Starwood Hotels: Rising in the East

CEO Barry Sternlicht explains why he sees Asia in general, and China in particular, as the key to his outfit's long-term growth

Starwood Hotels & Resorts Worldwide has ambitious plans for Asia, which it sees as the region that will drive growth for the hotel industry in the next decade. It's especially focusing on China, where the company expects to be running 200 hotels within five years.

Starwood (HOT ) has opened 13 hotels in the region this year, stretching from Tokyo to the Thai resort of Krabi Island. Group Chairman and CEO Barry Sternlicht recently spoke with BusinessWeek Hong Kong Correspondent Frederik Balfour about his vision for Starwood in Asia and his strategy for tripling profits from the region over the next five years. Edited excerpts of their conversation follow:

Q: You arrived in Hong Kong two days after the Bali tragedy [where more than a hundred people were killed in a terrorist bomb explosion and fire]. How will this affect your plans for the region?


We're a hotel company -- it hasn't changed our perceptions. I've been to Luxor [the Egyptian site where 60 tourists were gunned down in 1997]. I don't know if it has recovered yet. This is terrible, and it will take a while for Bali to recover.

Leisure tourists have a long memory, [so they] move around. We have two hotels in Fiji that will do better, and after Indonesia exploded [during the 1998 riots against President Suharto, Starwood's resort in] Phuket, Thailand, did better.

Q: Hasn't the perceived risk of investing in neighboring countries gone up?


Investing is about assessing risk and reward. Clearly, the risks of investing in Singapore just went up. We have to take a more conservative stance than before. It's tucked in between Malaysia and Indonesia. Capital can go anywhere, so why take the risk? But most hotels we're talking about in Singapore won't be completed until 2006, and our product is more business-oriented [than leisure].

Q: What are your plans for Asia?


There are more growth opportunities in Asia than anywhere else. In 10 years time, the hotel company [that dominates its industry] will do so as a result of its growth here.

Q: What's your strategy?


Asia contributes less than 10% of [operating profit], and we would like it to get to 25% by 2007. I've asked Miguel [Ko, Starwood president for Asia Pacific] to come up with a plan to quadruple profits in the next five years. That's going to take a couple of hundred million dollars.

Q: Where will the money come from?


We will have to sell assets in other parts of the world to pay for our expansion here, or else the global economy will have to get a lot better. We can't issue stock when our's is trading at a 50% discount to its underlying value. [Starwood is around $24, as of Oct. 21. Its 52-week high was close to $40.]

Q: What are your plans for China?


We [recently] signed on for the Sheraton Dongguan. We'll have 50 upscale hotels signed in five years. We'll look at how to get 200 hotels in China in five years. They won't be all Sheratons, Westins, and Four Points [all Starwood brands]. We'll have to be innovative with a new brand.

Q: What about Macau, where Sheldon Adelson and Steve Wynn are building casinos?


If you love Asia, you have to love Macau. You have to be fascinated with it. There's a hell of a demographic -- 1.2 billion people within a two-hour plane ride. We will look to see if there is a right way to participate.

Q: You're opening a W Hotel in Seoul, Korea, the first Asian city for that brand. Why Seoul and not Tokyo?


It's a good market, and our partner, SK Group, already has the Sheraton there. Korea is a very hip country. Asia is developing with younger, hipper, wealthier people, a perfect target for W. We'll agree on deals for W hotels in Hong Kong, Singapore, Tokyo, and Shanghai in the next 24 months.

Q: Will they be owned?


Frankly, we're limited by capital resources. We will manage, we won't franchise, as in Seoul.

Q: What's the trade-off between managing and owning?


Being in management has become as volatile as owning because a lot more management fees are performance-based. The stock market has rewarded higher multiples to more companies that are in management rather than ownership. But it misses the fact that lots of management companies are making large loans to support new developments. There are risks in [such] loans.

Q: How are Starwood's finances?


We just did $2.8 billion in refinancing, and we cover debt service four to one. But given the uncertainties in the global economy and pending [Iraq] war, it's not a time to be a cowboy with your capital. You have to think creatively and invest conservatively. We will likely reinvest in our stock, which is very, very cheap.

Q: Why is hotel service in the U.S. so poor compared with Asia?


In the rest of the world, it's prestigious to work in hotels. The service ethic is much higher [outside the U.S.]. In the States, the hospitality business isn't looked on with the same esteem as here or in Europe.

Edited by Patricia O'Connell

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