After nearly 20 years in the hospitality industry, Wyndham Worldwide chairman and CEO Stephen Holmes says he has seen several "shifts" -- from the way that consumers plan their vacations to what they expect to find when they stay at a hotel. The most recent catalyst for change has been the global economic downturn. Wyndham -- one of the world's largest hospitality companies with more than 55 brands in 100 countries -- has weathered that storm, and has actually grown since the recession began. In an interview with Knowledge@Wharton, Holmes discusses what changes he has witnessed in the industry, why timeshares have done surprisingly well during the downturn and what makes his stay at a hotel a happy one.
An edited transcript of the conversation follows.
Knowledge@Wharton: Steve, could you briefly describe the scope of Wyndham Worldwide in terms of the brands and the global nature of the organization?
Stephen Holmes: There are three business units within Wyndham Worldwide. In the hotel business, we franchise and manage hotels and now have 13 brands that fall under that umbrella -- brands like Wyndham, of course, but Days Inn, Super 8, Howard Johnson, Ramada. I could go on and on. We don't own any hotels. We franchise or manage them and take a management fee. That is one of what we call fee-for-service businesses.
The second business unit is called Wyndham Vacation Exchange & Rentals. We have the largest timeshare exchange company. If you own a timeshare in Myrtle Beach [in South Carolina] and you want to go to Hawaii, you might do that exchange through [us]. In that business unit, we also have the largest European rental operation where we rent villas, cottages and homes throughout Europe to consumers. Again, in both those businesses, we don't own any assets other than the systems to run them. They also are fee-for-service businesses.
Our third business is Wyndham Vacation Ownership. That is the more traditional timeshare business, in which you build or develop timeshare units, market them, sell them to consumers and provide financing for the purchase.... Then we manage the resorts as well.
Knowledge@Wharton: That's a fairly large operation.
Holmes: Yes. It is global. All three businesses operate globally.
Knowledge@Wharton: I was going to ask you how the recession has impacted your business, but maybe we should break that down into three parts because I suspect that the different aspects of your business have been affected differently. Is that correct?
Holmes: That is the right way to word it because the three businesses were impacted differently. The business impacted the most was our hotel business, which one might think would be the most stable because there are no assets involved. It's just a fee-for-service business. But it is dependent on hotel occupancy and rates, so it faces a direct impact from economic uncertainty.
The timeshare business, which many people think would have been very impacted because consumers might be pulling back and spending less money to buy timeshares, performed exceedingly well. Our efficiencies were up, which means we were selling more to the people who came to visit us.
The exchange and rental business also performed very well during the recession. Our earnings were actually up from 2008 to 2009 in that business, which probably is the only business in the hospitality sector that increased year over year from 2008 to 2009. Fortunately, our business was not as impacted nearly as much as some of our competitors were.
Knowledge@Wharton: To what would you attribute the up-tick in timeshare purchases?
Holmes: I don't know whether I can give you a quick, off-the-cuff answer. There are a number of reasons why the performance was enhanced. For example, we did [reduce] the overall sales [resourcing] of that business because the financing market -- the asset-backed market where we take our paper ... was soft. When we did that, we eliminated the weaker performing offices. They were all making money, but we took out the ones that weren't making as much money. The absence of the lower level raised the entire tide.
Another reason would be that because there was so much uncertainty in the marketplace [and people were wondering] "What's my future going to look like?," consumers may have been a little turned on to, "I wouldn't mind having my vacations assured. If I don't know where the rest of the world is going, maybe for $12,000 a year, I can at least know that I am going to be able to go on vacation. For the $12,000 purchase of a timeshare, I know I can go on vacation every year in the future and my family will have a family vacation," which is a very important part of American culture. There are some psychological and sociological reasons impacting that movement as well.
Knowledge@Wharton: In the meantime, you can't have empty hotels. What was your strategy to increase occupancy rates during this time?
Holmes: All hotels saw a decrease in occupancy during the downturn. The ones that saw the biggest hit were large, urban hotels -- in Philly, New York, Los Angeles or Chicago -- because business travel slowed more dramatically than leisure travel did. You're still going to go visit Aunt Ruth and stay at a Super 8 along the way, but you may cut down the number of trips you take. But your business travel probably fell off more dramatically.
Again, we weren't hit as hard because of where we are. We are largely leisure. We are mid-scale economy. We are not in the luxury top end, which also got hit harder. Occupancy at the hotels we franchise didn't dip as much as other levels did. What did we do to try to keep it from dipping further? You just get creative with marketing. You try to encourage franchisees to show some discipline on rates.
Maybe I should step back for just a minute. After 9/11, there was a really sharp decline in hotel occupancy. People just weren't getting on planes. People weren't traveling. The reaction at that time in the hotel industry was for everybody to cut rates, saying, "I want to keep my hotel full.I'll just basically give [rooms] away." That was a big mistake for the industry because they fought for years to get rates back up. Once they had discounted it so dramatically, consumers started saying, "I just stayed here last week for $100.Why is it $200 this week?" The industry as a whole showed a lot more discipline this time. It didn't drop rates. It tried to hold rates, then lost occupancy and rates came down. But it wasn't that falling off the cliff like it was after 9/11. The industry responded much better to this downturn than it did to the shockwave following 9/11 in 2001.
Knowledge@Wharton: If you had to give me a profile of your average customer, what would it be?
Holmes: It wouldn't be a business traveler. It would be more of a leisure traveler. We have profiles of what a traveler looks like for each one of our brands. The predominant [customers] would probably be categorized as road warriors. They are business people, but they're not business people carrying an American Express card. It's people paying with their own Visa because they're traveling for their own business. They're entrepreneurs. They are staying at Super 8s, because they can get good value and are saving money. Then there are the adventure seekers, people who want to see the world and are staying at our hotels as they drive through Nebraska.
Knowledge@Wharton: Have you seen their needs change over the time that you have been with Wyndham?
Holmes: Yes, I have. I have been in this industry for about 20 years and the industry as a whole has what's known as a seven-year cycle. Every seven years, occupancy gets better and then tends to hit a trough but comes back. The industry is cyclical.I've seen a few of those cycles. I've also seen shifts. The greatest shifts relate to how people plan their vacations. They plan much closer to the date of travel than they used to. The booking window used to be fairly long. You would plan your vacation six months in advance. Now, with the Internet and access to information, people are waiting and waiting and planning much closer to the date of travel.
Another shift would be the sociology of who is traveling. You see more families traveling together -- intergenerational travel has become much more popular. Grandparents are traveling with their kids and grandchildren. The trend that has been in place in Europe for some time is now coming to the U.S. Europe has what I consider to be a more mature travel market than the U.S. and the U.S. is growing to that model.
Knowledge@Wharton: Would you say that travel in Europe was also impacted by the recession? Have you seen changes there?
Holmes: Yes, definitely. There were changes. Our rental businesses did very well, but in the hotel side, there definitely were changes. It was kind of the same thing that you saw in the U.S. Business travel was down more dramatically. One of the differences in Europe is economies like Germany -- Germany is the largest travel market -- more people travel out of Europe than the U.S. or any other country. And the German economy had not been a vibrant travel market for quite a while. The general global economic shakeout didn't impact the German economy as much because it was already pretty low. When you're already [close to] the ground, you don't fall as far. Clearly the southern European markets were hurt more than the northern European markets for a variety of reasons.
Knowledge@Wharton: In the hotel business, is there a difference in strategy for gaining market share in the U.S. as opposed to Europe?
Holmes: Not really. But Europe has much less new construction. If you have a market that has 15 hotels, it may very well be all the hotels you are going to have in that market. It's tough to construct [new hotels] because the infrastructure is older than in the U.S. and sections of Europe are more densely populated. You don't have new markets opening like you do in the U.S. You do have new markets in Asia and the Middle East, but Europe is a tighter market so gaining market share is more about taking product from a competitor.
Knowledge@Wharton: Let's also look in more detail at strategy. How have rooms changed? What have you had to build into rooms to keep people coming back? Have you had to modify things a lot given changes in technology, for example?
Holmes: Sure. It used to be that a hotel room was a hotel room, just a place you stay in. There was a bed, a pillow, a TV usually, maybe a phone and a desk. That was it. Go back about 15 or 20 years and there was a kind of an arms race. Starwood brought out the Heavenly Bed [with features like more pillows and high-quality blankets], so everybody had to compete to make the bed better. There have been a number of other innovations. So there has been a movement toward making it a more comfortable environment. The room is not just utilitarian. It is comfort as well.
On the technology side, consumers now demand Internet. They need to have high-speed Internet access and many people decide where they are going to stay based on that access. You have different requirements or demands from consumers with respect to meal service. People want to have breakfast that they can grab on the go, a quick something to take with them on the trip, and they want it to be included in the price of their room. They want to have access to a fitness facility. There have been a lot of changes to hotels over the years.
Knowledge@Wharton: As someone who probably stays in a lot of hotel rooms, how do you critique a room when you enter it? What do you look for personally?
Holmes: I do stay in a lot of hotels and I start a critique the minute I drive up to a hotel. I look at the appearance of the hotel. I'm a pretty critical customer at walk-in.
Knowledge@Wharton: What would you look for?
Holmes: I look for the appearance of the hotel -- how inviting it is. I key in on how courteous the staff is. Do they try to greet you? When they say your name once, do they remember it and come back with it? How do they interact with you? Do they make sure all your needs are taken care of before you even head to the room? A large impression you have of a hotel is that first impression and experience when you arrive. Then when you get to the room, it has to be clean.It has to be comfortable. You can't walk into something that you are uncomfortable with because it doesn't have the safety or cleanliness one wants. I am pretty simple, so I don't need a lot of frills in a hotel room. But I want it to be clean and comfortable. I want the amenities that I need to be there -- the shampoo or whatever little things to help make the experience more comfortable.
Knowledge@Wharton: I notice that you have a special program for women. Are there other ways Wyndham makes sure that travelers are greeted with the experience you just articulated?
Holmes: Yes. We have loyalty programs and one of them is the Wyndham Rewards program. If you are staying at a Wyndham hotel and are a Rewards member, we have a file on you. You might say, "What I want in my room when I arrive are peanut M&Ms and water, and those will be in your room, so that when you are traveling, you don't have to stop and think, "I want to get a bottle of water before I get there." It's going to be there for you.
Women on their Way is a program that Wyndham ... has had for probably 15 years if not more. It was the first program to emphasize the different issues women have when they travel versus what men have. Women tend to have more issues with security and thinking, "I don't want to park far away in a parking lot and have to walk across it at night to get to the hotel." There are issues that Women on their Way really addressed in a meaningful way 15 or 20 years ago and continues to address -- addressing working mothers, who are traveling and how they deal with it and how they deal with social media when they are on the road.
Knowledge@Wharton: Do you place special emphasis on customer service or any sort of programs internally to help keep occupancy high? In other words, have you had to implement internal strategies to beef up customer service over the course of the past few years in light of the economy?
Holmes: We have, but I think it was coincidental because we launched it before 2007, before things started really getting rough. We had launched something called Count on Me, which is our rallying cry for service -- to be responsive to your needs, be respectful and deliver a great experience. Those are our three pillars of Count on Me.
Service is critically important. Like I said, the impression you get from the person at the front desk or the person who cleans the rooms walking down the hall. Do they greet you? Do they look you in the eye? Do they say good morning to you? That's very important. That leaves you with an impression of how much people care about you in the facility.
Knowledge@Wharton: Recently, you made an acquisition of ResortQuest International. Can you explain the strategy behind that? M&A is slowly picking up, but still unusual.
Holmes: Sure. Actually, it's the third acquisition we have done since this downturn. In difficult times, opportunities often present themselves and this was a perfect example of it. We bought a European rental company and a European hotel brand called Trip in the last year. ResortQuest is a company that has been around for about 15 years. It is in the rental business, which is aligned with our exchange and rental company, but it is U.S. rental. The difference between ResortQuest and other rental companies in the U.S. is ResortQuest is a full-service provider. So they will -- we will -- we closed the acquisition today, about three hours ago -- make sure that your experience on a rental is very good. You are not just going online and risking that the product you see online is actually going to be there. We will make sure that your experience is good and if it's not for some reason, we will make it right, which you can't get if you just go online to a listing service and say, "I'll pick that vacation home and hope it's the one in the picture."
It's the model we have in Europe. The margin is a little bit lower, but it's a very sustainable model. It builds a lot of loyalty. Our brands in Europe are extremely well known in the markets they are in, whether it is Holland, Denmark or the U.K., because there is a service culture. There is more service involved than with just a simple listing service. Because of that, it builds loyalty.
ResortQuest is the largest one in the U.S. doing that. It is very small, which means it is probably the best platform from which to grow in the U.S.'s $10 billion rental business, which is not really well organized. We think it is a terrific opportunity.
Knowledge@Wharton: How much has Internet travel impacted how you run things? Is there a huge emphasis now on your online presence?
Holmes: Without a doubt, yes. The Internet has changed the way people book hotel rooms. You don't call Days Inn any more. You click DaysInn.com. Even within the Internet, there has been a number of changes in the way the model functions. It went from being what we call "brand.com" to the OTAs -- the online travel agencies, like Expedia and Orbitz -- taking a huge part of market share for a while. Now, it has swept back a little bit to the brand.com model. There have been shifts in the whole way people book and travel. We think it's great because it's putting more control in the hands of consumers to make the decision about where they want to go versus passing the decision off to somebody else, whether a call center or travel agent.
Knowledge@Wharton: How does Wyndham, for instance, compete with an Orbitz? How do you lure a customer to your site as opposed to a broker?
Holmes: We don't compete with them. They are partners of ours. We work with them. But we market the Days Inn website separately. We market Wyndham separately. So people come to our brands and we offer a best-rate guarantee, just like the airlines. You know when you book an airline ticket through United, you are getting the cheapest ticket it will sell for that seat. That's the claim and the same claim at hotels.
Knowledge@Wharton: If you look ahead five years, what is it that keeps you awake at night?
Holmes: When asked that question before, I used to say to that I slept well and nothing really bothered me. I still do sleep very well. I'm not one to worry all night about things. But this last recession -- this shake out of the capital markets -- is something I never experienced before and no one who is 53 years old has. The fact is that the industry was hit much harder than anybody ever really expected because of the freezing of the capital markets and the flow of liquidity around the world. Hotels weren't bought and sold because there was no capital flowing.
Consumers weren't traveling because they felt poor and looked at their 401(k)s and said, "We don't have anything to retire on. We better save more money." It definitely changed the way people thought and traveled. It has changed the way people will make decisions for quite some time. The excesses that maybe we saw pre-2007 are going to be trimmed back for a very long time. It is a shift in the way people think about travel. If I worry about anything, it's about how stable are our and the global capital markets -- how much will they be impacted by events and the way bankers think about lending money or consumers think about saving or spending money? Nothing in the hotel industry keeps me awake or nothing in any of our other businesses keep me awake at night because we've got great business models and I've got phenomenal people running those businesses. I don't really worry about those. I think more about the external factors.
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