More than Just a Hotel—Creating an Experience

Simon M.C. Sherwood
President
Orient-Express Hotels, Ltd.

Selling an Experience
The large chains tend to approach the business as selling a standardized product where the room, essentially, is the same wherever you go. You wake up in the morning and look around, and it’s the same color scheme you would find in any of their hotels. The room gives you no clue as to where you are; it could be New York, Cape Town or Rio. There’s nothing wrong with this part of the business as many people who travel are seeking a comforting, familiar setting for their hotel room. Many people traveling frequently and far away are in fact looking for that reliable, standardized product.

But that is not what Orient-Express Hotels is about. Each property and every business that we’re involved in has a distinct identity and personality. This may never be the largest segment of the market, but it is certainly important and growing. When you go to our Hotel Cipriani in Venice, for example, you’ll see Murano glass chandeliers and Fortuny fabric on the walls (both of which are made in Venice) and the manager would be offended to have the food described as “Italian” – he is striving for it to be “Venetian.” The idea is that the hotel reflects its surroundings and offers a unique and personal feel. We’re not just selling a room or a bed; we’re selling an experience.

All of our properties reflect some of the character of the countries in which they are located and their own history. A good example is the Hotel Monasterio in Cuzco, Peru. The old monks’ cells have been converted to bedrooms and every effort is made to keep alive the spirit of the monastery, even to the extent of having monastic chanting as music in the courtyards each morning. Therefore, intentionally, none of our properties are the same. We remain consistent in terms of quality, and maintain excellence at the super-luxury end of the market. But at the same time, no two of our hotels are identical. Each hotel has its own name as we celebrate the fact that each has its own personality, as dictated by its individual surroundings and tradition.

I believe that there is growing demand for this sort of experience. Twenty years ago, the general tourist was looking for “sun and sand.” For example, the British on holiday wanted fish and chips washed down by lager and certainly wanted none of that “foreign food.” How times have changed! Tourists are looking now for a much deeper cultural experience. Nowhere is this truer than at the top end of the market. Our guests want to sample the local food, drink the local wines and understand a region’s traditions and history. I expect this trend to become stronger and stronger. No longer do our guests return from holiday and show off their photos of the beach. They now return to talk perhaps about the “special hotel,” unusual wine or some fantastic local brand of olive oil that they discovered in their travels.

****************
Local Autonomy
From a managerial and corporate standpoint, we are a fairly decentralized organization that respects the individuality of each of our properties. Of course, this requires a very strong management team at the local property level. If you compare the shape and size of our company, our head office would be much smaller than many others, and we would spend much more on the local management teams at the actual hotels. The managers really are key to our properties. We do set standards for the quality and the types of expenditures that the managers should be making, but for the most part they have a great deal of autonomy. Another indication of this is that we do not try to move managers from hotel to hotel, as many companies do, as part of their effort to standardize the experience everywhere. From our point of view, if a manager wishes to move on and develop, we respect that, but there is no great encouragement to jump from property to property – that is not the aim of what we are doing. We are very happy to have them seated in the same property for 10 years or more so that they can really develop the personality of that hotel as well as relationships and a rapport with their regular guests.

We value highly this special relationship between hotel and guest. In order to foster it, we communicate predominantly with guests at the individual hotel level rather than try to take over and ‘run’ the guest centrally (the approach of most conventional brand chains). For example, if a guest goes on one of our Orient-Express Safaris in Botswana, they will be contacted in the future by that business unit. After all, what they will be interested in will most-likely be very different from guests visiting the Reids Palace Hotel in Madeira. This is part of a broader picture, developing and fostering unique, individual relationships with guests, even after they have left the hotel, and we believe this is best done by building the local relationship between the guest and the property.

In short, our managerial approach is to try and enjoy the benefits of a mom-and-pop personal approach, and combine this with the benefits of a large organization that has a strong balance sheet, tight financial controls, financial clout, sophisticated marketing, and so on. We try to find a balance that gives us the best of both worlds.
*******************

Building an Image
It’s one thing to have a great product, but it’s another thing to communicate the value of that product to the great wide world. To be successful, any hotelier must carry through on both of these demands. In the weight of how we spend money (and effort), relatively speaking, we spend less on advertising – in fact, very little – and we put a much greater effort into what you might call public relations. Our relationships with journalists, travel writers, and guidebooks are strong. We want to get those people to stay in our properties because the hotels provide such a unique experience that they really speak for themselves. It’s a very symbiotic relationship because anyone who reads a travel magazine or a travel section in the newspaper is looking for exciting different experiences. Our properties with their distinct personalities work well for them. From our perspective it provides a way to communicate to the world what is a fairly rich and complex message about each experience we offer.

The very nature of our business, that every hotel is individual, means that every property has its own story. Whether it’s in the Windsor Court Hotel in New Orleans with the wonderful art collection, the food of New Orleans, and Mardi Gras, or whether it’s Bora Bora Lagoon Resort, with beautiful rooms built out over the ocean, each of these hotels has its own philosophy and its own tale. It’s not as if you go to one place and you’ve written the Orient-Express story – each property presents another chapter. It’s very difficult to develop a corporate ad campaign that really says who we are, because each of our hotels is so different. Without the support of the travel press and “word of mouth” support from our guests, we could not survive and I believe the same is true for all of the special hotels around the world.

The internet is a very positive development for our segment of the industry. It provides another channel of communication that is rich but cost-effective. In the past there must have been many occasions when we have attracted a potential guest (through perhaps word of mouth or an article) but then lacked the tools to properly describe what we offer and why it is worth paying the extra to stay with us. This has all changed with the internet. We have of course structured our websites (www.orientexpress.com) to reflect our strategy. All of the properties have their own website which is designed around their ‘message’ and these websites then link up to our corporate site.
**********************
We’re Not Selling Beds
We aren’t selling beds. That’s one thing I have to constantly remind people of, and I think the industry is very much waking up to this idea. For example, if a small group is coming for a conference at the Ritz in Madrid and you say that the price of your rooms is X, then you are selling nothing more than beds, and you’re not going to survive in our end of the market. What you need to sell is a Madrid experience such as three days including a private dinner at the Prado Museum, a tour of the Retiro Park, a privately organized visit to the palace, and so on. It is the whole experience that counts. Too many hoteliers still operate as if the guest experience stops as soon as the guest walks out of the hotel’s front door. Of course, everybody pays lip service that the experience outside the hotel is important but very few really work on it. A good hotel manager should have personally experienced every outside ‘trip’ that their guests regularly take – sadly in most hotel companies, this is rarely the case.

For our company it is so important to remember that our guests are not just looking for a bed. On average across our hotels, the achieved room rates 50 percent higher than the highest rate competitor in each market so we know that our guests can get a cheaper bed down the road. Our guests are really buying luxurious travel with personality and romance. That word “romance” is very important and is perhaps the key central component of our image. Some people assume that once you’ve reached a certain age you can’t be romantic, but I totally disagree. I think that as you get older you get more romantic.

Many of our guests do not see their stay as spending money, but as spending time. An awful lot of our guests may be able to get away from their office for only a couple weeks a year with their partner, and nothing could be more upsetting for them than a bad experience. You could refund all of their money and they would still be enormously upset. That makes the actual service and product delivery even more critical, because there’s no way to make up for it – you can’t give them back their time. Obviously, you do what you can, and inevitably – as with any company – you will have some complaints, and you address those as best you can. But it’s a much bigger problem than a situation in which you could just give them their money back and everyone is happy – it doesn’t work like that at our end of the industry because time is so precious to these people. Their scarce resource is not money, but time.

On the other hand, when you really deliver the romance, your guests are thrilled and can become friends for life. A trip on our legendary Venice Simplon-Orient-Express train service London-Venice costs about $1500 per person. This is equivalent to an achieved room rate of about $3000 per night and we get fantastic guest feedback. I remember one guest who raved about the experience and said that the money was irrelevant as it was an “investment in memories.” When we are old and decrepit, what will be more important that the memories of special times that we have shared with the people we love?
******************
Developing Loyalty
Loyalty is a desire to return. That’s important to remember because that is precisely what you are trying to create: a desire to return. In some of our properties there is a very natural desire to return. For example, the Mount Nelson hotel in Cape Town is a perfect destination for a winter escape with sunny weather, two beautiful pools, tennis and the wonderful wine, food and scenery for which the Cape is famous. It is the sort of thing you want to do every year. If you serve the guest correctly, you can create the desire to return, and at that hotel we have a return rate of over 50 percent in the high season.

Some of our other products are very different. With our Orient-Express trains, for example, the return guests from the prior year for any one train might be about 10 percent, which is much lower. That doesn’t mean that we’re not delivering quality, but for many guests a trip on one of our trains may be a “once-in-a-lifetime” experience. In fact, we do get more repeats than you might expect but these are often on a five and 10-year cycle, perhaps because people go for their honeymoon or a major birthday and then return for a subsequent anniversary. It’s important to recognize these differences when looking at the concept of loyalty. For example, our goal at the Mount Nelson should be to get guests to return the next year, whereas our goal on the trains may be to encourage them to try another one of our products the following year. If we deliver well on the Venice Simplon-Orient-Express, then perhaps we can get a follow-on trip to our luxury train in Asia or to one of our Italian hotels. Of course, this sort of performance and benefit is much harder to define and measure. Frankly, we do not even try to formally measure this except on an ad hoc basis (i.e. occasional samples). Fortunately most of our staff has a great pride to be associated with our collection of properties so the cross-sell message emerges naturally and we supplement this where possible with soft collateral such as our in-house lifestyle Orient-Express magazine. Even so, there is plenty of scope for improvement and building our cross- sell will be an area of focus over the next few years.

Of course, none of this is worth anything unless you have a happy guest to work with so we must never forget that loyalty is about service delivery and not about fancy past guest communication strategies or the latest guest relations software.

***********************
The Reservations Experience
Developing loyalty requires outstanding service at all levels. One aspect that is very important and perhaps underrated is the reservation and booking process. People really do develop an impression of the hotel by how you handle their booking and the speed of response. This is all part of the experience, and there is very little that gives as bad an impression of a property as being “messed around” during the booking phase.

An excellent example is someone organizing a banquet. We do a lot of banqueting at our ‘21’ Club restaurant in New York and what you really want is for someone to call up, tell you they have an idea for a party that needs to serve, say, 30 people, and in an hour or two they have three or four possible ideas with prices, in writing, in front of them. If this can be done smoothly and seamlessly, it will give you an impression of an organization that is going to look after you. If you have to wait a day or two and you are sent the wrong things, you are going to assume that the same will happen with their food order! There is no point in telling someone, “Oh, that’s just our reservations office; of course the operating side is completely different.” No one is going to believe that. Everyone understands that if it’s a mess in the sales department it’s likely to be a mess elsewhere.

This creates a dilemma. All of our properties have a wide variety of accommodation. In many, there are no two rooms alike. Good reservations skill requires quick efficient service but also in-depth knowledge of the property. Clearly the best knowledge resides at the hotel itself so that is the obvious place to seat the heart of the reservations function. On the other hand, there is convenience for the caller (long distance versus local call), language challenges for our European guests, and time differences, all of which push for a central reservations function. The jury is still out on the right balance for us but I expect that the best answer is that the lion’s share of reservations are handled at the local property level with a smaller “catch-all” central reservations operation to provide extra service to guests that need it.
******************

Building a Great Staff
Fortunately there is a great deal of pride and desire associated with working in one of our properties. It is hard to quantify but it is a good feeling to work for the best of the best.

As a result, we do get to cherry-pick when we are looking for people. Of course we provide competitive wages and good working conditions, but there are many people who are interested and have a natural desire to move into one of our properties. I believe that senior management in the industry naturally prefers a hotel with personality. They want to do something special and different. They want to be part of creating something unique rather than just receiving a set of instructions from head office. After all, isn’t this what pride is all about? As a result, we have an easier path than many to getting good people.

Orient-Express Hotels has a very high retention of staff, which is pleasing because it allows individuality to develop while retaining consistent service standards at the hotel. The staff learns more and more about the property over time. Many of our employees have been at the properties much longer than the manager, and really form the core of what becomes over time a tightly knit team.

In its essence, a hotel is a frenetic mass of activity. For every guest we have one or more employees running around, looking after the guest in a variety of ways. The key is for that frantic activity to be happening efficiently and quickly, but you don’t want the guests to see it. It is a Disneyland show, where the front of the house needs to be peaceful and at a nice pace. When you observe what happens from a room service order to a room service delivery, what you want to happen is that the guest makes the call, settles back, and then their breakfast arrives perfectly made. You don’t want them to be aware of the behind-the-scenes action – the call to the kitchen, the rapid preparation, the ride up the elevator. The reason they are paying to be at the hotel is that they don’t want to have to bother with that. For this all to happen seamlessly, there is no better preparation for staff than real experience at the hotel.

In regards to the senior management, at our properties we need a very special breed. Our general managers must play the role of owner as well as operator. This means that we must choose very carefully as a lot of managers with traditional training just cannot cope with the wider challenge. Obviously, we need managers who can run the operation smoothly (a good back-man) and handle the guests (a good front-man) but we also need somebody with some business acumen (a good finance- man) so they can take the ownership role. Perhaps most important of all is that the manager must have a sense of style (a good designer and dreamer) to further develop the personality of the hotel. As you can imagine, this is a very tall order. When we find somebody that works well, we want to hold on to them and I am glad to say that they appear to want to hold on to us.

Our senior head office team also needs a special mix of talents with an even greater requirement for financial acumen. If you look back 20 years ago, the head office of a hotel company was a basic operating center composed of central operations managers giving operating advice to the hotel managers. The whole financial control side was in the backseat. In today’s world, that’s just impossible – you need to have strengths in both areas. All of our regional Vice Presidents have extensive hotel operating experience but each of them also has extensive experience in finance and control.
*********************
Consolidation
One has to separate the United States from the rest of the world to understand some of the structural changes in the industry. If one looks at the U.S. there has been massive consolidation. Some of the big brand names have built to an enormous size and many of them are clustering together and creating multi-brands. The big giants of the industry such as Marriott and Starwood raise questions about the future. Will there only be a handful of hotel companies in fifty years time?

Often I’m asked what this means for Orient-Express hotels. In a funny way, I’m delighted, because the more that the cookie-cutter approach gains popularity, the more our little niche is different. The high- personality, unique hotel experience will never dominate the world, but there is clearly a market for it, and the more that other hotels are taken over or put under the flags of standard brands, the more that leaves our area open for us to exploit. It’s an interesting trend, but it’s not a very threatening trend from my point of view.

In Europe very few hotels are branded, and it will be interesting to see over the next five years whether the branding moves across Europe as it has in the U.S. My personal opinion is that it will not be as strong in Europe because I think that the countries in Europe have a much greater individual personality than the individual states in the U.S. I think when people are traveling to France, they want to see something French, and when people go to Italy, they want to see something Italian. There is less sensitivity to that in the U.S.; it’s not as necessary that a hotel in Boston be different from a hotel in Los Angeles. There’s not as much pressure or guest expectancy that those two should be extremely distinct, as there is in Europe.

We will be delighted to see more top-end hotels consolidating into brands because it helps highlight the difference that we offer. I like to use the example of a man saying to his wife (or vice versa), “Darling, let’s spend a romantic weekend at the Hilton in Venice.” There’s nothing wrong with Hilton, but it just doesn’t sound right. It’s not providing the high-personality romance that people associate with the destination, so I think there will always be a segment of the market looking to us for special experiences.
**************
Generating “Revpar”
The difficulty is that our approach costs more. The standardized “cookie-cutter” approach to the hotel business will always be cheaper. They can deliver a policy handbook, and every property buys the same frozen hamburgers, so there will be savings. Moving away from standardization and offering a unique product can be costly. Our strategy requires that we charge more to cover these costs. The question is whether guests are willing to pay. Fortunately the answer is “yes.”

We look at each of our hotel’s “revpar” – revenue per available room – versus the highest revpar in the market. On average across our whole portfolio, we get a revpar premium of about 50 percent over the highest revpar competitor in the market. This shows clearly that guests will pay the extra. Of course, when we are choosing destinations in which to establish an Orient-Express product, we need to choose somewhere that warrants a special experience and a unique hotel. There is little point in trying to do this at London Heathrow Airport, for example. That’s not to say that we couldn’t add a little bit to the rate, but it’s just not the right zone for a big win with our strategy.

When we get it right, we can build a very stable position. Of course we do well in the good times, but what about the bad times? Consider the cookie-cutter approach during hard times. One of the problems they face, as we have seen with the recent demand downturn, is that a drop in demand can trigger a much larger drop in revenue. If there’s a 10 percent drop in demand, all of the properties in the area panic and start fighting for market share. This can trigger a 10 to 20 percent drop in prices, which would lead to an overall 20 to 30 percent drop in revenue. Basically, the inevitable ensuing price war exacerbates the decline in demand. Note that all of the recent studies suggest that lower prices do not lead to a significant increase in overall demand (i.e. demand is relatively inelastic) – hotels are just fighting over their share of a predetermined pie.

The more differentiated your product is, the less likely that you are going to be involved in a price war. The revpar of the Villa San Michele in Florence is over twice that of its highest competitor in the market. Clearly, very few of our guests are shopping around on price. Ultimately, I think the cookie-cutter players’ major task is to control the competitive market and avoid damaging price wars that can suddenly break out over a piece of business. Easier said than done and getting harder.

Increasingly, transparent electronic auctions and disciplined purchasing will squeeze any company selling a commodity. Pricing is also becoming more and more visible, largely due to the internet. One of the great attractions of tourism as a business historically has been the relatively fragmented customer base. This fragmentation combined with relatively limited (and controlled) price information put the pricing power in the hands of the hotel operators. This is all changing very fast and I, for one, would be very uncomfortable working for a company that relies heavily on “price” to attract guests. All of these factors give us further confidence that Orient-Express Hotels is particularly well positioned in the industry for the future.
*********************
The Owner-Manager Experience
In our strategy, we are owner-managers, so we own and manage. There is not a single property in our collection where we do not have some sort of ownership position. There are properties we own 50 percent, but the vast majority we own 100 percent. That owner-manager policy really gives us a different approach to the business. When we buy a property, our aim is to lift its image and hopefully, therefore, the profitability. But when we are investigating a hotel, a major part of our effort is looking for potential expansion. By expansion I mean, principally, adding more rooms. As an owner this is very important, but most management companies are not really interested because they don’t want the hassle. What pure management company really cares if there are 110 rooms instead of 100? It’s not going to make much difference to the fees, and construction in the hotel will just be a potential headache.

But as an owner, the economics are totally different; if you can add 10 extra rooms, it can transform the economics, for two reasons. First, it’s relatively inexpensive to add new rooms because you don’t have to add another pool, another restaurant, or the rest of the infrastructure. Second, the revenue flow-through is fantastic, because you may need another person to clean the room or do room service, but for the most part, the hotel operating costs are fixed. The bulk of the extra revenue will flow through to the bottom line. When you buy a new property you might make an initial 10 percent return on your investment. For an expansion investment, you’d expect to be making a return of 20 to 30 percent, maybe starting at the lower end and working up over time.

For us, when we’re evaluating acquisition opportunities, much of our effort goes into looking at the potential for expansion or major capital investment that will add something and really improve the product, even if it takes a bit of disruption. Taking this approach requires a five-year horizon – you can’t say, “I’m going to buy this, I’m going to use it, and I’m going to flip it in a couple of years’ time,” because it’s going to take a year or so to get any permits, a year or so to build the rooms, and a year or two to start making the money you need to get a return. You’re out four or five years before you know it. You need to have that long-term view, which is obviously very different from the approach of some of the financial investors and the private venture capital funds, which are often investing with a two or three-year window. This often means that we are interested in properties that are of less interest to pure financial buyers. These are the opportunities that get us most excited as we are likely to be able to buy at a good price.

At the time of our Initial Public Offering of shares on the New York Stock exchange (September 2000), there was considerable controversy about our owner-manager strategy as the established wisdom in the US was that pure management is always better. In contrast, Europe was the opposite and has always had a long love affair with asset ownership perhaps because good hotel assets are perceived as so difficult to replace. This is because it is much harder to build a new hotel in a good location in Europe than in the US (with the exception perhaps of some of the well protected areas on the US West coast). Many of the US brand hotel companies have learned this lesson the hard way while trying to expand in to Europe and have been forced to switch to a more flexible approach.

Over the last year or so, attitudes in the US have changed concerning the advantages of pure management. The theory used to be that owners would suffer terribly in a downturn whereas pure management companies would continue to get their fees. I once heard it postulated that the revenue of a pure management company from fees is like an “annuity” and so has much greater value than the “risky” earnings of an owner. However, beliefs are now starting to change and investors and analysts are becoming uncomfortable with this picture. Why? Simply because the theory just does not stack up against reality following the recent savage downturn. Management companies suffered just as badly as owners (arguably worse).

Once again we must ask “Why?” The first thing to note is that there is considerable revenue volatility built in to the management fee structure. Competition for management contracts has been intense for the last few years and the owners have used the opportunity to make a greater portion of the fees performance-related, i.e. more incentive fee (typically based off gross operating profit) and less base fee (based off revenue). The owners have also forced the managers to make uncollateralized loans which can lead to painful “investment write-offs” in hard times. In spite of this, one might still feel that pure management would have the edge. From our perspective, there is one other key ingredient and that is the cost and effort associated with servicing a management contract. We have had pure management contracts in the past and my experience is that they take three to four times the effort versus full ownership. This is because, as owners, we can focus our resources exactly where they are needed. We do not have to hold endless meetings about hotels that do not need our help nor does our senior management team need to attend meetings that can be handled at a more junior level. There is no need to impress anybody by rolling out the Vice Presidents! The point is that you need a much bigger fixed central cost structure to handle management contracts and this makes the pure management company vulnerable in a downturn as it is very hard to slim down these large fixed costs (in fact the owners will be more demanding when performance is poor). Consider that we have over 30 hotels but these are covered by our 25 hotel head office staff in London including operations, control, technical, PR, e- commerce and even the UK hotel sales force.

Over time, I believe that the market will start to recognize what has been obvious to many for a long time. There is no wrong or right. There is no better or worse. Pure management and ownership are simply two different strategies – each bringing different strengths and weaknesses. Their risk profiles in a downturn are probably fairly similar which is not really a surprise as hotel owners are unlikely (in a competitive market) to hand over a safe earnings flow to the management companies for nothing. The most significant differences probably relate to timing and the famous “cycle” of boom and bust.
******************
The Right Moment in the Cycle
At this moment in the cycle (just after a serious downturn), it is a very exciting time to be Orient-Express Hotels. Business has been tough but hotels that are in financial difficulty create all sorts of opportunities for us, because we’re looking to buy. For a pure management company, an owner in trouble often means a lawsuit as anyone in difficulty will always look at the closest person to lash out at in frustration.

Another benefit for us of this stage of the cycle is that very little new supply is being added. From our point of view, that’s heaven, because at the end of the day we own hotels, and less new supply means less new competition. From the management company’s point of view, no new supply may mean that they have less competition, but virtually all of their growth comes from new builds, so their whole growth pipeline dries up.

The combination of acquisition opportunities (due to owners in difficulty) and limited new supply should make the next five years particularly successful for our company.
*********************
The Orient-Express Approach to Expansion
We have about 40 businesses now, and I’m often asked, “How big can your company be?” I cannot see us having thousands of hotels (as it would dilute our special style) but I can easily imagine 100-150. Few people realize how many special and unique properties exist around the world, particularly in Europe, but also in the U.S. and in Asia, so there’s plenty of scope to expand.

Our approach to acquisitions is different from many others and is one of the side benefits of the way we do business. We rarely say for example, “We want a property in San Francisco by next year.” If you take that approach, you will constrain yourself to looking at one particular location and hitting properties that come on the market that year. The chance of getting something really special is relatively small. We don’t need to do that because, at the end of the day, we don’t suggest that every trip should be with Orient-Express Hotels.

For many people, we might be the hotel they go to for that special experience with their partner. It may not be the hotel they would use for a two-day business trip. Because we’re not trying to hold the guest everywhere, we don’t need a presence everywhere. We don’t have that pressure on us to have our brand in every city, so it allows us to be more selective in our acquisition profile. We don’t have to say, “We must have a property in London.” We can say, “What’s on the market?” We review 300 to 400 properties a year, and we’re only looking for two or three. It may be in Europe, it may be in Latin America, it could be in the U.S., it could be in Asia – who knows where it will be next? This is what has allowed us to stay true to the Orient-Express idea while buying properties at reasonable prices.

Our desire to grow drives us forward, but we respect the balance between growth, profitability and the need to select only those properties that fit with us. I think it makes the acquisition process much easier for us than it is for a company that is desperately trying to spread their brand out in a strategy that requires certain cities to be covered within a few years. Too much haste means higher purchase prices or properties with poorer fundamentals.

Another difference between us and many other companies is that we have very little involvement in new-build hotels. I am not a great believer in new-builds and I sometimes wonder why anyone gets involved. Often it seems that there’s a management company that wants to manage it, there’s a development company that wants to build it, and they just have to find a poor sucker to own it. The actual return on new-build hotels over the years has been fairly meager.

From our perspective, the disadvantages of a new hotel are that you have to get permits, you have to build it, and you have to generate new demand, so you’re five years away from getting any return on the cash you’re putting in. Furthermore, the market may change during those years. So why would I do that instead of buying an existing hotel? Existing hotels are lower risk, have a quicker return and are generally cheaper than building from scratch.

So you might ask, “Why doesn’t everyone else do this?” Our advantage is that we can take a property that has a great personality and brand (for example, the Hotel Ritz in Madrid), and it can fit perfectly into our portfolio, provided it’s got the right image. We don’t have to say, “Every room has got to be like this. The food needs to be like this. The service needs to be like this.” We don’t have to create something that conforms exactly to our brand image. In sharp contrast, the management companies need all the rooms to be similar to every other room in their company, which favors building from scratch. It’s just not possible for them to grow rapidly by taking over existing hotels. Furthermore, many of the management companies are less interested in ownership, and it’s very hard to take over existing hotels unless you’re willing to take some sort of equity stake. It’s very hard to go to an existing owner and say, “Let me manage your property,” as they will probably believe that they are already doing a decent job and every owner knows that the sale value of their hotel may well be damaged if it is encumbered with a management contract.
****************
Evolution, Not Revolution
Our overall philosophy with our hotels is that they must change and they must develop. We are not a company that just sits on an investment. However, we tend toward evolution as opposed to revolution. We try to take what is good in a property and develop it. This means that we are careful with physical, technological, and personnel changes.

The Hotel Ritz in Madrid, for example, is a very special property. It has the most outstanding location in Madrid by far. If you take the Ritz in Paris or the Ritz in London, they’re nice hotels, but in Paris there is a cluster of five or six fine hotels. The Ritz in Madrid is really the only one – its competitors are not bad hotels, but they would probably not list in the top 10 hotels in other cities. But clearly the Ritz in Madrid is one of the best in any city. It has outstanding class and a fantastic location, so it’s a winner right from the beginning. It’s by the stock exchange on one side, the Prado Museum on the other. It has everything from the shopping area to the business district to the museum district, all literally a step away from the door. So all of that is already going in its favor, and it’s not as if you need to completely reconfigure the property.

However, the Ritz in Madrid has experienced some wear and tear over the years. There has been quite a sequence of changes in ownership, and it’s made it difficult to have a focused investment plan. Currently, we are working with Omega, a real estate company with which we are 50-50 joint venture partners, to bring a long-term view on improvements to the property. The basic improvements that we will make are refurbishment of rooms, refurbishment of public areas, adding a covered restaurant in the garden and improving the spa. This will all take time but we hope that the hotel will gradually evolve to sit higher and higher in the perception of travelers
***************************
Higher Expectations
As I highlighted earlier, we have more and more guests who really want to get a feel for the country or area they are visiting; there’s a much greater respect and interest. This is largely the result of literature, television, and the internet – people are more well-read and have a better feel for what they want to do. They are well informed and have higher expectations. For us, that’s a good thing because of the individual personality of our properties and our well-paid and competent staff, which allows us to more easily respond to those challenges than others in the industry. It’s a satisfying challenge and it keeps us on our toes.

There has been a notable rise in expectations regarding bathrooms. We spend a lot of effort looking at our bathrooms and trying to increase the size of them wherever possible because there is a clear trend. People now expect a much more comfortable bathroom, ideally with double sinks and a separate shower. This is something that has developed in the last 15 years driven initially by the US market. The problem is that bathrooms are very expensive to reconfigure – it’s one of the most expensive parts of the room. Whenever we refurbish a room, we probably focus more effort on the bathroom than anything else. It is the first thing that we look at when we consider acquiring a hotel.

Small size rooms and bathrooms will remain a challenge for the industry. Some have tried to deal with this through design. I think that this has driven the development of some of the trendier “modern” designed properties that we have seen emerge. I am not suggesting that this is universally true but I often get the impression that modern design is just an excuse to cover up the shortcomings of a tiny room. My personal opinion is that guests will not be fooled for long. The modern boutique hotels with large comfortable rooms may do well but the smaller “four star” rooms that are decked up to look trendy and “five star” will soon fall by the wayside – it is just “mutton dressed up as lamb.”
************************

Where Do We Go From Here?
As for Orient-Express Hotels and the future, I do not see any reason to stray from our current course. I believe that we have found a special niche. The high personality and individuality of our properties drives our whole strategy. It allows us to generate higher revenue than competitors. It helps us to communicate with our potential guests through stronger word of mouth, travel journalism and more recently the internet. It allows us to focus our growth through acquiring existing hotels which is cheaper and lower risk than building from scratch. Furthermore, it is not only profitable but it is a lot more rewarding than building the same hotel again and again and again.

Longer term there is lots more that can be done with the Orient-Express concept. Demand is growing for the sort of special experience that we offer. The core of our business is hotels but we also have luxury trains, a cruise boat and some very special restaurants. Orient-Express is a very special brand as it is flexible enough to encompass almost any travel experience but is strong enough to instantly communicate luxury travel, romance with an added hint of something very exotic. As we grow, I am sure that other opportunities will emerge where we can use the brand and our experience to build value in other sectors of the travel industry.

Simon M.C. Sherwood has been president of Orient-Express Hotels Ltd, a company quoted on the New York Stock Exchange (OEH) since 1994. OEH was formerly a wholly-owned subsidiary of Sea Containers Ltd, which Sherwood joined in 1991.

Prior to this post, Sherwood spent several years as a manager with the Boston Consulting Group (BCG), where he spearheaded strategic consulting projects.

Born in Oxford, England, Simon is a graduate of Cambridge University where he studied natural sciences and specialised in experimental psychology. He attended Harvard Business School from 1984-86, earning an MBA with Distinction.

Based in London and founded in 1976, Orient-Express Hotels owns and operates leading hotels, trains and cruises around the world. Each OEH entity, famous in its own right, offers a distinctive style and heritage, and is known for an unparalleled commitment to luxurious accommodation, personalized service and award-winning cuisine. Additional information can be found at www.orient-express.com.