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Achieving High Performance in the Lodging Industry

Executive Summary

Defining high performance

Operationally excellent companies with agile business models and focused brands and services will be best positioned to achieve high performance in the lodging industry.

Out of a peer set of 161 publicly held companies in the lodging industry Accenture’s High Performance Business research methodology as a high performer (see “The research”) found that high performance was achieved primarily due to an unusually asset-light business model, which has helped ensure stable revenues in unusually uncertain economic times. However, other more asset-heavy companies came very close to achieving high performance and we believe both models merit inclusion in our analysis.

1  Accor,

Choice Hotels, Club Mediterranee, IHG, Interstate, Mandarin Oriental, Marcus, Marriott, Millenium & Copthorne, NH Hotels, Orbis, Orient, Genting Malaysia Berhad (formerly known as Resorts World Bhd), Shangri-La, Sol Melia, Starwood

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The research
Accenture identified 16 of the world’s leading lodging companies. The companies were chosen according to the following criteria: • Publicly traded for more than 7 years • More than $700M revenue • More than 60 percent of revenues generated from hotel operations Accenture analyzed these companies across the five performance metrics of our High Performance Business methodology: profitability; growth (measured by revenues); positioning for the future (or future value, which is the market’s assessment of balance sheet strength going forward); longevity (total return to shareholders); and consistency of performance across the four previous dimensions over five and seven years.

Figure 1 shows three of these measures – profitability and consistency, which measures how often over seven years a company has outperformed the median ranked by peer comparison; and future value. It reveals the outstanding performance of the asset light business model, especially in terms of future value – though the near high performers also outperformed the peer group by a significant margin.

Figure 1: Seven year average of profitability, consistency and future value (as measured by invested capital)
Profitability in the 7-Year Time Frame (%), 2001-2008
Average = 8.69 % High Performer Near High Performer Rest of Peers -2.2
-5 0 5 10 15 20 25 30 35

Average Future Value/Invested Capital (%), 2001-2008
Average = 82.34 % High Performer Near High Performer Rest of Peers
0

34.9 1.9

460.0 64.0 55.4
100 200 300 400 500

7-Year Consistency, 2001-2008
Average = 2.0 High Performer Near High Performer Rest of Peers 1.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

4.0 2.4

Source: Standard & Poor’s, 2009; Accenture Analysis. Based on a peer group of 16 companies in the global lodging industry. Used with permission of Standard & Poor’s a division of the McGraw-Hill Companies, Inc. All rights reserved.

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The industry

Lodging is an exceptionally cyclical industry. Demand trails both consumer and business spending while supply, which is dependent on private investment spending, lags behind, reinforcing cyclicality. The business is mature, though still fragmented, and competition is intense. There is limited product innovation. And well-defined offerings and well-established brands make for high barriers to entry. The industry as a whole has attempted to manage cyclicality and keep occupancy stable by adjusting room rates, but this does not lead to new consumers buying more rooms. Existing customers simply get more for less and hotel revenues fall (see Figure 2).

Figure 2: The industry is cyclical and has managed cyclicality by adjusting room rates to keep occupancy stable
Average Annual Growth Rate: 2000-2009
10 % Occupancy: -0.81% RevPar: -2.02 % 5% ADR: +2.66 %

0%

-5 %

-10 % 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Concentration Expansion Concentration

Managing Cyclicality Occupancy rate, average daily rate (ADR) and revenue per available room (RevPar) in the US lodging industry; year-on-year % change
Source: Accenture Analysis

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Managing risk successfully is the key to growth but lodging companies face many challenges: • Multiple business models within the same organization—leading to complex inter-relationships among multiple stakeholders (such as owners, franchisees, property managers, lenders) • Costly labor contracts • Complex financing structures—with heavy fixed costs, capital intensity and a high financial risk profile (see Figure 3) • Multiple distribution models—for a wide range of customer segments involving complex networks of suppliers and intermediaries. (The Internet has added new media to existing ones, enforcing more divergent demands and ways of purchasing) • Limited, inefficient technology systems—characterized by redundant application architectures and antiquated technical platforms, usually dependent on many different niche technology providers

Figure 3: In an era of tighter credit, cost reduction should be a key focus area
Investment Criteria for U.S Hotels
Percentage
16 14 12 10 8 6 4 2 0 Capitalization Rate 2008 Discount Rate 2009 Interest Rate 0 Holding Period (No of Years) 4 2 +6% +13 % +16% 10 8 6 +7%

Source: PKF Hospitality Research 2009; Accenture Analysis

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The building blocks of high performance
Accenture’s ongoing High Performance Business research has revealed that top companies in all industries share a “competitive essence” made up of three building blocks of high performance: market focus and position, distinctive capabilities, and performance anatomy. These building blocks describe the organizational mindset that dictates how—and how well—an organization fulfills its strategic objectives. Our recent analysis of the high-performance lodging companies focused on understanding the six elements that make up the building blocks for high performance in this industry segment (see Figure 4).

Distinctive Capabilities
• Customer-centric marketing enhances brand awareness and ultimately the customer experience. The top performing lodging companies have targeted different market segments but all recognize that consistent focus on a chosen market is the key to success and all have used sophisticated channel management to reach customers. One of the near high performers, for instance, which focuses on affluent travelers, has launched the industry’s first multilingual, user-friendly mobile Website, which is designed specifically for smart phones. • Financial management and especially aggressive working capital management lead to exceptionally strong balance sheets. The balance sheet strength of an asset-light high performer enables the company to time the market and obtain credit for its franchisees on favorable terms. • Relationship management and financial leverage attract low-cost financing. An asset-light high performer, for example, has launched a US$20-40 million loan program for franchisee partners that commit to multi-unit development of new, branded hotels.

Performance anatomy
Performance anatomy in lodging is an amalgam of human capital management that enhances diversity and prioritizes performance, and a strategic approach to IT that provides visibility and delivers efficiencies all along the operational value chain. The high performers in lodging use IT strategically and all manage their human capital to sustain the innovation that drives high performance in this segment. • One of the near high performers, for example, has implemented a global performance management system in support of its strategic goal to double in size over the next four years. • Another near high performer gives high potential participants in its core talent development program on-thejob and classroom training for 12 to 18 months. • A high performer with an asset-light business model conducts mandatory training, which emphasizes “streetwise tactics for tough times”, for its franchisees and their employees.

Market focus and position
Market focus and position in this highly cyclical segment depends on an optimized business model and focused strategy that deliver predictable revenues. • A high performer with an unusually asset-light business model, for example, operates a fee-for-service business model that avoids costly new build in favor of converting the close to one-third of US hotel rooms that are still independent into franchises. The royalties that the company charges its franchisees result in a predictable revenue stream.

Figure 4: The three building blocks of high performance in the lodging segment

Market Focus and Position

Optimized Business Model
A focused strategy that delivers predictable revenues

Distinctive Capabilities

Customer-centric Marketing
Keen focus on a chosen customer segment for a consistent brand experience using sophisticated channel management

Financial Management
Aggressive working capital management and strong balance sheets

Relationship Management
Strong relationships with regional banks and other local partners to attract low-cost financing

Performance Anatomy

Human Capital Management
A diverse workplace culture that empowers and motivates employees

Strategic Use of IT
To gain customer insight, control of distribution and cost savings in processes, training and operations

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The future
Revenue growth will be a top priority for the lodging industry in the future. As cost pressures intensify leading industry players will likely move toward a hybrid business model, perhaps relying on franchises to manage their financial networks. The marketing challenge will likely intensify too as customers segment into ever-more complex categories and disruptive technologies complicate the task of reaching them. Emerging markets represent the biggest growth opportunity, with China, India and the Middle East accounting for a growing share.

The implications
Lodging companies will require flexible and relatively asset-light business models to sustain cash flows and lower the cost of expansion and growth. Financial management will become increasingly important in achieving the balance sheet strength to obtain low-cost financing. Customer analytics will be critical to the maintenance of brand equity. And as the growth story shifts to emerging markets, staffing and training in an industry long plagued by high attrition rates will come under greater strain. Our analysis shows that innovation founded on outstanding human capital management is an important building block of high performance in this industry. Companies that can couple this capability with superior customer analytics and astute brand management will be well placed to achieve high performance in the future. To find out more about how to achieve high performance in the lodging industry, please contact: Anne Pruvot anne.pruvot@accenture.com Kent Asaki kent.j.asaki@accenture.com

About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with more than 181,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.

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