Sleepless at Starwood

By spiffing up his hotels, CEO Sternlicht is betting on an upscale business that may not return soon

Three years of lackluster business travel have done something that few in the hotel industry thought possible: They've made Barry S. Sternlicht, the 42-year-old chairman and CEO of Starwood Hotels & Resorts (HOT )Worldwide Inc., look tired. Gone is the cocky young dealmaker who acted like the Jack Welch of hospitality -- albeit with an artistic flair. "He used to be more rah-rah, in the here and now," says Starwood director Kneeland C. Youngblood. Now, Youngblood says, Sternlicht is "grappling with the future."

With war, SARS, terrorism fears, and a weak economy hobbling the industry, that's a wise move. Hotel occupancy rates nationwide were down last year to 59.3%, the lowest since 1971. The industry's revenue per available room is expected to decline for the third consecutive year in 2003. The last time that happened, Sternlicht was in diapers. And his five-year-old family of 742 hotels -- Sheraton, Westin, W, Four Points St. Regis, and The Luxury Collection brands -- has fared worse than most, thanks to its heavy tilt toward upscale business travelers.

Starwood posted a first-quarter net loss of $117 million, largely due to asset writedowns, vs. a $33 million gain the year before. Hotel sales in Europe and at home should cut Starwood's debt to $4.6 billion from $5.5 billion earlier this year. It unloaded 12 U.S. hotels in July and expects to sell six more this year. Standard & Poor's downgraded Starwood's credit rating to a speculative grade in May.

Yet Sternlicht has stuck with his principal strategy: to invest for what he believes will be better times ahead. That means a heavy commitment to freshening up the dowdy 397-hotel Sheraton Hotels & Resorts chain with a Ralph Lauren-inspired decor. He has already reinvigorated Westin Hotels & Resorts into a chain of 118 hotels that are seen as a cut above the Sheratons and Hiltons of the world. And he expanded the ultra-deluxe St. Regis brand to 11 properties worldwide. But the biggest hit has been his 17 W Hotels, a chain he started five years ago. Its hip decor and trendy bars have attracted both style-conscious business travelers and local fashionistas.

Sternlicht declines to reveal the costs of all his planned makeovers, although Starwood's capital expense budget this year is $450 million. His level of commitment and portfolio mix has impressed investors enough to push the stock to $30, up more than 25% this year vs. 17% for the sector, giving it a premium over Hilton. Investors are betting that it will benefit if the economy picks up later this year. Unlike its rivals, Starwood owns a higher percentage of its hotels, rather than franchising them. That means more control over management and a bigger slice of any profits. "They're best positioned for a turnaround," says analyst Joseph Greff of Fulcrum Global Partners.

Until then, it will be a tough slog for Sternlicht, who made an early fortune in commercial real estate. "Every CEO you talk to is miserable except for the ones in the housing industry," he muses while munching on jumbo shrimp in a suite at his fashionable St. Regis Hotel in Manhattan. Business travelers are booking just days in advance, he complains, and the cost pressures are crushing. "You work no less hard for less results because of things you can't control," he says. At least there's one payoff: "I don't think anyone can say I'm just a deal guy anymore."

The upscale business traveler who would boost Sternlicht's hotels, however, may not soon return. Some corporate travel has been replaced by teleconferencing and business people who do travel are more likely to opt for middle-tier properties. Mark A. Williams, president of the Association of Corporate Travel Executives, thinks some of the changes may be permanent. "If all I'm going to do is sleep, shower, and be gone, I don't need a lot of amenities," says Williams, who manages travel and meetings at PricewaterhouseCoopers. A PwC study shows that revenue per available room at high-end hotels shrank 15.1% last year and may grow only 3.4% between 2003 and 2004. In contrast, revenue at midscale hotels without food and beverage service -- a category where Starwood doesn't play -- contracted just 2.4% last year and may grow 4.1% this year.

Starwood's rivals certainly aren't banking on the high end. These days, hoteliers are more apt to woo big groups and tourists with discounts. Says Hilton spokesman Marc A. Grossman, "the independent business traveler, who is the least price-sensitive, hasn't come back." Lee Pillsbury, CEO of Thayer Lodging Group Inc., an Annapolis (Md.) holding company with Marriott, Hilton, and Sheraton properties, is equally downbeat: "It used to be business travel was glamorous. Now, travel has become such a hassle, I'm not sure people who have the choice won't choose to stay home."

Sternlicht is determined to keep upgrading, despite the tough market. Repositioning Westin has been relatively easy, thanks to three factors: greater control of the properties, a brand that carried little negative baggage to start with, and inspired design that outfitted each room with everything from an all-white, duvet-covered "Heavenly Bed" to an upscale "Heavenly Shower."

Remaking Sheraton, in contrast, has proved to be hell. For one thing, says hotelier Pillsbury, "nobody was convinced it was going to make a difference or that the company was really behind it." Many U.S. hotel owners balked at paying even minimal costs for renovations in such a tough environment. About 15% of Sheraton's franchisees even opted for independence or other brands for what Starwood Chief Operating Officer Robert F. Cotter calls "design reasons." Currently, about 40% of Sheratons aren't under Starwood management contracts.

Sternlicht admits he's not quite there with his biggest brand. But he is confident he can replicate the success of W and Westin companywide. "I don't need this job," he says. "I do it for the intellectual challenge -- to build a company that's the best in the business." Until that business improves, though, the brain behind the Heavenly Bed could be tossing and turning for some time.

By Diane Brady in New York and Christopher Palmeri in Los Angeles

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