• Morgans faces brand challenge

Morgans Hotel Group, the portfolio of trendy boutique hotels that were created by Ian Schrager, reported its first quarter as a listed company this week, showing a 16% rise in operating profit.

But the flipside of the results was the increased net loss and the launching of a legal action against Morgans by a group of investors that relates to February's IPO.

The net loss was actually a better performance than had been expected, according to analysts at Morgan Stanley. They added that the legal action being taken by Century Operating Associates, concerning a share-out of the benefits from the Miami Shore Club development following the IPO, was not overly concerning.

More worrying for Morgans is its longer term plans. While under the leadership of Ian Schrager, the company proved adept at developing hotels but poor at operating them, building a reputation for below par service.

Some of this ineptitude was forgiven by guests seeking a brush with the glamour Schrager breathed into the hotels. But now, under the far more corporate management team, there is no such hiding place.

Schrager's problem was always that he could only be sufficiently present in a limited number of locations. And his New York socialite approach did not travel all that well, particularly when he brought his flair across the Atlantic to the two London hotels.

The challenge ahead is taking the niche play and scaling it up. The most ambitious project to date is the 50:50 joint venture with Boyd Gaming to develop two flagship hotels in Las Vegas bearing the Delano and Mondrian brands. The Mondrian brand is also being rolled out to the Scottsdale in Arizona.

CEO Ed Scheetz believes that these brands can deliver a return but it looks a stretch. If guests know they are not going to touch the Schrager glamour, they will certainly expect an improved service standard.

While revpar continues to surge in the US, any shortcomings will not be clearly visible. During 2005, at the company's seven owned hotels in the US, revpar was up17.3%.

For the two JV properties in London, Sanderson and St Martins Lane, revpar was up 1.6% and 0.2% respectively, despite the terrorist bombings in July.

EBITDA, adjusted for the impact of the IPO and other non-recurring items, was up 19.3% to $79.5m for 2005. The refinancing of the London hotels cost Morgans $2.2m in write-offs.

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