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Fri 5 Apr 2013 11:58 AM

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Starwood's love affair with the Gulf

With well over a thousand properties dotted around the world, Starwood Hotels CEO Frits van Paasschen has his finger on the pulse of the global economy. He tells Arabian Business why the headlines don’t tell the whole truth

Starwood's love affair with the Gulf

The first impression one gets after meeting Frits van Paasschen is that this is a man who doesn’t like to stand still — which is lucky for someone whose job is so closely tied to the travel industry. Not content with shifting the entire Starwood Hotels and Resorts Worldwide operation over to Dubai for a month, the wiry American is busy spending what little spare time he has over the weekends doing triathlons and cycling in the desert.

Starwood Hotels and Resorts Worldwide, the US-based company he has led for nearly six years, oversees 1,140 properties in over a hundred countries around the world. So it seems a bit strange that Dubai — not London, Paris or Hong Kong — has been chosen. Not at all, says van Paasschen, pointing out that the emirate actually hosts the second-largest number of Starwood hotels on the planet (fourteen, with another six confirmed in the pipeline), after New York.

“Why Dubai? Simply put, because of the extraordinary growth that’s happening here, and I think this region exemplifies something we’ve been calling the golden age of high-end travel. What better place to watch that unfold than a crossroads like the GCC, and particularly Dubai?”

It seems that Starwood’s love affair with the Gulf still has some way to go. It’s planning to have 30 hotels in the UAE in the next five years, alongside fifteen in Saudi Arabia. Altogether, the firm will launch 50 new hotels in the Middle East and Africa during the same period. When questioned whether the kind of capacity growth he is planning for cities like Dubai and Abu Dhabi is overkill in what are already highly competitive markets, van Paasschen shakes his head.

“Our business is about being a pioneer, being a first mover in the markets — so I would rather be early than late,” he says. “Even in the dark days of 2009, our occupancy across Dubai was 82 percent, and we haven’t dropped below that. In fact, today, the market is somewhere in the high 80s and we continue to be above that.”

“And even as I look at Abu Dhabi, there may be more supply today, but as you look at overall growth in the UAE, and you look at the investment creating Abu Dhabi as its own destination, I believe, from our own standpoint at least, our supply creates its own demand.”

While Van Paasschen has access to the kind of data that most economists can only dream of, he tends to think long term. While you may not have heard of Starwood, the chances are that you will have woken up in one of its hotels. Its family of nine brands includes Westin, Sheraton, Le Meridien and St Regis. So whether it’s emerging markets or first-world economies, van Paasschen has a pretty up-to-date grasp on where confidence is high and where the planet’s business is being done.

So what’s he got to say? Well, by and large, the news appears to be far better than the headlines - which tend to focus on a stuttering Europe, an America that is hampered by political wrangling, a hard landing in China and slowing growth in India - would have us believe. Emerging markets are of especial interest to Starwood, which has 80 percent of its pipeline of new hotels based in fast-expanding countries. In China, especially, van Paasschen reports that Starwood’s January figures indicate a bounceback in the world’s second-largest economy after the country’s leadership transition took place late last year.

“February and March are difficult months to look at in China because of New Year’s and some of the party meetings that are happening, but the early read on 2013 from a China perspective is a resumption in growth,” he says. “Now I say that recognising that our actual system revenues in China increased 25 percent in 2012, so if that’s a slowdown, we’ll take another slowdown. But the important thing is that our same-store sales in January showed an acceleration in demand across our product.”

The story is similar in India, although van Paasschen concedes that it is a more difficult country in which to do business, given the high cost of capital locally and the regulatory regime. But the one thing India does have is demand that is currently way in excess of supply. There are nearly as many hotel rooms in Las Vegas as there are in the whole of India; put another way, there are almost as many high-end rooms in the UAE as there are in the world’s seventh-biggest economy. Starwood has 30 hotels open in India today, with a further 15 in the pipeline. Further down the line, van Paasschen says that his goal is to have 100 properties operating on the subcontinent by 2020.

Elsewhere around the globe, the CEO reserves his harshest criticism for the US, and what he refers to as the “Washington circus”.

“For me it’s less about the sequester, but it’s the recurring issue of debt ceiling, fiscal cliff, sequester, continuing resolution and a political divisiveness that I do believe is undermining some confidence and holding back some capital,” he says. “We have seen some companies, particularly for large meetings and conventions, pull back and move into what we call ‘wait and see mode’.”

Having said that, van Paasschen says he has no concerns about the US, given what he refers to as its natural dynamism, entrepreneurship, and the recent performance of both capital and labour markets. He also appears to be more bullish than most on Europe, where supply has been limited over the course of the last decade, leading to a level of demand “that are as high as anywhere in the world”. If that sounds somewhat surprising, then he has two reasons for those impressive figures. One is the fact that most of Starwood’s European hotels are based in gateway or hub cities; with the rise of the middle class elsewhere in the world, many of those travelling for the first time tend to see cities like Rome, London or Paris as must-do destinations.

“We also reflect what’s going on in the high-end of travel,” van Paasschen adds. “So our bread-and-butter business is technology companies and professional service firms, and those businesses — in particular global companies — are travelling more than ever. Many of them are based in mature countries and are travelling in search of growth around the world. So, in many respects, this is also a travel-intensive recovery.”

However, having that insight into the intricacies of the global economy doesn’t necessarily mean that that information defines the operator’s strategy. After all, hospitality is inherently a long-term game; it takes roughly three years to build a hotel from scratch, and even if one is taking on an existing building, the commitment for each property is looked at in terms of decades, rather than years.

The Starwood CEO is therefore more interested in underlying trends that have shaped the global economy not just in the past decade, but since the Industrial Revolution. When there is a drop in demand at any one location, the hotelier tends to invest counter-cyclically, taking advantage of lower opportunity costs by either renovating or refreshing inventory in preparation for the return of better times. Van Paasschen says that he would rather be accused of being too aggressive in markets like India and China than not being in those markets at all.

“As cities get built out, and as great locations get claimed, having that first-mover advantage, not just to represent your brand but physically to be in those places over time is the best guarantee of success,” he says. “If I were to place the bet that in the last 25 years urbanisation in China went from 20 percent of the population to 50 percent, and that most of the developed world is at 80 percent, the likelihood that China’s urbanisation is going to continue for some time to come. And that’s the bet we want to place.”

He adds: “In the end, the most important driver is the force of economic change. There will be aberrations to that, both at certain times and in certain locations, but the simple force of 3 billion people entering the global middle class — as is projected by the OECD — I think trumps any political wobbles and problems along the way.”

However, while van Paasschen is keen to grow aggressively, he’s also reluctant to add a new brand to the Starwood portfolio. Element, an environmentally friendly brand, was the last to join, in 2006, after Aloft (2005), St Regis (1999) and W Hotels (1998). The CEO says that he would prefer to invest in current properties, adding that he feels “very comfortable” with the brands the firm is running today.  When pushed, he says: “It’s something we think about, but I can tell you in all sincerity that we don’t spend a lot of time on that. It’s very tempting in this business to make headlines by launching a brand. It’s much more important to invest and grow those brands over time.”

Details of how the company is projected to perform in the year ahead are scant, but that’s no surprise given Starwood is a listed company. Last year, the company made $562m in net profits, a fifteen percent rise on the year before. Van Paasschen says the firm is looking to increase revenue per available room (RevPAR) by between five and seven percent, plus a growth in footprint, in net terms, of between four and five percent in terms of rooms.

Further down the line, the company will add another 100,000 rooms to the existing 340,000 rooms in its portfolio in the next four years, which is no small undertaking. Needless to say, van Paasschen doesn’t seem fazed.

 “Coming out of the crisis, our goal was to make sure that we got more than our fair share of demand and we speak in terms of having gained at least a couple hundred basis points in RevPAR index in relative performance compared to our competitive properties on a worldwide basis in the three years or so since the crisis has really ended,” he says.

“But looking ahead, now, it’s taking advantage of and succeeding in realising the growth that we see in front of us in this golden age of travel.”

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