Room Boom

4 minute read
Michael Schuman

With credit tight and customers scarce, chief executives from San Francisco to Shanghai are hunkering down, cutting costs and praying that they can survive the punishing global recession. But not Madhu Rao, the new CEO of Hong Kong – based luxury-hotel operator Shangri-La Hotels and Resorts. Rao, 57, is forging ahead with an aggressive plan to expand Shangri-La’s 60-strong network of hotels, even as his business slumps. “We have one single vision,” Rao says confidently, “to lift this [company] to another level.”

The level Rao seeks is global. Shangri-La has confined itself mainly to its home turf of Asia, where it is a well-known brand. But now Rao, a former accountant who became CEO in August, sees opportunity in crisis. He is undertaking a wide-ranging expansion that will take Shangri-La hotels to markets as diverse as Las Vegas and Doha. In January, the company launched its first Shangri-La hotel in North America, with the opening of a 119-room property in Vancouver. Japan will see its first open in March in Tokyo, and Europe later this year in Paris. Others are planned for Miami, New York City and Vienna. In all, Rao plans to open 32 new hotels by the end of 2011, increasing the chain’s number of rooms by more than 40% to 39,700.

The expansion is planned at a time when the hospitality industry appears headed for trouble. Corporations and consumers are slashing travel budgets just as a wave of new hotels is reaching the market. Some 5,400 hotels will likely open globally in 2009 and 2010, the biggest surge in a decade, according to research firm Lodging Econometrics. UBS real estate analyst Eric Wong predicts a glut. As a result, revenue per available room — a common measure of hotel performance — is expected to fall in every major market in 2009. “Everybody was trying to grab a slice of the action,” says Wong. “Now a lot may start to unravel.”

Rao confirms that Shangri-La’s occupancy rates were down in the fourth quarter of 2008 (the company hasn’t released specific figures). Shares of Shangri-La’s Hong Kong – listed holding company have plunged by two-thirds from their 52-week high. Still, Rao says he currently has no intention of throttling back. Armed with cash from a $668 million rights offering in 2007 and $700 million in available credit, Rao feels he has the financial muscle to absorb the shock of the slowdown. He remains bullish on the prospects for Asia, and particularly for China, where Shangri-La already has 27 hotels including entries in up-and-coming cities like Wuhan and Dalian, where business has been holding up better than in major metropolitan areas like Beijing and Shanghai. “We do still see medium- to long-term opportunities for growth for all the areas we are getting into,” Rao says. “We are in this for the long haul.”

To be sure, Shangri-La is dealing with setbacks due to the credit crunch. In the Chinese gambling enclave of Macau, Shangri-La was scheduled to open two hotels along the city’s nascent Cotai Strip this year, but casino operator Las Vegas Sands failed to raise the necessary funds and the entire project is on hold. In the U.S., a 223-room hotel in Chicago, due to open in 2011 in Waterview Tower, is also stalled due to the developer’s financing difficulties.

Then there’s the challenge of filling rooms, both new and old. The Wall Street meltdown has reduced visits by big-spending bankers, mainstays of the luxury-hotel business. So far, Shangri-La is avoiding widespread discounting of room rates to protect its image. “If you look at all the top brands in the world at the high end — the Louis Vuittons, the Rolls-Royces — they never discount,” says Greg Dogan, Shangri-La’s chief operating officer. Instead, Shangri-La is targeting new customers, including corporations that might benefit from government stimulus packages, like construction companies, or are recession-resistant, like pharmaceutical outfits. “We have to knock on a few more doors,” Rao says.

While the outlook may be dim today, the slump won’t last forever. “This is the time to be reinvesting money and upgrading the product,” Rao says. With Asian economies expected to rebound more quickly than those in the West, the hotel industry in the region is expected to follow. Rao forecasts improvement will begin in the second half of 2009. “The moment there is cause for optimism, I think you’ll see the whole thing turning around,” says Rao. For a CEO with big plans, recovery can’t come quickly enough.

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