Boutique Hotels

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					Lifestyles of the Rich and Almost Famous:
The Boutique Hotel Phenomenon in the
United States

High Tech Entrepreneurship and Strategy Group Project

Professor Ron Adner

                                                              Alec Albazzaz
                                                             Beth Birnbaum
                                                            Daniel Brachfeld
                                                               Max Danilov
                                                        Oriane Kets de Vries
                                                                James Moed
Table of Contents
Executive summary.................................................................................................................... 4
Background on the hotel industry.............................................................................................. 6
   Hotel industry economic factors ............................................................................................ 6
   Hotel industry trends .............................................................................................................. 7
   Segmentation of the market.................................................................................................... 8
   Growth of branded hotel chains ........................................................................................... 10
   Major players ........................................................................................................................ 10
   Chain hotels and independents............................................................................................. 10
   Boutique Hotels: a definition ............................................................................................... 11
   The evolution of the boutique hotel..................................................................................... 12
Strategy Analysis of Boutique Hotels ...................................................................................... 13
Ian Schrager Hotels (ISH) ........................................................................................................ 16
   Hotel as Theater ................................................................................................................... 16
     Location............................................................................................................................ 16
     Design............................................................................................................................... 16
     Experience........................................................................................................................ 17
     Restaurants ....................................................................................................................... 18
     Marketing ......................................................................................................................... 18
     Targeting / Pricing............................................................................................................ 18
     Growth Strategy ............................................................................................................... 19
   Reaction to Competition....................................................................................................... 19
Starwood/W Hotels .................................................................................................................. 21
   Starwood’s Timing and Approach of Entry......................................................................... 21
     Timing .............................................................................................................................. 21
     Value Proposition............................................................................................................. 21
   Starwood/W’s Financial Structure, Support and Ownership ............................................... 22
     Economics of construction and operations ....................................................................... 22
     Does Size Matter? ............................................................................................................ 23
     W Hotels Financial Review .............................................................................................. 23
   The W Experience................................................................................................................ 24
     Amenities ......................................................................................................................... 24
     Restaurants and bars......................................................................................................... 24
     Meeting rooms .................................................................................................................. 25
     Catalogue and the W Store ............................................................................................... 25
   Starwood’s Competitive Advantages ................................................................................... 25
     Corporate Structure .......................................................................................................... 25
     Cost Savings Through Economies of Scale and Scope.................................................... 26
     Quality of Service............................................................................................................. 27
     Locations .......................................................................................................................... 27
     Willingness To Pay .......................................................................................................... 27
     E-strategy ......................................................................................................................... 28
     Marketing and Public Relations ....................................................................................... 28
     Growth Strategy and opportunities .................................................................................. 28
     Long term strategy ........................................................................................................... 29
Boutique Growing Pains .......................................................................................................... 29
Conclusion: Is Ian Schrager’s approach to hotels sustainable? Will W outperform ISH? ..... 30
Pictures..................................................................................................................................... 32
   W Hotels............................................................................................................................... 32
   Ian Schrager Hotels .............................................................................................................. 35

Exhibits..................................................................................................................................... 37
References: ............................................................................................................................... 48

Executive summary

The US hotel industry has traditionally been extremely fragmented. Many small players initially
entered the market by acquiring and renovating a local property, and maintaining it as a small business
or building it into a small regional chain over time. As US consumers became more mobile and a
growing cohort of frequent business travelers emerged, many travelers developed a higher willingness
to pay for a branded hotel’s comfort, cleanliness, quiet, reputable service, and provision of a good
night’s sleep.

Hotel brands are traditionally segmented by quality, generally falling into one of the following
category types: economy, midscale, upscale, upper -upscale, and luxury. Specific hotels can segment
further based on location, desired customer type (business vs. leisure), and hotel size. Luxury and
upper upscale hotels traditionally feature a wide range of fine services and amenities (multiple
restaurants and bars, spa services, concierge services, toiletries), large rooms, and premier urban and
resort locations. Upscale properties tend to cater more specifically to business travelers and groups,
while retaining an emphasis on quality and comfort. Midscale and economy hotels are generally
geared for short-term transient business and offer stripped-down features at a lower price point. The
major US players in hotel ownership and management, namely Marriott, Hilton, 6 Continents, and
Starwood, all maintain a wide portfolio of hotel brands (please note that we have considered the purely
franchised hotel business as outside the scope of this paper).

In the 1980s and 1990s, extensive consolidation took place in the US hotel industry, producing several
large chains that now control a large portion of US lodging capacity, especially in the midscale and
higher segments. These large, relatively stable companies can obtain financing to develop many
properties simultaneously and can develop more cost-effectively than smaller players. Chains also
benefit from economies of scale in operations, a centralized reservation system that allows them to
yield-manage more effectively than independent hotels, and a well-developed sales and marketing
organization that can attract group business. The major players have also diversified their activity from
pure hotel operations. In addition to owning, manag ing, and franchising properties under the flags of
their brands, their businesses now include real estate, time-shares/vacation ownership, car leases, and
food distribution.

In the past 20 years, a small but growing contingent of travelers, grown tired of staying in large,
personality-free hotels geared towards a mass audience, has begun to migrate towards a new, more
intimate breed of hotel. These travelers purposefully seek out “properties that are noticeably different
in look and feel from branded hotels,” choosing an element of ‘surprise’ over the more straightforward
values of consistency, comfort and convenience. A formal definition of the ‘boutique’ or lifestyle hotel
concept remains elusive, though pundits agree on the following criteria: a thematic , architecturally

notable design offering warmth and intimacy, a relatively small number of rooms, and a target of up-
market 20-55 year olds.

The innovation of the boutique hotel is most often credited to Ian Schrager. Famous for co-founding
the legendary nightclub Studio 54, Schrager saw an opportunity to sell an alternative to the mass-
market hotel experience. The 1984 launch of Morgans in New York was Schrager’s attempt to market
a hip, unusual hotel experience by telling image-conscious customers ‘you are where you sleep.’
Schrager had purchased a rundown hotel previously frequented by derelicts, and with the help of a
well-known French interior designer, created a dramatic nightclub-like environment populated by a
staff of part-time models and actors. Over the next two decades, the Schrager formula—distressed
property, powerful thematic design, and limited amenities —was recreated in ten more locations from
London to Miami. Each property’s centerpiece is a hip restaurant or bar leased to a famous chef or
restaurateur. These hotspots attract celebrities and a sophisticated local clientele—generating ‘buzz’
and profits.

Other entrepreneurs quickly followed Schrager’s lead, and independent hotels across the US rushed to
re-brand themselves as ‘boutiques.’ Major players in the industry also took notice and quickly tried to
exploit this growing market: Starwood Hotels and Resorts opened the first W Hotel in Midtown New
York in December 1998. Closely following the Schrager model, each property “offers signat ure
restaurant and bar areas that attract not only the hotel guests, but in-the-know local residents as well,”
according to the W Hotels website. However, W rejects the ‘boutique’ label, preferring to call itself a
‘lifestyle brand,’ and now (in the wake of the effects of September 11), emphasizes its customer
service aspects. Although the W brand had to overcome initial industry doubts that no chain hotel
could successfully emulate the boutique experience, Starwood claims that W is the most successful
hotel launch in history and has opened 17 locations since 1998. Being a Starwood brand provides
each W hotel economies of scale in purchasing and maintenance, synergies through Starwood’s guest
reward program, the Starlink central reservations system, and access to Starwood’s group and
meetings sales force.

Our analysis aims to uncover the extent to which the boutique hotel concept is truly an innovation over
the traditional luxury hotel. By introducing a powerful new aesthetic and eliminating amenities
previously considered de rigueur, boutiques, led by Schrager, appear to have distinctly altered the
industry’s value proposition. We hope to determine if these advantages are value creating, and more
importantly, sustainable in the face of increased competiti n and an uncertain economy. Boutique
hotels are highly leveraged, meaning that they attract the highest-revenue customers during times of
peak business travel. By keeping costs low and maintaining high demand with an aura of style and
exclusivity, Ian Schrager Hotels have been able to achieve operating margins as high as 45%.
However, their leverage makes them especially vulnerable in times of decline; because boutique hotels

offer limited or nonexistent meeting space, they cannot fall back on group sales to fill rooms when
individual business travel declines, and thus must let them go empty or sell them at distressed rates
through potentially brand-diluting wholesalers.     Boutique hotels experienced tremendous growth
during the economic boom of the late 1990s, but can they survive now that the bubble has popped?

Background on the hotel industry

Hotel industry economic factors

The development of the hotel industry has been linked with the international and domestic tourism and
travel sector in general. The economic growth of the ‘90s and the accelerated globalization of the
world economy significantly increased business and leisure travel. The development of travel
infrastructure and the decreasing cost of air and other forms of transportation have also driven growth.
Today, tourism is the third largest retail industry in the United States. Total US hotel industry revenue
rose from $62.8 billion in 1990 to $103.5 billion in 2001, while the average daily room rate (ADR)
grew from $58.08 in 1990 to $88.27 in 2001 (See Exhibit 1). i Much of this rapid growth has been
spurred by the middle and low end, while increased consolidation within the industry has put pressure
on the independent hotels to innovate at the risk being bought out.

Historically, demand for lodging has been highly correlated with GDP growth.              According to
PriceWaterhouseCoopers, demand elasticity to GDP is normally 1.0. Exogenous shocks such as the
Gulf war of 1990-1991, the Asian financial debacle in 1998, and the terrorist attacks of September 11,
2001, have distorted this relationship. Additional factors that affect lodging demand include consumer
confidence, interest rates, cost of transportation (fuel prices, indirect taxation), and foreign exchange
rates. (See Exhibit 2)

Supply for lodging tends to lag well behind demand, since it takes several years to bring new capacity
onto the market. In addition, market segments influence supply, as upscale and better hotels take
longer to complete than lower -range properties. Furthermore, deve lopers have limited flexibility to
defer or accelerate projects. In 3Q 2002, total lodging supply stood at 4.2 million rooms, while 2002
total turnover in the hotel industry worldwide was estimated at around $280 billion. (See Exhibit 3)

At a microeconomic level, the main factors of industry profitability are:

    •   Occupancy rate (OCC) and ADR are both driven by the demand-supply relationship. There
        are stark differences in the performance of hotels according to location and type of customers.
        Hotels relying on international travelers have been most affected by current slump in demand.
        Market segmentation is also a key factor; economy hotels are more resilient during demand
        downturns than upscale properties. A hotel’s ADR and OCC determine its main revenue
        indicator: its Revenue per Available Room, or RevPAR.

    •   Operational leverage. The ownership structure of its hotels has a significant effect on a hotel
        chain’s profitability. Hotel ownership is a more leveraged structure than franchising; it is
        difficult for properties to adjust operating costs when occupancy rates drop during market
        downturns, but franchise and other fees are a more consistent source of revenues. Similarly,
        in good market conditions, owned hotels perform better than franchises for the parent

Hotel industry trends

Several trends characterize the state of the international hotel industry over the past decade (See
Exhibit 4 for a more detailed history).

Consolidation: A number of large deals serve as examples of this important trend, such as the
Starwood acquisitions of Westin and Sheraton, the Doubletree and Promus merger deal, the Marriott
acquisition of the Renaissance Hotel Group, and the merger of Hilton and Hilton International. This
consolidation has created hotel companies with greater brand portfolios and greater global reach.

Increased globalization: Industry consolidation has encouraged overseas investment, increasing the
reach of many hotel companies. One example is the Marriott International, who recently purchased the
Hong-Kong based Renaissance Hotels. In addition to global growth through acquisition, many US-
based hotel companies are expanding their brands worldwide. In 1996, there was a rapid international
spread of US -based economy and mid-priced franchised hotel chains.

Increasing importance of finance: Financiers are increasingly driving the hotel industry. Hoteliers
have traditionally focused on internal operations, while financiers concentrate on earnings and
company growth. Although some say that this shift forecasts a more difficult negotiating environment
for travel buyers, others herald the transition as a positive step towards a stronger and more successful
industry. Wall Street has only recently developed an interest in the lodging industry, which it long
considered too risky and unstable.

The role of information technology: In 1996, it was estimated that hotel companies in the US and
Europe spent an average of 2.5% of their revenue on information technology. Slightly less than $2
billion was spent n the US and $2.5 billion in Europe. In the 1980s and early 1990s, the hotel
industry spent several billion dollars on technology, but most of that spending was kept in-house.
Many hotel companies now feel their proprietary technology is a key point of differentiation. Industry
consolidation has driven an increased appetite for spending with outside systems integrators,
outsourcers, and software developers.      Many technology innovations have been driven by the
industry's need to enhance the customer experience.          Smart cards, check-in kiosks, and the
proliferation of loyalty programs are all examples of hotel companies trying to get closer to their

customers. Because many hotel companies internally developed and purchased disparate systems, they
now face a need for systems integration as the industry consolidates. Distribution costs also continue
to be high. The changing role of the Internet, managed travel, and the evolution of the global
distribution systems (GDS) used by travel agents to access air, hotel, and rental car inventory, will
likely cause changes in the way hotel rooms will be distributed in the next several years. iii

Segmentation of the market

There are many ways in which to segment the hotel industry, the most relevant ones are highlighted

•   Segmentation by scale (level of luxury) splits the hotel industry into several segments. Industry
    practice divides hotels by scale into the following broad segments: Economy, Midscale (with and
    without food and beverage), Upscale, and Upper Upper Scale (including luxury hotels).iv (See
    Exhibit 5) Thus Marriott markets its flagship Marriott brand to the full-service upscale segment,
    where it competes with Starwood’s Westin and Sheraton, as well as Hilton’s Hilton and
    Doubletree brands, among others. Ups cale hotels primarily target business travelers and are
    generally located in prime locations in urban destinations. [To a lesser extent, upscale hotels can
    also be found in resort destinations, where they cater primarily to leisure travelers and groups.
    Generally speaking, business destination hotels yield-manage with higher price points during the
    week, and sometimes struggle to reach desired occupancy rates on weekends, especially during
    off-peak periods in seasonal destinations. The reverse is true for leisure destinations.] Upscale
    hotels will frequently advertise promotions and package deals to sell off their unsold inventory,
    and frequently sell distressed inventory through and other similar channels.

    Luxury brands such as Ritz-Carlton (owned by Marriott) and Four Seasons target the small but
    extremely lucrative Upper Upscale segment. These hotels will offer the greatest range of luxury
    services and charge a premium price; large and comfortable rooms with elegant appointments and
    fixtures, extensive restaurant and bar facilities, high-end shops, spa facilities, and premier
    locations are all de rigueur. Upper upscale hotels will generally let rooms go unsold rather than
    be shown to offer any sort of discount, although they will market packages bundling meals or
    services with hotel rooms.

    Midscale hotels target traveling businesspeople and families unwilling to pay for the full range of
    services in an upscale hotel. These properties offer fewer and less sophisticated restaurant and bar
    facilities than upscale hotels (or eliminate them altogether and instead offer a free ‘continental’
    breakfast of pastries and cereal). These hotels are generally located in urban areas, but unlike the
    upscale hotels located in prime downtown locations, midscale hotels will generally be found in
    suburban and highway locations. Holiday Inn Express, Ramada, Fairfield Inn by Marriott, Four

    Points by Sheraton, and Hampton Inn (a division of Hilton) are all examples of branded midscale

    Economy hotels constitute a large segment of the market. Hotels carrying the flags for brands
    such as Days Inn, Travelodge, and Super 8 (all franchised by Cendant), Motel 6 (Accor) and
    Prime Hospitality’s AmeriSuites and Wellesley Inn and Suites are frequent sights along major US
    Interstates. These hotels (often referred to as ‘motels’ in the United States) offer a limited range
    of amenities and services. Furnishings are basic, swimming pools are less common than in other
    segments, and few toiletries are offered. Many do not have an attached restaurant, for example,
    although it is common to see a restaurant located within walking distance of an economy hotel.
    Many economy hotels are franchises owned and managed by small businesspeople; franchisees
    are generally not considered to be able to offer the same consistency of quality of service as hotels
    owned or managed by the parent company.

•   Segmentation by location: Location can be used to attract a targeted customer segment. Airport
    hotels are for example focused on the transit travelers in the same way as resort hotels are
    targeting the leisure segment. (See Exhibit 6)

•   Segmentation by size: Hotels of more than 300 rooms account for only 21% of existing capacity.
    Larger hotels are an urban and resort phenomenon, whereas small hotels dominate in smaller cities
    and along highways. (See Exhibit 6)

•   Segmentation by type of customer: The key split is between leisure and business travel.
    According to the WTO, business travel is expected to grow faster than leisure (95% accumulated
    growth rate for the 2002- 2012 period vs. 90%), but business travel traffic tends to be more
    volatile than leisure, which makes it more highly leveraged to the business economy.

    Other criteria for segmenting by customer type could include booking source (such as Internet site,
    managed travel, telephone or travel agent), demographics and lifestyle, customer responsiveness
    to brand or price, etc. Boutique hotels target their customers by a combination of lifestyle and
    demographics, an innovative targeting mix in the hotel industry.

•   Segmentation by style : Designer hotels present a different customer proposition than mass-market
    hotels.   Large hotels (especially those part of a chain) have found it difficult to avoid a
    depersonalization of the service and a resulting trend towards commoditization.

Over time, the largest players (including Hilton, Marriott and Sheraton) began to segment the market
further by offering a range of hotel types and services. Through branding, companies can pinpoint
locations, price points, and level of service to attract the desired mix of business and leisure travelers.

To broadcast a consistent image of the level of quality and service customers could expect, the largest
hotel companies now market brands specifically to each segment of traveler.

Growth of branded hotel chains

Traditionally, the US hotel industry was extremely fragmented. Many small players entered the
market by acquiring and renovating a local property, and maintaining it as a small business or building
up a small regional chain over time. Consolidation began in 1943, when Hilton became the first ‘coast
to coast’ hotel chain in the United States. v In the late 1950s, JW Marriott, then a successful operator
of ‘Hot Shoppe’ cafeterias in the Washington, DC area, expanded into the hotel industry with a Motor
Hotel in Arlington, VA and subsequently began a rapid geographic expansion. vi An increasingly
mobile population appreciated the consistency and quality of service and co0mfort they found at
branded hotel , and as they grew, these larger companies also began to benefit from significant
economies of scale and scope.

The consolidation that took place in the hotel industry in the past twenty years produced several large
chains that control a large proportion of US lodging capacity, especially in the middle and upper
segments. As of 2002, the four largest hotel companies in the US controlled 35% of the total room
supply. All the big players have also diversified their activity away from pure hotel operations, but
Cendant may have taken this diversification strategy to an extreme. In addition to hotels, Cendant’s
many business lines include real estate, rental cars, travel technology, and financial services.

Major players

In the United States, a few major players have traditionally dominated the hotel industry. Marriott is
the world’s largest hotel chain, with over 2,200 units worldwide; its brands include Marriott,
Renaissance, Courtyard by Marriott, Residence Inn by Marriott, Fairfield Inn by Marriott, TownePlace
Suites by Marriott, SpringHill Suites by Marriott, Ritz Carlton Hotels and Resorts, and Ramada
International. Hilton owns, manages and franchises 499 hotels worldwide under the brands Conrad,
Doubletree, Embassy Suites, Hampton Inn, Hilton, Hilton Garden, and Homewood Suites by Hilton.
Starwood owns, manages, and franchises nearly 750 hotels under the brands St. Regis, Luxury
Collection, W, Westin, Sheraton, Four Points by Sheraton, and Starwood Vacation Ownership. Other
major players include 6 Continents, which controls the Holiday Inn, Crowne Plaza, and Inter -
Continental brands, and Cendant, a major franchiser of economy hotels. (See Exhibit 7)

Chain hotels and independents

Chain hotels dominate the US hotel market for a number of reasons. Chains are able to lower costs
significantly by benefiting from economies of scale. As large, relatively stable companies, they can

make real estate investments at a lower cost and develop properties more cost-effectively. They also
benefit from economies of scale in purchasing and maintenance for existing properties, and can invest
in a centralized reservation system that allows them to yield-manage more effectively than
independent hotels. At the same time, many consumers have a higher willingness to pa y for a known
quantity—a branded hotel’s comfort, cleanliness, quiet, reputable service, and provision of a good
night’s sleep, often backed up by a guarantee—than for an unknown quantity.

Boutique Hotels: a definition

In the past 20 years, a growing contingent of travelers grown tired of staying in large, personality-free
hotels geared towards a mass audience, has begun to migrate towards a new, more intimate breed of
hotel. These travelers purposefully seek out “properties that are noticeably different in look and feel
from branded hotels,” choosing an element of ‘surprise’ over the more straightforward values of
consistency, comfort and convenience. vii       These ‘boutique’ hotels, often located in renovated urban
structures such as run-down single-room-occupancy hotels, small office buildings, or older hotels,
attempt to replace the ‘cookie-cutter’ uniformity of a branded hotel’s décor, food, and service with
more individualistic offerings.

A formal definition of the boutique or lifestyle hotel concept remains elusive. However, pundits agree
on the following criteria: a thematic, architecturally notable design offering warmth and intimacy, a
smaller size than the typical business hotel (many in the industry believe hotels larger than 150 rooms
cannot be called true ‘boutiques’) and a target market of up market 20-55 year olds.viii Most boutique
hotels can be found in trendy neighborhoods of sophisticated urban destinations, and many offer
customers high-tech amenities such as high-speed Internet access, cordless phones and CD players
with a library of music (available for purchase, of course). However, a subset of boutique hotels
located in resort destinations try to achieve the opposite effect: often located in secluded areas, these
hotels focus on a higher l vel of service than their urban counterparts and offer low -tech amenities
such as spa facilities, privacy, and even the absence of communications facilities as proof guests
staying at the hotel will truly be able to ‘get away from it all.’ ix

Eliminating some features and services, such as spacious rooms and expansive lobbies, and replacing
luxurious fittings with cheaper, but architecturally more interesting, replacements (such as Vermont
slate for $1 a foot instead of imported marble at $8), allows these hotels to charge customers a similar
or slightly lower price point than upscale branded hotels, while lowering costs significantly from the
typical upscale independent hotel. x Architectural design compensates for smaller rooms whenever
possible (often permitting the hotel to pack more guests into a smaller space and/or renovate an
existing SRO or other nontraditional hotel building less extensively and thus save money). For
example, in the W New York-Times Square, where rooms average only 280 square feet, the

architecture firm “Yabu Pushelberg designed a translucent floor-to-ceiling panel of white
polycarbonate plastic to replace the solid wall between the bedroom and bathroom.”xi Another
significant cost savings for independent boutique hotels is the fact that they do not have to pay a
franchise fee to attract customers. xii Centering the hotel around a brand-name chef’s restaurant (and
often a trendy bar) in space leased from the restaurant also allows these hotels a significant revenue
stream in comparison to the typical branded hotel, for whom these services are generally not revenue
drivers. As a result, some analysts calculate that boutique hotels earn margins 30% higher than those
of standard luxury hotels. xiii

By building a thematic image “powerfully conveyed throughout the property” and relying heavily on
celebrity guests and public relations rather than mass advertising and a sales force to convey a hip
image, boutique hotels can successfully enter markets with high barriers by converting buildings not
normally suitable for hotel use. xiv Customers who want the experience of staying in a boutique hotel
are willing to trade off less-traditional locations and room designs that do not meet standard
definitions of comfort—such as the rooms in Ian Schrager’s Royalton Hotel in New York, which run
parallel to the hotel’s hallways rather than perpendicular.xv Generally, rooms are smaller than normal
and often relatively dark. The hotel compensates for these flaws by providing a comfortable lobby
space that provides a “Home Away From Home” outside the bedroom itself and is a “social hub…and
new kind of gathering space for guests and locals alike.”xvi Ideally, the guest spends so much time in
the lobby, restaurant, and later the bar, that he or she barely notices the relatively small size of the
room. Despite all the distractions, the typical lifestyle hotel guest is traveling on business rather than
pleasure: according to PwC, 68% of guests are corporate travelers. xvii

The evolution of the boutique hotel

A number of market dynamics accelerated the acceptance and the demand for boutique hotels. These
include: Eroding brand loyalty among franchises; customer access to the GDS via travel websites (and
their subsequently reduced dependence on travel agents); the emerging t end of ‘experience’ or
‘adventure’ travel; an increase in disposable income in conjunction with the largest sustained period of
economic growth in U.S. history; and the desire for more personalized service (particularly on the part
of discriminating business travelers).

The innovation of the boutique hotel is generally credited to Ian Schrager. Famous for founding the
legendary nightclub Studio 54, Schrager saw an opportunity to sell an alternative to the mass-market
hotel experience. The 1984 launch of Morgans in New York was Schrager’s attempt to market a hip,
alternative hotel experience by telling image-conscious customers ‘you are where you sleep.’ While
Andrée Putnam, the French stylist, designed that hotel, Schrager has maintained a design partnership
with noted designer Philippe Starck since 1987, and has only recently begun working with other noted

architects and designers, including the Canadian Bruce Mau. xviii Schrager has created a new breed of
urban hotels that offer guests high style at prices lower than those of traditional luxury hotels. By
building the hotel around an A-level restaurant and bar designed to attract a sophisticated local
clientele in addition to the hotel’s guests, Schrager successfully gives each of his hotels a unique
identity that also reflects the spirit of the hotel’s local urban environment.

As many of the traditional franchised product developers recognized this powerful and profitable
market segment, they too began to consider the compelling factors: the restrictive nature of most
franchise agreements, the considerable franchiser costs (royalty, reservation, marketing, application
fee, etc.), which range up to 12 percent of gross income, the inconsistency between franchised
products, the premium revenue per available room of boutique hotels vs. luxury hotels and, finally, the
barriers to entry in the traditional boutique hotel marketplace.

As a result, other entrepreneurs quickly followed Schrager’s lead, and independent hotels across the
US tried to re-brand themselves as ‘boutiques.’ Major players in the industry also took notice and
quickly tried to exploit this growing market: Starwood Hotels and Resorts opened the first W Hotel in
Midtown New York in December 1988. Closely following the Schrager model, each property “offers
signature restaurant and bar areas that attract not only the hotel guests, but in-the-know local residents
as well,” according to the W Hotels website. xix In fact, Starwood even hired Rande Gerber, designer
and operator of Schrager’s bars (and a celebrity himself, married to supermodel Cindy Crawford, able
to tap into a network of VIPs as his clientele) away from Schrager to design and manage the W hotel
bars, prompting a series of escalating lawsuits that are still unresolved.

Strategy Analysis of Boutique Hotels

The phenomenon of boutique hotels can be examined using various strategy frameworks, which can
explain the fast and furious rise of these hotels in the United States.

To begin, we have conducted a hotel industry analysis (See Exhibits 8 & 9). Although the exhibits
concentrate on Porter’s five forces on each of the Ian Schrager and W brands, they are mostly similar
and can be used to look at boutique hotels versus previously existing hotel types. The main message
to glean from the industry analysis is to notice how buyers and suppliers do not have bargaining
power. This means that the hotel industry itself can capture most of the economic benefits of the
hospitality category. Yet, within the hotel industry, it is worth noting that the internal rivalry is
intense. In addition, new entry is relatively easy and the many different types of hotels guarantee that
there is a large substitution effect.

It is in this environment that boutique hotels appeared, yet another in a long list of ways that hotels
have tried to differentiate themselves. The innovation of boutique hotels was not a radical change
from current offerings. It was clear that the concept of boutique hotels enhanced the competence of
hotel operators. Many of the current practices in the industry were kept and sometimes enhanced or
lessened, but the new hotels did not represent a disruptive technology to the core concept of hotels.
By combining their existing market knowledge with new ideas of what a new and different segment of
customers desired, Ian Schrager and later Starwood were able to create (in Schrager’s case) or enhance
(in Starwood’s case) current offerings (see Exhibit 10: What Type of Innovation is the Boutique
Hotel?). Although the concept of boutique hotels did not destroy the existing market knowledge, it did
disrupt what hoteliers believed was the correct combination of product offerings to target the lucrative
segment of young and upscale consumers (it is important to note that boutique hotels themsel es are
not a disruptive technology, rather a more targeted offering to a particular segment that was either
ignored or underserved). The ultimate list of attributes combined in a boutique hotel is narrowly
aimed at this segment, and therefore the innovation of boutique hotels can be described as niche
creation (see Exhibit 11: How Disruptive Are Boutique Hotels?).

One of Ian Schrager’s highest-impact innovations within the boutique hotel category was the creation
of über-hip restaurants and bars, which became city destinations (rather than the traditional model of
pushing hotel guests into its restaurants and bars). Hoteliers shrewdly realized that their expertise lay
in the hospitality industry, and not the entertainment industry (where these restaura and bars reside).
By using alliances with well-known chefs and bar and restaurant owners rather than trying to create
these on their own, boutique hotels were able to create products that their target segment actually
desired and valued very highly (see Exhibit 12: Building of Alliances Between Hotels and
Bars/Restaurants). W’s and Ian Schrager hotels’ profit sharing and revenue deals with their alliance
partners will be discussed in the next sections.

Apart from restaurants and bars, Ian Schrager created other valuable new factors in his hotels, while
reducing or eliminating other factors that did not add value to the target segment. The framework of
value innovation as it relates to boutique hotels is shown in detail in Exhibit 13 (Actions for Value
Innovation). One of boutique hotels’ greatest advantages is the ability to offer a customized offering
in a small amount of space. This was done by reducing the size of rooms and area used by non-value
added items such as in-hotel shops and lobby space. The value curve for boutique hotels as compared
to Luxury hotels (Four Seasons) and Upscale hotels (Sheraton) is highlighted in Exhibit 14 (Value
Curve for boutique hotels).

Where did boutique hotels’ customers come from? These consumers were previous ly staying in the
various offerings that targeted upscale travelers. Luxury hotels offer exquisite service and a top-end

product, but they were increasingly viewed by some as ‘stuffy,’ and were mostly frequented by an
upscale, older clientele. Although upscale hotel brands such as Westin and Marriott offer a lower
price and an adequate service and product, these hotels have increasingly been viewed as ‘cookie-
cutter,’ offering a uniform and unexciting product. These hotels target the average businessman. In
contrast, the boutique hotel provides a more targeted luxury, drawing in a younger, but still upscale,
crowd (see Exhibit 15: Preference Structure).

There is a paradox present in the model of the successful boutique hotel. Naturally, given the high
fixed costs and the low variable costs in the hotel industry, selling as much as possible is preferred.
But one of boutique hotels’ value-added offerings is the feeling of exclusivity and being part of a
vibrant scene. This cannot be accomplished by allowing too many people to be part of the boutique
product. In terms of the innovation diffusion curve, this means that there is a forced and desired break
between early adopters and the majority of adopters (see Exhibit 16: Innovation Diffusion for
Boutique Hotels). One interesting way to understand boutique hotels is to see it as Ian Schrager’s
attempt to turn a hotel into a fashion item. Therefore, the highest willingness to pay will lie in a new
and ‘attractive’ product. There is a way to reconcile the issue of hotel size with hotel feel: expand into
new boutique hotels. The phenomenal growth of boutique hotels is currently possible because of how
few of these hotels currently exist. Instead of expanding the hotel itself, the way to expand in this
business and still keep the main value proposition of a boutique hotel is by increasing the number of
hotels in currently underserved areas. As cities become saturated with boutique hotels (as New York
might soon be), there will be a decreasing return on guests (and therefore revenues and profits), not
only because of overcapacity, but also because of the limit of upscale and young consumers in the

Using various strategy frameworks, we have shown that the offerings of boutique hotels have both
increased the target segment’s willingness to pay while at the same time reducing the hotels’ costs.
This gives them a competitive advantage over luxury and upscale hotel products (see Exhibit 17:
Competitive Advantage (WTP vs. Cost)). The advantage may not be sustainable though. Issues of
further segmentation (more targeted hotels) and the loss of the “new” feel as time progresses may
force boutique hotels to rethink their offerings and either further value innovate to raise willingness to
pay or reduce their costs through scale.

The next sections will highlight each of Ian Schrager and Starwood’ timings and approaches to
boutique hotels.

Ian Schrager Hotels (ISH)

Hotel as Theater

When asked to define the term “boutique hotel,” Ian Schrager provides a simple reply: “It’s a hotel
with a point of view.” Schrager approached hotel development with the belief that customers will pay
as high a premium for attitude, glamour, and exclusivity as they will for more traditional amenities of
a luxury hotel. In 1984, fresh from a 13-month jail term for tax evasion, Schrager and Studio 54 co-
founder Steve Rubell turned a rundown former single-room occupancy hotel (SRO) on Madison
Avenue in New York into Morgans. Draped entirely in blacks and grays, Morgans boasted provocative
Robert Mappelthorpe photos on the walls, impenetrably dark hallways, small guest rooms, part-time
models for staff—and a devoted clientele. xx Today, Ian Schrager Hotels (ISH) has expanded the
concept of ‘hotel as theater’ to 10 locations in New York, London, Miami, Los Angeles and San
Francisco. By starting with low cost properties such as SROs, adding powerhouse restaurants and
bars, offering limited extra services, and keeping demand high by staying at the edge of cool, Ian
Schrager claims to have achieved profit margins of 35% to 45%.xxi And the point of view? Schrager
directs the scene and the customers willingly play their parts.


Schrager hotels typically begin as urban properties that have some architectural distinction, but ha ve
fallen into disrepair and can be acquired cheaply. The Mondrian, which opened in West Hollywood in
1997, (bought out of bankruptcy for $17 million), was previously a fifties apartment block built to
evoke the work of the artist of the same name. xxii Schrager’s 1995 renovation of the Delano in
Miami’s South Beach marked the revival of a neighborhood known for its Art Deco design. ISH’s
acquisition and turnaround strategy is likely what attracted the attention of NorthStar Capital, which in
March 1998 paid $255 million for a controlling stake in ISH (reportedly around 70%).xxiii NorthStar’s
portfolio focuses on “undervalued assets [that] possess significant revenue-generating potential [and]
are either overlooked or out of favor in the eyes of mainstream investors.”xxiv With the backing of
NorthStar, ISH has been able to take on more ambitious investments including a May 1998 purchase
for $177 million of the Barbizon and the Empire, New York properties with over 300 rooms each. xxv


Ultimately, the Schrager developments that have succeeded prove that the value of a theatrical
production is its ability to cheaply transform an empty space into an emotionally compelling
environment. Beginning with French interior designer Andrée Putnam at Morgans, Schrager recruit ed
visionary interior designers who imbued each property with a powerful theme and an element of
fantasy.   The Royalton’s ‘ocean liner’ décor features portholes in the bathrooms, while the
Paramount’s ‘European’ touches extend to Vermeer reproductions over each headboard. xxvi

Schrager’s main collaborator and ISH partner over the past decade has been French designer Philippe
Starck, whose designs combine minimalism and extravagance. “For me, a hotel is a stage where I try
to inspire people to open up the door in their wake them up to realize they can reinvent their
own lives.”xxvii However, ego-driven design often takes precedence over practicality (one Starck-
designed shower door is infamous for its dangerously tricky handles). Like a stage set, Schrager
achieves his “look” at a low cost and is known for skimping on details that do not add to the overall
effect (such as the Royalton’s $1 Vermont instead of $8 marble). xxviii ISH rooms are also noticeably
smaller that those in hotels of equivalent star rating.       Without abandoning his penny-pinching
philosophy, Schrager has dramatically increased his renovation budgets, allowing him to build more
spectacular settings for guests—from $4 million at Morgans in 1984, to the $125 million refit of the
1000-room Hudson in 2000. xxix As Schrager has taken on higher -profile projects, his distinct vision
has occasionally clashed with local sensibilities. After ISH purchased the landmark Clift Hotel in San
Francisco from the Four Seasons Group in 1999, local activists organized protests to prevent him from
destroying the famous Redwood Room of the historic property.


ISH emphasis on ‘social engineering’ represents a significant departure from the path of established
hoteliers.   While traditional hotel service foc uses on serving the needs of the individual guest,
Schrager views a hotel as he would a nightclub—guests are there not simply to rest and eat, but to be
part of a group experience, which reinforces their membership in the stylish urban elite.

         “I'm more of a social scientist than a businessman or a hotelier. When I sit down with
         Philippe, we talk about the sociology: What are people doing, what are they avoiding, where
         are people going, where are they moving—together, en masse, or apart? We're not talking
         about fabrics or walls or design, but the whole idea of the way people behave.”xxx

From the outset, Schrager’s motto for his hotels has been ‘you are where you sleep.’ Driving this
message home even further, ISH populates its hotels with a staff vetted for style and physical beauty
and often comprised of part-time actors and models. In 1996, Schrager’s redesign of the Mondrian
included the dismissal of a team of Latino and Asian bellhops, who were described in a famous
Schrager memo as “too ethnic.” (The ensuing complaint to the EEOC resulted in a million dollar
settlement.) Similarly, the utilitarian aspects of a hotel (room size, professional service) are often
downplayed in favor of spectacular lobbies, gardens and public spaces full of beautiful people that
serve to remind guests of the cachet that comes with staying at a Schrager hotel.


This phenomenon is in greatest evidence at the hip restaurants and bars that are attached to each
Schrager property and defended by various layers of doormen, maitre d’s, and VIP lists. While hotel
restaurants have typically been loss leaders designed for the guest convenience, Schrager’s serve as
the main draw of each property—Asia de Cuba and 44, among others, have become local hotspots and
celebrity hangouts. Created, owned and managed by celebrity restaurateurs like Alain Ducasse, they
not only create buzz, but also constitute profit centers in their own right. As landlord, Schrager claims
        -10% of gross revenues and 50% of profits. xxxi For ISH guests, the relationship between a
to take 7
hotel like the Mondrian and its über -trendy Sky Bar is priceless—a room key is the only guaranteed
way to get past the bouncers. With the bars’ individuality comprising a major source of ISH’s
competitive advantage, Schrager actively defends them from imitators. In May 2000, Schrager filed
suit against Rande Gerber, who had run three of ISH’s most successful bars before leaving the
organization to join Starwood’s W hotel chain. Claiming that Gerber had recreated ISH bars at W
properties and shared secrets with the competition, Schrager waged a public battle with the bar
operator, eventually buying him out of Morgans and Skybar for $1million. xxxii


Beyond their contemporary design and central locations, ISH hotels are dependent on a steady stream
of celebrities to sustain the feeling of ‘access’ that Schrager provides to guests. The aura of exclusivity
surrounding each property has, until recently, been backed up purely by shrewd public relations, never
advertising. According to Schrager, “You can get a million dollars of free publicity by underwriting a
party for $10,000.”xxxiii Schrager hotels have played host to events for Miramax Films and MTV, and
a team of publicists makes sure that the properties get mentioned in trendy periodicals and celebrity
magazines alike. In addition, Schrager’s website offers, in exchange for an email address, a few dozen
photos of celebrities mugging for the cameras at his hotels as well as a feature called ‘The List,’ which
offers visitors an inside view on what’s hot in each Schrager city.

Targeting / Pricing

Schrager’s investment in ‘cool’ translated into real value in the eyes of his target market. ISH
clientele has consisted heavily of professionals from the media and entertainment industry and their
hangers-on. (Originally Schrager used this fact to justify the small sizes of his guest rooms, assuming
that his guests would most likely be too busy partying to notice. xxxiv) More generally, the segment
attracted to a Schrager hotel is looking, if not for innovation, than for a non-generic experience. In
providing an environment distinctly different from that of the predictable luxury hotel chains, Schrager
hotels also excluded the features that are more or less irrelevant to its target customers, most notably
meeting and conference facilities. This acted as a deterrent to group bookings and a draw for those

who seek out uniqueness. However, the ISH deliberately avoids comparisons to traditional luxury
hotels. By cutting away extraneous and costly services and focusing on image, Schrager is able to
offer his customers a completely new value proposition he describes as ‘cheap chic.’ ISH room rates
run as high as $5000/night, but are generally priced slightly lower than luxury establishments.
Schrager has also made a point of publicizing the ‘democratic’ rates of the Paramount on Times
Square, as well as the $95/night rooms at the Hudson (though these tiny rooms are in very limited
supply and standard rooms are listed at $175).xxxv According to ‘cheap chic,’ Schrager hotels
discriminate on style but not on spending power —thus manage to be both hip and proletarian.

Growth Strategy

During the flush economy of the late 1990’s ISH and NorthStar actively sought to replicate the
Schrager formula in different formats and on a larger scale. Schrager opened his largest hotel to date,
the 1000-room Hudson in 2000 and strayed from ‘cheap chic’ with the Clift in San Francisco (rates
start at $260). In addition to the 1998 purchase of the Empire and Barbizon in New York for $177
million, ISH (with a loan from CSFB ) acquired the lease for the iconic St. Moritz, promising to
undertake a $100 million refurbishment.xxxvi Most remarkably, in 2000-2001, ISH acquired at its first
build-from -scratch property on New York’s Astor Place, employing Dutch architect Rem Koolhaas,
saying “There isn't as much financial upside...but this is a chance to have an impact on the skyline of
New York.”xxxvii Three of the four New York projects have since been abandoned and creative
differences with Koolhaas led to a replacement with architect Frank Gehry. Nonetheless, Schrager
continues to look for growth opportunities. In the US, ISH is exploring sites in Las Vegas and is due
to open a beachfront ‘summer camp for adults’ in Santa Barbara, CA. In a dition, as the only
independent US boutique brand with a presence in Europe, ISH is looking to expand further into
London as well as Paris. According to Schrager, his strategy is to “go into international, 24-hour,
gateway cities and do multiple hotels at various price points.” xxxviii

Reaction to Competition

Schrager’s new focus on market-driven differentiation ultimately reflects deep changes in philosophy
that have gradually taken hold at ISH, particularly in the face of increasing competition from other
boutiques, most notably Starwood’s W chain. (In New York, boutiques are so popular that no large
hotels are due to open before 2004xxxix) As more hotels adopt a design driven approach over mass-
market architecture, Schrager has found that as a competitive advanta ge, ‘coolness,’ particularly in
trend-obsessed cities is both substitutable and difficult to sustain. Additionally, the recession had a
particularly negative effect on clients in former ISH strongholds like the media and tech sectors.

Changes over the pas t 2 years include:

§   Professionalization of management/staff: With the opening of the Clift, ISH installed its first
    human resources department and training programs. Similar moves have been taken at other
    properties where waits for room service were known t run into the hours. More recently, ISH
    hired a new VP for the Paramount in New York—the former general manager of Starwood’s
    Phoenix resort in Arizona.

§   Redesign/Renewal: ISH is believed to be pursuing a $400 million refinancing of existing hotels.
    The Paramount is undergoing renovation, including the renaming of its once-trendy Whiskey
    Bar. xli

§   Comfort over coolness: In a 2002 Wall Street Journal article, Schrager said his hotels would
    become “more comfortable, not quite so provocative in the rooms, [with] more lighting. I'm not
    going to rely on having the coolest lobby or bar.” Schrager was also said to be distancing himself
    from longtime collaborator Philippe Starck. xlii

§   Business services: Despite previously being labeled as “the media place to stay,” ISH is pursuing
    relationships with traditional purchasers of business travel accommodation, including Morgan
    Stanley. All locations currently feature meeting spaces a. Schrager: “I’m giving access to my
    hotels to some segments that I haven’t given access to bef ore.” xliii

§   Price Reductions: In 2002, rooms at the Paramount were offered for $145, about half previous

§   Advertising/Incentives: ISH launched a billboard campaign and sent 500,000 fliers to previous
    guests, offering a free night for two paid nights. Additionally, in March 2002, Schrager developed
    limited-time incentives for travel agents including 15% commissions and cash rewards.xliv

ISH has reacted to increased competition by re-focusing on service and individual customer needs,
                         rom the playbook of the industry it once disrupted. However, as ISH
ironically taking a page f
increases the range of services and guest amenities, it runs the risk of cutting into the cost advantage it
has traditionally held over its rivals. More importantly, efforts to attract a wider clientele threaten the
delicate formula that gives Schrager hotels their aura of hipness and exclusivity, undermining the main
pillar of Schrager’s value proposition.

Starwood/W Hotels

Starwood’s Timing and Approach of Entry


Starwood entered the lifestyle hotel segment because “Barry Sternlicht [CEO of Starwood] wanted to
create a different, cutting edge hotel line…using physically tired assets and converting them to cater to
a different type of market and outsourcing the restaurants and bars to professionals.”xlv Starwood
launched the W line in late 1998 with the opening of the W New York in midtown Manhattan.
Designed to appeal to business travelers in the 25-49 age bracket, with incomes at or exceeding
$100,000, the launch of W happily coincided with a major economic boom, helping the brand find its
niche immediately. xlvi

By late 1998, the market for lifestyle or boutique hotels had already been well established by
entrepreneurial hoteliers. The Kimpton Group launched its first boutique hotel, the Bedford in San
Francisco’s Union Square, in 1981. Ian Schrager’s Morgans Hotel, was opened in 1984, Chip Conley
started Joie de Vivre Hospitality with the launch of the rock n’roll-themed Phoenix Hotel in San
Francisco in 1987, and the Kimpton Hotels and Restaurants Group began “the successful renovation
and repositioning of old buildings into charming hotels paired with popular restaurants” on the West
Coast as early as 1982. xlvii The popularity of the concept, the potential for significant cost savings, and
the relatively high willingness to pay, despite a more limited range of offerings and services, had all
been well established. The major questions for Starwood were whether an obviously “corporate” hotel
could draw the same stylish clientele that floc ked to offbeat boutique hotels and their popular
restaurants, and how far the concept could be extended before the market for lifestyle hotels reached

Value Proposition

Unsurprisingly, the W hews to the classic boutique formula of small rooms and high style, charging a
price premium to Starwood’s upscale Westin line. Starwood played up the hotel and room amenities
while being relatively honest about the hotel’s drawbacks. At the W New York, the first hotel
launched in the W line, so-called “Wish Rooms” are advertised at $209 per night, only a small
premium to the New York nightly average of $203,xlviii but customers are told upfront “Our wish
rooms are small and cozy and so is the rate…get a cozy room with the ultimate queen bed,
complimentary movie, and all the extras —custom formulated Aveda botanical bath products, lush spa-
style cotton pique W bathrobes, W ‘Goodie Box,’ and much more.”xlix The lobby of each W is
decorated with orchids and green apples because, according to Sternlicht, “orchids are not expensive

and will last at least six months. When I first started this business, I put orchids and green apples at
the front desk of a property. Suddenly, the hotel looked expensive. It only cost $800 to implement,
but it changed the entire price category of the hotel.”l

The website also promises “savvy travelers refuge in a hectic world.” Calling the hotel an “oasis” and
noting that “the amenities are unparalleled,” the hotel’s web page highlights some of the name-brand
talent that gives the hotel its stylish edge. “Architectural designer David Rockwell has created a
tranquil sanctuary inspired by nature's elements - earth, wind, fire and water. Lose yourself in public
spaces that feel private…Savor a delicious meal at Heartbeat, the hot restaurant from Drew
Nieporent—creator of Nobu, Tribeca Grill and Montrachet—featuring noted chef, Michel
Nischan…Immerse yourself in the intimate scene at WHISKEY BLUE—Rande Gerber's creation that
redefines nightlife.”li

Perhaps most importantly, Starwood feels that service is what differentiates the W from a typical
boutique hotel, and hence rejects the ‘boutique’ label applied to Schrager’s hotels among others.
Schrager admits “I was alone in this market for 13 years. When you are the only game in town, you
can get away with certain things. But, you learn that if the air conditioning does not work, it is not
good for anyone…I never had a training program or a human resources department.”lii Starwood’s bet
is that it can woo the same type of customers attracted to boutiques, but retain them through superior
service. To that end, it is the first company in the hospitality industry to embark on a Six Sigma
initiative, investing $17 million in training costs in 2001 alone. liii Says Sternlicht, “Travelers don’t
want to jump from hotel to hotel. They want to rely on certain amenities like an exciting meeting
place in the lobby of each W hotel and on a certain level of service…” liv

Starwood/W’s Financial Structure, Support and Ownership

Economics of construction and operations

Starwood founded the W line to fight the growing trend towards commoditization in the hotel
industry, but it still hews to a low -cost strategy whenever possible. By renovating “physically tired
assets” rather than engaging in new construction (a notion pioneered by Schrager and other early
entrepreneurs in the space), Starwood reaps significant cost The W New York was financed
for $225,000 a room, in comparison to the industry average of $400,000 for a new hotel. lvi In
comparison to independents, however, Starwood can benefit from economies of scale in construction.
Further economies of scale can be reaped from Starwood’s large purchasing and maintenance
contracts. lvii

Does Size Matter?

A W Hotel is generally far larger than the typical boutique hotel, which has approximately 150
rooms.lviii At 713 rooms, the W New York is the largest of all the W hotels controlled by Starwood;
the W Chicago Lakeshore (a converted Days Inn motel) runs second with 556 rooms. lix The average
W has about 311 rooms.lx While this is far larger than the average boutique hotel size of 150 rooms, it
is still smaller than a typical Westin, which has over 400 rooms.lxi Starwood and Schrager have both
bet, apparently with success, that customers do not highly value intimacy in a lifestyle hotel as much
as design and thematic elements, warmth, and energy. (see exhibit 18 for a list of W properties)

W Hotels Financial Reviewlxii

Despite being a new brand, W Hotels generate higher ADR and RevPAR than the average upper -
upscale properties. W Hotels mainly focus on transient business customers, which constitute 70% of
their overall business. Boutique hotels are highly leveraged: when the market is up, they do
especially well because they attract transient business customers, which generate the highest
revenues (groups negotiate discounted rates in exchange for volume). However, in economic
downturns, transient travel declines, so boutique hotels suffer more than mass-market hotels
geared towards group business. Thus W hotels’ high operational leverage serves them well during
good market conditions, but is a burden during bad market conditions, since W hotels have a limited
capacity to increase group sales when the transient market is underperforming.

For example, during 2001, RevPAR at Starwood’s W hotels declined 16.4% and EBITDA declined
41.1%, whereas Starwood’s overall North American owned portfolio recorded an 11.9% RevPAR
decline and a 23.1 EBITDA decline. (See table below). By contrast, in 2000, W hotels were more
profitable than the rest of the North American portfolio, with an EBITDA margin of 34.7% vs. 33.3%
for the portfolio. While the brand is still very new and has not yet gone through a full lodging cycle,
early indications are that Starwood was able to exploit the brand’s leverage during the economic
boom: the W New York, W San Francisco, and W Los Angeles together gave a 20% ROI in 2000.

Profitability comparison of W hotels vs. Starwood’s North America, 2001

                    RevPAR (%)            EBITDA (%)           Margin               Flow -through
W Hotel             -16.4                 -41.4                -930bp               2.5x
NA Owned            -11.9                 -23.1                -430bp               1.9x
Source: Deutsche Bank, Company Information

The W Experience


Lifestyle hotels compete vigorously on providing first-class amenities to their guests. A stylish cotton
bathrobe, toiletries from Kiehl’s, Aveda or another small, salon-quality firm, and plush bedding are
par for the course in boutique hotels, capitalizing on one of the more popular features of luxury hotels
(W rooms promise guests 250 thread count sheets, goose down comforters, and Aveda bath products).
In contrast to a Ritz Carlton or Four Seasons, which downplay their extensive business services
beneath a veneer of old-world elegance, W offers a more visible, ‘wired’ approach to service and
intends to extend them further through a deal with Cisco Systems to provide extensive broadband
services.lxiii Rooms have high-speed Internet access through the 27-inch TV’s entertainment system, a
CD player (and library of CDs available on request), coffeemaker with W’s own designer coffee
blend, a high-speed port for guests who have brought their own laptops, and two phones in every
room. Guests who want privacy are offered 24-hour room service from the fashionable restaurants
located in the hotels, or are given priority access to tables. Because its guests are primarily business
travelers, W offers a full-service business center in most lobbies and will arrange meetings and
functions. lxiv

Restaurants and bars

One of the keystones of the W concept is to provide trendy restaurants and bars that draw in a local
audience as well as hotel guests. This is a complete transformation of both the traditional upscale
hotel concept of a restaurant that provides sustenance to tired guests but does not attempt to serve the
type of food that would attract a clientele not staying in the hotel, and of the traditional luxury hotel
concept of a formal fine dining venue where a meal will feature extremely refined service and often
last three hours. To attract a stylish crowd interested in eating fashionable food, Starwood has
recruited celebrity chefs to helm the restaurants in its hotels, leasing the space to boldface names like
Drew Nieporent (Heartbeat in the W New York, Earth & Ocean in the W Seattle, and Icon at the W
New York—The Court), Todd English (Olives at the W New York—Union Square), and Gail
Deffarari (XYZ in the W San Francisco).

A popular nightlife venue is also a key element of the image W is trying to portray and helps keep the
hotel occupied with leisure customers on weekends. To build a collection of hip bars, W established a
partnership with former model and nightlife impresario Rande Gerber in 1996, as the company
planned its launch of the W New York, purchasing a 49% interest in Gerber’s company Midnight
Oil. lxv Gerber was leasing commercial real estate at Ian Schrager’s Paramount Hotel in New York
when he opened a bar there called The Whiskey. His formula of tightly controlling the guest list by
effectively limiting it to guests of the hotel, local VIPs, and celebrities proved extremely popular, and

Gerber began to operate bars in other Schrager properties, including the Whiskey in the Sunset
Marquis Hotel in Los Angeles. When Gerber moved to the Starwood camp, his relationship with
Schrager soured and the two have engaged in a near-constant legal battle since, with Schrager buying
Gerber out of some properties and an agreement that leaves Schrager the rights to name his bars “Sky
Bar,” and Gerber “Whiskey.”lxvi

Meeting rooms

While many boutique hotels have eliminated meeting spaces as a cost-cutting measure, W uses its
function space as a competitive advantage. This enables it to derive up to 20% of its business from
groups. lxvii Although it cannot host the large functions many mass-market hotels regularly run, most
W hotels offer several smaller meeting areas and market them to executives concerned with form as
well as function. W has innovated the concept of ‘Sensory Meetings,’ which promise “a new way to
motivate minds and get ideas flowing, using the five senses as inspiration. Mood music, aromather apy
scents, retro candies, and many other special touches help set the tone.” lxviii Of course, the hotels also
offer their meeting spaces on weekends for weddings and parties.

Catalogue and the W Store

Because building a returning clientele is a key profit driver for W, it looks to invade its customers’
lives to the greatest extent possible. To that end, it has established an online and print catalog that it
places in each guest room, allowing customers to take the W experience home with them. In addition
to the W signature waffle weave cotton robe, bed linens and mattresses, and branded clothes and
accessories, customers can find in the W store catalogue a juicer designed by Philippe Starck, stylish
modern office accessories, and for the truly young at hear t, a skateboard. The chain also maintains a
physical store in the W New York Times Square.

Starwood’s Competitive Advantages

Corporate Structure

W hotels benefit from significant competitive advantages by being part of the Starwood organization.
The brand can exploit Starwood’s resources, from website design and upkeep to access to Starwood’s
sales and marketing network. W also benefits from synergies with Starwood’s loyalty programs: in a
model reliant on repeat business, 80% of the W customer base is a member of the Starwood Preferred
Guest (SPG) loyalty program.lxix This helps W retain customers, but it also brings in new customers
who experience the W brand for the first time when they trade in points accrued at other Starwood
brands or through purchase made with firms that allow customers to earn SPG points; the company
does not view cannibalization as a significant risk. Loyalty programs are also considered a value

driver for business travelers in the upscale segment, although not as important as price, hotel type, or
location. lxx

Because W can leverage the existing Starwood corporate structure, it can be run as a relatively lean
operation. Under a VP of operations, W has one director of sales and marketing, a training director,
and a team of 10 workin g in design and development. This team works with various architects to keep
the brand image consistent across W hotels, while each hotel remains stylistically unique, choosing
upholstery and room design elements for each hotel.

Cost Savings Through Economies of Scale and Scope

The size of the Starwood organization and number of hotels in the chain also lower costs through
significant economies of scale. All Starwood hotels share a common property management system
(PMS) connected to a proprietary central reservations system (CRS), Starlink, capable of yield
managing room rates across one hotel or an entire market (see Exhibit 19 – The hotel business
transactional process – reserving a room). A seamless connection between a hotel’s PMS and the
chain’s CRS offers hotels the ability to coordinate and yield manage individual and group sales
reservations. These reservations can come through travel agents accessing any one of the four
centralized Global Distribution Systems (GDS), websites (both Starwood’s proprietary website and
unaffiliated travel websites, which hit Starlink via the GDS) and telephone. By contrast, independent
hotels cannot afford a customized CRS, while Ian Schrager only implemented a standardized PMS
across his hotels in early 2003. lxxi Independent hotels and small chains must find a way to link their
PMS (or CRS if they have one) to a switch providing access to the four GDS systems; this is often
accomplished by joining a marketing group or signing up with a GDS representative such as Utell,
Unirez, or Lexington Reservation Systems, all of which charge significant fees —on top of the GDS
fees—for each reservation or sometimes for each night of stay. Finally, Starwood benefits from
pricing and sales information from its other hotels in each W’s market, information not available to
independent hotels and small chains.

W also benefits from Starwood’s economies of scope, gaining advantaged pricing on maintenance
contracts and supplies as part of a large family of brands. In contrast, independent hotels and small
chains must purchase in smaller quantities and pay higher prices. Starwood is also able to devote
more resources to improving its supply chain management than a small chain or independent hotel,
seeking out and achieving cost savings in its purchases of items including linens, cleaning supplies,
telecommunications, and IT infrastructure.

Quality of Service

All W Hotels are tightly controlled by Starwood (e.g., owned, leased, part of a consolidated joint
venture, or managed by Starwood),                which gives the company a far greater ability to control the
level and consistency of service than it has for franchised hotels managed by third parties. While
Starwood franchises its Westin, Sheraton and Four Points by Sheraton brands, it is not pursuing a
franchise strategy for W.lxxiii Starwood defines the service philosophy for the W brand as follows: W is
“a fresh alternative combining the personality and style of independent hotels with whatever you want,
whenever you want it service.”lxxiv Based on industry reviews, it has apparently succeeded in this
strategy: Business Travel News ranked W Hotels first in the upper-upscale category for 2001, rising
from fifth place the previous year, and beating long-established competition from Loews, Le Meridien,
and Inter-Continental. lxxv Condé Nast Traveler Magazine named three W hotels to its 2002 Gold List,
consisting of the magazine readership’s favorite hotels, resorts and cruise lines worldwide. lxxvi

In comparison to independent hotels, W benefits from the ability to train its staff using techniques that
have been established and rolled out across the entire Starwood organization, such as its $17-plus
million Six Sigma initiative. This is especially critical in a segment of the industry that suffers higher
turnover than industry average; because lifestyle hotels tend to recruit young, trendy, good-looking
staff, there is a high risk of losing that staff to more rewarding opportunities in the fields of modeling
or acting. lxxvii


The W model is to build hotels in major urban destinations. These destinations cement the brand’s
status as a business hotel; to boost its leisure bookings, the line uses a heavy promotional push to
entice out-of-town and even local guests for weekend stays. Efforts include advertising (including a
major campaign in national magazines and the Wall Street Journal for late winter/spring 2003) and
targeted promotions often bundling added-value services such as spa treatments, meals, parking, spa
discounts, flowers, and champagne with rooms at special prices.

Urban locations were hardest-hit by the aftermath of the September 11th attacks on the travel industry.
However, Starwood considers that the worst is over on this front and that the company’s urban focus
leaves it “levered to the busines s travel recovery.”lxxviii

Willingness To Pay

The W brand appears to be a good example of value innovation: Starwood has eliminated features and
services that are not important to customers and accentuated or implemented services and features that
add value to ts base. A specific example might be its popular ‘Wired’ promotion, offering guests
unlimited high speed Internet access, unlimited local, toll free, and domestic long distance telephone

calls, and a keepsake mouse pad, in addition to the room, which was based on customer requests. Key
features such as fitness centers and the W’s signature Away Spa are accentuated, while expensive
elements not highly valued by customers, such as room space, exterior balconies, and new
construction, are eliminated. Branded hotels also offer an enhanced image of security in comparison
to independent hotels, for which both business and leisure travelers are willing to pay a premium:
10.75% for leisure travelers, and 7.73% for business travelers.lxxix


Internet bookings are a significant opportunity for hotels, because they eliminate all fees normally paid
to GDS companies and outsourced customer service telephone operators, as well as travel agent
commissions. Thus Starwood has made a significant investment in its hotel websites, as have many of
its competitors. This effort appears to have begun to pay dividends: the company has experienced a
60% increase in web bookings over the past year.lxxx While independent hoteliers are also investing in
allowing online bookings, many do not have the capability of eliminating third parties from the
transaction, and still have to pay GDS fees on any sales booked over the Internet. For example, Ian
Schrager’s site is powered by, and uses Pegasus to link to the GDS.

Marketing and Public Relations

W is able to leverage Starwood’s significant investments in marketing in ways not available to
independent hotels and small chains.        Starwood has dedicated significant resources to its hotel
websites. W plans to roll out a new web design in mid-March, and envisions a “constantly evolving”
web presence. lxxxi However, because W seeks a significantly different image than the other Starwood
brands, and relies heavily on PR to maint ain its trendy image, it does not rely on Starwood’s internal
PR department and instead pays a fee to an outside company. lxxxii

Growth Strategy and opportunities

A new location for a W hotel must meet several criteria. First, the location itself must serve the
brand’s image: for example, the W Atlanta (in Buckhead) and the W Suites in Newark, CA (Silicon
Valley) are W’s only suburban locations. If a location is suitably urban and hip, the market must still
be able to support a hotel at a $50 price point premium to a Westin and an even greater premium to a
Sheraton. Starwood will not open a W in a market that it believes cannot sustain greater than a $30
premium to a Westin. lxxxiii

The W brand accounted for 6% of Starwood’s EBITDA in 2001, when it declined more heavily than
other Starwood brands because its distribution is weighted towards markets profoundly affected by the
business downturn in 2001. Starwood intends to grow the brand aggressively over the next five years,

increasing the total number of W hotels to 50 by 2007. lxxxiv Starwood owns 22 properties that do not
fly the flag of one of the Starwood brands and thus appear to be ripe for conversion into W branded
hotels. lxxxv

Long term strategy

Starwood views W as a growth vehicle, feeling the brand strategy has been successful and that the line
has earned its place in the Starwood portfolio. Developers are excited to partner with Starwood in a
time of decreasing capital investment in the hotel industry. One question mark still to be resolved is
how the capital replacement cycle economics will play out for the brand. While larger Starwood
assets, such as Sheraton hotels, tend to be renovated on a 20-30 year cycle, W's upper upscale
segment, fashion-conscious target market, and reliance on design elements will require more frequent
renovations. At this point, the existing W hotels are too new to estimate the economic impact on the
life of the capital invested in the brand. Of course, this capital replenishment issue would also affect
independent boutique hotels as well as W hotels.

Boutique Growing Pains

Sensing a market opportunity, others soon jumped onto the bandwagon. In 2001, Marriott announced
it was repositioning its Renaissance brand as a chic boutique chain, stating “We figure 30% of the
market out there is attracted to the boutique, sort of eclectic, sort of different, give-me-a-surprise kind
of hotels.”lxxxvi Marriott has also made a combined $140 million investment with Italian jeweler
Bulgari to launch a line of boutique hotels in Europe. lxxxvii This gold-rush m entality may have created
a surplus of boutique hotels in the market. After the events of September 11th, 2001, which left the
travel industry reeling, many boutique hotels were struggling to survive. Still relatively new, they
were not yet as competitiv e as seasoned players, and without significant meeting space (a costly use of
space eliminated in many boutique hotels), they had fewer tools to drive demand during a
downturn. lxxxviii Service also became a differentiator: because staff at a boutique hotel is often chosen
for looks, style, and energy, training can be spotty and staff may neglect to maintain a deferential
‘service’ attitude under high-pressured situations.     Given the “ego-driven” nature of the typical
boutique hotel client, keeping staff more exci ed by a dreamed-of career in modeling or acting than
their current job “interested in what the hotel is,” is a challenge boutique hotels cannot ignore if they
want to survive. lxxxix

Perhaps because of this backlash effect, W Hotels has attempted to categorize their product as
‘lifestyle hotels’ rather than ‘boutiques,’ with a stronger emphasis on service as a differentiating factor
as well as the now-expected design, chic restaurants and bars, and individual style.xc Says Lisa Zandee
of W, “We have never used the term boutique—though others have used it of us. People in the US are
questioning the longevity of boutique hotels because what happens, after they come into fashion, if a

lot more open? We are trying to make our brand last by not making it too trendy. We don’t want
design that will be out of date tomorrow.”xci

The events of September 11 hit urban, upscale hotels extremely hard, as business travel declined and a
shaken customer base began seeking out comfort and solace over a hip, trendy lobby scene. “Given
the state of the economy, [boutique hotels] became not only less appropriate (but excessive),” notes
Bjorn Hanson of PwC.xcii Says Chip Conley of Joie de Vivre, a 22-hotel chain based in San Francisco,
“We’re in the era of the post-hip boutique hotel. Travelers have had enough of hotels that are all about
the scene and are moving toward those that are stylish, comfortable and offer something they can
relate to.” xciii “We have to move away from positioning as a status symbol and move to positioning as
a comfortable sanctuary,” agrees Jim Berra, Starwood’s vice president of customer loyalty. xciv Despite
the volatility of the segment, Starwood has rushed to open new W hotels (17 are open to date, with
five in New York City alone, and launches are planned for Mexico City and Seoul later this year),
calling the brand a “runaway success.”xcv Indeed, the line experienced an increase in revenue per
available room night (RevPAR) of 30%, from $142 to $182, between fourth quarter 2000 and the same
period a year before. xcvi However, because the hotels are primarily located in cities that suffered major
downturns after September 11, the average daily rate for 2001 suffered a 23% decrease from the prior
year, from $245.83 to $189.76. xcvii After September 11, urban hotels in general saw occupancy rates
decline from 68.2% in 2000 to 56.2% in early 2002; boutique hotels showed a similar pattern with
rates declining from 73.7% to 55.6% during the same period, according to Smith Travel Research.
However, boutiques have been rebounding more slowly than other segments, and “they’re probably
going to face an uphill struggle for the foreseeable future,” according to Smith Travel Research analyst
Bobby Bowers.xcviii Nonetheless, the W brand saw 14.2% RevPAR increase in fourth quarter 2002
over the same period a year earlier. xcix

Conclusion: Is Ian Schrager’s approach to hotels sustainable? Will W outperform ISH?

Arguably, Ian Schrager Hotels used value innovation to change many contextual elements of the
upscale hotel business model. Primarily, Schrager altered the scope of competition by offering
unique, design-led customer experiences. Schrager hotels reintroduced creative differentiation to an
industry that was accustomed to competing solely on the ability to provide the same array of standar d
luxuries at the lowest cost. Additionally, he revived an element of turn-of-the century grand hotels by
developing restaurants and bars that functioned as local draws and profit centers.

However, the entry of Starwood’s W proved that a hotel can also be successful by adopting selected
aspects of the boutique formula while highlighting comfort and service. Schrager’s recent move to
embrace traditional elements of customer focus (improved customer service, implementing advertising
and business services) confirms that service is a key willingness to pay factor for many segments of

the increasingly heterogeneous boutique hotel customer base. Industry observers note that Schrager
may be alienating his core clientele by allowing too much of the mass market behind his velvet rope,
leaving himself ‘stuck in the middle.’ The tastes of this trend-setting group are notoriously fickle,
particularly in the face of intense competition in cities like New York. By attempting to turn hotels
into fashion items, forgetting that fashion inevitably fades, Schrager may find sustainable profitability
elusive. Furthermore, Schrager will be required to invest frequently in renovating his properties if he
intends to keep them ‘fresh’ and ‘buzzworthy.’

Ian Schrager’s main opportunity may be to retrench to serving the style elite that make up his core
customer base, and using his current European footprint to be the first mover in cities outside the US
with no existing boutique presence. However, his independent status may prevent him from gaining
access to the capital he needs to pursue necessary expansion, particularly in a downturn. Starwood, on
the other hand, closed a new $1.3 billion senior credit facility in October 2002, leaving it with $600
million of capacity after refinancing its existing debt, and claims that developers are excited to partner
with the company to develop W hotels in a time of decreasing capital investment in the hotel industry. c
ISH’s global ambitions run a serious risk of being preempted by Starwo or by European
entrepreneurs and hoteliers with deeper local knowledge and pockets.

The high leverage of lifestyle hotels has led them to suffer heavily from the current economy in their
core urban markets. However, the W brand is better positioned than most to survive the downturn. W
can leverage Starwood’s established sales organization and extensive contacts with corporate planners
to stimulate contracted business travel towards W hotels as needed. On the other hand, independent
boutique hotels, including Schrager's properties, do not have the meeting spaces, sales organizations,
or relationships to attract group business in times of economic downturn. As a result, hoteliers such as
Schrager are forced to turn to less-desirable sources of transient guests such as Expedia/Travelscape
and These websites provide hotels with large volumes of guests, but at a high cost:
hoteliers must set aside blocks of rooms at low net rates, pay high distribution costs, and potentially
suffer brand dilution in the case of image-sensitive hotels like Schrager's.

While boutique hotels in general must wait for sunnier economic times to thrive again, Starwood
appears to have built a sustainable competitive advantage over first-mover Ian Schrager that holds in
both good times and bad. Schrager is rightly credited with popularizing the boutique concept, but W
has found a way to bring the cachet of boutique hotels to a wider audience, without damaging the
brand’s credibility. Schrager may well survive as a niche player, but W is better positioned to succeed
in the long run. Thanks to its superior corporate organization, economies of scale, and quality of
service, the W brand is poised to be more than just a passing fad in the hotel industry.


W Hotels









Ian Schrager Hotels






Exhibit 1:

 US Hotel Industry – Short History in numbers

   120            Sales (US$ billion) - lhs          Occupancy (%) - lhs                                 5,000
                  Average Room Rate (US$) - lhs      Total hotel rooms (in thous.) - rhs
   100                                                                                                   4,000

    20                                                                                                   1,000

     0                                                                                                   0
           1900    1910    1920     1930    1940   1950    1960     1970      1980         1990   2000

 Source: American Hotel and Lodging Association

Exhibit 2:

           US Lodging Demand and GDP – 1968 -2001

           Source: PricewaterhouseCoopers, Smith Travel Research, Deutsche Bank

Exhibit 3:

    US Rooms under Construction Versus Existing Supply as of July 2002
    Number of Rooms Chain               In construction      % Existing Room     Existing Room Base
    Scale                                                                Base
    Upper – Upper Scale                         26,504                  4.4%                605,795
    Upscale                                     22,189                  6.9%                323,430
    Mid Scale w/F&B                              4,364                  0.7%                630,162
    Mid Scale w/o F&B                           18,586                  3.2%                577,508
    Economy                                      5,243                  0.7%                778,890
    Unaffiliated                                25,803                  2.0%              1,305,034
    TOTAL                                      102,689                  2.4%              4,220,819
    Source: Smith Travel Research and Deutsche Bank Securities Inc., estimates

Exhibit 4: Timeline of the Hotel Industry

1900 - A typical first-class hotel offers steam heat, gas burners, electric call bells, baths and closets on all floors, billiard and sample rooms,
barbershops, and liveries. The Lenox H offered "fireproof lodging, unexcelled cuisine, a shower bath, roof garden, and
American/European lodging plans starting at $2."
1904 - New York City's St. Regis Hotel provides individually controlled heating and cooling units in each guestroom.
1908 - Gideons International places their first Bible in the Superior Hotel in Montana. The Hotel Statler chain begins in Buffalo. All
guestrooms have private baths, full-length mirrors, telephones, and built-in radios, serving as the model for hotel constr       uction for the next 40
1910 - The American Hotel Assn. is formed for the "apprehension and punishment to the fullest extent of the law, of professional deadbeats,
check forgers, dishonest and undesirable employees, crooks of all descriptions and such other matters." The lodging industry consists almost
entirely of hotels situated in urban centers and resorts near the principal vacation destinations. Electricity is beginning to be installed in new
hotels for cooking purposes, as well as for lighting. However, most hotels place candlesticks, new candles, and matches in every room-
electric light bulb or not.
1916 - The Federal Road Aid Act spawns a new segment of the lodging industry.
1919 - Conrad Hilton purchases his first hotel, The Mobley, in Cisco, Texas.
1920s - Golden Age
1920 - Prohibition begins.
1922 - The Treadway Company has some of the first management contracts on small college inns. The first collegiate program in hotel and
restaurant management is initiated at Cornell University by the American Hotel Association.
1925 - The first roadside "motel" opens in San Luis Obispo, Calif., for $2.50 a night.
1927 - The Hotel Statler in Boston becomes the first hotel with radio reception; rooms are equipped with individual headsets to receive
broadcasts from a central control room. The Huntington Hotel in Calif. installs the first Olympic-size hotel swimming pool.
1929 - Western Hotels, now Westin, starts with 17 hotels in the Pacific Northwest and establishes the first U.S. hotel management company.
The Oakland Airport Hotel becomes the first of its kind in the country.
1930s - The Great Depression
1930 - Four out of five hotels in the United States go into receivership. The standard travel agent commission is 10 percent.
1933 - Due to the Great Depression, hotels post the lowest average occupancy rate on record, 51 percent. Construction grinds to a halt.
1934 - The Hotel Statler in Detroit is the first to have a central system to "air condition" every public room.
1937 - Membership in the Waiters and Bartenders National Union, which encompasses hotel employees, exceeds 200,000.
1939 - Quality Courts, later Choice Hotels International, is formed by seven motel operators as a nonprofit referral system.
1940s - WWII and Recovery
1940 - No materials for expansion; 93% occupancy. After the Depression, recovery awaits the outcome of the World War II. Air
conditioning and "air cooling" become prevalent.
1945 - Sheraton is the first hotel corporation to be listed on the New York Stock E     xchange. Travelodge becomes the first economy-lodging
1946 - Recovery at last. Occupancy reaches the highest-ever rate, 93 percent. Best Western is founded by M.K. Guertin and 54 friends. The
first casino hotel, the Flamingo, debuts in Las Vegas. Westin debuts first guest credit card. Larry and Bob Tisch purchase Laurel-in-the -
Pines, Lakewood, N.J., which evolved into Loews Hotels.
1947 - Westin establishes Hoteltype, the first hotel reservation system. New York City's Roosevelt Hotel installs television sets in all
1949 - Hilton becomes the first international hotel chain with the opening of the Caribe Hilton in San Juan, Puerto Rico.
1950s - The Growth of Motel Chains
1951 - The American Hotel Institute, later to be renamed the Educational Institute, is launched. Hilton is the first chain to install television
sets in all guestrooms.
1952 - Less than a year after Congress approves the development of an interstate highway system, Kemmons Wilson starts Holiday Inns.
Kemmons Wilson opens his first Holiday Inn in Memphis, Tenn., named after a Bing Crosby movie. The far              -reaching impact of the
interstate highway system on travel patterns, which meant boom and opportunity for many, and decline or bust for others.
1953 - AHA buys the Universal Credit Card. The American Hotel Foundation, a subsidiary of AHA, is founded.
1954 - Howard Dearing Johnson initiates the first lodging franchise, a motor lodge in Savannah, Ga. Conrad Hilton's purchase of the Statler
Hotel Company for $111 million is largest real -estate transaction in history. An inn in Flagstaff, Ariz., is the first in a series of "motor hotels"
forming Ramada, a Spanish word meaning "a shaded resting place."
Mid-1950s - Atlas Hotels develops the first in-room coffee concept.
1957 - J.W. Marriott opens his first hotel, the Twin Bridges Marriott Motor Hotel in Arlington, Va., and Jay Pritzker buys his first hotel, The
Hyatt House, located outside the Los Angeles Airport. Hilton offers direct-dial telephone service.
1958 - AHA sells license for the Universal Travel Card to American Express. Sheraton introduces Reservatron, the industry's first automated
electronic reservations system, and the first toll-free reservation number. Omni Hotels, originally Dunfey Hotels, is founded.
1960s - The Growth of Hotel Chains
Early 1960s - Siegas introduces the first true minibar
1962 - Motel 6, the forerunner of budget brands opens.
1964 - Travelodge debuts wheelchair     -accessible rooms.
1965 - The Highway Beautification Act, which ultimately changed highway advertising, an important marketing lifeline for roadside
lodgings. AT&T offers a direct -reservation service featuring raid dialing; 300 hotels sign on with Guaranteed Reservations; Holidex by IBM
is installed in Holiday Inns; Univac' s Teleman Unitel system makes up to 120 reservations per hour.
1966 - Inter-Continental introduces retractable drying lines in guest showers, business lounges, ice and vending machines in guest corridors,
and street entrances for hotel restaurants.
1967 - The Atlanta Hyatt Regency opens, featuring a 21-story atrium and changing the course of upscale hotel design. Hyatt Hotels
Corporation splits into a real -estate holding company.
1969 - Westin is the first hotel chai n to implement 24-hour room service.
1970s - The Growth of Franchising
The budget -hotel boom, little more than another new idea in 1966, was a full -blown trend by the early 1970s. Increased momentum in the
development of chains, which represented less than 10% of the motel population in 1966, was an estimated 40% by 1975. The destabilizing
jolt of the energy problem --then crisis--of the early 1970s, left in its wake an erratic economy over most of the remainder of the decade.
Tourism industry is hard hit.

Tourism industry is hard hit.
 1970 - Hilton becomes the first billion-dollar lodging and food service company and the first to enter the Las Vegas market.
1973 - The Sheraton-Anaheim is the first to offer free in-room movies.
1974 - The energy crisis hits the industry - hotels dim exterior signs, cut heat to unoccupied rooms, and ask guests to conserve electricity.
1975 - Four Seasons is the first hotel company to offer in-room amenities such as name    -brand shampoo. Hyatt introduces an industry first
when it opens its Regency Club, a concierge club level that provides the ultimate in VIP services. Cecil B. Day hands out wooden nickels to
guests over 50, establishing the first seniors program.
1976 - Two Florida hotels are the first to offer HBO in guestrooms.
1977 - Showtime and The Movie Channel debut in hotels.
1978 - Best Western has 2,000 affiliates; Holiday Inns, 1,700; Super 8, 71; and Budget Host, 25.
1980s - Prosperity and Recession
Reagan administration tax law encourages investment in construction as a tax shelter and spurs the boom of the century. Expansion of Bed
and Breakfast concept in North America. Steady advances in computerization and systems management that replace more rudimentary
procedures and leads to improvements in every area of operations, from back-of-the-house functions to central -reservation systems. Massive
overbuilding of hotel accommodations result in a room surplus and plunging occupancy rates.
1981 - Two of the first boutique hotels in the world open their doors to the public: The Blakes Hotel in London and the Bedford in San
1983 - Westin is the first major hotel company to offer reservations and checkout using major credit cards. VingCard invents the optical
electronic key card.
1984 – Ian Schrage opens his first boutique hotel in New York City: the Morgan’s Hotel. Holiday Inn is the first to offer a centralized
travel agent commission plan. Choice Hotels introduces the concept of market segmentation. Choice Hotels offers no      -smoking rooms.
Hampton Inns is the first to offer a set of amenities. Holiday Inn debuts Embassy Suites Hotels, the first nationwide all-suite hotel chain, in
Overland Park, Kan.
1986 - Teledex Corporation introduces the first telephone designed specifically for hotel guestrooms. Days Inn provides an interactive
reservation capability connecting all hotels.
1988 - Extended stay segment introduced with Marriott's Residence Inns and Holiday Corporation's Homewood Suites.
1989 - Hyatt introduces a chain wide kids program for ages 3-12 and a business center at the Hyatt Regency Chicago. Hampton Inns is the
first hotel chain to introduce the 100 percent satisfaction guarantee.
1990s - Recession and Recovery
By the early 1990s, expansion ends with more changes in the US tax code, worldwide recession and the Persian Gulf War. These events lead
to a 3-year period of slumping occupancies and rates. New construction virtually stops as financing becomes scarce. These years are
followed by the recovery of the hotel industry. Full-service, city center hotels become the linchpin sought by municipal governments for
attracting travelers back to city centers. New industry strategies include: Niche marketing / market segmentation, an increase in central
reservation systems, and a stronger emphasis on quality of service. Between 1986 and 1992, the US hotel industry lost approximately $14
billion. Overcapacity plagued the industry for most of the late 1980's and early 1990's. Most of these operators cite operating cost controls,
higher room rates, and restructuring of real estate debt as measures taken towards renewed profitability.
1990 - Loews Hotels' Good Neighbor Policy becomes the industry's first and most comprehensive community outreach program.
1991 - Westin is the first hotel chain to provide in-room voice mail. Industry sees record losses, 61.8 percent.
1992 - Industry breaks even financially after six consecutive years of losses. 1993 - Radisson Hotels Worldwide is the first to introduce
business-class rooms.
1994 - First online hotel catalog debuts - Promus and Hyatt Hotels are the first chains to establish a site on the Internet.
1995 - Choice Hotels International and Promus become the first companies to offer guests "real -time" access to its central reservations
syste Choice and Holiday Inn are the first to introduce online booking capability.
1996 - Best Western celebrates its 50th anniversary, making it the oldest continually operating brand.
1999 - Choice Hotels International is the first chain to test making in-room PCs a standard amenity for guests. Starwood Hotels & Resorts
takes the boutique segment mainstream with the opening of its W brand.
2000s - New Opportunities
Technology, Mergers and Acquisitions: International Expansion, Demographic Changes: Age, Cultural Diversity, Eco -Tourism…
2000 - Hilton unveils plans for the first luxury hotel in space.

Exhibit 5:

     US Room Revenue by Chain Scale – 2001
     Segment                                 Rooms              % Total              Room         % Total
     Upper – Upper Scale                    595,658                14.3             20,397             26.6
     Upscale                                318,497                 7.6              7,010              9.2
     Mid Scale w/F&B                        637,663                15.3              9,692             12.7
     Mid Scale w/o F&B                      568,039                13.6              8,447             11.0
     Economy                                777,018                18.6              7,406              9.7
     Independent                          1,276,551                30.6             23,601             30.8
     TOTAL                                4,173,426               100.0             76,553            100.0

     Source: Smith Travel Resear ch and Deutsche Bank Securities Inc., estimates

Exhibit 6:

US hotels by size                                        US hotels by location

                                          150-299                                            Suburban
    75-149                                 rooms                                               29%
    rooms                                   21%              Airport
     35%                                                      11%
        >70                                                   Highway
                                         Over 500                                             Urban
       rooms                                                    32%
                                          rooms                                               16%

Exhibit 7:

         US Hotel Industry : Market Share by Major Player as of July 02
                              Others                                8%
                               61%                             Cendant

         Source: Smith Travel Research, Deutsche Bank

Exhibit 8:

                                             Threat of New Entrants: HIGH
    Ian Schrager                             • Low variable costs once property is up
                                             and running
    Hotel’s Five Forces                      • Customer heterogeneity can be
                                             addressed by specialty/themed hotels
                                             • Low property costs for run-down
                                             buildings that will be renovated
                                             • Large chains can make small “bets” on
                                             a boutique hotel
                                             • Use of viral marketing (peer
   Bargaining Power of Suppliers:            recommendations)                           Bargaining Power of Buyers: LOW
   MEDIUM                                    BUT,                                       • High willingness-to-pay for “in”, hip
   • Limited access to GDS - need to use a   • High property costs for prime location   hotels
   marketing group or GDS representative.    • High design costs                        BUT
                                                                                        • No loyalty program
                                                                                        • Low switching costs
                                             Rivalry Among Existing Players: HIGH
                                             • Little differentiation within quality
                                             • Newness and hipness of hotel needs to
                                             be constantly maintained
                                             • fewer added services offered             Threat of Substitute Products: HIGH
                                             • Some price-based competition             • Luxury Hotels
                                             • PR-based competition                     • Resorts
                                             BUT,                                       • Other hotels
                                             • Very high growth of boutique hotel
                                             • Location-specific nature of hotels

Exhibit 9:

                                             Threat of New Entrants: MEDIUM
    W Hotel’s Five                           • Low variable costs once property is up
                                             and running
    Forces                                   • Customer heterogeneity can be
                                             addressed by specialty/themed hotels
                                             • Low property costs for run-down
                                             buildings that will be renovated
                                             • Boutique hotels can be added one by
                                             one - no need for mass expansion before
                                             profits can be had
   Bargaining Power of Suppliers: LOW        BUT,                                       Bargaining Power of Buyers: LOW
   • Own reservation system - direct link    • High property costs for prime location   • High willingness-to-pay for “in”, hip
   (STARLINK - from Starwood)                • High design costs                        hotels
   • Use leverage of Starwood for            • High marketing expenditures              • Loyalty program (Starwood) - lock -in
   purchasing                                                                           BUT
                                                                                        • Low switching costs
                                             Rivalry Among Existing Players: HIGH
                                             • Little differentiation within quality
                                             • Newness and hipness of hotel needs to
                                             be constantly maintained
                                             • Services offered (business conference    Threat of Substitute Products: HIGH
                                             rooms, added 9/11 security)                • Luxury Hotels
                                             • Some price-based competition             • Resorts
                                             • Economies of scope                       • Other hotels
                                             BUT,                                       • Potential risk of cannibalization from
                                             • Very high growth of boutique hotel       other Starwood brands (Westin)
                                             • Location-specific nature of hotels

Exhibit 10:

        What Type of Innovation Is the
              Boutique Hotel?
                               Market Innovation
                            Enhance           Destroy

               Enhance     Boutique
     Market Knowledge

Exhibit 11:

         How Disruptive Are Boutique
                           Technology Knowledge/Links
                            Conserve          Disrupt

                           Boutique Hotels
               Disrupt     (Niche Creation)

     Market Knowledge/

Exhibit 12:

         Building of Alliances Between
          Hotels and Bars/Restaurants
                                                          Alliance                           Networks

                     Competence                        Boutique
                     Leverage                          Hotels


Exhibit 13:

                                 Actions for Value Innovation
                           Feel and Design (Architecture)                   Technology in room
                           Themed Hotel                                     Hip restaurant
                           Fashionable Staff         - New buyer            Hip bar                   Raise on
          Create                                     target                 Intimacy (small hotel)
                           Inclusion on “the list”                                                    Primary
                                                     - Strong draw from
                                                     restaurant and bar                               Factors
        New Factors
                                             Customer Benefit
                                                                                               Which factors are key
       Are there entirely new factors                                                          benefit drivers but often
       that deliver customers a                                                                compromised?
       quantum leap in value?

       Are there factors that the
       industry takes for granted
       but which don’t add value?                                                              Which factors are necessary
                                                                                               but not to be overdone?

          Eliminate                                                                                    Reduce
           Tertiary                                     Cost
                            Shops in Hotel         - Eliminate some         Business meeting space    Secondary
           Factors          Luxurious fixtures     luxury                   Size of room                Factors
                            (Marble)               - reduce size of rooms   Size of lobby
                            Multiple Restaurants   and lobbies (more        Depersonalization
                            Multiple Lobbies       rooms in a smaller

Exhibit 14:

                                                                                     Value Curve for Boutique Hotels

                                                                        Boutique                                                                                        Luxury Hotel
                                                      Low                                                                                                                     (Sheraton)

                                                                                                                           etic ural


                                                                                                                                                                                              Spa eting



                                                                                                     (Ba ertainm

                                                        Tec room

                                                                                                                       Are ceptio


                                                                                                                      Ae hitect




                                                                            Fac ing






                                                         In -





                                                                                               Key elements of product, service and delivery

Exhibit 15:

                                                                                 Preference Structure
    Functional Attribute: Level of Targeted Service

                                                                                         Luxury Hotel

                                                                                                                        Boutique Hotel

                                                                                                                                Mass-Market Hotel

                                                                        Upscale                  Upscale and                      Average and
                                                                        and Older                Younger                          All ages

                                                                                 Functional Attribute: Type of Consumer

Exhibit 16:

                       Innovation Diffusion for
                           Boutique Hotels

                                                       Early and Late Majority




Exhibit 17:

               Competitive Advantage (WTP
                         vs. Cost)
             Luxury Hotel

                             Boutique Hotel     Mass-Market
                                                   Hotel                         WTP



Exhibit 18:

Exhibit 19:

      The Hotel business Transactional
        Process - Reserving a room

                    Hotel Website

                                      $ - Outsourced       Customer Reservation
       Customer                                                                              Hotel
                                                              System (CRS)
                     Travel Agent
                                           Global Distribution
                  Unaffiliated Travel        System (GDS)        $ - Switch -
                       Website                                   Fixed cost for W
                                                                 variable (per use) fee for Ian Schrager
                       $ - lower than by phone


  American Hotel and Lodging Association, History of lodging,
    Deutsche Bank, Lodging Industry Overview , August 2002, ABN Amro, Hotel & Leisure Direction 2003, Jan
2003, Ernst&Young, 2002 National Lodging Forecast
    PriceWaterhouseCoopers Research Briefing, October 2001
   Hilton Hotels Website
    Marriott Hotels Website
     Anhar, Lucienne, “The Definition of Boutique Hotels.” Hospitality Net, December 13, 2001.
    Gordon, Meryl, “The Cool War: Ian Schrager vs. His Imitators,” The New York Times , May 27, 2001.
    Dunlap, David W., “From Planet Hollyw      ood to a Hotel W in Gray,” The New York Times , Section B, p. 7,
August 29, 2001.
    Anhar, “The Definition of Boutique Hotels.” Hospitality Net, December 13, 2001.
      DaRosa, Alison, “Upscale Hotels Go Hip Instead of Traditional,” The San Diego Union-Tribune, Travel, p.
D-3, September 9, 2001.
    O’Connor, Stefani C., (citing Bjorn Hanson, head of PriceWaterhouseCoopers hospitality and leisure group),
“Boutique Hotels, A Difficult Segment to Define,”, January 21, 2001.
      Ian Schrager’s Vision Statement, p. 1,
       Bray, Roger, “Chains Awake to Designer Trend: Boutique Hotels,” Financial Times, FT Report: Business
Trav el, September 26, 2002, p. 2.
        Anhar, “The Definition of Boutique Hotels.” Hospitality Net, December 13, 2001.
     Tomkins, Richard, “Schrager and NorthStar join forces,” The Financial Times , March 19, 1998 Gordon,
Meryl, “The Cool War: Ian Schrager vs. His Imitators,” The New York Times , May 27, 2001
      Parkes, Christopher, “Cool hotelier remodels façade,” The Times of London, October 28, 1996 (at the
Mondrian and London’s Sanderson respectively).
      Tomkins, Richard, “ Schrager and NorthStar join forces,” The Financial Times , March 19, 1998
        NorthStar corporate website,
       Billig, Michael, “Schrager Hanging ‘For Sale’ Sign on New York’s Empire Hotel,”,
June 20, 2002
        Gordon, Meryl, “The Cool War: Ian Schrager vs. His Imitators,” The New York Times , May 27, 2001
        Ibid., Arden-Smith, Tara, “The man who’s shaking up the hotel scene,” The Boston Globe, June 10, 2001
        Gordon, Meryl, “The Cool War: Ian Schrager vs. His Imitators,” The New York Times , May 27, 2001
         Fink, Mitchell; Rubin, Lauren, “Schrager vs. Gerber: It’s a barroom brawl,” New York Daily News, May 11,
         Gordon, Meryl, “The Cool War: Ian Schrager vs. His Imitators,” The New York Times , May 27, 2001
         Gordon, Meryl, “The Cool War: Ian Schrager vs. His Imitators,” The New York Times , May 27, 2001
        Arden-Smith, Tara, “The man who’s shaking up the hotel scene,” The Boston Globe, June 10, 2001
         Grant, Peter, “In Need of Financing, New York Hotel Developer Feels Trump's
Pressure,” New York Daily News, July 13, 1999
          Gordon, Meryl, “The Cool War: Ian Schrager vs. His Imitators,” The New York Times , May 27, 2001
          Interview with Ian Schrager in Travel Agent, March 11 2002
         Murray, Sarah, “Boom time for New York hotels,” The Financial Times, January 14, 2003
    McMullen, Shannon, “New GM at NYC’s paramount to oversee redesign,”,
February 27, 2003
     Billig, Michael, “Major re-fi in works for Schrager hotels,”, January 17, 2003
      Binkley, “Bloom Fades at Boutique Hotels,” The Wall Street Journal, cited in The Chicago Sun-Times, Travel
Section, p. 6, March 17, 2002.
       Interview with Ian Schrager in Travel Agent, March 11 2002
      Conversation with Robert Koren, VP of Operations, W Hotels, on Thursday, February 6, 2003.

        Blair, Jayson, “Not the Best of Times, But Manhattan Hotels See Encouraging Signs,” The New York Times,
Section B, p. 1, March 28, 2002.
   Shinn, So -Chung, “Starry Might: Starwood Hotels and Resorts Invests in Design to Create Style, Attitude, and
Brand Distinction in its Six International Hotel Brands,” Interior Design, Starwood Hospitality Supplement,
March 27, 2001, p. S10.
     Scoviak-Lerner, Mary, “Challenging the Chains,” Business and Management Practices, Vol. 36, No. 1, p. 50-
     Starwood 2001 Annual Report, p. 4.
     Sullivan, Aline, “Future Face of Hotels: Industry Looks For Right Formulas,” International Herald Tribune,
Special Report, p. 9.
     Conversation with Robert Koren, VP of Operations, W Hotels, on Thursday, February 6, 2003.
     Seitz, Patrick, “How Dell, Starwood and Teva Fight, Win in Commodity-Priced Business,” Investor’s
Business Daily, Section A, p. 1, May 4, 2001.
      Conversation with Robert Koren, VP of Operations, W Hotels, on Thursday, February 6, 2003.
      Anhar, “The Definition of Boutique Hotels.” Hospitality Net, December 13, 2001.
     Starwood Hotels and Resorts Worldwide, Inc. Detail list of Hotels and Rooms Owned, Leased and
Consolidated Joint Venture, as of June 30, 2002, p.5-6. The numbers quoted do not reflect franchised properties.
     Brown, Ron, “Hospitality Conference Presentation,” November 2002,, slide 2.
      Deutsche Bank, Starwood Hotels & Resorts, August 2002
      “Starwood Announces Strategic Relationship With Cisco Systems to Deliver Secure, High-Speed Internet
Access and Next -Generation Services to Hotel Guests,” Business Wire, March 5, 2001.
      Belgum, Deborah, “Own Brand of Whiskey,” Los Angeles Business Journal, October 14, 2002.
       Conversation with Robert Koren, VP of Operations, W Hotels, on Thursday, February 6, 2003.
      Conversation with Robert Koren, VP of Operations, W Hotels, on Thursday, February 6, 2003.
      “HSMAI Foundation Focuses Research on Defining Value Drivers For Business, Leisure Hotel Customers,”, December 18, 2002.
      “Ian Schrager Completes Standardization on HIS’ epitome Property Management System,”, January 6, 2003.
       “Summary of Portfolio by Properties and Rooms, as of June 30, 2002,” p. 1,
lxxiii, p. 4.
lxxiv, “About the Company,” p. 1.
       “Travel Pros Give Starwood Brands Top Honors in Business Travel News’ U.S. Hotel Chain Survey,”
Business Wire, February 11, 2002.
        “Savvy Travelers Vote 56 Starwood Hotels and Resorts to Condé Nast Traveler’s 2002 Gold Lists,”
Business Wire, January 7, 2002.
        Conversation with Robert Koren, VP of Operations, W Hotels, on Thursday, February 6, 2003.
        Brown, Ron, “Hospitality Conference Presentation,” November 2002,, slide 35.
       HSMAI Foundation Focuses Research on Defining Value Drivers For Business, Leisure Hotel Customers,”, December 18, 2002.
       Conversation with Robert Koren, VP of Operations, W Hotels, on Thursday, February 6, 2003.
         “Savvy Travelers Vote 56 Starwood Hotels and Resorts to Condé Nast Traveler’s 2002 Gold Lists,”
Business Wire, January 7, 2002.
         Falcone, Mark, Hausler, Eric, and Attie, Joshua, “Starwood Hotels & Resorts: Coverage Initiated—
Embedded Growth Opportunities,” Deutsche Bank Securities Inc. , August 6, 2002, p. 35.
        Ibid., p. 35-36.
         “Marriott to Reposition Renaissance as Boutique Brand,”, August 27, 2001 (citing
Bill Marriott, as quoted in the Wall Street Journal ).

         Berke, Jonathan, “Marriot (sic), Bulgari Launch ‘Boutique’ Hotel Chain, The Daily Deal, M&A Section,
February 13, 2001.
         O’Connor, Stefani C., “Battered Boutique Label Needs ‘Lifestyle’ Change: Panel,”, April 26, 2002.
       Ibid., with quotations from Brad Wilson, General Manager of the W-Union Square Hotel.
     Conversation with Robert Koren, VP of Operations, W Hotels, on Monday, February 3, 2003.
     Bray, “Chains Awake to Designer Trend: Boutique Hotels,” Financial Times, FT Report: Business Travel,
September 26, 2002, p. 2.
      Fong, Tony, “Boutique Hotels Hit Harder Than Other Segments; Recovery Will Take Longer,” The San
Diego Union-Tribune, August 21, 2002.
      Lee, Gary, “The End of the Boutique Hotel?” The Washington Post, Travel, p. E01, April 21, 2002.
      Binkley, Christina, “Bloom Fades at Boutique Hotels,” The Wall Street Journal , cited in The Chicago Sun-
Times , Travel Section, p. 6, March 17, 2002.
      Starwood 2001 Annual Report, p. 4.
      Berke, “Marriot (sic), Bulgari Launch ‘Boutique’ Hotel Chain, The Daily Deal, M&A Section, February 13,
       Binkley, “Bloom Fades at Boutique Hotels,” The Wall Street Journal, cited in The Chicago Sun-Times,
Travel Section, p. 6, March 17, 2002.
       Lee, “The End of the Boutique Hotel?” The Washington Post, Travel, p. E01, April 21, 2002.
      “Starwood Reports Fourth Quarter and Full Year 2002 Results,” Business Wire, January 29, 2003.
   Conversation with Drew Patterson, Starwo od revenue management executive, February 12, 2002.
    Lobby, W New Orleans French Quarter
     Guest Room, W Times Square
     W New Orleans
     W New York – The Court
     W San Francisco
     W New York – Union Square
      W Sydney
      W Suites Newark, CA
     Hudson Hotel, New York
     The Paramount Hotel, New York
     The Delano Hotel, Miami Beach
      The Clift Hotel, San Francsico


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