WSJ article on Ritz-Carlton hotels.
April 8, 2002
Putting on the Ritz Means Less As It Happens More Frequently
By CHRISTINA BINKLEY
Staff Reporter of THE WALL STREET JOURNAL
Just two years ago, Florida was home to three Ritz-Carlton hotels in
resort towns such as Palm Beach. By next year, nine Ritz-Carltons will
blanket the state. Tiny Naples has two. Miami will have three. Orlando
will get its own giant 584-room Ritz, complete with golf course and
sprawling spa.
Amid the worst travel market in decades, having $1 billion in Florida
luxury hotels strikes some as ill-advised -- even within Ritz-Carlton Hotel
Co. LLC. "I'm worried about Florida in general," says Simon Cooper, the
company's president. "We're doubling our inventory there."
In truth, though, Ritz-Carlton and its parent, Marriott International Inc.,
don't have all that much capital at stake in Florida. Instead of owning
hotels, Ritz-Carlton manages them on behalf of investors in return for a
percentage of revenue and other fees. Sometimes, Ritz-Carlton even
lends the investors money to make the deals work. The bottom line:
Ritz-Carlton can make money even if its hotels don't.
This financial structure makes it tempting for Ritz to open as many
hotels as possible. But the growth spurt has also left the Atlanta-based
chain noticeably struggling to maintain its service standards while
grappling with high expenses. Like Calvin Klein, Pierre Cardin and other
luxury purveyors who lost cachet by vastly expanding their franchises,
Ritz has slipped from its perch atop the high-end hotel business.
The Ritz-Carlton collection will have grown to 49 at the end of this year
from 10 in 1990, spreading the company's classic Oriental carpets,
fireplaces and hunting prints from Philadelphia to Hong Kong. Some of
these hotels have turned up in decidedly un-Ritzy places such as
Cleveland's stadium district and a Dearborn, Mich., office park.
Throughout the 1990s, with ample support on Wall Street, other publicly
traded hotel companies sought to put more emphasis on winning
management contracts. But Marriott International was, and is, by far the
most aggressive in getting other investors to pay for hotels it manages.
Now, the owners of individual hotels are beginning to argue that the
strategy saps quality and creates conflicts of interest between owners
and managers. A number of the new additions are losing money for their
owners, with at least two -- in San Juan and New Orleans -- involved in
bankruptcy proceedings. The San Juan Ritz is in Chapter 11 and has yet
to make a payment on $85 million in Puerto Rican government-backed
bonds used for its development. At the same time, Mr. Cooper lists it
among Ritz-Carlton's best-performing properties. Last year, Ritz-Carlton
earned about $2 million for managing it, according to the owner's
financial records.
Mr. Cooper says he expects to attend the opening of a new hotel nearly
every month this year. But with so many launches, it's little wonder that
guests are encountering rough spots. Over the last five years, the
number of the chain's customers who say they're entirely satisfied with
their stays has fallen three percentage points to 79.4%. That puts the
company behind its biggest rival, Four Seasons Hotels Inc., in J.D.
Power & Associates rankings of overall satisfaction. Toronto-based
Four Seasons, which has five Mobil five-star-ranked hotels to Ritz's one,
now commands higher prices and occupancies in North America and
Europe.
Four Seasons is still run by its legendary founder, Isadore Sharp, who
has kept the 42-year-old company tightly focused on a single segment of
the lodging market: midsize luxury hotels. While Four Seasons also
manages hotels on behalf of owners, its development has been more
conservative, with hotels located in high-priced cities and upscale resort
areas.
One of Ritz-Carlton's biggest challenges is winning back disillusioned
travelers such as Marty Rich, a 59-year-old optical-shop owner from Fairfax, Va. When she recently
arrived at the San Juan Ritz, Ms. Rich says she was surprised to find herself in a room with a view of the
airport runway rather than tropical ambience. Her clothes filled the tiny closet, so her husband's garments
remained packed. Room-service breakfast took an hour to arrive. After having been previously disappointed
with a Washington-area Ritz-Carlton, Ms. Rich says, "I've become a little bit prejudiced against
Ritz-Carltons. Some of them are fakes."
Another traveler, Baton Rouge, La., accountant Michael Blue, says he wrote a letter to the company after a
recent $265-a-night stay at its New Orleans hotel. Mr. Blue described "dirty glasses and dishes stacked at
the end of the bar several deep and several high." Among his other complaints: missing wash cloths,
paint-stained draperies and a 40-minute wait for his car to be retrieved by a valet. Ritz-Carlton says that
service at the hotel has been improving.
The company's roots go back to Cesar Ritz, a Swiss shepherd's son who founded the Ritz hotel in Paris in
1898 and later had an interest in London's Carlton hotel. The Ritz-Carlton name was eventually licensed to
other hotels, including one in Boston that opened in 1927.
Like a private club, the Boston Ritz-Carlton once checked its guests for membership in the Social Register
and Standard & Poor's Directory of Executives. Profits took a back seat to pomp: The hotel employed a
craftsman whose sole job was to paint gold stripes on the furniture. Lobster au Whiskey has been the dining
room's signature dish since 1927.
Blueprint for a Chain
The Boston hotel became the blueprint for a chain when Atlanta real-estate developer William B. Johnson
bought it in 1983. Replicas opened in Phoenix, Houston, Florida, and Southern California. When Marriott
paid $200 million in 1995 for a 49% stake -- and bought most of the rest in 1998 -- the Washington-based
company began churning out Ritz-Carltons across the globe.
To build new hotels in the key cities of New York and Washington, Marriott employed a device it has
increasingly used to spur growth. When an eager developer needed help with lenders, Marriott would drive
the deal home by offering mezzanine loans or guarantees. Two years ago, the company guaranteed $100
million in funding to help clinch a deal with Millennium Partners to build or refurbish six Ritz-Carltons in
Boston, New York and Washington.
Ritz-Carlton and Marriott also found other creative ways to further their expansion. The Laguna Beach,
Calif., area, for instance, is home to one of Ritz-Carlton's most prestigious resorts, the Laguna Niguel, built
in 1984. A few years ago, Ritz-Carlton leapt at an opportunity to develop a hotel just four miles north. Since
it was barred contractually from using the Ritz name so near its own hotel, the new resort -- the Laguna
Colony -- will be managed by Ritz-Carlton without using the Ritz name or flying the chain's cobalt blue flag.
Ritz executives say that the two hotels won't cannibalize one another because the Colony will have its own
independent sales force.
But Laurence Geller, chairman and chief executive of Strategic Hotel Capital LLC, which owns the
Ritz-Carlton Laguna Niguel, calls the new unbranded hotel a "dead ringer" for his property. "It's going to
compete with my same customers," he says. "These chains will do anything to grow because the [Wall
Street] analysts worship at the altar of growth."
Another owner, Sheik Abdul Aziz Bin Ibrahim Al Ibrahim, in 1995 filed a lawsuit over four Ritz-Carltons he
owned in New York, Washington, D.C., Aspen, Colo., and Houston, disputing Ritz-Carlton's
"owners-be-damned corporate attitude." During his ultimately successful battle to dislodge Ritz-Carlton
from the hotels -- which ended with rival Starwood running most of them -- the chain argued that the Sheik
had failed to properly maintain them.
In order to fill all the rooms his company will open by December, Mr. Cooper estimates he must find
500,000 new customers this year. But the hotelier has pretty much tapped out the blue-hair set to whom
Ritz's traditional ethos of "ladies and gentlemen serving ladies and gentlemen" appeals.
To appeal to new generations, Mr. Cooper says he's breaking with some traditions maintained under Horst
Schulze, the company's legendary former president. A notorious stickler for impeccable formal service, Mr.
Schulze's leadership saw Ritz-Carlton twice earn the Malcolm Baldridge National Quality Award from the
U.S. Commerce Department. But some owners argued he catered to guests without sufficient regard to
profits. "Any idiot can walk into a hotel and save money," Mr. Schulze counters. "How do you make
money? That's what it's all about."
Mr. Cooper, a British former yacht skipper who worked at Marriott for many years before assuming the
reins at Ritz-Carlton in 2001, says he's taking Mr. Schulze's philosophy to heart by focusing on fixing
service glitches, building up over-taxed management and becoming choosier about building new hotels. He's
also banned first-class air travel for most Ritz-Carlton employees and his penchant for cost-cutting has even
reduced the scope of some hotels' flamboyant floral arrangements. "We can't afford to be spending like our
audience," Mr. Cooper says.
The company is gingerly modernizing the Ritz look and feel. After nearly a year of discussions, Ritz-Carlton
agreed to use "Borneo Beige" rather than time-honored white-and-gray marble in the bathroom of its new
Washington hotel, according to people involved. At certain properties, it's replacing wine tastings with beer
"boot camps" and courting families with kid menus and tub toys.
A newly opened Ritz-Carlton in Manhattan's Battery Park City offers a look at the chain's future. It has
contemporary decor, light-fruit-wood paneling and modern art. Its pantries are filled with Ritz's trademark
Rosenthal Epoque china from Germany. But young financial hotshots will sip coffee from mugs rather than
cups and saucers. "The age group that has money today is much different than the age group that was
staying at Ritz-Carlton," says Christopher Jeffries, principal of Millennium Partners, which owns the hotel.
"The Four Seasons look is what we were going for," he says.
Some owners are betting big that Mr. Cooper is on the right track. "They still want it to be recognizable as
Ritz-Carlton without being the same old stuffy thing," says Michael Ryan, a developer who's building a $190
million Ritz-Carlton in Grand Cayman. The hotel, when completed, will cost the princely equivalent of
$633,000 a room.
Over lunch recently, Mr. Cooper compared himself with Michael Bloomberg, who became mayor of New
York in tough economic times on the heels of the wildly popular Rudy Giuliani. "I'm the Bloomberg -- the
guy who comes into the sty situation after the big guy leaves," he said.
The San Juan hotel embodies many of Ritz-Carlton's missteps of recent years. When it was first proposed,
the hotel was supposed to provide a Caribbean beachhead for Ritz-Carlton. The company had an eager
first-time hotel investor in Harvey Sandler, the retired founder of the Sandler Associates hedge fund. The
Puerto Rican government backed the $132 million hotel with the $85 million in bonds, hoping to draw yet
more luxury development.
But the 414-room San Juan hotel abuts run-down commercial-strip malls and the island's main airport.
During its development, the noise from planes was so intense that designers cut out plans for balconies and
windows that opened, even in most beachfront rooms, and replaced them with soundproof glass. The hotel,
boasting water-spouting lions at the pool's edge, afternoon high teas and an elegant casino, opened in
December 1997 advertising rates as low as $175 a night.
Quickly at Odds
The hotel's manager and its owner were quickly at odds. Mr. Sandler's representatives complained of the
expense of everything from mandatory Ritz-Carlton-label ketchup to setting up four free meals a day for
club-level guests and moving new managers from faraway Australia and Spain. Despite commanding one of
the island's highest average daily rates -- $233.11 a night last year -- the property lost $655,300, or $4.34 a
night in net operating income for each available room, according to financial records.
Ritz-Carlton executives say Mr. Sandler is a novice hotel investor who doesn't yet understand the
complexities of operating such a property. "Being a pioneer, it takes a while for the luxury market to
develop," says Jim Schultenover, a Ritz-Carlton sales vice president who calls the San Juan hotel's problems
"an extreme case." The Ritz executives say that high spending is necessary to maintain the standards of its
brand.
But the brand's formality seems to lack the appeal in San Juan that it has in Boston. In the hotel's wine
cellar, vintages such as a 1982 Chateau Latour priced at $1,965 and a $600 1990 Chateau d'Yquem remain
"sitting on the shelves," says David Ross, Mr. Sandler's son-in-law and former president of the hotel's
parent, Green Isle Partners Ltd. Despite the recent addition of a saxophone-electronic keyboard duo --
which recently performed the Spinners' 1972 hit "I'll Be Around" to a handful of patrons -- many Ritz
guests flee in the evenings to the Wyndham El San Juan just down the street. "The Ritz-Carlton is like a
church," says Anibal Vega, a San Juan taxi driver who regularly drives Ritz guests to the Wyndham, which
has eight lively restaurants, dancing and live bands. "It's too quiet."
Perhaps worst of all, rather than being a cash cow full of Monte-Carlo style high rollers, the Ritz-Carlton
casino lost $3.2 million last year. "People come here to spend their social-security checks," says Luis
Alfredo Rodriguez, a disabled San Juan truck driver, feeding nickels into his favorite slot machines at the
Ritz alongside his mother one recent evening.
Mr. Sandler has promised to pay back-interest and principal on the bonds in order to enlist the Puerto Rican
government's support in kicking Ritz-Carlton out. Mr. Sandler was "seduced by the whole cachet of owning
a Ritz as an investor," says Scott Baena, his attorney. "It's like buying a really nice sports car and then you
take it to the mechanic and you find out it's very expensive to maintain. And you can't do what you
expected with it because you are not driving it on the race track, you're on the road."
Write to Christina Binkley at christina.binkley@wsj.com
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