• Starwood up on global expansion

Starwood Hotels & Resorts has increased its full-year outlook after reporting an 11% increase in second-quarter revenue to $1.43bn.
Revpar was up 11.8% year-on-year as the company was able to benefit from its exposure to the business market and expanding overseas market, with Frits van Paasschen, president & CEO, commenting: "Our customers are busy and look to stay busy".
The company has forecast earnings before special items of $1.67 to $1.77 per share, up from an earlier forecast of $1.60 to $1.70.
Van Paasschen told an analysts' call that the company was able to maintain momentum despite "tepid US economic growth and persistent high unemployment" because of the divided nature of the recovery, which not only saw emerging markets growing fast while developed ones were languishing, but also saw a split within developed markets between successful companies and those "with looming debt maturities".
The group's core business travel market continued to show signs of growth, with business transient revenue up 9% and rate up 6%. Van Paasschen said that transient revenue booking pace through September, was up by double digits, adding: "With supply already tight in the US and Europe, we foresee strong rate increases, not just for the rest of this year, but also for corporate rate negotiations for next year".
The group's leisure business saw 7% rate increases and 12% revenue growth for the quarter, with the CEO commenting that the expected ongoing growth would mean "less inventory sold through costly channels such as OTAs".
The company continued to focus on global growth, and moved its HQ to China for a month during the quarter. Van Paasschen said: "When I was asked about my motivation for going to China, it reminded me of what the gangster Willie Sutton said when he was asked why he robbed banks. And he replied: "Because that's where the money is". For our case, that's where the growth is, and the growth continues to be spectacular."
The group has 75 hotels in operation in China and nearly 100 more under construction which, when open, will be around a third of the group's US footprint. Van Paasschen said: "It's rare that any country has more hotels in the pipeline than in its existing footprint. But it's unprecedented for this to be happening in our second-largest country."
Van Paasschen added that the group was seeking growth spreading beyond the major markets to the second- and third-tier cities, with over 80% of the group's hotels being built in the 170 or so such cities, each with populations of more than 1 million. He said: "We're often asked whether this rapid growth will lead to temporary overcapacity. And no doubt, there will be some wrenching adjustments as supply and demand move in and out of balance."
The company identified its "two main trouble spots" as Japan and parts of the Arab world, where it has forecast a $25m to $30m full-year hit on Ebitda. On the fee front, North Africa and Japan are expected to cut 2011 management fees by up to $18m, with two thirds of the impact on incentive fees.
Looking at the company's future expansion, the group said that the signing pace was improving and the pipeline growing, with Asia and Latin America driving growth. Most of the additions in North America were, it said, conversions.
Eighty-five per cent of the company's 90,000-room pipeline was outside North America, and 75% of the rooms were in the high-fee luxury and upper upscale segments. With only about 40% of the group's fees earned in the US, it has a good international spread.
In addition, Starwood has good exposure to emerging markets. In fact, this was a central feature of van Paasschen's speech during the conference call with analysts. And for emerging markets, Starwood specifically means China.
From June 8th to July 11th, Starwood set up its corporate headquarters in Shanghai. At the time van Paasschen said: "Nowhere is more emblematic of our global growth than China where we will open one hotel every two weeks this year".
During the conference call he said that the reasons for going to China was to "deepen our dialogue with our leadership team [there] and to add to our set of shared experiences".
It was unusual to have more hotels under construction (100) than open (75) but unprecedented, he said, for this to be the case in what is now Starwood second largest country, after the US.
The volume of new hotels is possible due to the spread into second and third tier cities. About 80% of Starwood's new hotels are being built in the 170 or so Chinese cities classified as below primary (although each still has a population in excess of one million).
The Chinese focus has led to an increasing Sino-fication of Starwood. It started tailoring its loyalty programme for Chinese travellers four years ago and it now drives more than 50% of Chinese occupancy.
In 2009 it opened what is now the largest call centre for any global hotel company and using it not just to take bookings but to launch promotions and develop talent for its operations. In regards to hiring, Starwood estimates it is going to triple the number of its employees in the country over the next five years to reach 90,000.
Van Paasschen also criticised his rivals by pointing out that Starwood had the only website where guests could book start to finish in Chinese – most start in Chinese but finish the process in English.
The Chinese outbound market is also now a priority. Starwood describes it as a "Outpost to Outbound" transformation, moving from a position as an outpost for Western travellers to a business that today caters mostly for Chinese travellers.
The Starwood CEO was also keen to knock his rivals on their opening rates for hotels in China, claiming that in 2010 Starwood opened 47 upper upscale or luxury hotels compared to 39 for Marriott, 22 for Hilton and 11 for Hyatt.
He concluded his comments with: "The world really is changing like never before, and the way we see it, it's changing in our favour with so many new travellers who want our brands. The only thing that keeps me up at night is the fear of not fully seizing this moment."

HA Perspective: Starwood is in something of a sweet spot right now in terms of the business cycle. It has a high proportion of owned hotels relative to its global major peers and most of its portfolio is in the luxury or upscale segments.
Morgan Stanley estimates that 40% of its EBITDA comes from owned hotels or incentive management fees. It is thus highly geared to the recovery.
The skew of the pipeline towards emerging markets is another major plus. Morgan Stanley estimates that the three markets of Brazil, India and China will add 3% CAGR of 3% for Starwood.
And finally Starwood has the asset disposal programme to come through. This will be a major test of how strongly the company believes in its own rhetoric, or at least believes it can convince investors of its rhetoric.
Simply handing back the cash from these disposals to shareholders would not be good enough if van Paasschen truly does spend his nights worrying about not seizing opportunities.

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