Ritz carlton case study solution

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________________________________________________________________________________________________________________ Senior Lecturer Sandra J. Sucher and Research Associate Stacy E. McManus prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

S A N D R A J . S U C H E R

S T A C Y E . M C M A N U S

The Ritz-Carlton Hotel Company

The Master said, Govern the people by regulations, keep order among them by chastisements, and they will flee from you, and lose all self-respect. Govern them by moral force, keep order among them by ritual, and they will keep their self-respect and come to you of their own accord.

— The Analects of Confucius

James McBride, general manager of the new Ritz-Carlton in Washington, D.C., faced the largest

challenge of his successful career. A proven veteran of the luxury hotel chain’s march across Asia, McBride’s most recent assignment was as the general manager of the 248-room Ritz-Carlton in Kuala Lumpur. Opened in 1998, the hotel was named “Best Hotel in Asia-Pacific” in the eighth Business Traveler Asia/Pacific magazine Travel Awards Subscribers’ Survey and, for two consecutive years, “Best Business Hotel in Malaysia” by Business Asia and Bloomberg Television.1 As Nikheel Advani, food and beverage services director for the Washington hotel, noted: “James is excellent—we have opened many hotels together. In the place where you didn’t think that it had a chance, he made it the best hotel. That’s his talent. That’s what he can do really well. It’s for the entrepreneurial person who wants to get involved and who thinks they can make a difference.”

But this was a new situation, even for McBride. For the first time, The Ritz-Carlton was opening a hotel that was part of a multi-use facility. Owned by Millennium Partners and located in the historic Foggy Bottom district of Washington, D.C., the $225 million “hospitality complex” covered two-and- a-half acres and included 162 luxury condominiums, a 100,000 square-foot Sports Club/LA, a Splash Spa, three restaurants, 40,000 square feet of street-level restaurants and retail shops featuring the latest designs from Italy and other countries, as well as the 300-room hotel. While The Ritz-Carlton had already signed contracts to manage five other hotels for Millennium Partners, the upscale property developers had also inked deals with the Ritz’s foremost competitor—the Four Seasons. Brian Collins, manager of hotels for Millennium Partners, had his own ideas about what constituted luxury service and how the hotel’s general manager should approach the new-hotel opening. Under pressure from Collins, McBride was reexamining the “Seven Day Countdown,” a hallmark of The Ritz-Carlton’s well-defined hotel-opening process. Any changes McBride made could not only affect his company’s future relationship with Millennium Partners but also the carefully guarded Ritz- Carlton brand.

1 The Mystique: The Ritz-Carlton Hotel Company, L.L.C. Employee Newsletter, Winter 2000.

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The Ritz-Carlton History

In 1898, Cesar Ritz saw his dream come true. Having left behind his life as a shepherd in Switzerland, he moved to Paris where he worked in some of the finest hotels and restaurants in the city before finally opening the grand hotel that bears his name. One year later, he opened London’s Carlton Hotel, setting the stage for what would ultimately become The Ritz-Carlton Hotel Company.

Relying on the famous hotelier’s vision of excellent personalized service that satisfied the most discerning guests, The Ritz-Carlton expanded to North America. One Great Depression and two world wars later, many of the luxurious hotels had folded. By 1983, when the Atlanta-based Johnson Company bought the North American rights to The Ritz-Carlton name, only the hotel in Boston had survived, thanks to the largesse of a wealthy property owner. From 1983 until 1997, The Ritz-Carlton expanded domestically and internationally under the Johnson Company’s ownership.

In 1997, Marriott International purchased The Ritz-Carlton, which operated as a wholly owned subsidiary. By the end of 2000, The Ritz-Carlton was primarily a management company operating 38 hotels and resorts across the globe (see Exhibit 1 for comparisons between The Ritz-Carlton and Four Seasons), with minority equity stakes in 10 properties and outright ownership of 3 hotels. The primary growth strategy for The Ritz-Carlton was to obtain management contracts for new hotels and resorts around the world (see Figure A).

Figure A Ritz-Carlton New-Hotel and Resort Openings Since 1983

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Source: Company. Number of openings represent only those that remained under the management of The Ritz-Carlton Hotel Company through 2000.

Millennium Partners Overview

Millennium Partners was a New York-based real estate development group founded in 1990 by Christopher Jeffries, Philip Aarons, and Philip Lovett. The principals initially set out to create high- end luxury apartments that would command premium prices from wealthy individuals looking for second or third homes in world-class cities. Millennium’s Lincoln Square four-building complex in New York City was their first project, setting the tone for future developments. The address for celebrities such as Regis Philbin and Rosie O’Donnell also included the renowned Reebok Sports Club/NY, as well as the highest-grossing theater complex in the United States—Sony’s 12-screen Lincoln Square multiplex.

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Brian Collins joined Millennium Partners Management in December 1996 as their CFO, subsequently becoming the COO and a partner, as well as a principal and the president of Millennium Hospitality Partners. Collins explained how they came to be hotel owners:

We are residential developers who ended up in the hotel business. It was not our intention to end up owning eight hotels, which is what we have under construction today—six Ritz- Carltons and two Four Seasons. Our intention was to create a base for our luxury apartments. Our vision is that apartments sell for a substantial premium if they have height, light, and views. The trick then was what to create below those apartments, which is both economical and adds to the residential experience, which also lifts it up in the air. So you try to do it with the best theater company, one who understands our vision. Then we’re starting on the third floor. And you try to do it with a Sports Club. Their box, their basketball court, is about 29 feet, and that’s another three stories. So if we do nothing else but have those two, we’re 60 feet in the air. Washington’s a bad example, because we have a 110-foot height limit. In San Francisco, the hotel is 13 stories, so the apartments are starting maybe 250 feet up in the air. And now you don’t have any apartments that don’t have height, light, and views.

The other thing that helps sell residential properties is services. We said “Well, how can we solve this service problem? How do we convince people that they’re going to get great, great, great service?” And Chris Jeffries hit on the idea of a luxury hotel. At the high end of the market, there’s really two choices: Ritz-Carlton and Four Seasons. Ritz and Four Seasons are clearly the best hotel operators. So we’ve approached both, and we’re doing deals with both.

Business Model

Millennium Partners was one of the several hotel owners for whom The Ritz-Carlton managed properties. The Ritz-Carlton charged management fees that were typically 3% of gross revenues, augmenting their income stream with revenues from land rent, resort timesharing, franchise fees, management incentives, and profit sharing.2 While there were many independently owned and operated luxury hotels around the world, The Ritz-Carlton and Four Seasons were the two most internationally recognized chains serving the highest end of the market.

Two key indicators of success in the hotel industry were the average daily rate (ADR) and the revenue per available room (RevPAR; see Exhibit 2). While the ADR was bounded on the upper end by what the local markets would bear, RevPAR was influenced by both ADR and occupancy rates. Filling hotel rooms was crucial, and The Ritz-Carlton’s general managers aggressively pursued their two main customer groups: (1) independent travelers, and (2) meeting event planners.