Hitting New Heights

22 November 2010

Appointed as CEO of global hospitality giant Starwood with no experience of the hotel sector whatsoever, the last three years have provided a steep learning curve for Frits van Paasschen. He tells Phin Foster why he and the company have emerged all the stronger for the experience.

Of the sectors considered to be most at risk from the impact of the global financial downturn, the areas of luxury and hospitality must rate pretty highly. Nosediving consumer confidence, the decline of business travel and talk of an impending 'age of austerity', 'staycations' and the death of 'bling' all amounted to a full-scale assault on a number of fundamentals that had seen the segments flourish in a previously booming economy. In this context, spare a thought for Starwood Hotels & Resorts.

The $11.5bn hospitality giant, operator of a stable of leading high-end brands that include Sheraton, Le Méridien, Westin, St Regis and W, saw room rates cut by, on average, 20-25% and total revenues fall by 17% in 2009.

But the last thing Starwood CEO Frits van Paasschen expects is sympathy. He is not only buoyed by a significant pick up in occupancy rates over the past nine months, but is also rather bullish when it comes to defending his company's position in the market.

He has clearly had plenty of practice. "I wish I had a loyalty point for every time somebody has asked me whether luxury is dead over the past two years," he chuckles.

"Whether we're talking hotels, retail, cars or anything else; there's no disputing that the top end was significantly hit, but the fundamentals have remained the same. We have not seen a seismic cultural shift akin to that witnessed during the Great Depression; luxury is an essential component of the human condition and when people feel good about their situation and business confidence is high it will always be in demand."

"Luxury is an essential component of the human condition and when people feel go."

The 49-year-old triathlon enthusiast is approaching his third anniversary heading operations from Starwood's HQ in White Plains, New York, and his CV is atypical in an industry that can, at times, seem somewhat insular. It includes senior directorial positions at Nike and Disney and, prior to his arrival at Starwood from his role as president and CEO of Coors, boasted no hospitality experience whatsoever. Some cynics might have cited this lack of conditioning as lying behind the seemingly counterintuitive decision of pushing ahead with openings and extensive renovation work when the market was at its worst.

While people expected Starwood and its ilk to retreat to the sidelines and weather the storm, van Paasschen set out with all guns blazing. "In many ways, we have been able to emerge from the downturn a stronger company than when we went in," he argues. "We opened over 80 properties in 2009 and reached the landmark of 1,000 hotels worldwide this year. Alongside renovation projects, that means 60% of our portfolio is less than three years old or has been upgraded significantly during that time.

"From a financial perspective, we reduced our debt from just over $4bn to under $3bn and, perhaps most importantly of all, our leadership group has been galvanised as a team; there's nothing better for creating a shared sense of purpose than a crisis. We didn't simply slash costs; a lot of thought went into how we do business and the way in which we work together. This is a much stronger company for going through that process."

A new perspective

Having joined the organisation with a reputation as a canny operator of global lifestyle brands at a time when the industry, and Starwood itself, had never been in ruder health, events soon transpired to transform the CEO's role significantly. He describes it as a move from being a "leader for growth" to more of a "crisis manager". Van Paasschen made a point from the beginning to spend as much time on the ground as possible, meeting with general managers and visiting properties – he has been to over 300 hotels in almost 50 countries – but did his lack of experience in lodging seem daunting?

"The worst thing you can do as a business leader is to build a team that looks and sounds like yourself," he counters. "They won't thank me for saying this, but our regional presidents have 115 years in the hospitality industry between them and they're excellent gatekeepers and offer great guidance.

"One of the challenges you have in any large organisation, regardless of sector, is that people can become quite compartmentalised; they tend to see things solely from the perspective of their own function, particularly in times of uncertainty. A major part of my role has been to break down those barriers and remind our associates, both intellectually and emotionally, that we have shared success in mind."

While results do appear to be heading in the right direction – revenue per available room (RevPAR), the primary metric for gauging financial performance in the hotel industry, was up 15% last quarter and climbing – van Paasschen stresses the hospitality sector's ability to act as barometer for the wider economy.

"I like to say we have courtside seats," he begins. "While things have picked up much more quickly for our business than we had anticipated at the start of the year, there are signs that a more general recovery might come in fits and starts. Our group meetings business – major events and conventions – are still being booked within a short window. Whereas before we'd have been working to timescales of one, two or even three years, now it's more like six months. Companies recognise that it's safe to press ahead, but are still unsure as to what 2011 and 2012 will bring."

A more promising sign has been the return of the transient business traveller. "Of our top 20 global accounts, 15 are looking at travel rising in the double digits," he reveals. "Particularly encouraging has been the return of the financial and consulting side, as well as IT. It looks as though businesses have acknowledged that they will have to invest in sharpening their strategies if they hope to increase performance."

This is a route that Starwood has taken through a $200m multi-year contract, signed in 2009, that sees Accenture provide the organisation with an integrated IT solution, including end-to-end applications and infrastructure management. Along with the shift in strategy from owning hotels to franchising and managing, it is reflective of the acknowledgment from senior brass as to where the hospitality giant's core competencies lie.

"Outsourcing IT services was based on the recognition that our focus as a company is on managing global hospitality brands," van Paasschen explains, "we're not a software development company. There are firms out there who are more effective and able to lower the cost of their ability to deliver solutions. It is important to recognise that it is difficult to be world-class in multiple disciplines and you can waste a lot of money and energy trying."

The partnership with Accenture also evokes a wider trend in the global business dynamic that makes the CEO optimistic for the hospitality industry's long-term future. "We've outsourced IT to India and are playing our part in developing the middle class out there," he explains. "A number of our senior executives have been travelling to the sub-continent, working with our new partners, and it's symptomatic of how the growth in technology and knowledge bases is forging new travel paths."

And Starwood is well positioned to take advantage of this trend. Some 40% of its business comes from emerging markets and around 60% of the company's 85,000 rooms in the pipeline will be built in Asia. Second quarter RevPAR growth was 46% in China in 2010, which is expected to be the world's largest tourism market by 2020.

"My first visit to China was in the mid-1980s and the Western hotels out there were exclusively catering to international travellers," van Paasschen recalls. "Today, around 80% of our guests in that market are Chinese. They're typically business travellers, but the growth in the leisure market is equally impressive. We must operate as a local business now, with booking facilities, call centres and a growing cadre of Chinese associates meeting that demand."

Shifting balance

Starwood's standing as a truly global operator is reflected in where its CEO sees further potential, citing the growth of business between China and Africa, as well as his group's extensive presence in both geographies, as cause for optimism.

"In many ways, we have been able to emerge from the downturn a stronger company than when we went in."

"A global footprint is an enormous asset," he says. "If you believe certain projections, 70% of economic growth in the next decade will come from rapidly growing markets. People are attracted to brands that they know, and being established in these economies means we have a real head start."

But does a focus on new markets mean that offerings initially developed in the West need to develop new characteristics? Aloft's launch in China, for example, saw Starwood revise the select service component of the brand. "It's a balancing act of retaining certain characteristics while adopting local identities," van Paasschen acknowledges. "Sometimes you have to give yourself the freedom to make certain changes."

In his eyes, this reflects a greater shift in the significance of brand identities and consumers' relationships with them. This is particularly noticeable in the hospitality industry, where the 'cookie cutter' approach to design and feel is fast becoming redundant.

"There was a time when being a strong brand meant simply delivering reliability and consistency," he explains. "As more companies became better at doing that, we woke up to the fact that brands also have to demonstrate personality and make an emotional connection.

"Over the last two to three years, we've gone through a process of putting discipline behind what it means to have distinctive brands, focusing on what defines each one and makes them compelling for our target guests. At the same time, we've also been looking to centralise or standardise those things that aren't distinctive."

A trivial but significant example was the realisation that nine different types of laundry bag were in use across the organisation – "I don't think there's a person on Earth who chooses their hotel room on those grounds,' he jokes – and hearing a multinational CEO discuss the intricacies of housekeeping is perhaps indicative of a greater cultural shift and growth in humility among business leaders as a direct response to the crisis.

"We've gone from a state of economic apoplexy to the gradual realisation that the world has not ended," van Paasschen explains, "but the process has been dramatic enough that a generation of CEOs will perhaps no longer take certain things for granted. Having that sense of scepticism should make us better business leaders in the long run."

Events also conspired to forge far stronger links across the industry as a whole, with van Paasschen and his peers speaking as one in defence of a sector under attack. "We compete on the field of play as fiercely as anyone else," he begins, "but there are also areas where being aligned is equally important. When the US Government moved from criticising the extravagant use of tax payers' money to a more general vilification of travel as a whole, we stood up and reminded the lawmakers that the hotel sector employs more people than the auto industry.

"We were not asking for a bailout and reminded them that travel would be a critical aspect of getting the economy back on its feet. Finding our collective voice saw the rhetoric disappear quite quickly."

Starwood CEO Frits van Paasschen.