites, and 22 percent hoteliers project occupancy rates and open or
visit four or more sites. Because they check close rate classes accordingly (according to
prices in several places, on-line purchasers yield-management principles). I believe, how-
have become increasingly intolerant of incon- ever, that major international hotel chains’
sistent information, and may react unfavor- electronic-distribution activities are indicative
ably to a firm’s disparate rates by booking of industry patterns, because recent research
with the company’s competitor. Two related has shown that large companies are most ac-
questions, then, are: tive on the web—perhaps because their size
often gives them an advantage in terms of
1. If rates are not consistent across channels, technical expertise and financial resources. As
is any one route consistently cheaper? a result, I decided to focus this study on the
behavior of the top-50 international hotel
2. Is the company’s approach to pricing log- brands. While this strategy means that the
ical from both the consumer’s and the ho- findings are not representative of the industry
tel’s perspective? as a whole (and, therefore, not generally ap-
plicable), it does allow establishment of an ac-
In this paper, I seek to answer those curate benchmark of trends as they currently
questions. stand. The companies were chosen based on
the ranking of the top-50 hotel brands pub-
᭤ METHODOLOGY AND lished in Hotels magazine in July 2000. Two of
LIMITATIONS OF THE those companies (Disney and Club Med) were
STUDY removed from the listing because they operate
resorts and distribute their rooms largely as
Previous studies of hotels’ Internet use have part of packages, which means that their prod-
ucts are not directly comparable to the rest of
been limited. Murphy et al. (1996, 70–82) fo- the industry. Furthermore, another three com-
cused on rating the content of hotel web sites, panies neither offered on-line reservations on
while Van Hoof and Combrink (1998, 46–54) their own web site nor were they listed on any
attempted to measure managers’ perceptions of the other channels studied. Thus, the results

30 Chapter 1 ᭿ Overview

discussed below reflect the findings from the by the agent, and I did not ask for a lower rate
45 hotel brands for which consistent data (nor did I record any subsequent offers after
could be found. I demurred from making a reservation). Al-
though better rates could probably be
Five major types of electronic business- achieved by haggling, I decided that negotiat-
to-consumer distribution channels were iden- ing would leave no systematic way of consis-
tified from the literature, and leading tently determining the lowest rate, depending
examples of each category were selected for as it does on the caller’s persistence. The
inclusion in the study. In addition to a chain’s above process was repeated for five sets of al-
own web site (e.g., www.marriott.com), these ternative dates to reduce the possibility of er-
comprised channels that draw their data and ror due to system malfunctions or other
reservations engine from the GDS (i.e., Expe- exceptional circumstances.
dia and Travelocity); those that are based on
the databases and reservation engine of the ᭤ SUMMARY OF RESEARCH
switch companies (namely, Travelweb); and FINDINGS
pure web-based channels with an inventory
and reservations database that is maintained As can be seen from Table 1.3, each of the
on line (i.e., WorldRes). While not collectively
exhaustive, these represent the majority of major hotel brands uses multiple simultane-
hotel-reservation sites. Omitted from the ous distribution channels. The most com-
study were the auction-style web sites, such as monly available channels were voice (via the
Priceline.com, which are not comparable to company’s CRS) and electronic (through the
typical booking approaches. company’s corporate web site). The company
that did not make a CRS number available
As another point of comparison, I incor- was in the economy sector. Offering hotel
porated voice channels into the study by ana- rooms via the company web site is almost uni-
lyzing the rates offered by the toll-free versal, all but one of the brands surveyed of-
number to the central reservations service fering on-line reservations in this manner. It is
(CRS). Data were collected by repeatedly of- interesting to note that this represents a con-
fering to reserve a standard double room for siderable advancement when compared to
specified dates in a selected property from surveys made only a few years ago, which
each of the brands using each of the distribu- found that only approximately 50 percent of
tion channels discussed above. Where the the major hotel companies provided on-line
product requested was available on the sys- reservations (O’Connor and Horan; Hensdill,
tem, both the number of rates displayed and 1998).
the lowest rate available were recorded for
analysis. To help ensure consistency, I ignored As shown in Table 1.3, hotel companies
rates not available to the general public (e.g., make less use of the other channels investi-
corporate, military, AARP, and AAA), and gated. Approximately four-fifths of the major
analyzed only those rates that could be brands used the GDS-based intermediaries
booked by a “normal” customer. After check- Expedia and Travelocity, three-quarters used
ing the web sites, I telephoned the hotel com- Travelweb, and barely one-third used World-
pany’s CRS to request the same booking. In
that case, I recorded only the first rate quoted