Managing A Portfolio Of Hotel Brands: A Case Study

Case Study Classroom Notes

The business-casual dress code had Troy Freeman stumped. As the long-time 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 1. 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 portfolio2, given the overlap between existing and acquired brands in terms of positioning, price tier, and geography

1 In 2015 the global hotel industry comprised approximately 16 million rooms in more than 200 countries, with 38% in Europe, 36% in the Americas, 32% in Asia Pacific, and 4% in the Middle East and Africa.

2 Marriott’s roughly $13 billion acquisition of Starwood, completed in 2016, became the largest transaction in the hotel industry’s history, surpassing Accor’s $3 billion acquisition of Fairmont, Raf?es, and Swissotel, consummated in 2015.

During the deal discussions, Otto’s board had encouraged Troy to remain noncommittal about the company’s post-merger 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.3

Hotels are not the only industry to be faced with whether or not to prune brand portfolios. Large consumer packaged goods companies such as Procter & Gamble and Unilever, spirits companies such as Diageo, and food businesses such as Nestlé have struggled with similar questions. 3

A Bigger Bucket

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 brand4, had sent statements supporting a shake-up a few hours earlier.

4 Hotel performance is often measured with a metric called RevPAR, which is calculated by multiplying a hotel’s average daily room rate by its occupancy rate or by dividing its total room revenue by the total number of available rooms in the period being measured.

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 5 if that’s what it came to.

In Carmel

5 Multibrand strategies at companies that have several brands in the same category can suffer from diseconomies of scale. Has Otto considered all the potentially hidden costs?

“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?” 6 Troy asked, smiling.

6 Some experts argue that getting rid of loss-making, declining, weak, or even marginally pro?table brands to bene?t investors means the resources freed up can be used to bolster the remaining brands and make them more attractive to customers, thereby serving multiple stakeholders.

“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 7. 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.”

7 “Flag” is hotel industry lingo for a brand.

“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.

The Seats People Chose At The Conference Table Reflected Where They Stood On 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 8, they might discontinue their affiliation with us and defect to Hilton, or another competitor. We will lose properties.”

8 Because hotels are typically owned by one entity and branded by another, brand elimination decisions are more complicated. Property owners who have invested in the existing brand might balk at a switch.

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 clamoring 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 9. 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.”

9 Loyalty programs add another complication. When you phase out brands, you risk losing members loyal to them, and, as the postmerger experience of airlines has shown, it’s no easy task to migrate customers from one program to another.

“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?”

Should Otto keep all 21 of its brands or prune its portfolio?

Otto doesn’t have to reduce its Brand list. Indeed, owning such a broad and varied brand portfolio will only help the company grow, enabling it to compete effectively across both metropolitan cities and tiny villages. The total of the 21 emblems is larger than the sum of their parts: possessing extra brands will give even more worth to the quarters and buildings Otto purchased from Beekman. One of the key principles that helps a hospitality firm like Otto win is hotel diversification. In any given industry, there can only be a certain variety of options available, therefore having more hotels enhances the chances that a customer will opt to stay at one of yours.

Consumers’ online purchasing habits follow the same rationale. The further Otto brands that appear in a customer’s search engine results on a site like Trip-advisor or in a professional reservation system, the more likely they are to be chosen. Observe how consumable processed food businesses view display space in super markets: You want people to see several of your brands as possible. I’m not convinced by the swimming channel metaphor. While it’s true that brands shouldn’t collide, this is more akin to coordinated diving. If Piper and Even Star are identical, find out what distinguishes them and build a gap between them so you can have two brands that your customers enjoy.

Otto should concentrate on providing each brand its own specialty once the deal is finalized. I believe in the importance of branding and the fact that individuals can be committed to multiple companies at the same time. However, Troy and his crew must keep in mind that hotels are a commodities purchase for many customers; they don’t care if they stay at a Piper or an even star if the price is appropriate.

What do you think should be done in the case and why?

I believe that keeping the established 21 brands and developing a business plan that will provide a unified approach to management and provision of services is the greatest approach to the situation. Before making a choice, the different sides must evaluate a number of issues. Profitability, share of the market development, expansion, shareholder satisfaction, and financial advantages are among these considerations. The 21 brands give the company the ability to expand into other locations without having to spend more money on growth.

They will gain from growing consumer volumes, which will boost their sales and profits. Investors will be more loyal to a company if they can keep track of the flags that they handle. Shareholders will also not remove their money out of the company once they see that 21 flags would bring in more money. The 21 brands will work with Otto Hotels and Resorts to develop pricing structure and tactics that will increase revenues and efficiency.

Finally, the 21 brands would have a favorable lengthy influence on the company ’s market worth and profit flows. Supervisors should concentrate on finding strategies to achieve that the all brands are thriving and maintain a strong perspective that will grow Otto Hotels and Resorts’ value. This act makes sure that all flags come together to produce consistent results that will benefit the firm’s stability and prosperity.

Explain Modelling after the Acquisition of Sheraton by Marriott.

The $13 billion purchase of Sheraton by Marriott presents a valuable model that Otto Hotels and Resorts can use to replicate their corporate structure. Marriott will become the leading hospitality corporation, with more than 30 brands. Marriott does not want to disrupt Sheraton’s systems and processes, but rather to capitalize on the Sheraton’s distinctive business tactics for attracting and retaining guests.

Marriott seems to have more brands, Otto Hotels and Resorts may gain from this approach because they are utilizing a business plan to make sure other brands withstand the union in order to achieve organizational excellence. They can deliver one-of-a-kind services that cater to the needs of many clients in community. Marriott does not want to eliminate any of its brands, but rather to boost the effectiveness of specific brand in the industry. This strategy is assisting the organization in being profitable and successful in a difficult business world.

Provide your concluding remarks and findings on this case.

The circumstance described above emphasizes the importance of developing a strategy that will help Otto Hotels and Resorts succeed while also ensuring the organization’s long-term sustainability. There is no need to trim the brands because corporations like Marriott are able to successfully operate a franchise with over 30 brands. Administrators at Otto Hotels should seek a practical solution that combines the mission and objectives of different flags in order to achieve long-term socioeconomic profitable growth. This strategy will help Otto Hotels and Resorts achieve long-term success and expansion.

Reference:

Dev, C.S. (2018). Case study: prune the brand portfolio?

Picker, L. (2015).  Marriot to buy Starwood hotels, creating world largest hotel company.