Majestica Hotel in Shanghai?

MAJESTICA HOTEL IN SHANGHAI?

On March 20, 2005, Richard Roy, executive vicepresident of Majestica Hotels Inc., was in China, for negotiations with Commercial Properties of Shanghai Limited (CPS). They were discussing a possible management contract under which Majestica would be the operator of a new luxury hotel there owned by Shanghai Industrial Holdings.

Majestica Hotels Inc. was one of the world's leading operators of luxury hotels. The expansion into mainland China had been on management's agenda since 1999. The opportunity emerged in late 2003 when a close friend of Majestica's chief executive officer (CEO) revealed that CPS was looking for an operator for its new luxury hotel under construction in Shanghai. Majestica immediately sent representatives to Shanghai to explore the possibility of becoming the operator.

Majestica's proposal was welcomed by CPS, and a letter of intent was signed on August 20, 2004.

However, in discussions regarding the management contract, the two parties had reached a deadlock. The key issues to be resolved were the contract term, and the responsibilities and rights of Majestica as the operator, and CPS as the owner, of the hotel.

This Shanghai deal was important for Majestica's global expansion. It would not only provide Majestica with the opportunity to enter the China market but could also set a precedent for Majestica's future expansion in other emerging markets.

MAJESTICA HOTELS INC.

Majestica was founded in 1970 in Western Europe. It focused exclusively on its niche of developing and operating luxury hotels with 200 to 450 rooms. In 1977, Majestica expanded to the United Kingdom. In 1984, Majestica entered the U.S. market via acquisition. Majestica's expansion in the U.S. market continued with properties in seven other major cities. By the end of the 1990s, Majestica had secured a strong position in the luxury hotel industry in North America, competing with such established chains as Four Seasons, Ritz-Carlton, Hilton, Hyatt, Marriott and Westin.

While Majestica expanded quickly in North America, it adopted a gradual expansion strategy in Asia. This gradual expansion strategy shifted when the opportunity arose to acquire a major competitor in Asia in 1998. This acquisition made Majestica one of the world's largest operators of luxury hotels and resort properties. More importantly, it provided Majestica with a much expanded position in Pacific Asia and an immediate presence in the greater China area. Majestica continued its international expansion by amassing a select portfolio of medium-sized luxury hotels in the world's commercial and financial centres. By the end of 2004, Majestica managed 40 properties in 15 countries with approximately 20,000 employees. The contribution of Majestica's properties in North America, Asia and Europe to its consolidated revenue was 54 per cent, 14 per cent and 32 per cent, respectively. Exhibit 1 provides a five-year review of the occupancy rate, average daily room rate (ADR) and average room revenue per available room (REVPAR) of Majestica hotels in these three regions and worldwide.

In 2004, Majestica had a market capitalization of $1.7 billion1 and generated revenue of more than $2.3 billion (see Exhibit 2). Majestica earned revenue both from hotel management and hotel ownership operations. In the past five years, Majestica shifted away from owning hotels and focused on managing hotels. In 2004, 80 per cent of Majestica's earnings before other operating items were generated by its hotel management business.

Majestica followed a business strategy that offered business and leisure travellers excellent hotel and resort accommodation in each destination it served. Following this strategy, Majestica developed into a luxury hotel chain with service standards among the best in the industry. Majestica hotels and resorts were widely recognized for the exceptional quality of their guest facilities, service and atmosphere.

The Majestica brand was generally considered one of the top luxury hotel chain brands in the world, and its hotels and resorts were named frequently among the world's best hotels and travel experiences by Institutional Investor, Condé Nast Traveler, AAA Five Diamond and others. Majestica's success was also reflected in consistently achieving above-market operating results for the properties under its management. During 2003, REVPAR (revenue per available room) for Majestica core hotels worldwide and in North America was 60 per cent higher than that of its competitors in the luxury segments worldwide and in North America. The room rate for a Majestica hotel in Chicago, for example, averaged $50 higher than those of Hyatt Regency, Hilton, Sheraton and Marriott (see Exhibit 3). Majestica's superior hotel management results attracted the owners and developers of luxury hotels worldwide. By the end of 2004, in addition to the 40 hotels under its management, Majestica had 16 new hotels and resorts under construction or development, and it was evaluating dozens of additional management opportunities around the world. In summarizing the key success factors, the Majestica management pointed to a service culture that they had fostered for decades.

It emphasized anticipating travellers' needs and meeting those needs with superior hotel structures and a deeply instilled ethic of personal service. This service culture was built into every property, going beyond elegant hotel designs and finishes to the small, thoughtful touches that would add value for the guests. Every detail was deliberate, from mechanical systems that were as quiet as they were efficient to providing a disposable bathing suit in case hotel guests forgot to bring one. In addition, the design of the hotel rooms highlighted a use of space that enhanced the sense of luxury. On average, standard guest rooms in Majestica hotels were 25 per cent larger than those in Hyatt Regency, Hilton, Sheraton and Marriott.

More importantly, the service culture emphasized the depth of personal service. Majestica deemed ultimate luxury as not derived from furnishings but from personal service. The services at Majestica hotels were comprehensive and highly personalized. Guided by the service culture, Majestica's employees treated every interaction with guests as an opportunity to anticipate and satisfy a need. They provided services ranging from room service that felt like a fine dining experience to replacing worn shoelaces. The strong service culture ensured highly reliable services. For example, room service always arrived on time and conference arrangements were in place as promised.

The service culture encouraged surpassing each guest's