CASE STUDY: PRUNE THE BRAND PORTFOLIO

The business-casual dress code had Troy Freeman stumped. As the longtime CEO of Otto Hotels &
Resorts, now the second-largest lodging company in the world, he'd packed for hundreds of work trips
before, but without suits as an option, he was having a much harder time.
His flight was leaving first thing in the morning for Carmel, where he would meet his newly expanded
executive team for an off-site to discuss the company's portfolio strategy. The facilitator, Caroline
Dvorjak, was a marketing professor and a seasoned consultant.

Otto had just finished a $9 billion acquisition of Beekman Hotels, which meant it now had nearly 4,800
hotels and slightly more than a million rooms in 100 countries. Like most of the big hoteliers, however,
Otto owned few of those properties; instead it franchised and managed them, with the bulk of the real
estate owned by independent companies that licensed Otto's brands. The addition of Beekman's
eight brands had increased the number now under Otto's umbrella to 21. The question on everyone's
mind, especially investors', was how Troy would manage this much larger portfolio, given the overlap
between existing and acquired brands in terms of positioning, price tier, and geography.
During the deal discussions, Otto's board had encouraged Troy to remain noncommittal about the
company's postmerger strategy. He'd once commented on an earnings call that Otto "probably" didn't
need all the brands but had quickly added that it had no plans to prune soon. Still, people were
speculating, and now, with the acquisition work behind them, it was time for management to make
some decisions.

Troy shooed his dog, Tanker, off the bed so that he could take a look at the clothes he'd laid out. "Too
much here, Tank," he said aloud. Then he laughed. He needed to streamline his wardrobe to attend a
meeting where he would work out how to do the same with Otto's brands.
Troy's phone buzzed, and he saw it was an e-mail from Meena Nair, Otto's CFO. Caroline had asked
all 12 of the executives invited to the off-site to send one-page summaries of their opinions on
the portfolio question to the group -- the idea was to short-circuit the backroom politics that typically
arise in such situations -- and here was Meena's. Though Troy knew where she generally stood, he
was eager to see what more she had to say.
In an eloquent argument for retaining all 21 brands, she referred to the Four Seasons and Regent
merger. She said it was possible for each Otto brand to stay in its own "swim lane." Changes would
be costly, and Otto could deliver on the promises of the merger without them. She and her team
projected $200 million in annual cost savings; greater negotiating power with online travel agencies
such as Expedia and Priceline; and the ability to boost both revenue, by cross-selling brands, and
occupancy rates, by leveraging a larger reservations system -- no pruning necessary.
And yet she seemed to be in the minority in this debate. Kent Brockman, Otto's CMO, and Khalil
Salem, the brand manager for Piper, Otto's largest and most profitable brand, had sent statements
supporting a shake-up a few hours earlier.
Troy sat on the bed, and the dog jumped up. "Whaddaya think, Tank?" Troy asked. "Can I fit
everything?"
Tanker wagged his tail, and Troy folded all the polos, khakis, and blazers into his suitcase.

A BIGGER BUCKET
As soon as Troy passed through security the next morning, he saw Kent and Khalil in the line at
Starbucks. He hadn't realized they were on his flight but was pleasantly surprised. They waved him
over, and Khalil pointed to his phone. "Did you do your homework?" he said, teasing. "We didn't get
your statement."
"I think we have enough opinions to go around," Troy replied, "so I'm still --, Switzerland -- at least for
now."
Khalil and Kent had been close allies ever since Khalil's ascension to the top of Piper, five years
earlier. When Caroline had mentioned wanting to avoid politicking, Troy had immediately thought of
these two. They'd always seen the acquisition as a way to grow Otto's existing brands.
"I guess you know where we all stand anyway," Kent said. "Meena wants to save costs. Rick and the
other Beekman folks want to save their brands." He was referring to Rick Guerrero, the manager for
Evenstar, Beekman's largest chain, which had the most overlap with Piper and was therefore a target
for absorption. Rick had indeed defended his brand but also said he would be willing to take a step
down and work for Khalil and Piper if that's what it came to.
"But," Kent continued, "Meena's Four Seasons analogy doesn't really hold water. Regent played in
the same price tier but in entirely different geographies. The situation wasn't nearly as complex as
ours. And it did rebrand as Four Seasons over time."
Khalil jumped in. "For me, it's really a resource question. Right now we're putting our resources into
21 different buckets. What if we put them into just 15 -- or 10? We'd be able to do a lot more "with the
successful brands."
"Or do you just want a bigger bucket?" Troy asked, smiling.
"Yes, of course I do. But I swear this isn't just about Piper. It's about all of Otto. If you look at how
most of Beekman's brands are doing, it isn't pretty. If we bring them in as is, they'll dilute
the portfolio. It's time to put them out of their misery."
"And give you their properties?" Troy asked. He was getting annoyed. Otto wouldn't have acquired
Beekman to get a collection of sorry, underperforming brands.
"Yes, exactly! Or we can sell Beekman's weaker brands and use the money to support the stronger
ones."
"That's possible," said Troy, trying to keep his voice measured, "but what if the new owners compete
with us and steal market share?"
Kent seemed to sense Troy's irritation and piped up: "I don't think either of us would argue that we
should get rid of all Beekman's brands, right?" Khalil nodded. "They have some good flags. It's just
too difficult to manage that many. 'Swim lanes' might make sense from a financial standpoint but not
in the eyes of our customers. Our research shows that most people don't distinguish between brands.
Piper or Evenstar -- it's all the same to them."
"OK," Troy said, "let's wrap up the lobbying efforts for now. We can debate this with the group later.
I'm going to get a coffee and read the Journal."
Khalil clearly had more to say, but he took the hint.

IN CARMEL

The seats people chose at the conference table reflected where they stood on the portfolio issue.
The Beekman managers were all on one side. They had a personal stake in the decision, of course --
they wanted to keep their jobs -- but they'd also made good business cases against pruning, arguing
that it would cut off consequential income streams. Meena sat with them, right next to Rick.
> On the other side were Kent, Khalil, other managers from Otto, and Anita Dineen, its COO, who
supported streamlining to simplify her team's job.
Caroline kicked off the meeting by asking people to summarize some of their main points while she
wrote keywords on a whiteboard.
"We need a brand architecture that isn't confusing to customers, hotel owners, or even our own
employees," said Anita. "What we've got is a mess."
"What we've got is scale, which is exactly what we wanted from this deal," Meena responded. "But I'm
glad you brought up owners. We haven't yet talked about the impact on them." Rick and his
colleagues nodded, and Caroline encouraged her to elaborate. "There are only so many places we
can open another Piper," Meena said. In some cases, Otto had given owners of Piper hotels exclusive
rights to certain markets, and those contracts prevented it from flying another Piper flag in those
areas.
Rick spoke up. "Yes, we've heard from lots of nervous owners. If we discontinue the Evenstar brand,
they might discontinue their affiliation with us and defect to Hilton, or another competitor. We will lose
properties."
The room was quiet for a moment. Everyone knew this was a sore point for Troy and the board. The
reason for buying Beekman was to scale quickly, and losing hotels would defeat that purpose. Otto
needed to retain as many properties as possible.
"I think owners will be clamouring to stay," Kent countered. "They'll save on procurement,
reservations, and agency fees and, ultimately, have greater pricing power, because we control much
of the room inventory in their markets."
"Those are the upsides we've touted, but we haven't realized them yet," Meena said.
"It's early," Troy said.
"OK then, let's talk about the stock price," she continued. "The latest research shows that in most
situations, portfolio slimming hurts value."
"But investors have responded incredibly well to the purchase," Kent said. Indeed, the sector was up
80% since the close of the deal, with Otto leading the way. "They're clearly not concerned about
consolidation."
"Right," Khalil added. "Besides, those are consumer packaged goods studies -- totally different
scenario."
"I wouldn't say it's irrelevant, though," Caroline said, stepping into the fray. "We should learn from
other industries. That said, there's evidence to support both sides here: cases indicating that it's a
huge mistake to eliminate brands worth millions of dollars and ones showing that when you try to run
a portfolio as big and overlapping as yours, it inevitably leads to failure. The research won't make the
decision for you."
"I guess we knew that," Troy said.
"One thing the research shows for sure, though, is that it's better to make a decision soon," Caroline
continued. "Investors are waiting to see where you go with this, and you have a passionate team" --
this prompted laughter -- "that needs its marching orders."
They all nodded, but Troy wondered if everyone would support whatever call he made.
"So," Kent said. "Are you still Switzerland? Or are you ready to take a stand?"