The business-casual dress code had Troy Freeman stumped. As the longtime CEO of Otto Hotels & Resorts, now the second-largest lodging company in the world, he’d packed for hundreds of work trips before, but without suits as an option, he was having a much harder time.
His flight was leaving first thing in the morning for Carmel, where he would meet his newly expanded executive team for an off-site to discuss the company’s portfolio strategy. The facilitator, Caroline Dvorjak, was a marketing professor and a seasoned consultant.
Otto had just finished a $9 billion acquisition of Beekman Hotels, which meant it now had nearly 4,800 hotels and slightly more than a million rooms in 100 countries.1 Like most of the big hoteliers, however, Otto owned few of those properties; instead it franchised and managed them, with the bulk of the real estate owned by independent companies that licensed Otto’s brands. The addition of Beekman’s eight brands had increased the number now under Otto’s umbrella to 21. The question on everyone’s mind, especially investors’, was how Troy would manage this much larger portfolio,2 given the overlap between existing and acquired brands in terms of positioning, price tier, and geography.
During the deal discussions, Otto’s board had encouraged Troy to remain noncommittal about the company’s postmerger strategy. He’d once commented on an earnings call that Otto “probably” didn’t need all the brands but had quickly added that it had no plans to prune soon. Still, people were speculating, and now, with the acquisition work behind them, it was time for management to make some decisions.
Troy shooed his dog, Tanker, off the bed so that he could take a look at the clothes he’d laid out. “Too much here, Tank,” he said aloud. Then he laughed. He needed to streamline his wardrobe to attend a meeting where he would work out how to do the same with Otto’s brands.3
In an eloquent argument for retaining all 21 brands, she referred to the Four Seasons and Regent merger. She said it was possible for each Otto brand to stay in its own “swim lane.” Changes would be costly, and Otto could deliver on the promises of the merger without them. She and her team projected $200 million in annual cost savings; greater negotiating power with online travel agencies such as Expedia and Priceline; and the ability to boost both revenue, by cross-selling brands, and occupancy rates, by leveraging a larger reservations system—no pruning necessary.
And yet she seemed to be in the minority in this debate. Kent Brockman, Otto’s CMO, and Khalil Salem, the brand manager for Piper, Otto’s largest and most profitable brand,4 had sent statements supporting a shake-up a few hours earlier.
Troy sat on the bed, and the dog jumped up. “Whaddaya think, Tank?” Troy asked. “Can I fit everything?”
Tanker wagged his tail, and Troy folded all the polos, khakis, and blazers into his suitcase.
A Bigger Bucket
As soon as Troy passed through security the next morning, he saw Kent and Khalil in the line at Starbucks. He hadn’t realized they were on his flight but was pleasantly surprised. They waved him over, and Khalil pointed to his phone. “Did you do your homework?” he said, teasing. “We didn’t get your statement.”
“I think we have enough opinions to go around,” Troy replied, “so I’m still Switzerland—at least for now.”
Khalil and Kent had been close allies ever since Khalil’s ascension to the top of Piper, five years earlier. When Caroline had mentioned wanting to avoid politicking, Troy had immediately thought of these two. They’d always seen the acquisition as a way to grow Otto’s existing brands.
“I guess you know where we all stand anyway,” Kent said. “Meena wants to save costs. Rick and the other Beekman folks want to save their brands.” He was referring to Rick Guerrero, the manager for Evenstar, Beekman’s largest chain, which had the most overlap with Piper5 and was therefore a target for absorption. Rick had indeed defended his brand but also said he would be willing to take a step down and work for Khalil and Piper if that’s what it came to.
“But,” Kent continued, “Meena’s Four Seasons analogy doesn’t really hold water. Regent played in the same price tier but in entirely different geographies. The situation wasn’t nearly as complex as ours. And it did rebrand as Four Seasons over time.”
Khalil jumped in. “For me, it’s really a resource question. Right now we’re putting our resources into 21 different buckets. What if we put them into just 15—or 10? We’d be able to do a lot more with the successful brands.”
“Or do you just want a bigger bucket?”6 Troy asked, smiling.
“Yes, of course I do. But I swear this isn’t just about Piper. It’s about all of Otto. If you look at how most of Beekman’s brands are doing, it isn’t pretty. If we bring them in as is, they’ll dilute the portfolio. It’s time to put them out of their misery.”
“And give you their properties?” Troy asked. He was getting annoyed. Otto wouldn’t have acquired Beekman to get a collection of sorry, underperforming brands.
“Yes, exactly! Or we can sell Beekman’s weaker brands and use the money to support the stronger ones.”
“That’s possible,” said Troy, trying to keep his voice measured, “but what if the new owners compete with us and steal market share?”
Kent seemed to sense Troy’s irritation and piped up: “I don’t think either of us would argue that we should get rid of all Beekman’s brands, right?” Khalil nodded. “They have some good flags.7 It’s just too difficult to manage that many. ‘Swim lanes’ might make sense from a financial standpoint but not in the eyes of our customers. Our research shows that most people don’t distinguish between brands. Piper or Evenstar—it’s all the same to them.”
“OK,” Troy said, “let’s wrap up the lobbying efforts for now. We can debate this with the group later. I’m going to get a coffee and read the Journal.”
Khalil clearly had more to say, but he took the hint.
The seats people chose at the conference table reflected where they stood on the portfolio issue. The Beekman managers were all on one side. They had a personal stake in the decision, of course—they wanted to keep their jobs—but they’d also made good business cases against pruning, arguing that it would cut off consequential income streams. Meena sat with them, right next to Rick.
On the other side were Kent, Khalil, other managers from Otto, and Anita Dineen, its COO, who supported streamlining to simplify her team’s job.
Caroline kicked off the meeting by asking people to summarize some of their main points while she wrote keywords on a whiteboard.
“We need a brand architecture that isn’t confusing to customers, hotel owners, or even our own employees,” said Anita. “What we’ve got is a mess.”
“What we’ve got is scale, which is exactly what we wanted from this deal,” Meena responded. “But I’m glad you brought up owners. We haven’t yet talked about the impact on them.” Rick and his colleagues nodded, and Caroline encouraged her to elaborate. “There are only so many places we can open another Piper,” Meena said. In some cases, Otto had given owners of Piper hotels exclusive rights to certain markets, and those contracts prevented it from flying another Piper flag in those areas.
Rick spoke up. “Yes, we’ve heard from lots of nervous owners. If we discontinue the Evenstar brand,8 they might discontinue their affiliation with us and defect to Hilton, or another competitor. We will lose properties.”
The room was quiet for a moment. Everyone knew this was a sore point for Troy and the board. The reason for buying Beekman was to scale quickly, and losing hotels would defeat that purpose. Otto needed to retain as many properties as possible.
“I think owners will be clamoring to stay,” Kent countered. “They’ll save on procurement, reservations, and agency fees and, ultimately, have greater pricing power, because we control much of the room inventory in their markets.”
“Those are the upsides we’ve touted, but we haven’t realized them yet,” Meena said.
“It’s early,” Troy said.
“OK then, let’s talk about the stock price,” she continued. “The latest research shows that in most situations, portfolio slimming hurts value.”
“But investors have responded incredibly well to the purchase,” Kent said. Indeed, the sector was up 80% since the close of the deal, with Otto leading the way. “They’re clearly not concerned about consolidation.”
“Right,” Khalil added. “Besides, those are consumer packaged goods studies—totally different scenario.”
“I wouldn’t say it’s irrelevant, though,” Caroline said, stepping into the fray. “We should learn from other industries.9 That said, there’s evidence to support both sides here: cases indicating that it’s a huge mistake to eliminate brands worth millions of dollars and ones showing that when you try to run a portfolio as big and overlapping as yours, it inevitably leads to failure. The research won’t make the decision for you.”
“I guess we knew that,” Troy said.
“One thing the research shows for sure, though, is that it’s better to make a decision soon,” Caroline continued. “Investors are waiting to see where you go with this, and you have a passionate team”—this prompted laughter—“that needs its marching orders.”
They all nodded, but Troy wondered if everyone would support whatever call he made.
“So,” Kent said. “Are you still Switzerland? Or are you ready to take a stand?”
The Experts RespondQuestion: Should Otto keep all 21 of its brands or prune its portfolio?
OTTO HAS NO need to trim its brand portfolio. In fact, having such a large and diverse collection of brands will only benefit the company, by allowing it to dominate the market in both big cities and small towns. The sum of the 21 flags is greater than the parts: having additional brands is going to provide even more value than will the rooms and properties that Otto acquired from Beekman.
Hotel distribution is one of the key strategies that help a lodging company like Otto win. Only a limited number of hotels can be in any given market, and having more properties increases the chances that a consumer will choose to stay at one of yours. If a Piper already exists in a particular city or at a highway exit, the company can work with its existing owners in that area to add an Evenstar. Why would you stand by and watch a competitor build there? Or, even worse, why would you alienate existing hotel owners and force them to go to one of your competitors?
The same logic applies to consumers’ online shopping experience. The more Otto brands that show up in a user’s search results on a site like Expedia or in a corporate booking system, the better the chances that the shopper will pick one of them. Consider how consumer packaged goods companies think about grocery store shelf space: You want to maximize the number of your brands that people see.
I don’t buy the swim lane analogy. Sure, brands shouldn’t be crashing into one another, but this is more like synchronized swimming. If Piper and Evenstar are similar, figure out what makes them distinctive—create a little space between them so that you can have two brands your customers love.
After the merger is complete, Otto should focus on giving each brand its own niche. I believe in the power of brands and that people can be loyal to many of them at once. But Troy and his team must also remember that for many consumers, hotels are a commodity buy; those people won’t care whether they’re staying at a Piper or an Evenstar if the price is right.
Wyndham has 20 hotel brands, and rather than collapsing them, the company thinks about how to make them appeal to different types of consumers. The hotel group also tries to have as many properties as possible. If you’re driving up and down Interstate 95, we want you to see one of our hotels—a Days Inn, a Super 8, a Howard Johnson, or a Microtel—at every exit and on every corner of each intersection.
Having more hotels increases the odds that a consumer will choose one of yours.
Troy should worry less about creating confusion and more about creating a portfolio story and a loyalty program that clearly communicate to guests the benefits of spending their travel dollars with Otto. That will give consumers a reason to choose any of its brands over a competitor’s, even if it means paying a little more or driving a little farther.
Khalil, Kent, and Rick need to stop fighting internally over which brands are winners and which are losers. Instead they should learn to let all the brands coexist. It’s time to point the cannons outward, focusing on the competition. If they do that, they’ll all be better off.
I BELIEVE THAT Troy and his team should be coming at this problem in a different way. Instead of looking at the existing portfolio—which was probably cobbled together from smaller acquisitions over several decades—and deciding what to prune, they should take a blank sheet of paper, outline a new brand architecture that is informed by current customer needs, and then map the brands they have to that.
The size of this merger presents a perfect opportunity to reevaluate both the market and Otto’s business. Which consumer segments does the company want to serve? What do those people want from their hotel experience? That research should inform the development of a portfolio that addresses the broadest possible spectrum of end users, with a wide variety of price points (given its new size, Otto should operate at all levels: premium, mid-market, and low market), geographies (some brands will aim at global executive travelers, others at salespeople who do regional travel in the United States), and reasons to stay.
Each of the 21 brands then needs to define its reason for existing within this new structure. Does it mean something to its target customers that positively influences their purchasing decision? Or is it just a name above the door? The brands with the highest positive equity should be nurtured. Others can be repositioned without the risk of losing customers. And, of course, some should be dropped.
Minimizing overlap in the new portfolio is essential, so probably there will be fewer brands after this exercise. Several might end up as sub-brands of a flagship. But it doesn’t make sense to retain them all, because there’s little benefit to competing against yourself.
Otto needs a united portfolio that has fewer and more-valuable “flags.”
The brands remaining in the portfolio aren’t likely to get equal amounts of marketing investment. Otto will probably want to give the largest share of dollars to its premium brands (even if they don’t bring in the most revenue) so as to build a positive brand association in the minds of consumers. Managed correctly, this can still create a halo effect for its other brands.
When I joined Samsonite, soon after three private equity companies had bought the company, its portfolio included seven brands; we owned some outright, and others were licensed. Samsonite was the strongest in terms of consumer awareness, but people seemed to have trouble distinguishing it from American Tourister, another of our brands. We decided to make Samsonite more premium globally, which meant taking it out of retail outlets that sold the products at a lower price point. The U.S. sales team thought there would be backlash, and some stores did indeed talk about blacklisting American Tourister if they couldn’t get Samsonite. But it was the right move, because it increased Samsonite’s price point worldwide and, ultimately, the company’s value.
If brands are managed as individual fiefdoms, counterproductive infighting ensues. When I joined Waterford Wedgwood (now WWRD), for example, each brand had its own CEO, CFO, chief supply officer, and even section of the building—with different access cards! This is what Troy wants to avoid, perhaps by putting all the brands that address similar customers under one leadership team so that everyone will start working together.
Ultimately, Otto needs a united portfolio that has fewer and more-valuable “flags.” And Caroline is right that its leaders should act fast. Investors, hotel owners, and employees have to know what to expect from the newly merged company sooner rather than later.