Sales and Marketing

Case Study: The Suite Smell of Success - George Washington didn't sleep at the W Hotel. But thanks to smart niche marketing, Ben Franklin does

They are the bane of business travelers everywhere: the polyester floral bedspread, the cellophane-wrapped drinking glass, the generic chow in the restaurant just off the lobby. Foot soldiers in America's corporate armies spend dozens of nights a year bivouacked on the style-free front lines of the average business hotel.

Starwood Let's not be unduly dismissive: Lots of folks work hard to make sure your employer's $179 buys a clean, hassle-free, consistently bland night's lodging. But if your future plans include significant time on the road, brace yourself for aesthetic deprivation that no minibar can remedy. In those first moments of the morning, you probably won't know whether you're in Denver, Dallas, or Detroit. But by God, you'll know you're in a Marriott.

There has to be a better way. And, arguably, there is.

Step inside the W Hotel's flagship location on Lexington Avenue near 49th Street in New York City. Check into your room, outfitted with a comfy bed, a cordless speakerphone, Web TV, and a decor that's more Pottery Barn than Hilton. Perhaps you'll find an hour to step upstairs to the Away Spa & Gym and submit to the hands that have rubbed oil onto the backsides of Tyra Banks and Melissa Joan Hart. Adjacent to the lobby await two after-work options. There's the Heartbeat restaurant (run by the owner of the celebrated New York eateries Nobu and TriBeCa Grill) or the Whiskey Blue, one of the city's hottest bars. Yes, at $260 a night, the W may cost a tad more than the Marriott next door. But it's not so pricey that the expense-account cops will sound the sirens. So which will you choose?

That's what Barry Sternlicht hoped you'd say. Sternlicht is the 39-year-old chairman of Starwood Hotels & Resorts, and he created the W Hotel concept two years ago. A graduate of Brown and Harvard Business School (class of '86), Sternlicht spent his early postgrad years working for a real estate investment firm. But by the mid-1990s he'd thrown himself into the hotel business, snapping up storied brand names like Westin and St. Regis. Then, in a stunning $10.2 billion deal in 1998, he stepped in as a white knight to buy ITT/Sheraton, which had been the target of a hostile bid by Hilton. Clearly Sternlicht knows how to read a balance sheet, but he's equally passionate about showerheads and sofas. He launched W to cater to folks who share his sensibilities. "W Hotels was an attempt to reach a segment of the market that really doesn't have a place to stay," Sternlicht said recently. "It's a place that speaks to a younger crowd, a slightly hipper crowd."

So far, the plan seems to be working. "It was considered by the industry to be a surprising move, but it's turned out to be a big success," says Warren Marr, director of hospitality consulting at PricewaterhouseCoopers. By the end of the year, W will have 14 locations, with 25 planned to open by the end of 2001. Already the two-year-old W is the fastest-growing brand in Starwood's portfolio, which includes Westin, St. Regis, Sheraton, Four Points, and a collection of stand-alone hotels. Altogether Starwood owns, manages, franchises, or leases 725 properties containing 217,000 rooms, putting it alongside Hilton and Marriott as one of the industry's three biggest players.

Industry analysts categorize the W chain as a "style" hotel, a larger cousin of the "boutique" hotels that have won legions of fans in recent years. Boutiques are a throwback to the pre-chain days, when small hotels had charm and character. Today boutiques are mostly about style and attitude. They hire staff from modeling agencies, dress them in black, station them in monochromatic lobbies, and wait for the beautiful people to start checking in. Ian Schrager, famous as a co-founder of Studio 54, gets most of the credit for starting the boutique trend with his trio of New York properties—Morgans, the Royalton, and the Paramount—the first of which opened its doors in 1984.

But when Sternlicht launched W in 1998, he was bucking several industry trends. Rival hotels had been launching new brands, but most were moving down market, not up. "There were a lot of new brands in the late '80s that were mostly suite properties or extended-stay properties," which appeal to traveling families or price-conscious business travelers, says Peter Keim, a vice president at PKF Consulting, a hotel industry research firm. In moving into hipster hotels, W faced—and still faces—other challenges. Traditional boutiques achieve much of their ambience by being small—fewer than 200 rooms. By contrast, W's flagship Manhattan location, a former Doral Inn, has a whopping 722 rooms. And though plenty of businesspeople stay in boutiques, most of these hotels are not a natural sell to business travelers. Spend a night at the I'm-too-sexy Mondrian in West Hollywood to understand why nobody chooses it for its excellent fax machines.

Despite those obstacles, Starwood's move represented a classic marketing strategy: pioneering new segments in a maturing industry. The wisdom of market segmentation has been accepted in the realm of manufacturing since the 1920s, when General Motors' multi-brand lineup ("A car for every purse and purpose") sped ahead of single-brand Ford. By mid-century, marketers like Procter & Gamble had become adept at using "brand management" to segment categories like detergent that lack obvious attributes for differentiation.

Segmenting service industries is a somewhat more recent concept. High-end and low-end air travel, from the Concorde to Southwest, has been around since the '70s. It took a while for hotels to follow that lead, but follow they have. "Niche positioning for hotels has been proceeding apace for the last 8 or 10 years," says Malcolm Noden of Cornell's School of Hotel Administration. "The major flags have subdivided themselves into thinner and thinner slices."

The strategy does have its downside. It requires spreading marketing dollars over more brands, potentially diluting their impact. It taxes top managers, who typically have more to oversee. And it focuses a brand on one group of consumers—a risky proposition if that group goes away. (Example: Buick's customers have aged to the point that they rarely need to buy new cars.)

But Starwood decided a niche play was a leap worth taking. By offering low-end, mid-priced, and high-priced hotels under the same corporate umbrella, companies can create one-stop shopping. That's particularly important given the advent of frequent-stay programs. For instance, a middle manager might stay in a mid-priced hotel on business, in a cheaper property for a kids-along vacation, and in a luxury suite for a romantic weekend, accruing reward points with every stay.

To put this vision into action, Sternlicht's team began at the center of the room, with the bed. That's the place business travelers spend the most hours, but at many hotels it gets short shrift. Rival hotels pay $110 to $140 for each mattress. W claims to spend $480. Guests like W's linens—down pillows, 250-thread-count sheets, puffy duvets—so much that they're now available by mail order. TVs, phones, CD players, and bathroom fixtures look like they came out of a home-design catalog. One reason for that is Theresa Fatino, W's VP of design and brand development and a former designer at Pottery Barn and Ralph Lauren. She finds inspiration everywhere. "I start flipping through fashion magazines, seeing what's hot," she says. "We'll look at the hotel's location, the neighborhood, the city, the vibe." The goal: to reinforce W's signature aesthetic, which she says is "hip and fun and doesn't take itself too seriously."

So far, W managers say, the company is meeting its market share goals. Now, with their stable of properties expected to nearly double in 2001, the question facing managers is how far W can expand. Executives say the concept has room to grow—key U.S. markets such as Boston and Washington are still W-less. But not everyone accepts two years of success as proof that W has reached cruising altitude. "My guess is that the brand has not yet reached that plateau where they can relax," says Cornell's Noden. "They still have to fight for every unit of occupancy."

To be sure, challenges lie ahead. The boutique concept is so hot that every hotelier has new properties in development, adding to the more than 2 million boutique rooms already available nationwide. As supply grows, room rates may drop. W may face further price pressure as it expands to second-tier cities where guests are unaccustomed to $200-and-up rates. Those prices may sound high, but since boutique owners spend lavishly on interiors, there's a genuine risk of not covering costs. What's more, for all its appeal, W's young, hip, free-spending demographic seems susceptible to faddishness. If Leonardo or Wynona suddenly chooses the Benjamin instead of the W, the aspiring hordes may follow. But let Starwood investors fret over that. For consumers weary of tired hotel designs, the trend is a good thing. So what's next? "I've always wanted to do swing sets in a lobby," says designer Fatino. It's a whimsical, impractical notion. But as the boutique space gets more crowded, that may be exactly what it takes to get noticed.

This article originally appeared in the November 2000 issue of MBA Jungle.



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