Hotelier of the Week: Richard Hartman (Aug 16)

Richard Hartman came out of retirement to become ceo for Millennium & Copthorne Hotels, a company with 102 three-, four- and five-star hotels with more than 30,000 rooms in 19 countries worldwide 

It also has a marketing alliance with German group Maritim Hotels which has 50 properties. Mr Hartman held senior positions at InterContinental Hotels Group where he was a main Board Director between 2003-2007, including managing director of IHG, Europe, Middle East and Africa with responsibility for 620 hotels.

Richard Hartman

Why did you take this new job?

I'd retired for six months which is about the limit for me and I've known the company and the chairman for a long time and I really wanted to  get back into a property-based business.

The company has had a number of CEOs in recent years. How long will you stay?

When I came here I thought I would stay until I got the foundation set and once the strategic direction was established by me and my people and accepted by the board. Then we would start looking for someone to execute it. I saw my role as being to stabilise the company, come up with asset plans for all of our hotels, lay out some strategic choices that the board can look at and analyse and then once a decision has been made we could move forward. I thought all that was my job and then someone else could do the moving forward.

What sort of strategic decisions?

Things like ‘What do we want to do?' ‘Do we want to run all our hotels?' ‘Do we want to get into other people's brands?' ‘Do we want to grow through management contracts and licence agreements?' ‘Do we want to focus only on developing countries?'

When will these decisions be delivered ?

Once the craziness in the market is over. Once I've stabilised the business. Once we've done our asset planning. Once we've come up with an asset management plan for the whole company and what we're going to do to each hotel and once I'm convinced it's time to talk about long term strategy rather than just cleaning up what's there now. I thought that would be 2010 but it will be a little longer because a lot of the strategic initiatives I started in 2008 were suspended because of what happened from September of that year.

Is it better for a hotel company to own the assets in an economy like this?

We have 102 hotels and we own 70 of them so we are primarily a property company. I'd say it is best to be an integrated company, that owns and franchises, and if the brand was strong enough, franchises some as well.

Why?

The idea of operating leverage as things go down is good in theory, but I don't know that it's well understood or reflected in relative share prices. If you look at the drop in earnings of hotel companies that have just released their figures lately, tracking the drop of revenue in terms of drop of earnings is not much different from a company that owns most of its hotels. But the most important thing is that when you're a fee-based company, a distribution-based company, your future really depends on your growth rate. You've got to keep adding rooms and adding hotels, and at times like this, when the brakes get put on for new property development, it can slow down your growth rate tremendously which could have detrimental effect on the perceived value of your company. The growth potential gets knocked back and the expectations of the share price appreciation get knocked back as well.

Are you in a strong position to take advantage of the current economic position?

If you look at the structure of our balance sheet and the relatively small debt load that we have and the book value of our assets one would think our very considerable leverage would give us some advantages going forward, but I'd hasten to add we are not buyers right now. There's nothing to buy at the right price and the expectations of the sellers and the expectations of the buyers are quite different.

You have several brands, Millennium, Copthorne, Kingsgate and also Grand Millennium ?

We haven't done a very good job of telling that story. The Grand Millennium Hotels are just very, very beautiful hotels, better than the group of standard Millennium. What their attributes are needs to be worked on. We're in a position like that which occurred in 1985 when Hyatt launched the Grand Hyatt in Hong Kong. They had a Hyatt Regency in Kowloon which was magnificent. Hyatt didn't have a whole load of specs for the new hotel at the time so they just had to create something different and better.

Yet other companies have been very strong in pushing their brands.

Our business model was never based on double digit growth in hotel rooms. If you're a fee-based company like any of the big five, the total shareholder return is a function of dividends and of stock appreciation. If you are not growing in a fee-based business then the only thing that drives your shareholder return is the dividend, you become a cash flow company. They have got to grow because that gives stock price appreciation. If you are going to grow, and you've already saturated the market like Marriott or Sheraton, you have to create new brands and that's why all these brands were created and why they continue to be created. We are not a distribution-based company. We could be. That's a strategic decision which we will have to examine very carefully because, at this time of the cycle when everyone is trying to increase, it would be difficult. But instead we are more of a destination-based company. We have some hotels which are in not particularly strategic locations. But we also have some that are in terrifically strategic locations which are like micro geographies, like our hotels  in Singapore, or London or New York which are in great  locations and do well because of that. The ideal thing would be to do both, but it's not easy to do if you are not in the property business.

And Copthorne?

Copthorne has a lot of overhang in terms of its reputation from the Aer Lingus days. It's basically a provincial, full service, midscale, UK hotel. It trades in the space of the Holiday Inns. It's got some function space, it serves meals and has a price point that is affordable to moderate business travellers and to leisure travellers at the weekend.

That's supposed to be a horrible part of the market to be in right now

It could be a horrible part but the important thing is to have the right locations. We only have 14 of these hotels and they happen to be in fairly good locations with the exception of maybe one or two. We have expanded opportunistically.  We don't have a big development department; we aren't running around trying to sign deals; we don't franchise. But when we have people who come along and want to open a Copthorne hotel, we work with them.  We just opened one in Sheffield and there are a couple of other projects we are working on. We have a hotel in Reading and one at Chelsea Football Club as well.

How do you think the market is changing for business travel?

In my opinion, what's happened today is a very major shift in the way people buy stuff. The RFP rates, the corporate rates which we used to spend so much time negotiating with our corporate clients are only any good if the internet rate is higher than the corporate rate. It's just too easy to look up a hotel, find the corporate rate and then the best available rate on the internet. As long as the RFP rates are higher than the best available rate you'll see a big drop in corporate travel but you don't know how much of that is business which has moved over there.

I went to a corporate client not too long ago, and he showed me his system. He selected a hotel - they have a list of hotels that his employees are authorised to stay in. The negotiated rate came up -  let's say it was £200 - and without having to push a button on the computer, the programme accessed this hotel's internet and brought up the best available rate for that day which was about  £20 less. So there right on the screen within a few seconds you have a choice, book the RFP rate or book on the internet.

What can you do?

I think the annual negotiation of RFP rates is something that no one's going to be doing within three years. It's all going to be dynamic pricing.  I think it's good thing, it makes everything a lot simple. There has been a complete lack of compression in pricing since last year because of the big drop in travel from the banking and financial sector. They are not paying the prices. Frankly it's no longer cool to spend $400 for a 30m square room in New York.

When will the business return?

We are bumping along the bottom, every once in a while we get some air under our wings and then take off a while. In our group we've achieved a lot more stability than we had in the beginning of the year. Prices are not falling like they were, occupancy is doing pretty well, but in order to reach back the levels of profitability we had in some of the big cities, that's going to take some time. It's a combination of being a lot more vigilant about how we manage the processes that go on in the hotels, how we market ourselves and how we manage the cost base. We've had several years of high predictable occupancies that have led to the increase in fixed costs. The whole industry is going to have to move closer to more variable costs and less fixed costs and that's not going to be easy.

What about marketing and brand departments?

We don't need those departments. If you are a destination-led company you have to be in the right destinations. If you are a distribution led company then your job is to grow the business and you might not be able to go to only great destinations and that's when you need the power of the brand.

If I had a target of 100 hotels in the UK in five years I would have to invest a whole lot of money in business and brand development to make people build and franchise with me. Because, once I get out of the city centres out of Mayfair, Kensington and George Square in Glasgow, trying to put them up in other places that are not killer destinations requires a really strong brand.

We are concerned about the lack of brand development so far, but it is not the number one thing I've got to do right now. The number one thing is to make sure that our asset base is solid, the right amount of investment has gone into it, what things need to be done in the next five years. We are doing asset reviews in all of our hotels, but they all need to be completely reviewed to decide what we want to do with each of these assets. And money is not being invested until I know where to put it. One of the problems in the hotel business is we spend a lot of money without really understanding what it's going to do after you've finished spending it.

http://www.millenniumhotels.co.uk/

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