COVER

EXPANDING TO THE BEACH

THE SECRETS OF SHARP’S TRADE

JOHN DeMONT June 5 1989
COVER

EXPANDING TO THE BEACH

THE SECRETS OF SHARP’S TRADE

JOHN DeMONT June 5 1989

The 31-year-old Canadian’s brashness startled the buttoned-down British businessmen when negotiations began in 1963. Since the mid-1950s, the McAlpine family of London, which owns large construction and real estate operations in the United Kingdom and Canada, wanted to develop a hotel on a piece of prime real estate it owned on the edge of London’s famous Hyde Park. Because the city seemed awash in first-class accommodations, the McAlpine interests envisioned a structure with 320 medium-priced, smaller-sized rooms. But Isadore Sharp, chairman and founder of their Toronto-based partner, Four Seasons Hotels Ltd., insisted that a top-class hotel would be more appropriate and, after five years of bargaining, the two sides struck a deal in 1968 under which Sharp guaranteed them the same revenue for a structure which contained 100 fewer rooms—provided the rooms were more luxurious. The skeptical McAlpine representatives quickly dubbed him “the crazy Canadian.” But 23 years later, the London Inn on the Park’s occupancy rate is a steady 90 per cent, and it remains one of the most profitable hotels in the world.

Generating: Sharp has never backed away from taking risks. He built his first Toronto hotel on a shoestring, making a deal with the tradesmen working on the project that they bill him only after the structure was up and generating revenues. “Fortunately it worked out,” recalled Sharp. “Or I would have been paying off debts 20 years later.” Now, Four Seasons has embarked on its most ambitious expansion plan yet, after striking deals to build new projects in choice locations around the world. And, once again, Sharp has persuaded other people and companies to take some of the risks to finance his latest expansion of the Four Seasons hotel chain. But, despite Four Seasons’ uncanny knack for understanding what affluent travellers want, some analysts say that making a success of Sharp's spectacular hotel-development venture will not be easy.

Quality—not size—is Four Seasons’ specialty. And the 22-hotel chain that Sharp built is small compared with such less lavish and expensive U.S. chains as Sheraton, which has nearly 500 hotels, Marriott—more than 350—and Hilton with more than 270 properties. But Four Seasons’ focus on service and elegance propelled the company to the top of the world’s luxury hotel chains—alongside the lavish Hong Kong-based Mandarin Oriental Hotel Group and the legendary Atlanta-based Ritz-Carlton Hotel Co. Said Saul Leonard, a Los Angeles-based leisure-industry consultant for the international management and consulting firm Laventhol & Horwath: “In North America, the Four Seasons and the Ritz-Carlton chains are in a category altogether—and they consistently remain each other’s main competition.”

Now, Sharp wants to spread the Four Seasons name and style even further. Four Seasons hotels are scheduled to open in Tokyo and Singapore in 1991 with the Four Seasons Paris and the Four Seasons Mexico to follow in 1992. And the company that Sharp built is also expanding into the resort business. Next year, it plans to open the Four Seasons Wailea on the island of Maui and the Four Seasons Nevis in the West Indies, with the Four Seasons Kona on the island of Hawaii to follow in 1991. And last week, the company announced an agreement to operate a new luxury resort scheduled to open in Carlsbad, Calif., in 1992.

Anchored: The shift in corporate strategy is anchored in part to international trade policy. Analysts say that with trade barriers coming down around the world and the economic influence of Pacific Rim countries growing, the business world is becoming increasingly global in scope, which means that the demand for upscale hotels should increase. The same logic lies behind Four Seasons’ move into the resort business. Analysts say that when workaholic business people go on vacation now, they are looking for the same service and quality accommodations that they receive when their companies are paying their expenses. And that fact may create a booming new market in the sun for Four Seasons. Said Sharp: “This is not a dramatic departure for us. We are essentially going after the same market as we always have. The people who use our hotels for business travel have told us that they want the same quality in a resort setting.”

Still, the Toronto chain will face stiff competition. During recent years, the resort sector has been the fastest-growing segment of the world hotel business. When Four Seasons’ Maui hotel is complete, it will be going head-to-head with the new Ritz-Carlton and Hyatt properties, as well as the recently renovated Inter-Continental Hotel. Said Laventhol & Horwath’s Leonard: “Hawaii is getting overbuilt. Too many new properties will be coming on stream at the same time.”

Analysts have expressed some of the same concerns about some of the big North American cities where developers in recent years have been busily building exclusive new hotels to attract well-off travellers. Recently, luxury chains, including Ritz-Carlton, have been moving into markets which Four Seasons already dominates. At the same time, established chains, including Hyatt and Hilton, are increasingly reaching for growth into the upper end of the market—with rates ranging up to $215 for a double room in peak season. With new hotels regularly opening their doors across the world, analysts, as a result, are worried that there could be an oversupply of hotels in some cities by the early 1990s. And that could hit Four Seasons hard. Said Steven Eisenberg, a New York City-based hospitality industry analyst with the brokerage house Bear Stearns & Co. Inc.: “The supply problem stands to be the greatest in the luxury end of the market. The companies with the top locations, the most astute marketing and the best and most consistent service will survive and come out on top.”

Recession: Even so, Sharp has always trusted his instincts for knowing when to expand and when to pull back. And right now he wants to expand. In 1980, when interest rates soared to 20 per cent and the world economy edged toward recession, Sharp called a halt to the company’s growth because he felt Four Seasons was spreading itself too thin. But when the worst recession since the Depression hit in 1981, Sharp refused to follow the other hoteliers across the world who were pulling back and cutting service to shave costs. Instead, he launched an extensive and costly renovation program to improve most of his hotels. Said Sharp: “Earnings took a hit, but when we came out of the recession our customers knew that we will never compromise on quality.”

Still, the improvements were expensive, pushing long-term debt to $116 million by 1982—most of it at floating interest rates which hit a high of 21 per cent that year. The solution was to start selling assets. The company sold its equity interests in the Clift Hotel in San Francisco in 1983, the Belleville Hotel in 1984 and the Four Seasons Calgary in 1985.

Still, despite his bullish attitude during the 1981 recession, in his new round of expansion Sharp is cutting risks to a minimum. Until 1976, Four Seasons owned most of the hotels it operated. But, starting with San Francisco’s Clift, the company shifted from outright ownership to operating contracts. Because they are built and owned by other investors, they require a much smaller initial investment by Four Seasons, and that ultimately limits the firm’s financial risks.

By becoming a hotel operator, the company also helped smooth out the volatile fluctuations in earnings and cash flow which hurt it during the 1970s. And the transformation from owner to manager is now the key strategy in Four Seasons’ future—as it is, indeed, for other chains, including Hilton and Hyatt. As a rule, the company no longer takes more than a 25-per-cent interest in a project. In fact, Four Seasons plans not to take any equity interest—or to take only a small one—in the new hotels, which means that most of the financial risk will be carried by the resorts’ owners. Four Seasons, in turn, receives a management fee, which typically starts at 3.5 per cent to four per cent of total revenue. And it also gets an incentive fee, normally 15 per cent to 20 per cent of profits, once the project is earning money. Said Ira Gluskin, partner in the Toronto investment firm Gluskin Sheff & Associates Inc.: “This is the world’s greatest business. The manager gets a percentage off the top, the owner takes all the risks and, if the hotel someday manages to make a profit, the manager gets a percentage of that too.”

Investors clearly like the arrangement. Following news about the company’s expansion plans, Four Seasons shares closed at $36 last week, compared with $19.50 just one year ago. They were not always so healthy. Shortly after they issued shares on the stock market in 1969, Four Seasons had disappointing results and the shares dropped from a high of $22 down to just under $4. But in 1978, after heated negotiations with his partners, who included Toronto furrier Edmond Creed and Murray Koffler, founder of the Shoppers Drug Mart chain, they bought back Four Seasons common shares at $5.62 each—taking the company private. Sharp says that going public then was “a mistake.” He added: “There was no real reason for us to have gone public in the first place. And once we did, the value the stock market put on our shares was ridiculous.”

Cutting: But three years ago, Four Seasons went public again, this time to give Creed and Koffler an opportunity to sell off part of their stock holdings for estate reasons, cutting their interests in the company to roughly eight per cent of the common shares each. But under the terms of the financial restructuring, Sharp ended up with 83 per cent of the voting 35 rights—even though he has just 28 per cent of the actual common shares. Despite constant overtures from Bay Street’s leading brokerage houses that Sharp should sell off some of his stock, and that the company issue new shares, he says that he is not likely to do so. Strong internal cash flow means that Four Seasons will not likely need to raise cash on the stock markets to finance its expansion plans. At the same time, Sharp says that he has no intention of diluting his now-tight hold over Four Seasons. Declared Sharp: “I have control of the company and I don’t have any intention of allowing that to change.” With the company about to enter a new growth phase, Four Seasons shareholders likely feel the same way.