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Consumer brands bet on niche hotel audiences
May 30 2013

Non-hotel brands like Nobu and Virgin are capitalizing on personalized experiences and niche audiences as differentiators against cookie-cutter legacy brands.

Highlights
  • Paramount Hotels & Resorts finalized a licensing agreement with Paramount Pictures to develop a hotel under the Paramount brand.
  • With 26 restaurants in 16 countries, Nobu Hotels is capitalizing on its 3 million annual global customers by starting a hotel-management company.
  • “We have a game plan of 20 hotels in 10 years,” Raul Leal of Virgin Hotels said.

GLOBAL REPORT—When fast-food powerhouse McDonald’s saw its stock prices declining in the late 1990s, the CEO of McDonald’s Switzerland Urs Hammer, took action. The company needed to diversify its revenue stream, and he reportedly proposed the idea of converting Big Mac eaters into hotel guests.

In 2001, McDonald's Suisse Holding SA, the Swiss franchisee of McDonald's, opend two Golden Arch Hotels in Switzerland. Because the restaurant chain had served more than 74 million customers in the country, Hammer reportedly assumed the hotel concept would translate into an abundance of guests already familiar with the brand, according to "McDonald's failed venture in hotels" by Stefan Michel, a professor of global marketing at Thunderbird School of Global Management.*

But the golden yellow arches did not shine brightly.

Despite the fanfare and McDonald’s relative ubiquity, guests couldn’t marry the idea of a fast-food giant as a 4-star upscale hotel, according to a case study by Michel titled "Golden Arch Hotel: McDonadl's Adventure in the Hotel Industry." In Michel's research he attributed McDonald's fledgling venture to design issues and perception coupled with economic woes in the early aughts. In 2003, the hotels were sold, becoming the Park Inn Zurich and the Park Inn Lully.

Though McDonald’s failed foray into the hospitality industry is a cautionary tale for some, other established consumer brands are optimistic about their chances of reviving an industry sometimes beleaguered with the status quo.

Players who have thrown their brands into the ring include Baccarat, Harrods, Nickelodeon, Virgin, Lego and more.

“Consumer brands are now becoming hotel brands,” explained Rob Cornell, senior VP of global development for Preferred Hotels & Resorts, which recently partnered with Paramount Hotels & Resorts. “And the most critical step (for consumer brands) is getting in front of a core audience to establish credibility.”

The Dubai, United Arab Emirates-based Paramount Hotels & Resorts finalized a licensing agreement with the licensing division of Paramount Pictures to develop hotels under the Paramount brand, with plans to open the first hotel, between 200 and 250 rooms, in 2015 in the emirate.

“We, of course, are trading on the name,” explained Thomas van Vliet, CEO of Paramount Hotels & Resorts. Considering the visual presence of the Paramount logo, “we want to create a hospitality product that is unmistakable and unforgettable.”

Niche obstacles
Van Vliet isn’t taking any chances with entering the hotel industry. The company has hired top hotel executives and is partnering with Preferred Hotels because of its “luxury image, overall functionality and geographical spread of the properties,” he said.

“They signed Trump. If Trump was impressed by their possibility, that means something,” van Vliet continued.

Preferred offers Paramount Hotels its global branding, sales and marketing, global distribution system, revenue management, promotions, strategic communications, key business partners, etc., giving the new company programs it can step into for “an immediate advantage,” Cornell said.

Other hotels are faced with challenges that come from being in a niche market. The 250-key Legoland Hotel, which opened at the entrance of the Legoland theme park in Carlsbad, California, in April has a specific target audience with its themed hotel: 5 year olds.

“The challenge I see at the moment of what we’ve created … because of the focus of the children, the clear focus on family and the clear focus on the Lego brand,” is catering to that specific group of demand drivers, Peter Ronchetti, GM of Legoland, said.

Because this is the third Legoland hotel—with one in Denmark and one in the United Kingdom—Ronchetti isn’t deterred by his demographic.

“I absolutely love being this niche. The question we’re asked, when children get beyond 12 is, ‘Can you extend (the brand) to teenagers and above?’” The answer is “Definitely not,” he said.

With 26 restaurants in 16 countries, high-end restaurant chain Nobu capitalized on its three million annual global customers by opening its first Nobu Hotel in Las Vegas this year. “It’s easier to enter the hotel business if you understand restaurants,” CEO Trevor Horwell said of the 180-room hotel.

“Rooms are the easy part; the hardest part is making it successful in food and beverage.” The established F&B moniker makes operating easier. “We make as much money in F&B as we make in rooms,” Horwell said. “It’s appealing for investors.”

A rendering of the Baccarat Hotel & Residences that will open in New York next year.

A natural progression
For most lifestyle brands, entering the hotel industry is a natural progression.

Baccarat, a brand that was created to enhance the lives of kings and queens, is more than a luxury jewelry company but a way of life, explained Scott Rohm, president of SH Group, the hotel brand-management company of Starwood Capital, which holds the Baccarat Hotel license.

“It was a logical transition and extension for Baccarat to introduce an ultra-luxury hotel experience,” Rohm said. The first Baccarat Hotel & Residences opens in New York next year, coinciding with the company’s 250-year anniversary.

“Starwood Capital Group has been working on the development of the Baccarat Hotel brand for several years, and we’re ready to bring the brand to life and compete among the very best, well-established luxury brands in New York and beyond,” Rohm said.

Virgin’s notoriety in the travel space for the past 25 years made transitioning to hotels a simple decision. Raul Leal, CEO of Virgin North America, said the 65-million Virgin lifestyle fans are a coveted customer base for the consumer brand that is opening its first 4-star lifestyle hotel in Chicago.

“Not a lot of brands have that consumer,” he said. “It made a lot of sense to start a hotel company focusing on the lifestyle niche of the hotel business.”

Lifestyle over status quo
Once in the hotel space, consumer brands are emphasizing lifestyle over experience, sources said.

“There are good lifestyle hotel companies in the world,” van Vliet of Paramount said. “I’m not saying we’re better than them, we’ll be different. We can add an element they have no reason to add. We have this unique opportunity to add experience that is linked to the Paramount logo. That gives us an opportunity to differentiate ourselves.”

Guests will have access to a library of Paramount movies during their stay at the hotel. Additionally, each month will have a theme around a genre, movie or an actor. Upon arrival, guests will be greeted by a replica of the Paramount Pictures studio gate. Secondary elements—like calling the staff “the cast”—will link the hotel to the movie company without losing hotel functionality.

Virgin is hoping to benefit from the experience-seeking traveler who embodies the brand’s philosophy.

“The legacy brands like Marriott and Hilton have done an amazing job of establishing consistency. Consumers go there and know what to expect,” Leal said, but Virgin Hotels will embrace the traveler’s adventurous side.

Though he admits some things must be the same.

“Certain things have to be formulaic. A comfortable bed has to be formulaic, an amazing space for people to work in the room is formulaic, a great shower and shower pressure are basics every hotel does consistently,” Leal said. Virgin hotels will provide comfort but go beyond that, giving a unique experience to “that curious experience seeker and traveler.”

Peter Ronchetti, GM of Legoland, said the core demographic for the themed hotel is 2 to 12 year olds.

Long-term success
The big question is can a consumer brand translate to a successful hotel company or will it go the way of the Golden Arches?

“I think maybe the best way to explain it is we’ve been in the hotel business for many years,” said Nobu’s Horwell. “Hotel companies come to us and put our restaurant in their hotels to give them a (F&B) destination.”

With the longevity from its restaurant concept, Horwell said “we felt strongly that all the hotels we’re in, we can do equally as good operating the hotel ourselves.” In the first three months of operations, Nobu is performing well above market, he added.

Nobu’s strategy is to open four more hotels in the next three years in Europe, the Middle East and Asia. “We don’t want to do 100 hotels in 10 years,” he said. “There’s no rush.”

A survey conducted by Virgin shows 80% of consumers said they would stay at a Virgin hotel, which is propelling plans to open the hotel beyond the Chicago market into other major domestic and secondary cities in the U.S. and London.

“We have a game plan of 20 hotels in 10 years,” Leal said. “It’s not tremendously aggressive.”

“If you look at what Starwood is doing with Baccarat and Marriott with Bulgari, it seems to be working,” Cornell of Preferred Hotels said of the success of consumer brands. “Look at all the brands that have been created by the big five hotel companies in the last few years—how many of them are household names? Some of them are struggling.

“If you can take an established lifestyle brand and parlay that into a hospitality product, you have a great combination.”

*Correction, 30 May 2013: HotelNewsNow.com used secondary research from reputable sites for details on McDonald's foray into the hotel industry but did not site those sources correctly. Those instances are now cited to clarify and attribute the sources. HotelNewsNow.com did not talk with the McDonald's company directly.

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