The Light Is On At Hilton

CEO Stephen Bollenbach made a well-timed bet on midpriced chains

Five years ago, Hilton Hotels Corp. (HLT ) CEO and Co-Chairman Stephen F. Bollenbach startled the industry when he shelled out $3.7 billion in cash and stock to buy Promus Hotel Corp., a big franchiser of midpriced chains such as Hampton Inn, Doubletree, Homewood Suites, and Embassy Suites. Some shareholders were alarmed, too. The deal pushed Hilton's debt to $5.5 billion, sent its stock slumping, and left investors wondering why the venerable owner of the Waldorf-Astoria in New York and Palmer House in Chicago would want to go into hock to run a string of hotels going for as little as $70 a night.

Today, however, few question Bollenbach's judgment. His decision to broaden Hilton's portfolio and customer base with those midpriced hotels has met with success. Because they are franchised, Hilton receives income from scores of new properties without an up-front construction investment. And Bollenbach, 61, spent hundreds of millions of dollars developing a sophisticated reservation system, perfecting Hilton's online marketing, and beefing up customer loyalty programs to get more bodies into its hotels.

It is paying off. Hilton now has 2,185 owned or franchised hotels, up from 269 before the Promus acquisition. It gets one-third of its sales and profits from franchising, more than twice the level in 1998. First-quarter sales jumped 9%, to $994 million, and profits quadrupled, to $37 million. Hilton has retired $1.8 billion of debt, and its stock, at $18 a share, delivered a 12.5% average annual return over the past three years. That soundly beats the Standard & Poor's (MHP )--hotel, restaurant, and leisure index, as well as the returns of rivals Marriott International Inc. (MAR ) and Starwood Hotels & Resorts Worldwide Inc. (HOT ).


With the travel industry climbing out of its hole, the near-term outlook is even better. Overall hotel revenues in the U.S. rose 7.7% in the first quarter and this summer is expected to be the strongest since 2000 in terms of room rates and occupancy, according to the hotel group at PricewaterhouseCoopers. Analysts at Reuters Research see Hilton earning $214 million in 2004 -- up 30% from 2003 -- on sales of $4.1 billion.

Competitors note that for all its gains, Hilton still trails in some respects. The company has just 191 Hilton Garden Inn hotels, a midpriced suburban chain catering to business travelers, vs. 616 franchised hotels at its closest rival, Marriott's Courtyards. "They're a good competitor, but he [Bollenbach] has a ways to go," says J.W. "Bill" Marriott Jr., chief executive of Marriott.

To tie his empire together, Bollenbach is counting on his $145 million-a-year program of technology improvements. Key to the effort is a complex reservation system that allows all seven Hilton brands to operate as one. Hilton hotel employees can look up a customer's profile no matter where in the system they've stayed. The system also improves efficiency. With all systems linked, operators at the central reservations desk can offer other company hotels if the local Hilton is full. The company says the cross-selling generates more than $300 million in incremental revenues each year.

Expanding its customer loyalty program, Hilton HHonors, to include the Promus hotels has also helped. Hilton HHonors members make up roughly 40% of all guests -- a big lure to franchisees. The loyalty program also is one of Hilton's best weapons against Web travel sites such as Expedia Inc. (IACI ) and LP (TSG ). Last year, Hilton was among the first big chains to require that franchisees offer rooms on its central Web site at the same price as third-party sites. That lessens the incentive for customers to shop around. "Hilton has taken about as strong a stance as you can," says L. Scott Tarwater, senior vice-president of sales and marketing at John Q. Hammons Hotels Inc. (JQH ), whose holdings include Hilton franchises.

Bollenbach says Hilton's technological smarts can attract even more customers. "We're committed to keeping on top of where the world's going," he says. Right now, guests at the New York and Chicago Hiltons can check in and get room key cards at lobby kiosks. Next year, guests will be able not just to book their room online but also pick which room they want. It's the kind of progress that Hilton is banking on to lure new guests and keep old ones coming back -- whether they're booking a $1,000-a-night suite in Manhattan or a $70 room in the boonies.

By Christopher Palmeri in Los Angeles, with Catherine Yang in Washington

— With assistance by Catherine Yang

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