The RoccocoNew York HotelAnna S. Mattila

The Pennsylvania State University

The following customer complaint letter was submitted by a first-time customer at the Roccoco NewYork Hotel. Tony Richards, the general manager, had called a meeting with his executive committee toponder the situation facing the hotel. The director of operations, Sylvia Jenkins,the human resourcedirector, Paul Gordon, and the director of marketing, Nancy Wheeler, were glancingthrough the letteras Mr. Richards explained that, unfortunately, this customer encounter typified what many clientsexperienced during their stay at the hotel. Two members of the executive committee, the food andbeverage director and the head of the engineering department, were absent due to amandatory firedrill taking place in the main kitchen on snowy January 2, 2008.

To Whom It May Concern, I stayed at your hotel last week and was disappointed in my overall experience. I travel to the city oftenand will probably not return to your hotel. I would, however, like to express my discontentment with theservice I received. As I sat in the bar waiting for my cocktail to be delivered, I became more and morefrustrated with theservice I had received since my arrival the day before. Upon booking my reservation, I was kind of waryabout what I was in for. After all, I had not heard too much about this brand. It was not like going to aHilton or Marriott where I know what type of service and atmosphere to expect. Needless to say, I waspleasantly surprised with the grand atmosphere at this hotel. It can be described as an oasis in the heart ofTimes Square. The lobby area is small, yet elegant and quaint. It is the type of hotel where I can feelcomfortable entertaining my clients and holding negotiations. It is big enough to provide privacy, yet cozyenough to deliver a personalized type of service. Automatically, my expectations of service soared as I admiredthe care and beauty of the rooms and public areas. No detail has been left unfinished. Unfortunately, myexpectations were quickly shot down as reality set in. After an extremely long journey from halfway across the world, I was more than looking forward to a hotshower and warm bed. I checked in at about 6:00 PM on a Wednesday evening. Upon arrival,the doormanwelcomed me graciously and collected my bags. I took the elevator to the lobby area to check in. Iapproached the desk and stood there for what seemed like an eternity before either of the two girls standingthere acknowledged my existence. Finally, one of the girls looked up from her paperwork and, as if I wereinterrupting her, asked me if she could be of assistance. I gave her my last name and told her I had areservation. She confirmed my room number, handed me my key, and in no time I was on

C-555

C-556 Cases in Strategic Management

my way—I could not wait. Upon entering the room, I noticed that there weretwo beds anda horrible smoky smell. I had asked for a king bed, nonsmoking. I immediately called downto the front desk. The girl who answered seemed a bit annoyed and said that I could returnto the lobby, as she would try to accommodate my needs. With that, I went back to the el-evator, down 20 floors and finally back to the front desk. She half-heartedly apologized forthe inconvenience, gave me another key, and once again, I was on my way. I waited nearly a half an hour before the boy at the entrance came up with my luggage.He placed my very expensive carryon piece in front of the door (to hold itopen) and pro-ceeded to take in the rest of my bags. He informed me about the amenities available at thehotel. You know, the usual—minibar, complimentary shoeshine, 24-hour room service, ex-ercise room, and so on. With that, he smiled and wished me a pleasant stay. I wondered ifhe even knew my name or realized that I was upset with the time it took myluggage to ar-rive (not to mention the fact that my carryon piece had doubled as a doorstop). After unpacking and settling in, I picked up the room service menu. It was pretty lim-ited, but I was very tired and was not about to go out for a bite to eat. The girl who an-swered the phone knew who I was. Quite impressive, as I had only been there for abouttwo hours: "Good evening, room service, this is Gary, how may I help you, Ms. Bressner?"The meal was delicious, although it arrived nearly an hour after I orderedit—the girl whotook my order said it would be up in 25 minutes. After finishing my meal, I called backdown to room service to tell the girl that I would leave my tray outside the door. Finally,with all that I had been through that day, it was almost midnight before Iwas finally ableto get some rest. The following morning, I stepped out of my room and almost onto the very same roomservice tray; it was right where I had left it the night before. That evening, upon checkingout, the girl asked me if she could assist me in making reservations for afuture trip to thehotel. I politely declined and told her that my stay was not a pleasant one. She apologizedand wished me a good evening. As I walked away from the desk, thinking of what my stayhad been like, I knew that I would never return. I liked the hotel; in fact, it is definitely nicer than most of the Marriotts or Hiltons I hadbeen to and the price was very reasonable for NYC. However, I do not thinkI will return.It is something about the service—it is definitely not what I had expected. Your staff shouldwork on their attitudes and attention to detail. Very few were really friendly, and even fewerseemed interested in my happiness. I hope this situation is rectified, as you have alreadylost at least one guest.

Sincerely,

Laura Bressner

As the executive committee reviewed the hotel's performance, TonyRichards ad-dressed the critical questions. "What can we do to avoid problems on this type in thefuture? How can we improve the level of service quality in our establishment? Weneed to do something to ensure that occupancy levels will remain highdespite the rateincreases imposed by our financial situation. Why don't we brainstormto get someideas? Nancy, what do you suggest from the marketing perspective? Nancy Wheeler responded, "Well, given the resistance to rate increases from ourcurrent guests, I feel that we should focus on attracting new customers. Weekends areclearly a problem for us; the occupancies drop to a mere 50 percent on most weekends.By offering attractive packages, we could get more leisure travelers to stay with us.Because we have such a high proportion of Asians in our client mix, Isuggest that weincrease our Web marketing. We could place ads on Asian air carriers'sites or onGoogle or Yahoo! so that, when people are seeking travel information regarding NewYork City, they get an immediate exposure to our hotel. I have done some datasearching, and the current monthly cost on travel sites is about $12,000."

Case 24 1 The Roccoco New York Hotel C-S57

"I hate to disagree with you, Nancy, but our main goal should beto satisfy our ex-isting customers," Paul Gordon asserted. "Look, the data from our customer satisfac-tion surveys and the ever-increasing pile of complaint letters that Ihave in my officeclearly indicate that our current guests are not happy. Or, have a look at the shopper re-port summary (see Appendix 1). I think that we should put our effortsinto developinga service recovery policy. My informal talks with our front-line employees indicatethat they feel lost with our operating manuals. They have to deal with upset customerswithout having the power to do anything about their complaints. At the moment, a su-pervisor's signature is required for any service recovery effort. I can just imagine howour guests feel about paying over $200 a night and having to wait forsomeone's ap-proval to get a complimentary welcome drink because the room is not ready. In manycases, further referral to the department head is needed, causing unseemly delay andfurther guest irritation. These things should be handled on the spot by our customer-contact employees." Sylvia Jenkins, the director of operations, joined the discussion. "Empowering thefront line to deal with service failures is a good idea in theory, but how do you controlthe money involved? Free meals and free stays represent lost revenues, and I do not be-lieve that our cash position is such that we could afford a dip in revenues. Moreover,as you know, we are in the process of hiring new food and beverage employees, andthis additional expenditure will have an impact on our bottom line."

MANAGEMENT BACKGROUND

Tony Richards's first exposure to the hospitality business had come 25 years ago work-ing as a busboy in his father's family restaurant. During college, hehad worked sum-mers at various resorts on Cape Cod. After graduating with an undergraduate businessdegree, he spent three years working for an insurance company in Hartford, Connecti-cut. His heart kept longing for the hustle and bustle of hospitality,and he then decided toreturn to school to earn a master's in hospitality management. After college, he workedfor Bristol Hotels, mainly opening new properties for the fast-growing hotel chain. Sincehe had joined the Roccoco hotel two years ago, Tony had been working vigorously tobring the revenue stream to its optimal level while controlling costsand increasing de-mand. As a result of these efforts, the Roccoco New York Hotel realized its first positivecash flows in 2007. The general manager hired a new food and beverage manager, Mr. Jean-PierrePottier, at the end of 2006. His dynamic character, combined with a prestigious culi-nary degree from Cordon Bleu in Paris, had made him successful in revamping the ho-tel's restaurant business. Jean-Pierre's reputation for superb banquets and creativemenu concepts had resulted in a 22 percent increase in food sales during the past 12months. Room service sales, in particular, had gone up by 50 percent since 2006. Paul Gordon, the current director of human resources, had workedfor Holiday Innsin the corporate training position for 15 years prior to joining the Roccoco Hotel sixmonths ago. His wife had been relocated to New York City, and Paul was looking for-ward to a more stable family life. The hotel's former HR manager had implemented siz-able budget cuts for employee training and hiring practices, and these efforts had indeedshowed a positive impact on last year's bottom line. In the past, newly hired employeeshad completed a two-week formal training program, but this procedure had been re-placed by a more cost-efficient, on-the-job "buddy" training system. In addition to on-the-job training, each new employee received the hotel's 500-page operations manual,

C-558 Cases in Strategic Management

which explained company policies for each department. The hotel had lost many of itsmiddle managers to competitors over the past three years, but these positions had beenleft vacant to improve the bottom line. The director of marketing, Nancy Wheeler, had joined the RoccocoHotel nearly ayear and a half ago. Her previous job as a middle manager of a mega-convention cen-ter had familiarized her with group business travel. Summarizing the situation facingRoccoco, she reported: "There is perceived guest resistance to higherrates, requiringour hotel to have a competitive edge when compared to similar hotel properties andhotel brands." Sylvia Jenkins, the director of operations, was an old-timer at the Roccoco Hotel.In fact, she had been with the hotel over ten years and had personally seen the trans-formation from a typical mid-priced Restwell Inn to a quaint boutiquehotel. Sylviastarted her career as a housekeeper and worked her way up to a rooms division man-ager within the Restwell Corporation. When she was offered her current position fiveyears ago, she gladly accepted. Sylvia strongly believed in "management by walkingaround" and was constantly fixing problems throughout the hotel.

PROPERTY OVERVIEWThe Roccoco was a full-service, 30-story boutique hotel with 305 rooms. Boutique ho-tels were relatively small, well-staffed properties that offered upscale, high-end andample amenities. Corporate buildings, restaurants, shopping, and the theater districtsurrounded the Roccoco Hotel. The Times Square location was, however,less desir-able than Central Park or the Upper East or West Side. Amenities offered included afull-service restaurant overlooking Times Square, a wine bar, a cocktail lounge, and24-hour room service. The lobby was small and quaint, perfect for thebusiness trav-eler who preferred a private, relaxing atmosphere. In addition, amenities such as com-plimentary shoeshines, coffee delivery with wake-up calls, and entertainment serviceswere available to all guests. In terms of meeting business travelers' needs, the property lagged behind the com-petition. Meeting facilities were limited to less than 2,000 square feet, and there wereno video conferencing facilities. Free WIFI was available throughout the hotel. Formerly a Restwell Inn, the Roccoco group purchased and reflagged the propertyin the early part of 2003. More than 25 million dollars was allocatedto renovate thehotel. Because no structural upgrades were needed, all of the capitalwas used to en-hance the property's appearance. The general manager contracted a famous New YorkCity artist to design an art-deco lobby area, restaurant, and guest rooms. Marble andfine cherry woods replaced the original decor. Massive statues and fine, imported fur-nishings created a lavish environment, and a restaurant and a lounge area were createdon the main lobby level.

COMPETITIONThe New York City hotel market was fiercely competitive. (The 2006-07statistics onthe overall New York market are shown in Exhibit 1. For information on Manhattan ratestructures, refer to Appendix 2.) There were two main competitive sets (see Exhibit 2).The Sheraton, Crown Plaza, Guest Suites, and Millennium were all relatively large

Case 24 The Roccoco New York Hotel C-559

exhibit 1New York Area Hotel Market—Selected PropertiesOccupancy Room Rate

CurrentYear$158.45$176.90

Annual Room Supply

CurrentYear

2,533,7942,637,125

Annual Room Demand

CurrentYear

2,075,1772,217,822

Year20062007

CurrentYear81.9%84.1%

PriorYear76.2%81 .9%

PriorYear

$144.60$158.50

PriorYear

2,328,7942,533,700

PriorYear

1 ,744,4692,075,177

exhibit 2 Competitive Set Report1 2006

RoccocoCompetitive Set ICompetitive Set II

Occupancy

79.8%83.3%84.1%

ADR

$167.13$166.53$176.95

REVPAR

$133.38$138.72$148.90

Competitive Set I

SheratonH. I. Crown PlazaMarriottGuest Suites

Competitive Set IIH. I. Crown PlazaMillenniumGuest SuitesLeonardo Davinci

1 2007RoccocoCompetitive Set ICompetitive Set II

Occupancy83.1%86.5%85.1%

ADR$174.86$169.65$184.23

REVPAR$145.30$146.75$156.82

Source: Smith Travel Research. This information is taken from a sample of eight area hotels and general demandpatterns. RevPar stands for revenue per available room. ADR refers to average daily rate.

properties that catered to a different clientele, as the properties offered a less personal-ized atmosphere and larger public areas; however, their geographiclocation and pricesimilarity had enabled them to control a large portion of the market. A nearby propertyowned by the Roccoco group, previously considered a major competitor, had evolvedinto a support system for the Roccoco. Since becoming part of the same global distrib-ution system, all overflow from the second property, which ran at full occupancy mostof the year, was diverted to the Roccoco. The Sheraton had completed its renovation atthe end of 2007; every guest room was now equipped with ergonomic chairs, WIFI,and a Hewlett-Packard Office Jet Printer/fax/copier machine. The Sheraton was expectedto increase its room rates to $240 per night within the next threemonths. Perhaps the Roccoco's primary competitor was the Leonardo. Located only blocksaway, this 178-room property offered its guests a more personalized and superior stay.Amenities such as fresh flowers in the rooms, standardized bath amenities (i.e., bubblebath), slippers, and fruit baskets were among the items all guestscould expect. In eval-uating the quality of the property and service at the Leonardo, even Roccoco's man-agement admitted to the property's inherent superiority. One guestwho had previouslystayed at the Leonardo described it as, "The perfect place to stay—anywhere in theworld. The staff there knows what you need even before you do. It is amazing. Everyluxury you could expect, right in the heart of New York's finest. They even know yourname before you introduce yourself. I do not know how they do, they just do."

C-560 Cases in Strategic Management

CUSTOMER PROFILEBecause of its boutique orientation, the hotel attracted guests looking for a quiet, con-venient place to stay. The property's mix was 70/30 between business and leisureguests. Accordingly, weekday occupancy levels were much greater than weekend,with little seasonal variation. Many of the hotel's business clients were mature, that is,between the ages of 45 and 65. They preferred to stay in the same hotel and quite of-ten the same room. This had contributed to the property's repeat customer base ofnearly 60 percent. Unfortunately, the customer retention rates had been consistentlydropping over the past few years, as the repeat base had declined by about 10 percentin reaction to the hotel's increase in room rates (see Appendix 3A). To induce high re-sponse rates, Mrs. Wheeler had revamped the hotel's customer satisfaction instrument(see Appendix 3B). Many of the clients, up to 40%, were internationaltravelers. Withthe hotel's luxury reputation in Asia, about 80% of the internationalguests came fromthis market. Customer satisfaction data indicated that Asian businesstravelers wereparticularly unhappy with the level of service provided by the Roccoco staff.

EMPLOYEE OVERVIEWThe Roccoco had approximately 250 employees. Because of the hotel's relatively smallsize and the complex labor market in the New York area, staffing issues posed a majorproblem. This hotel was a nonunion property in a market where approximately 96 per-cent of hotels were unionized. Thus, in order to keep the union out of the hotel, pay andbenefit packages were slightly higher than union standards. The property realized anannual turnover rate of approximately 10 percent, although the industry standard forfirst-class hotels was 45 percent. Average seniority was 3.7 years, with 10-15 percentof the employees remaining from when the hotel was a Restwell. Despite this seemingly low level of turnover, employee satisfaction was quite low.Morale and culture had been compromised through the shifts in management and theambiguous nature of policies, procedures, and management support (seeAppendix 4).In terms of management, turnover was extremely high. In fact, the current generalmanager was one of five who had been at the property since it opened.With the ex-ception of Ms. Jenkins, the rest of the members in the executive office were also rela-tively new to the property (hired within the past two years). Ms. Jenkins was oftenheard to repeat the following phrases to her employees: "You should have seen thisplace before renovation took place . . . all the furniture and fixtures were getting wornout. . . really shabby. But look at it now; what a beauty this hotel has turned out to be.We should all be proud of it."

FINANCIALS Although occupancy levels remained high and the New York market was booming, theRoccoco was struggling. In the first three years of operation, the property realized a netloss of nearly $12 million annually. This loss had since been reducedto approximately$1 million per year. The property showed its first positive cash flowin 2007. With thisin mind, the management team had calculated that the rates must be increased by anadditional 30 percent over the following two years. In light of the relatively low ADR (average daily rate), the property had not realizedits revenue goals. Guests had been paying a room rate that was, on average, $30.00 lessthan the projected $205.00 ADR budgeted for 2008. Additionally, many guests paid cur-rent rack rates (published, nondiscount rates) of $205 to $305 (the differentiation in

Case 24 I The Roccoco New York Hotel C-561

rates can be accounted for by differences in weekend-weekday demand patterns). Thesemostly non-New York City residents would need to believe they were receiving valuewith personalized service and attention to detail that was worth the additional $30 overcurrent rack rates (see Appendix 5). A comparison of Roccoco's profitability against industry standards (ratios and pub-lications published by consulting firms) showed that the level of gross operating income(income before fixed charges) was about 2 to 4 percentage points below the average forcomparable properties. While Tony Richards acknowledged that opportunities for mar-ginal cost-cutting might exist, these efforts might well conflict with the need to providehigher levels of service quality. For example, in a previous board ofdirectors' meetingtwo months ago, one of the owners of the hotel had suggested that management shouldget rid of the hotel's full-service restaurant or its labor-intensive24-hour room service.The executive committee strongly objected to this cost-cutting plan because reputablefood service operations form an integral part of any upscale property's image and pres-tige value.

WHAT TO DO!The slowly drifting snow had turned into a heavy mix of snow and rainby 5:30 PM.The traffic would be chaotic in a couple of hours, so Mr. Richards decided to call it aday. He would draft a letter of apology to Ms. Bressner the first thing in the morning.Driving home that night, he started to think about the board of directors' meetingscheduled for next Friday. "What can we do to add value to the guest experience? Howcan we enhance guest satisfaction? Should we aim at new target markets to increaseoccupancy levels? I need to have my recommendations ready by Friday."

Appendix 1 Roccoco Hotel Sample Executive Summary— Shopper Survey, September 2008•

•

•

The High Stars Consulting Company is a leading international firmspecializing inquality management programs in the hospitality industry.The executive summary is based on the experience of four shopperswho stayed atyour property for three nights during the week of September 15.Shoppers are trained by the corporate office to pay attention to the following areas: speed of service, cleanliness of the property, handling of special requests, andoverall employee attitudes.

Reservations• All reservationists with whom we spoke were polite and

professional; however,one reservationist addressed us by first name, although a full, simple name hadbeen provided.Inconsistent offers of smoking versus nonsmoking rooms and mention of the 6 PMcheck-in time.

•