Innovation and brand management in the hospitality and leisure industry

Perspectives from new leaders.

about spencer stuart

Spencer Stuart is one of the worlds leading executive search consulting firms. Privately held since 1956, Spencer Stuart applies its extensive knowledge of industries, functions and talent to advise select clients ranging from major multinationals to emerging companies to nonprofit organizations and address their leadership requirements. Through 50 offices in more than 25 countries and a broad range of practice groups, Spencer Stuart consultants focus on senior-level executive search, board director appointments, succession planning and in-depth senior executive management assessments. For more information on Spencer Stuart, please visit www.spencerstuart.com.

A number of top leadership positions in the hospitality and leisure industry have recently been filled by professionals from outside the industry mainly from large, fast moving consumer goods (fmcg) companies famous for brand management and innovation. This follows a strategic shift by many of the large hotel operators towards franchise and management contract business models; becoming brand owners and operators rather than asset owners.
Spencer Stuart decided to explore this trend via a series of one-to-one interviews with experienced industry observers as well as some of those CEOs new to the hospitality and leisure sector. Topics covered included: > The relevance of fmcg experience to the hospitality and leisure industry > Perceived differences between the hospitality and leisure industry and other sectors > The state of brand management, consumer insight and marketing generally in the industry. > The outlook for the hospitality and leisure industry and the skills required of its leaders in the future. In addition to industry observers and consultants, the following leaders agreed to participate in the survey and we thank them for their support and valuable insights. Their passion for the hospitality and leisure industry was clearly evident. In alphabetical order: > > > > > Gabriele Burgio, chairman and CEO, NH Hoteles S.A. Andrew Cosslett, CEO, InterContinental Group Andre Lacroix, CEO, Inchcape, PLC (former CEO, Eurodisney) Steven A. Rudnitsky, CEO, Cendant Hotel Division John Vanderslice, CEO, North America, Club Med

Innovation and brand management in the hospitalit y and leisure industr y

Making the move

The CEOs we interviewed had a variety of different reasons for wanting to move into the sector. One CEO put it like this:
After 0 years in fmcg it was important for me to see how transferable my skills were. The hospitality and leisure industry is a very international, people-orientated business that offers good prospects for growth. I was attracted by the industry itself as well as by the desire to test my skills and experience in a different sector. There is considerable complexity in terms of different business models (owned, managed, franchised), multi geographies and the real estate angle. It is also refreshing to be able to work directly with the end consumer rather than through the retailer as in fmcg.

Another CEO was drawn by the parallels between the fmcg industry and the hospitality and leisure (H&L) industry:
Both have world class international brands: a dynamic relationship between the brand and the distributor is crucial for both sectors and, while the complexity around innovation is very different, there is a need for product innovation. Both industries operate in a two-tier environment business to business and business to consumer.

For another CEO it was the sectors non-differentiated brands that offered a challenge:
People in hospitality and leisure have built their own brands but there is an opportunity to differentiate. The wants and needs of the consumer must be broken down and the brand or product designed around that.

A move into a new sector is about more than just exploring opportunities and furthering a career. Leaders from the outside have to bring something to the industry in the form of skills or experience in order to succeed. One CEO believes that, despite the hospitality and leisure industry lagging behind fmcg in terms of marketing, the most important attribute he brought with him was his experience of how large international organizations work and his understanding of different cultures. Secondary to that was my marketing and branding experience, he says.

Another CEO feels he brought common sense, order and discipline in the use of capital, while yet another believes consumer insight was his most important contribution, highlighting the difficulties of forming a common culture in the sector:
I find it difficult to build a culture with so many layers and such geographical complexity, and having to take into account the strong entrepreneurial spirit. The people running our hotels in Ghana and Cuba, for example, are true entrepreneurs. They are almost on their own.

Understanding the sector

While the similarity between fmcg and H&L sectors has attracted outsiders into the sector, there are also some distinct differences. As one CEO explains:
There are a number of aspects that make the industry very different including ownership structures, the real estate dimension and the difficulty in brand building in the different segments.

In his view the industry is more fragmented and a lot less global than it appears from the outside. Another CEO feels that the H&L sector generally tends to be more conservative than the fmcg sector, pointing to the irony in the fact that hospitality and leisure has been affected more profoundly than just about any other sector by the impact of the Internet, particularly in relation to its business-to-consumer activity. This view is shared by others who see growth at the top and bottom end of the industry: continuing demand at the ultra-value end as well as growth in more bespoke travel to exotic or higher value destinations:
There is an increasingly individual approach to planning trips and hotel accommodation, made possible by the Internet and the growth of no frills airlines.

To the only person in the survey whose background was not the consumer goods industry this is measurable:
In terms of the impact of the Internet, .5 per cent of our sales come through our own web site. This is not taking into account other engines that are selling our brand.

However, despite this he still considers the industry, in his home country at least, not very sophisticated and fundamentally dormant not differentiated compared with other industries of which he has experience.

Innovation and brand management in the hospitalit y and leisure industr y

One of the major differentiating factors is the high fixed cost combined with low margins. It is a very retail-orientated sector and the most expensive thing in it is an empty bed, says one CEO. Various ownership models exist in the sector, but are not necessarily unique to it, such as franchising. One group has opted not to go down the franchising route, having found it difficult to find partners who could maintain group standards. Its CEO comments:
You have to move down for franchising to make sense Ibis is a good example. We do not have sufficient size to take this route. It would require hundreds, or probably thousands, of openings to really make an impact on the size of the company. This is a cyclical debate. Three years ago bankers were telling me that what was important was to own the asset, and now they say the opposite. We buy what we think are good hotels; we are driven by the quality of the assets and not the way of purchasing or financing them. We try to get the best assets.

The marketing dimension

Consumer insight, innovation and marketing or rather its underdeveloped state in the hospitality and leisure industry is clearly an issue and something that surprised several leaders new to the sector, one of whom remarked:
Post 9/ there has been a lack of marketing investment: there is much that could be done in this area with further investment. There needs to be more understanding of the power of consumer data and how to use it and a more systematic approach to brand development. There is a lot more that can be done in terms of innovation when you have someone in a room for  hours compared with trying to innovate in the packaged goods industry.

This view is shared by another CEO:

The biggest gap I found in the sector was a lack of strategic thinking about consumer expectations and behaviors. The sector could do a better job segmenting the market and a better job at marketing in a consistent manner.

There was a feeling that more should be done to use consumer data to understand consumers and build brands:
Effective use of consumer research to understand consumers is not as prevalent as in the fmcg sector it is not a discipline I witnessed coming in here.

The same can be said for the use of technology:

Too many businesses are built around legacy systems that dont really offer CRM software. We are working hard at CRM to target lifestyles family suites, DVDs for kids, babysitters.

Given these circumstances, one CEO suggests that previous brand-building experience is essential to outsiders coming into leadership positions in the industry:
Its critical because its not just about brand building but about strategy. You really need to be a few years ahead in your thinking.

According to one CEO, the use of technology, while important, has to be seen in the context of the sectors idiosyncrasies:
We have done a lot of work with our database and we are doing direct marketing, but you have to bear in mind that only % of our clients stay 0 nights per year. The rest stay, on average, only once or twice.

This same CEO emphasizes branding specific to location and property:

Location can go against the brand, as people will choose a particular hotel because it is in the right place irrespective of the brand. It is not easy to find the drivers for brand building in the hotel industry. We have made a lot of efforts such as hiring a famous chef, but I am not entirely convinced of the results. It helps to have loyalty programmes, points, cards, but the only real successes in brand building are in the U.S. as they have a very powerful local market. We have dedicated a lot of time and resources to brand building. The idea is that if you have a brand, you can improve all the associated services (e.g. commercial, advertising, publishing). It is much easier to finance branded hotels than unbranded ones and this is reflected in a lower cost of financing. This trend will become better and better for hotels in Europe we manage to finance the acquisition of a hotel with huge debts purely because of our brand.

He does, however, have reservations about the way in which executives coming into the sector from outside emphasize brand building. This, he says, is not necessarily the right approach:
I am concerned that top executives coming from the consumer goods industry will dedicate too much effort and time to brand building. Buying a room in a hotel is a very rational decision; it is not like buying Coca-Cola. I believe the key for creating a brand is good service. If a customer is happy, he will return. He will accept a room or food that is not perfect, but the human part of the service must be 00% perfect. This is really the key.

Innovation and brand management in the hospitalit y and leisure industr y

Developing talent inside and out

Management in the industry is characterized by one interviewee as having great energy, lots of passion and enthusiasm, a focus on the end consumer, and a willingness to learn and improve:
They are very good hospitality managers and with the right development they could become great business managers.

Historically, the sector has focused on developing operational talent with real success. There is a new emphasis on marketing and therefore a need for better marketing talent. Another CEO points to the difficulty of building a culture in the sector and attracting good talent to run the business in his home country:
The challenge is to motivate and retain your people, without being able to pay huge salaries. There is a lack of justice in terms of what these people do and what they are paid.

One interviewee feels, however, that availability of talent will improve: as the industry matures and gets more customer brand-focused well attract more talent. He is also adamant, however, that the industry needs to take more responsibility for developing its own talent. We run great training programmes and have some of the best employees, he says. We have to continue to train and develop staff. This observation is shared by another CEO:
The hospitality and leisure industry could learn more about people development from the fmcg sector. We need to bring in more people from other industries, introduce some fresh blood and invest in people. There is also a lot of talent in the wrong position.

A different CEO takes a more positive view:

There is a real value in the breadth of experience and the fundamental talent pool within the hotel/lodging industry is really very good. He acknowledges, however, that problems exist. For the most part, the talent is home-grown and potentially limited in the long term. I also see lots of gaps within various functions of general management relative to consumer packaged goods. I have really excellent talent in terms of industry knowledge, but there are gaps in people management. Id say there is a real opportunity to focus on coaching, providing feedback, the development of employees, investment in training and development.

Not everyone is convinced that talent from other industries is the answer:
We have tried to hire people for operations from other industries such as retail, but it did not work. They must come from the industry especially when it comes to positions like area/ regional managers. Talent in my company is coming from inside. We have internal programs that provide cross-border exposure among other things.

There remains a concern over the availability of talent in the sector, specifically in family-run businesses:
In countries such as Italy, Germany and Spain there are many small, family-owned companies with plenty of scope for consolidation. Due to the family nature of the businesses, however, it is very difficult to find the right management inside. What worries me most is the day-to-day management, dealing with tour operators, finding different ways to sell, and so on.

One CEO also identified a need for clever management of owner relations. The major chains are competing against other investment classes when trying to attract owners to invest in their brands. This calls for a quality of relationship management, cultural understanding and financing more normally associated with top private bankers.

Outlook for the industry

On the whole, the outlook for the hospitality and leisure industry is upbeat, with good growth expected. As one CEO explains:
There is an 8-0 year demand cycle in the industry but the underlying growth rate is positive more people are traveling and the Internet has made the world a smaller place. More people from Asia will be traveling. People are generally becoming more adventurous. The quality in the sector will rise; there will be more global brands and more choice. There will also be more fragmentation in terms of product offerings, and investors will have to be prepared for this.

Another CEO is also cautiously optimistic about growth in the sector generally:
Barring any awful extra calamity that none of us can really control, I think that the opportunity, both in the U.S. and overseas, is really significant. When you look at research, theyre calling for mid- to high-single-digit growth over the next several years for the lodging industry.

Innovation and brand management in the hospitalit y and leisure industr y

This growth, however, will not be uniform across the sector, according to one interviewee:
The economy sector is not growing as fast. Consumers are looking for additional offerings and are migrating to mid- and up-scale brands as price value becomes more of a factor. I think the supply and demand curve is going to continue to provide opportunities for development of new properties, most notably in the mid- and upscale arenas.

Regions, too, will experience this growth differently, he warns:

I think the real opportunity is outside the U.S. for companies that have a brand value proposition to provide partners in other countries. There will also be a tremendous amount of growth in Asia Pacific, led by China, as well as continued growth in Europe.

Others also see disparate growth in the sector, with the top-end niche and bottom-end value sectors doing well at the expense of the middle market sector:
Players in between are under increasing pressure due to the lack of brand differentiation, consistency or innovation. They are in danger of becoming a commodity theyre in the same situation as the airlines were several years ago.

Commenting on the impact of corporate governance for the industry, one interviewee says he does not expect the calls for more transparency in internal controls or management contracts (as a result of franchising) to have an impact on property management:
From a corporate standpoint, it is the IFRS, the international accounting practices that are going to change the treatment of businesses. How we work through that will be critical; and because of IFRS the influx of private equity is going to continue.

Despite what he sees as a small and fragmented market in which the market cap of the largest five hotel groups in the world does not even equal that of Telefonica, the Spanish telecom operator, one European CEO is optimistic: I see a lot of opportunities, since our competitors are still very dormant. One of the biggest problems traditionally facing the industry has been the negative perception of it. This, believes one CEO, is changing:
The industry once had a very bad reputation. This perception has clearly changed and we are able to attract good talent. In Europe, however, it is still a very primitive industry and I foresee difficult times. From a financial point of view, we have been able to build a strong group and we are prepared to take advantage of the consolidation to come.

Conclusion
Executives from fast moving consumer goods companies have been attracted to the hospitality and leisure industry by the opportunity to transform businesses perceived as lagging behind in terms of brand development and innovation. Despite similarities between the hospitality and consumer goods sectors, those we spoke to referred to a marked distinction between how the sectors currently operate and future opportunities for growth. Asia Pacific, especially China, is expected to produce massive growth, as is Europe still a fragmented sector due to the proliferation of family owned companies. Executives warn that businesses will have to decide whether they are top or bottom end niche players, since the middle ground is becoming increasingly commoditised with less room for growth. The Internet has had a significant impact on what is otherwise still a fairly conservative industry, bringing more choice for consumers and affecting the marketing model. The sector currently tends to lack sophistication in consumer insight, innovation and marketing. More emphasis is needed on creating strategies based on consumer data and research to determine consumer needs and behavior. With a shortage of talent in the sector, more resources need to be invested in developing existing people. Nevertheless, the industry will continue to bring in talent from outside and address the relatively low levels of compensation. As the sector matures, attracting great talent, particularly in marketing, should become easier.

Innovation and brand management in the hospitalit y and leisure industr y

About the authors

Salvador Palmada
Barcelona Before joining Spencer Stuart in May 00 as director of the Financial and Hospitality & Leisure practices, Salvador was a Managing Director of Bank of America Spain in charge of investment banking and responsible of the Banks office in Barcelona, one of the most successful international operations of Bank of America. Salvador started his career in Bank of America in the fixed income division. In the early nineties, he was involved in the development of the highly profitable client derivative business of the Bank in Spain as well as in the creation of a strong corporate finance team both as an analyst and a client manager. He was also Board Member of Bank of America, S.A., a wholly owned subsidiary of Bank of America NTSA. Salvador hold a BBA & MBA from ESADE Business School in Barcelona. He speaks Spanish, English and Catalan.

Edward Speed
London Edward Speed joined Spencer Stuart in 990, and has more than 8 years of executive recruiting experience across a range of board and senior management positions. He leads the European Consumer Goods & Services Practice, and has special expertise in the packaged goods sector, where he has recruited chief executive officers, chief operating officers and top management for leading multinationals and local companies. He also is a member of the European Board Services and Hospitality & Leisure Practices. Edward is a product champion in Europe for the firms Strategic Leadership Services Practice and specialises in management assessment and post-merger integration consulting. In his early career, he served in senior management roles with a British manufacturing group and an international food company before spending three years with a leading recruitment firm. He has lived and worked in France, Germany and the Middle East. A graduate of Cambridge University, Edward speaks Arabic, French and German.

0

Consumer Goods & Services Practice

Since 95, our global Consumer Goods & Services Practice has been helping companies build superior leadership teams, conducting nearly 900 searches each year for clients ranging from major global companies to startup firms. The practice operates as part of a global network with shared intelligence and access to senior industry professionals through a proprietary database. Our in-depth knowledge of specific industry sectors, based on years of direct senior-level experience and long-standing relationships with top leaders, is our foundation for unmatched results. Our Consumer Goods & Services consultants concentrate in one or more of the following sectors: > Consumer Durables & Packaged Goods > Direct & Interactive Marketing > Restaurants, Hospitality & Leisure > Retail, Apparel & Luxury Goods > Sports Business



Innovation and brand management in the hospitalit y and leisure industr y

worldwide offices
Amsterdam
T 31 (0) 20.305.73.05 F 31 (0) 20.305.73.50

Houston
T 1.713.225.1621 F 1.713.658.8336

Munich
T 49 (0) 89.45.55.53.0 F 49 (0) 89.45.55.53.33

Stockholm
T 46.8.534.801.50 F 46.8.534.801.69

Atlanta
T 1.404.504.4400 F 1.404.504.4401

Johannesburg
T 27 (0) 11 707.9460 F 27 (0) 11 463.3371

New York
T 1.212.336.0200 F 1.212.336.0296

Sydney
T 61.2.9247.4031 F 61.2.9251.3021

Barcelona
T 34.93.487.23.36 F 34.93.487.09.44

Leeds
T 44 (0) 1937.547700 F 44 (0) 1937.547710

Orange County
T 1.949.930.8000 F 1.949.930.8001

Tokyo
T 81.3.3238.8901 F 81.3.3238.8902

Beijing
T 86.10.6505.1031 F 86.10.6505.1032

London
T 44 (0) 20.7298.3333 F 44 (0) 20.7298.3388

Paris
T 33 (0) 1.53.57.81.23 F 33 (0) 1.53.57.81.00

Toronto
T 1.416.361.0311 F 1.416.361.6118

Bogota
T 571.618.2488 F 571.618.2317

Los Angeles
T 1.310.209.0610 F 1.310.209.0912

Philadelphia
T 1.215.814.1600 F 1.215.814.1681

Vienna
T 43.1.36.88.700.0 F 43.1.36.88.777 Warsaw T 48.22.620.80.87 F 48.22.620.81.87

Boston
T 1.617.531.5731 F 1.617.531.5732

Madrid
T 34.91.745.85.00 F 34.91.561.42.75

Prague
T 420.221.411.341 F 420.222.233.087

Brussels
T 32.2.732.26.25 F 32.2.732.19.39

Manchester
T 44 (0) 161.499.6700 F 44 (0) 161.499.6710

Rome
T 39.06.802071 F 39.06.80207200

Washington, D.C.
T 1.202.639.8111 F 1.202.639.8222

Budapest
T 36.1.200.08.50 F 36.1.394.10.97

Melbourne
T 61.3.9654.2155 F 61.3.9654.4730

San Francisco
T 1.415.495.4141 F 1.415.495.7524

Zurich
T 41.44.257.17.17 F 41.44.257.17.18

Buenos Aires
T 54.11.4313.2233 F 54.11.4313.2299

Mexico City
T 5255.5281.4050 F 5255.5281.4184

San Mateo
T 1.650.356.5500 F 1.650.356.5501

Chicago
T 1.312.822.0080 F 1.312.822.0116

Miami
T 1.305.443.9911 F 1.305.443.2180

Santiago
T 56.2.940.2700 F 56.2.249.7883

Dallas
T 1.214.672.5200 F 1.214.672.5299

Milan
T 39.02.771251 F 39.02.782452

Sao Paulo
T 55.11.3759.7700 F 55.11.3759.7736

Frankfurt
T 49 (0) 69.61.09.27.0 F 49 (0) 69.61.09.27.50

Minneapolis/St. Paul
T 1.612.313.2000 F 1.612.313.2001

Shanghai
T 86.21.6386.1177 F 86.21.5306.2718

For copies, please contact: Angela Whittle on +44 20 7298 3334 or awhittle@spencerstuart.com. 2006 Spencer Stuart. All rights reserved. For information about copying, distributing and displaying this work, contact permissions@spencerstuart.com.

Geneva
T 41.22.312.36.38 F 41.22.312.36.39

Montreal
T 1.514.288.3377 F 1.514.288.4626

Singapore
T 65.6586.1186 F 65.6438.3136

Hong Kong
T 852.2521.8373 F 852.2810.5246

Mumbai
T 91.22.5637.2006 F 91.22.5637.2008

Stamford
T 1.203.324.6333 F 1.203.326.3737



www.spencerstuart.com

Amsterdam Atlanta Barcelona Beijing Bogota Boston Brussels Budapest Buenos Aires Chicago Dallas Frankfurt Geneva Hong Kong Houston Johannesburg Leeds London Los Angeles Madrid Manchester Melbourne Mexico City Miami Milan Minneapolis/St. Paul Montreal Mumbai Munich New York Orange County Paris Philadelphia Prague Rome San Francisco San Mateo Santiago Sao Paulo Shanghai Singapore Stamford Stockholm Sydney Tokyo Toronto Vienna Warsaw Washington, D.C. Zurich