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RITZ-CARLTON

(Circa 2008)

Hotel Ritz Paris-1898

 

 

The Ritz located in Paris, established in 1898

Problems

The first Ritz-Carlton opened its doors for guests in 1898 when Cesar Ritz, a Swiss hotelier, started his own hotel in Paris. Ritz had extensive prior experience and his objective was to create the most elegant and fashionable establishment possible, with an emphasis on outstanding customer service. His vision of meticulous devotion to quality service and impeccable decor was duplicated in other hotels he directly founded or indirectly inspired in London, Europe and the United States. The name of Ritz-Carlton has become synonymous with wealth, fashion and power. (Hoover’s December 2008 Company Profile).

 

In 1995 Marriott International Inc. acquired a minority stake in Ritz-Carlton which was expanded to a 99% controlling interest by 1998. For Marriott's' most recent fiscal year ended December 28, 2007 there were thirty-six Ritz-Carlton hotels in the U.S. and thirty-four abroad with a total of about 22,000 billable rooms and approximately $1.6 billion in revenue. Revenue has experienced strong growth, increasing 7% from 2005 to 2006 and 11% from 2006 to 2007. Marriott manages Ritz-Carlton hotels but in most cases does not own the hotel real estate. (Source: Segment information from 2006 and 2007 Marriott International Inc. Annual Reports).


Ritz-Carlton has a policy of investing 10% of its payroll expenses in personnel training and was ranked first by the human resource magazine Training in the efforts it expends to achieve excellence by its staff and management. (Training, February 2007.) The company is the first hotel to win the illustrious Malcolm Baldridge National Quality Award and the only service firm to have won twice (in 1992 and 1999.)

 

The company's marketing efforts focus intensively and creatively on achieving the very best possible customer experience: "The goal, [President and COO] Cooper says, is to develop such a strong emotional engagement between the hotels' staff and their guests that "a guest will not consider staying anywhere else, if they have an option."" (Business Week, How Ritz-Carlton Maintains Its Mystique, by Carmine Gallo, 2/13/07).

 

The company has also successfully marketed itself to its own employees. Ritz-Carlton's parent corporation, Marriott International, was named one of the 100 best companies to work for in the U.S. by Fortune magazine:

 

(http://money.cnn.com/magazines/fortune/bestcompanies/2007/full_list/).

 

Personnel turnover at Ritz-Carlton hotels averages approximately 18% in an industry that can experience annual turnover approaching 100% (Ritz-Carlton: Redefining Elegance, Training, March 2007.)

 

Ritz-Carlton realizes that because it is in the service business with no substantial or tangible product to transfer to customers, a focus on outstanding service quality is essential to success. It has chosen the high road to success by investing in its personnel and training them to strive for excellence. One central management practice is the "daily lineup", held three times a day, where key company policies are restated and problems are addressed.

 

Another central practice is the "Monday Wow" where personnel meet and exchange "...stories about employees who had gone the extra mile in delivering customer service." (Ritz-Carlton's Human Resource Management Practices and Work Culture: The Foundation of an Exceptional Service Organization, ICFAI Center for Management Research, 2007).

 

In practice every employee of Ritz-Carlton has been actively recruited into the company's marketing function by striving to attain excellence in service and customer experience. Even more important than the opulent furnishings and lavishly appointed rooms, the employees of Ritz-Carlton pride themselves on leaving a positive lasting impression on guests. Perhaps the strongest evidence of this customer-focused marketing practice is the fact that "All employees of the company, regardless of position or rank, were empowered to spend up to $2,000 of the company's money to correct a problem or handle a complaint, without having to ask permission from a superior." (Ibid.)

 

As a five star hotel chain the company occupies the rarified top niche of the hotel industry where only a few competitors exist. The largest U.S. competitor to Ritz-Carlton is the Four Seasons Hotel, a Canadian based company operating 78 hotels in 32 countries. Smaller hotels also compete in local markets with the Ritz-Carlton. (Hoover's Company Profile).

 

Ritz-Carlton was ranked the best luxury hotel in the U.S. for six years through 2005; in 2006 the Four Seasons acquired this top ranking, according to the US Hotel Chain Survey conducted by Business Travel News (BTN). In the 2008 BTN survey Ritz-Carlton and Four Seasons were tied.

 

One recent marketing innovation has been the development worldwide of Ritz-Carlton timeshare and vacation properties which leverage the company name into a different type of business. These efforts have resulted in the sale of a new product with characteristics, challenges and customers that differ substantially from the core hotel business.

 

The target customer of a Ritz-Carlton hotel is split among three major segments. The largest group consists of leisure travelers. These individuals are either exceptionally wealthy or are on the verge of affluence. The second largest group consists of guests benefiting from incentive rewards offered by their employers or sponsors. The third largest group consists of first-class business travelers including CEO's and other senior executives. (Hoover's Company Profile.)

 

Recent industry trends do not bode well for the hotel and travel industries, even for the luxury range tier. Negative economic conditions have impaired disposable income of even the wealthiest individuals. Since the recent worldwide stock market crash trillions of dollars in wealth has been lost in US stock markets and "...if history is any guide, the proportion of national income and wealth held by the richest 1%...will shrink markedly in coming months." (Wall Street Journal, Why the Rich Are Losing Their Share of Wealth by Robert Frank, 10/22/08).

 

The 2009 Zagat Survey of US Hotels, Resorts and Spas, released on 11/12/08, indicated a significant decline in business travel. Tim Zagat, CEO of Zagat Survey, stated that "the travel industry is certainly affected by the economic crisis" and will have to respond, in most cases, by dropping rates and increasing promotions. (Hotel News Resource, Zagat‘s 2009 US Hotels, Resorts & Spas Survey Finds More Options Available for Cost-Conscious Travelers, 11/12/08).

 

According to Hotel News Resource "In year-over-year measurements, the industry's occupancy rate fell 22.6% to 41.5% (53.6% in 2007). Average daily rates dropped 12.2% to finish the week at $90.84 ($103.51 in 2007). Revenue per available room decreased 32.0% to end the week at $37.70 ($55.48 in 2007). (Hotel News Resource, US Hotel Performance for the Week Ending November 29, 2008, released 12/5/08).

 

It might at first appear that a luxury brand like Ritz-Carlton would be largely immune to pressures arising from the present negative economic climate. In a recent interview with Charles Dubeau of Business Week, the President and COO of Ritz-Carlton, Simon Cooper, described his hotel as oriented primarily towards very affluent leisure and not business consumers. He admitted that revenue from US consumers who are only "aspirationally wealthy" was declining, while stating that revenue from core customers, who come from the ranks of the very wealthy, was holding steady. However, Cooper also seemed to hint that second quarter 2008 and subsequent financial results would not be great. (Business Week, How Upscale Hotels Weather Downturns: Marriott’s Ritz-Carlton can manage it:


http://feedroom.businessweek.com/?fr_story=b9241ce0fc81b26dd8a5aac15b4427c8495872b9

 

During the Great Depression all Ritz-Carlton hotels in the US, with the single exception of Boston, went out of business. Conceptually, there is a degree of pain for all income levels, no matter how wealthy, that will eventually cause declines in discretionary spending. This is the central and convincing observation of a recent article in the New York Times by Stephanie Clifford: "After getting through most of this year unscathed" luxury spending is finally showing signs of falling off in response to worsening economic conditions. (New York Times, For Luxury Brands, Less Money to Spend on Ads, by Stephanie Clifford, 11/23/08.) The article reports that "...the Ritz-Carlton Hotel Company has halted projects in Florida, Vancouver and California."


In the depths of the Great Depression, in 1933, the Boston Ritz-Carlton, a lonely bastion of luxury amidst economic ruin, had thirty guests at one point. Ninety percent of its rooms were vacant. In a grand gesture of defiance the general manager at that time, Edward Wyner, "...turned on the lights in every guest room to give the appearance [that] the hotel was full." (http://en.wikipedia.org/wiki/Ritz-Carlton_Hotel_Company, accessed 12/5/08).

 

The central marketing issue now facing Ritz-Carlton is keep its brand relevant and necessary to the broadest possible customer base. Barring complete economic collapse, there will always be those thirty or so super-rich guests who will come to a Ritz-Carlton. This group is not enough to sustain a great hotel. The company needs a broader base of customers to keep its lights on, and to illuminate its path towards the more prosperous times that everyone hopes are just around the corner.

 

Solutions

Ultimately, no company can be stronger than its customers and the strength of their loyalty to and patronage of a business. Ritz-Carlton has developed this strength and capitalized upon it. As COO Cooper stated during the Business Week interview, the hotel and its name have become positive cultural icons that transcend the current customer base. The Ritz-Carlton experience has become an aspirational good widely recognized throughout our entire society, and the world. Borrowing and applying an ad slogan used by an unrelated business, one can say that 'nobody doesn't like' Ritz-Carlton. This is the core strength of this company.

 

The most significant weakness of Ritz-Carlton is its traditional formality which arose from many years of catering to 'old-wealth' and older customers. Changing demographics and culture have changed the profile of a typical customer and the company must change accordingly. The average age of a Ritz-Carlton guest is now 47; it used to be 59. “The luxury customer of today is more casual, informal and younger” according to Lawrence Chi, a Ritz-Carlton Human Resource Director, quoted in Human Resources Magazine. (Human Resources Magazine 9/5/06). Ritz- Carlton must adjust its brand image to suit the needs of a changing customer base: "Adaptability has to be inherent in every part of the marketing agenda." (The New Complete Marketer, by Gregor Harter, Edward Landry and Andrew Tipping.)

 

The company's most significant unexploited opportunity at present is to tell the public the inside story of Ritz-Carlton, how it treats its people, its guests and the community at large. The exceptional nature of how employees are managed is not well known. The quality of guest experience is not widely publicized and neither is the degree to which the company, and Marriott overall, contributes to the wider community.

 

One example of this under-utilized opportunity is the fact that Marriott has invested significant funds in developing a synthetic fuel capability for use by its hotels. Much of the information pertaining to this environmentally beneficial investment is buried in income-tax related footnotes to the company's financial statements. Market research in the hotel industry indicates that up to "31%" would "...pay more to stay at an eco-friendly property." (Hotel News Resource 11/12/08). By telling its own story sincerely and to a wider public and not just the narrower group of present customers Ritz-Carlton has the opportunity to become luxury with a human face. Environmentally responsible policies should not be hidden in accounting footnotes. This company has every reason to take pride in who it is and what it does.

 

The most serious present threat to the company is the current negative economic climate. According to the Business Week interview with COO Cooper, business travelers are only the third largest customer segment, dwarfed by the leisure and incentive-rewards segments. However, declining business travel and reduced discretionary spending can only hurt occupancy and create pressure to cut prices. Not even the most luxurious hotel can afford to indulge in the fantasy that it is immune to the present severe economic crisis.

 

Ritz-Carlton's unique combination of personal service and opulence allows this company to deliver the closest thing to magic that exists for adults. For some this magic will take the form of romance; for others it will be a reward for achievement. Because of the uncommon quality of respect with which it trains and treats its own people and its guests, Ritz-Carlton may, with sincerity, be the incarnation of luxury with a human face.

 

The company must tell the story of itself, what it does, and how it treats the people in whose lives it participates in the most human and compelling way possible. Such stories, when told to the public with great sincerity, have the unique advantage of selling themselves, perhaps more effectively than any ad, and of rising above and beyond present circumstances, whether bad or good, to become a lasting icon.

 

The magic that this company can offer is told during the weekly (private) 'Monday Wow' sessions when staff discuss employees who achieve truly exceptional service. One especially poignant story concerned how hotel staff gave a prom to Natalie Salazar, a twelve year old champion figure skater who was diagnosed with terminal cancer. Her one regret was that she would not live to attend her high school prom. At great cost and substantial overtime work the Dearborn Ritz-Carlton held a prom for Natalie that appears to have been magical for her. (How the Ritz-Carlton Hotel Company is Redefining the Gold Standard by Joseph Michelli.)

 

In reviewing the company's rather limited advertising, there is a sense of a closeted business that more by inaction than action is aloof from public view. Since so many people would find the Ritz-Carlton experience enjoyable there is no clear business reason for this company not to engage in further outreach and wider promotion of its image among the broader public. Such outreach can only bolster the ranks of future customers, burnish the positive image of the company, and help it compete more effectively against its chief rival, the Four Seasons hotel chain.

 

One tangible way to share the story of this company more fully would be to involve guests in at least some 'Monday Wow' sessions, and perhaps to publicize or advertise them. These sessions are unscripted and real-life and even if something goes 'wrong' from an image point of view it would only add to the integrity and validity of these sessions and the company's business image.

 

With regard to the primary problem facing this company arising from the current severe economic crisis, there are four plausible ways for it to respond.

 

First, as many in the industry will likely do, the company could start cutting prices, increasing promotions, and engage its primary and near-rivals in price-value competition. For Ritz-Carlton this approach may recapture some business lost to the "aspirationally wealthy” leisure travelers.

 

Second, the company could avoid price competition as antithetical to its brand image, and continue to promote the exceptional quality of its experience. This approach would require an intensification of its advertising efforts and increased market research into identifying, contacting and attracting new customers.

 

A third approach, of unknown feasibility, would be the outright acquisition of the Four Seasons chain resulting in the elimination of the largest source of competition to the Ritz-Carlton. There are likely to be serious financing and other issues with such a transaction.

 

Finally, the company could go down the path followed by some prestige brands and offer a cheaper version, a 'Ritz-Carlton-Lite'. This would require radical changes to the business in order to reduce costs and allow the brand name to be leveraged to appeal to a broader group of customers on the basis of affordability.

 

Recommendations

I recommend that Ritz-Carlton follow the second alternative discussed above and avoid competing on the basis of price. Direct price competition ultimately undermines brand images that are built up through many years of investment. Ritz-Carlton is the embodiment of a brand with its devotion to quality, a devotion which is, at the same time, the foundation of brand success.

 

To implement this approach the company should engage in greater outreach to the public and tell its story of how it treats its people, its guests and the broader community. The examples of extraordinary service to guests recounted during staff meetings should be shared with the public using a variety of media, instead of the ad hoc and anecdotal means used so far. Ritz-Carlton must look beyond the hotel lobby and the golf course and achieve a marketing vision that is as broad as the iconic status of its brand.

 

Once upon a time before the tabloid era America had luxury with a human face and it was embodied in such figures as Jacquelyn Kennedy and Eleanor Roosevelt. While it may seem counter-intuitive it is nevertheless a fact that the public is strongly attracted to luxury and elegance that are gracefully united with sincere respect and compassion. This is the only aristocracy Americans can love. Ritz-Carlton is uniquely positioned to tell this story about itself and doing so will only recruit future loyal customers. And beyond these customers, past, current and future, may be a group who merely admire the company from afar. Ritz-Carlton can and should speak to these people too.

 

There is always the risk that this brand, like many other great brands from the past, will fail. While the parent corporation, Marriott International, has obligations to its shareholders, employees and other stakeholders, it can also be argued that it has at least some obligation to maintain the integrity of its brands, especially a prestige and storied brand like the Ritz-Carlton. If this brand can be 'saved' only by losing its soul, such as by cheapening it or otherwise tampering with its integrity and tradition, then perhaps it is better after all to let it fail. If Ritz- Carlton does pass away into history it may still be brought back to life again in some more prosperous future time.

 

 

LEGAL DISCLAIMER

George Adams
Certified Public Accountant Master of Business Administration
Tel: (207) 989-2700 E-Mail: GeorgeAdams@IntelligenceForRent.com
450 South Main Street: The HQ of IQ
Brewer, Maine 04412-2339

©2015 Copyright George Adams CPA MBA. All Rights Reserved.

 

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