Since the attacks of September 11th occurred in the United States, there has been a level of social, environmental, and political unrest. This unrest is not only among individuals, but also among businesses worldwide and Four Seasons is not excluded from that list. Most of the scrutiny that is felt is directed at countries and more specifically groups of the Middle East that seemed to be involved with, or to be blamed for the disturbances of September 11th.The case study clearly points out that political unrest between the Middle East and the United States could play a huge role in determining the expansion and over all success of that area (or lack there of). Unfavorable economic and political conditions in international markets, including civil unrest and governmental changes, could undermine consumer confidence and reduce the consumers' purchasing power, thereby reducing demand for leisure products like luxury hotels.
In addition, boycotts resulting from political activism could reduce demand, while restrictions on the ability to transfer earnings or capital across borders which may be imposed or expanded as a result of political and economic instability could impact profitability for four seasons. Without limiting the generality of the preceding sentences, the unfavorable business environment, the current unstable economic and political conditions and civil unrest and political activism in the Middle East, and the unstable situation in Iraq or the continuation or escalation of terrorist activities could adversely impact international business.
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Even with these economic and political factors to consider, socio-cultural factors also play a huge role in assessing risk for the development of a Four Seasons hotel in the Middle East. The four Seasons practices business in a European way (being headquartered in Canada), with their primary focus being customer service, customer loyalty, and values that correspond to American and European culture. Middle eastern Social values are vastly different, and may result in conflicts of service. For one, Woman are considered to be in a lower separate classes, as compared to American and European beliefs.
This would go against the hotels core competencies and beliefs for how their customer should be treated. Small things such as having pets, or understanding poverty, all play a huge role in understanding the culture. The bottom line of this issue is tolerance. Tolerance between our socio-cultural beliefs are vastly different, therefore could be risky if you try to mix them for business reasons. The case talks about how the industry is under the process of consolidation. Strategic alliances, mergers and acquisitions are a huge reason why international investments in the Middle East may be less concerning.
In the case of Four Seasons, the article discusses how many acquisitions and mergers have taken place with Four Seasons since the 1970s and 1990s. An important one was the acquisition of Regent international hotels. Not only did that expand them into Eastern markets, but it also lured an alliance with The Saudi Arabian Prince when he bought 25% of the company for 167 million dollars. His understanding the culture and his deep pockets allowed them into a market that was otherwise a very risky proposition. As per the case study, this reason is the reason for economic expansion and growth in the Middle East.
The pro’s and Con’s of the luxury hotel segment There are many benefits to being in the luxury hotel segment. The case study strongly suggests that individuality is a key competitive advantage for this segment. What positively distinguishes a brand is the unique level of service offered, known as “the golden rule”. The golden rule is to treat others as you would like to be treated (which in the Ritz Carlton, it means ladies and gentlemen serving ladies and gentlemen). This is typically not the case in lower level hotel segments, which creates a competitive advantage for these upper echelon hotels.
Another key advantage that the case points out is the luxury segments ability to be averse or immune from economic downturns, such as the one that occurred on September 11th 2001. The effected population consists of the middle class. The “movers and shakers” of the world will still utilize the amenities of the luxury segment. Brand name recognition is another huge advantage for this segment. This accounts for over 80% of their marketing efforts. According to the urban land institute property performance survey, the upscale luxury segment will significantly outperform the mid prices economy segment through mid 2002. (Even with a total market share of only 17. 6%).
Another advantage was occurring in times of economic distress. The cost associated with opening new hotels was astronomical, causing a very high barrier to entry for non-established brands in the middle market segment. This is a clear indicator of a strong luxury segment. Companies such as the Four Seasons have been moving into hotel management, which has a lower perceived risk and a lower cost of ownership. With all these advantages at hand, the case study suggests that now is the time that the luxury hotel segment should expand on all these factors.
Although the advantages seem legitimate, there are causes for concern for the luxury hotel segment and it starts with competition with the lower hotel segments. The case discusses a downturn in business travelers and an upswing of leisure travelers by a considerable margin. The issue for the luxury segment occurred when lower level hotels were cannibalizing their guests by tailoring services to match their needs instead of losing them to luxury hotels. Examples of this would be Wyndham by request, which is a customer relationship management model.
Another huge area of concern for luxury hotels is the change in technology and how that affects the capture of new and repeat clientele. It’s stated in the article that lower segment hotels have adopted recent technology changes quickly but the luxury segment was slow to grasp it. This was a clear disadvantage to the luxury industry that relied heavily on bookings from agents, and telecommunications. In 2002, Four Seasons hired MICROS systems to consolidate all customer records and help them link the properties systems. The development of new luxury properties was sure to slow down drastically in an economic downturn.
This made expansion a harder proposition. It would cost luxury hotels nearly 375,000 dollars per room to expand with a new building as opposed to the 48,900 dollars per room for middle market hotels. Due to this drastic cost difference, luxury hotels had to rely on developing there existing assets which is “very difficult” to the case studies point. Hotel Management VS real-estate Ownership In order to discuss why the Four Seasons became a management company, we must first understand how it was accomplished. In 1974, cost overruns nearly led the company into bankruptcy.
As a result, the company began shifting to its current, management-only business model and eliminate costs associated with buying land and buildings and instead begin earning profits through managing them. The recent economic downturns such as the September 11th disaster forced the company to sell its shares to majority stockholders such as the Saudi Arabian Prince who bought 176 million dollars in shares. After that point, Four Seasons got into the market of managing properties as they acquired hotels such as Regent and many others.
This is when Four Seasons started to manager their properties. It operates them on behalf of real estate owners and developers. The contracts between Four Seasons and property owners typically permits the company to participate in the design of the property and run it with nearly total control over every aspect of the operation. Four Seasons generally earns 3 percent of the gross income and approximately 5 percent of profits from the properties it operates, and the property owners are required to additionally contribute money for chain-wide sales, marketing and reservations systems.
Four Seasons hotels have larger staffs than competing chains, therefore they create separate reserve accounts to cover upkeep costs. While profit margins are relatively low, the reputation of the brand and the value of the hotel for sale as well as loan collateral generate developer interest. Lets look at some figures from the table on page 29 to understand why they chose to be a management company. From 1998 to 2000, ownership operations produced a positive income of 9,000, 8,000 and 13,000.
Although the numbers are positive, they are a minuscule number in comparison to the profits of the management operations, which were 79,000, 89,000 and 125,000 for those years. If we look ahead to the years 2001 and 2002, you will notice that the ownership operations actually yielded a loss for both years of (10,000) and (19,000). These numbers are in congruence with the expected economic downturn that occurred at that time that affected all hotels. This is why Four Seasons made the move to managing hotels.
If we pull up the management operations profit figures, we notice that for year 2001 they earned 95,000 and in 2002 they earned 82,000. Although it’s less then the year’s prior, we can clearly see the difference in profits, even with a management fees and royalties earned of 3 to 5 %. Average revenue streams and the interpretation of net earnings and cash from operations Average revenue per property: Worldwide $52,173 x 365 = $19,143,145 United States $67,808 x 365 = $24,749,920 Europe/Middle east $44,572 x 365 = $16,268,780 Net income: 1999 $86,479
2001 $86,486 2002 $21,231 Cash used in operations: 1999 $106,787 2001 $75,510 2002 $41,673 Calculation of difference between the tow measures: Year 1999 ($20,308) Year 2001 $10,976 Year 2002 ($20,532) In the year 1999, Four Seasons showed a positive growth in their net earnings statement coming in around 86,000. The issue here is that the cash used in operations exceeded the amount that was profit, leaving a negative number. The same applies for year 2002. However, in 2001, it shows that the net profits were still higher than cashed used in operations.
This pattern does not directly correlate to overall business decline, but just a difference in how the money is being received throughout Four Seasons. Operating cash flow is the lifeblood of a company and the most important barometer that investors have. Although many investors gravitate toward net income, operating cash flow is a better metric of a company's financial health for two main reasons. First, cash flow is harder to manipulate under GAAP than net income. Second, "cash is king" and a company that does not generate cash over the long term is on its deathbed.
Calculations of profit margins, ROA, and ROE and the 5 year trend 1998-2002 Year 1998 1999 2000 2001 2002 Net Profit Margin 28. 02% 31. 16% 29. 66% 28. 53% 7. 46% ROA 12. 79% 10. 39% 10. 47% 8. 82% 2. 19% ROE 12. 79% 10. 39% 10. 47% 8. 82% 2. 19% From the above calculations, we can make some educated inferences as to the direction that the company is headed. We can see that the Net profits are steady and then take a severe plunge. This is probably due the September 11th occurrence (which also leads to consumer shock and uncertainty). Nonetheless, it’s frightening to see your margins fall that low.
On the flip side, we can see that the ROA and the ROE are identical. First of all this means the Four Seasons did a great job managing their debt to equity. Research indicates that if your ROA equals the ROE, then your company has no debt. This was accomplished when Four Seasons decided to become private again and sell its shares to rich investors. This also was a testament to their willingness to change amid a vastly adapting service industry. They had to create a niche in the management field and shy away from the real estate norm.
The direction that the company will head in the next 5 years will also involve much of what they already did, and that is adapt to change. The calculations and all the research through this case study suggests that its getting harder and harder to attain the same cash flows by doing the same activity. A new platform will have to change the way Four seasons captures new business, and secures its returning business for more profits than ever before. The platform is consumer technology platforms. With time, the luxury consumer will become happier, but also more discerning.
Customization on a customer-by-customer basis will be important. Creating a digital experience on the web will heavily increase traffic. Most important of all points will be the age of social media networking. Companies like facebook are starting to pop up in this 5 year trend forecast, and being the front runner in this technology will create a digital media universe at the their disposal. The mobile revolution is also on the horizon in this forecast, so having your company prepared for this will undoubtedly help your profits, ROA, and ROE.
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