The Bed Race ~ Hotel Companies' Everlasting Pursuit of Differentiation.
Gabi Baumann ~ HVS International
Tuesday, 1st August 2006
According to Michael Porter - there are three approaches to outperforming other companies in an industry; Differentiation - Overall Cost Leadership and Focus.

Differentiating a product or service of a firm means to create something that is perceived industrywide as unique. Design, brand identity, image, technology, amenities, and customer service all present opportunities for hotel companies to distinguish themselves from the rest. For increased protection, most companies strive to be different on every level. The goal remains the same, to gain customers' loyalty and the resulting lower price-sensitivity.

An example of the importance of differentiation among key players in the hotel industry is the development and introduction of new bedding products. The idea to exchange hotel beds by a more comfortable, 'home-away-from-home'-like version and to use this innovation as a mean to differentiate, stems from Starwood Hotels & Resorts, a company regarded widely as the industry's innovator.

According to Sue A. Brush, Westin's senior vice president of marketing when the new beds were introduced, "Starwood wanted to differentiate itself from the competition, it wasn't anything that came through in the research". This statement indicates just how important differentiation is to hotel companies today.

The Beginnings
George Bernard Shaw once said, "while reasonable people adapt to the world, the unreasonable ones persist in trying to adapt the world to themselves. Thus, all progress depends on the unreasonable person." Starwood, initiating the development of the Heavenly Bed in 1999, caused industrywide progress in terms of the room product offering. Their research showed that comfort, a good night's sleep, and consistency were high priorities for consumers. The company realized that a comfortable bed, including high quality linen and fluffy pillows were the solution. Hilton also conducted a sleep research study in 2000, realizing how important better beds are to customers.

However, the massive advertisement efforts in connection with the introduction of the Heavenly Bed indicate that the actual motive had more to do with winning the race for differentiation. Many would agree that it seems farfetched to assume that hotel guests, especially business travelers, would demand more pillows or more luxurious beds in a customer satisfaction survey. Today's new hotel beds are the result of a call for attention.

Jumping on the 'Bed'-Wagon
Starwood's innovation became a self-fulfilling prophecy. The Heavenly Bed was extremely well received with hotel guests and Westin enjoyed the benefits of first-mover advantage. However, unfortunately for Starwood and in line with D'Aveni's theory of hypercompetition, no competitive advantage is sustainable. While Starwood managed to disrupt status-quo and create a temporary ability to serve customers better than the competition, it did not take very long for the other hotel chains to start introducing their version of a good night's rest. Hyatt introduced the Hyatt Grand Bed, Marriott the Revive Collection including the Marriott Bed, Radisson the Sleep Number Bed, and Hilton the Hilton Serenity Collection, to name the major ones.

Due to the longer average length of stay periods, the innovation also became a hot topic in the extended-stay segment. Overall, one could say that Westin's bedding innovation has lost a lot of its originality over the years. More so today, people expect nothing less. The discerning frequent traveler would certainly have a difficult time accepting a traditional, small print patterned, colorful polyester bedcover.

Capitalizing on the Idea
What used to be a motive to differentiate from competitors has turned into a multi-million dollar investment for today's hotel companies. The investment was certainly worth it for the customer. But in what way and, more importantly, how much did it benefit the hotel companies? While a differentiation strategy does not allow a firm to ignore costs, it cannot let costs become the primary strategic target.

More commonly, achieving differentiation implies a trade-off with costs if the activities required in creating it are inherently costly, such as research, product design, and high quality materials. In the case of the "bed war", millions for dollars were spent on R&D, purchasing, and logistics. Hotel companies worked together with executive housekeepers, mattress and bedding producers, FF&E purchasing firms, designers, owners, and customers to produce their version of the new bedding package. According to PricewaterhouseCoopers, the US hotel industry purchased 1,4 million beds in 2005 alone, whereof Marriott bought roundly 628,000 beds for eight of its brands and Radisson purchased 90,000 beds to supply 90% of all their hotels. Marriott will invest around $190 millions (reportedly the company's biggest initiative ever) and Radisson about $20 millions.

It is difficult to believe that an investment of this magnitude had nothing to do with the absolute necessity to match what was introduced a few years prior. The issue was no longer differentiation, as most companies had already introduced their bedding products. It was simply about catching-up ASAP. At least, the past two years have presented a good time period for the implementation of such initiatives. Due to widely available capital, 2005 represented an extremely strong year for transaction. And the more transactions take place, the more properties are being renovated and reflagged. Business has been so good, every day sooner a room can get renovated to the better bedding package that will enable a higher room rate, the more money for owners and hotel companies.

Doing the Math
According to a statement by Bjorn Gullaksen, Radisson's Executive Vice President, the new beds were introduced after focus-group participants said they would be willing to pay as much as $10 a night more for better beds. "The bed is paid for by a $1.89 increase in rate over five years," he says. Bill Marriott agrees by saying that he expects to be able to charge as much as $30 a night more in Marriott hotels once the new beds are installed.

In 2005, the total US average rate is anticipated to have increased by 4.0% to $90. How much of that increase can be attributed to a more attractive room product is difficult to say, according to Bill Brooks, Hilton's Vice President for Standard Management and Performance. In his experience, satisfaction and loyalty of Hilton customers has definitively increased strongly thanks to the new beds but, according to him, it is not possible to estimate the return in terms of average rate increases at hotels.

Instead of trying to determine what rate increases might have been achieved so far, it is easier to estimate by how much average rate would have to increase in order to recuperate such an investment.

The following example represents an attempt to analyze the payback. The example is based on the average room count and performance statistics in the mid-scale without F&B segment in 2005. The average 150-room property in that segment generated approximately $2,600,000 in rooms revenue in 2005.

Introducing new beds in all guestrooms within two years would mean the purchase of approximately 100 beds per year, at an estimated cost per unit of $900. Related costs are estimated at approximately 5% of the per-unit cost, resulting in an estimated total investment of roundly $186,000 over a two-year period.

The investment could be recuperated by either an extra 3.6% increase in average rate, occupancy, or some combination of the two. In case of average rate, a $2.60 increase would be needed in 2005 and 2006, in order to recuperate the total investment within two years.

Considering that the mid-scale without F&B segment's average rate in 2005 increased by roundly 3.3%, an additional increase of 3.6% is substantial. If the investment is recuperated within five years, an increase of approximately 1.5% would be necessary, which is somewhat in line with the 1.89% increase mentioned by Bjorn Gullaksen. The second but less attractive option is to recuperate through increased activity.

Obviously, an equal increase in occupancy would be necessary in 2005 and 2006 for the recovery of the $186,000 investment over a two-year period. However, increased occupancy implies increased operating costs.
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The Lasting Costs of Added Comfort
The new bedding impacts costs on various levels. The most obvious area affected is laundry. According to Bill Brooks, the sheet load increased by 50% after the introduction of the new Hilton beds. This is mainly due to the triple-sheeting and the duvet covers that need to get washed after every checkout. The impact on energy costs is difficult to determine but as energy prices continue to be highly volatile (according to the New York Mercantile Exchange, oil and natural gas prices increased by 44% and 39%, respectively, in the 12 months before November 2004), operators with fixed price supply contracts were certainly better protected than those without.

Bill Brooks notes, however, that the issue is not so much laundry but housekeeping. He estimates that the additional workload of making a bed with either triple-sheeting or, worse, a duvet forfeits roundly one room per person per day. This implies that if cleaning a room took 20 minutes with the old bedding, it would now take 20.9 minutes for a room with the new beds. Companies analyzed the situation with the help of time-motion studies, in order to not only to try and understand the impact on labor costs but also to be prepared for union negotiations. Another point at issue is the fact that a shorter person faces extreme difficulties changing a duvet-covered bed, which turns staffing into a challenge for executive housekeepers.

At airport hotels, this is somewhat less of an issue; Due to the shorter average lengths of stay triple-sheets are preferred to duvets. However, at resort properties with lengths of stay of four nights or more, duvets are used more frequently.

The new beds not only affect laundry and housekeeping. The frequent washing also accelerates wear-and-tear of the linen. It is no secret the former polyester bedcovers were not being washed too often during the year, which saved some of the energy, labor, and replacement costs. Fortunately, sanitation is no longer missing in hotel beds today. This is comforting to know for guests but harmful to hotel's operating costs. Hilton Garden Inn's beds come at a cost of roundly $900 per bed, which, according to Adrian Kurre, Senior Vice President for Brand Management, is about double from what a bed used to cost. In order to partially offset that increase, the brand reduced the cost of the remaining FF&E by roundly $400 per room. The focus is clearly shifting from traditional FF&E material and two-line phones to higher quality beds, ergonomic chairs, flat-panel high-definition televisions, and MP3 players.

Not There yet
When sleeping in a traditional hotel bed, taking a shower using 2-in-1 shampoo and conditioner, or trying to find an internet connection on-site, guests used to and many still wish they were home instead. However, this situation is becoming less and less frequent, as hotel companies realize that the hotel product could be better than what people have in their homes. This revolution has started with the new beds and will continue to affect many other areas within hotels.

The next big and probably also the most urgent improvement is expected to happen in bathrooms. Hotel companies are already researching the transformation of the all-in-one plastic unit, bath/shower and toilet combined in one bathroom. The future hotel bathroom could feature a separate toilet area, a separate shower, a large bathtub, chrome hardware, marble floors, 100% Egyptian cotton towels, flowers, decorative items, DVD players, and flat-panel televisions.

In a nutshell, everything one would like in one's own bathroom. Such bathrooms might appear exaggerated. However, according to USA Today, the Maison Orleans hotel in New Orleans features all those items. Also, major luxury hotel chains are proud of their abnormally large bathrooms, such as the Four Seasons, featuring 750 square-foot bathrooms, and the St. Regis in New York City. The race for differentiation has not yet come to an end. The new beds were just the beginning.

A Better Home away from Home
Traditional hotel rooms feature two or three items, which guests tend to consider highly desirable, i.e. towels, bathrobes, and slippers. Those items are prone to disappear from guestrooms on a regular basis. Therefore, hotels offered them for purchase in their gift shops, trying to prevent the cost of theft. After the introduction of the new bedding products, hotel companies have created virtual gift shops, including many more popular assets of the new guestrooms, including mattresses, blankets, pillows, sheets, bath amenities, shower rods, alarm clocks, and even products for dogs. As previously presented, the three major hotel companies' stores provide the bedding products at retail prices ranging from roundly $2,600 for a complete kind-size bed package at shopmarriott.com to up to $3,000 for a Serenity bed from hiltontohome.com.

Despite the rather high price levels, these online shops have proved to be very successful. Westin, supposedly, has sold $10 million in bedding accessories to its customers so far, including 30,000 Heavenly Beds. ‘Hilton to Home' also exceeded expectations, according to Bill Brooks. The success of this concept is an indication that guestroom products have become much better and more desirable than what people have at home.

The Never-Ending Race
The race for differentiation has incited increased rivalry within the hotel industry, initiating the transformation of the traditional hotel into a sort of ‘dream home' for guests. Starting with the quintessential offering of the hotel, the bed, to the bathroom and, also soon, lobbies, hotels continue to spend millions of dollars to gain a competitive edge. However, no competitive advantage is sustainable, everything can be duplicated, and everyone will. Differentiation, the hotel industry's preferred strategy to stay competitive, comes at a high cost. These days, it's good to be a traveler!

Gabi Baumann, work for HVS International in the Mineola, New York
(Hotel/Motel Valuations, Market Studies, Feasibility Reports, and Investment Counseling)

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