Creating a value in Oversupplied Markets: The Case of Charlotesville, Vinia, Hotels

Cornell Hotel and Restaurant Administration Quarterly

Volumn 34, Issue 5, 1993, Pages 68-96

  Overstreet, George A ^a  

^a UNIVERSITY OF VIRGINIA   (United States)

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EID: 43949169346     PISSN: 00108804     EISSN: 15523853     Source Type: Journal    
DOI: 10.1177/001088049303400513     Document Type: Article

References (53)

1. For a cogent analysis of the factors leading to the supply glut in commercial real estate, including hotels, see Anthony Downs, “The Fundamental Shift in Real Estate Finance: From a Capital Surplus in the 1980s to a Capital Shortage in the 1990s,” Salomon Brothers, Bond Market Research, Real Estate, February 1991, pp. 1-19.
2. See: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: The Free Press, 1980)
3. Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985).
4. George A. Overstreet, Jr., “Profiles in Hotel Feasibility: A Case Study of Charlottesville,” The Cornell Hotel and Restaurant Administration Quarterly, 29, No. 4 (February 1989), pp. 8-19
5. and George A. Overstreet, Jr., “Profiles in Hotel Feasibility: The Consequences of Over-building,” The Cornell Hotel and Restaurant Administration Quarterly, 30, No. 1 (May 1989), pp. 10-18.
6. See, for example, the following: “Qualitative Methodology,” J. Van Maanen, ed., Administrative Science Quarterly, December 1979
7. M. Miles and M. Huberman, Qualitative Data Analysis (Beverly Hills, CA: Sage Publications, 1984)
8. G. Sjoberg, et al., “The Case Study Approach in Social Research,” in J. Feagin, et al., A Case for the Case Study (Chapel Hill, NC: University of North Carolina Press, 1991).
9. Treatment of the evolving convergence of financial management and corporate strategy is presented in: John Martin and John Kensinger, Managerial Finance, 14, No. 2-3 (1988), pp. 9-14.
10. Also see: Alfred Rappaport, Creating Shareholder Wealth: The New Standard of Business Performance (New York: The Free Press, 1986).
11. See, for example: Barbara Parker and Marilyn Helms, “Generic Strategies and Firm Performance in a Declining Industry,” Management International Review, 32, No. 1 (first quarter 1992), pp. 23-39.
12. The authors’ response rate for U.S. textile firms was 16 percent (48 returned questionnaires). The response of U.K. firms was lower (13 percent, 39 firms). The often-cited early study by Gregory G. Dess and Peter S. Davis—“Porters’ (1980) Generic Strategies as Determinants of Strategic Group Membership and Organizational Performance,” Academy of Management Journal, 27, No. 3 (September 1984), pp. 467-488—involved a sample of 22 closely held firms. Those two studies used self-reported return on assets and return on equity as their performance measures.
13. For that matter, individual unit results in all industries are available on a proprietary basis only. Not only is it difficult to obtain such data, it is even more difficult to get competitors in the same market to release such information for educational uses. Over time, my researchers and I have been able to review proprietary information from six of the nine hotels discussed. The estimated financial results for the other three players highlighted were reviewed by industry experts and cross-checked through interviews with hotel management.
14. See, for example, the following cases available from the author: The Riverview Hilton, The Charlottesville Sheraton, The Downtown Radisson, The Omni Hotel, The Hampton Inn, The South Street Inn, The Boars’ Head Inn, and The Keswick Inn and Country Club.
15. See: Pannell Kerr Forster, Trends in the Hotel Industry, U.S.A. Edition, 1991, pp. 1-123.
16. It is also testimony to the power of pro forma methodology to look behind the market data to competitor financial pressures and behavior.
17. See: Porter, 1980; and Porter, 1985. For a succinct summary of key concepts, see: Michael Porter, The Competitive Advantage of Nations (New York: Free Press, 1990), Chapter 2.
18. Financial theory is deeply rooted in the neoclassical theory of the firm. Porters’ use of the theory of the firm frame and language marks the movement of strategy literature toward that of finance.
19. See: G. Bennett Stewart III, Quest for Value: A Guide for Senior Managers (New York: Harper Collins, 1991), Chapter 8.
20. Porter, 1990, p. 37.
21. Porter, 1980, p. 40. In a 1985 survey, scholars ranked Porters’ work as second only to that of Alfred Chandler. See: Luis Calingo, “Environmental Determinants of Generic Competitive Strategies,” Human Relations, 42, No. 4 (1989), p. 354.
22. See William K. Hall, “Survival Strategies in a Hostile Environment,” Harvard Business Review, 58, No. 5 (Sept.-Oct. 1980), pp. 75-85.
23. Hall, p. 78.
24. See: Hall, pp. 75-85; and Charles W.L. Hill, “Differentiation Versus Low Cost or Differentiation and Low Cost: A Contingency Framework,” Academy of Management Review, 13, No. 3 (July 1988), pp. 401-412.
25. See: Aneel Karnani, “Generic Competitive Strategies—An Analytical Approach,” Strategic Management Journal, 5 (1984), pp. 367-379
26. Alan I. Murray, “A Contingency View of Porters’ Generic Strategies,” Academy of Management Review, 13, No. 3, pp. 390-400.
27. Porter, 1985, p. 11.
28. For example, see: Howard Rudnitsky, “Blood in the Suites,” Forbes, October 28, 1991, p. 28
29. Bernard Baumohl, “The Banks Are in Hotel Hell,” Time, May 27, 1991, p. 44.
30. Porter, 1980, Chapter 11.
31. Visitors to the Charlottesville-Albemarle Convention and Visitors Bureau were down 7 percent and visitors to Monticello were off 4 percent for the period. See: Charlottesville Daily Progress, Oct. 2, 1990, pp. A1, A12.
32. Market estimates for national lodging trends such as occupancy and daily rate are notoriously loose. Salomon Brothers, for example, has changed its index twice during the past four years.
33. In fact, the property never achieved an ADR approaching that of its rivals, despite initial upscale rack rates. Occupancy for the Sheraton was reported to be approximately 55 percent with a $50 ADR during 1987.
34. Similar industries include gas stations, fast-food outlets, and convenience stores, which are beginning to merge in some segments.
35. See: Overstreet, February 1969, pp. 8-19; and May 1989, pp. 10-18.
36. Overstreet, May 1989, p. 15.
37. Overstreet, May 1989, pp. 13-14.
38. Assuming an interest rate 200 basis points over the average often years of U.S. government bond rates.
39. Porter, 1985, p. 16.
40. Porter, 1985, p. 163.
41. Overstreet, May 1989, p. 18.
42. Charlottesville Daily Progress, Nov. 8, 1992, pp. A1, A8. Interviews with Charlottesville city manager Cole Hendrix and Omni manager Brian O’Day provided additional insights.
43. This assumes that the citys’ loan is a sunk cost. The cost of the hotel is shown in Exhibit 14 as $19.7 million because that is the depreciable base upon which the income statements are developed. The cash-flow analysis excludes this issue.
44. For background on the Courtyard concept, see: Jerry Wind, et al., “Courtyard by Marriott: Designing a Hotel Facility with Consumer-Based Marketing Models,” Interfaces, 19, No. 1 (January-February 1989), pp. 25-47.
45. Annual Report, Marriott Corp., p. 38, 1987.
46. The initial structure of the management fees that Marriott collects were as follows: a base management fee (3.5 percent of revenues), a Courtyard management fee (2.5 percent of revenues), an incentive fee (15 percent of operating profit increasing to 20 percent after the hotel is refinanced), a chain fee (2 percent of revenues), a ground-lease fee (to be determined by the partnership but up to a maximum of 8 percent of revenues), and a regional-management fee that is also flexible. For more details, see the private placement memorandum, Smith, Barney, Harris Upham and Co., for $147,000,000, Sept. 17, 1987.
47. As noted by Bruce Wardinski, director of project finance, Marriott Treasury, in a 1990 lecture.
48. Kristin Downey, “Pact Targets 97 Percent of Antonelli Assets,” Washington Post, March 3, 1992, pp. D1, D2.
49. Downey, D2.
50. Margo Vignola, “U.S. Lodging Industry: Value Reigns,” Salomon Brothers Equity Research Report, September 1992, p. 2.
51. The English Inn was the poorest-performing unit in the middle market in terms of market share and Revpar. It was not surprising to hear of the owners’ bankruptcy proceedings on March 29, 1993. The property had been on the market for over a year at the time. It would appear to have turnaround potential at the right price, given a strong franchise.
52. Lodging firms increasingly adopted such techniques during the 1980s, with 74 percent of the lodging chains using internal rate of return (IRR) and 55 percent using net present value (NPV). See: Raymond S. Schmidgall and James Damito, “Current Capital Budgeting Practices of Major Lodging Chains,” Real Estate Review, Winter 1990, p. 43.
53. Martin and Kensinger, p. 12.