McDonald’s Adventure in the Hotel Industry

TB0109

Copyright © 2005 Thunderbird, The Garvin School of International Management. All rights reserved. This case was prepared by Professor Stefan Michel for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. The case was prepared from published sources, and neither McDonald’s nor Golden Arch is in any way responsible for the completeness, accuracy, or fairness of the presentation of any information contained herein.

The author thanks Nancy Stephens, Professor at Arizona State University, for sharing her pictures and her experi- ence, and Daniel Deutscher, hotel expert, for providing benchmark financial data. The following graduate students at Thunderbird, The Garvin School of International Management, translated part of the case from German to English: Trevor Bundy, Patrick Häberli, Gian McCoy, Oliver Sanders, and Bjorn Van den Berghe.

Stefan Michel

McDonald’s Adventure in the Hotel Industry

In spring 2001, McDonald’s Corporation opened its first hotel in the Swiss town of Rümlang. The 211- bed, four-star Golden Arch Hotel, situated close to Airport Zürich-Kloten, was followed in the same month with the opening of a second hotel in the town of Lully. Heading this project was Urs Hammer, longtime chairman of McDonald’s Switzerland. Hammer hoped the hotels would continue “the spirit of McDonald’s hospitality philosophy.” Jack Greenberg, CEO of the McDonald’s Corporation, viewed Hammer’s concept as a way forward for the company—since McDonald’s competed in many saturated markets with its restaurant business, diversification was a promising way for future growth.1

McDonald’s

The McDonald’s story began in 1954, when a self-employed salesman named Raymond Kroc sold a popular milkshake mixer in Southern California. Oddly, many of his clients referred to his product as the mixer that the McDonald brothers used in San Bernardino. As the number of these references increased, Kroc asked himself why the McDonald brothers were so well known and what was their secret? He decided to find out by driving down to San Bernardino. The “secret” was a restaurant on the outer limits of the city.

Through observation, Kroc noticed that many of the customers had come from far away (far being, of course, more than 25 miles!—remember, this was 1954), and the reason they came was un- common for the time: hamburgers, cheeseburgers, French fries, a soda, and a milkshake made with the same mixer that Kroc himself sold. Kroc questioned some of the customers in the restaurant and discov- ered that the reason they came was that they could get the freshest burger and fries all at one price (think Value Meals and Happy Meals). Also, what impressed Kroc during his visit to the restaurant was that the food was served in a clean environment and it provided “fast and friendly” service—the service was so quick that none of the customers had to wait in line.

1 http://www.leisureopportunities.co.uk/newsdetail.cfm?codeID=180, dated Spring 2001, accessed Nov 13, 2004.

October 20, 2005

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

2 TB0109

Impressed with the consistent quality and taste, day or night, that the McDonald system pro- vided, Kroc offered the McDonald brothers the chance to open more restaurants. His original intent was to make more sales with his mixers, but the McDonalds refused his offer under the auspices that they didn’t want to leave San Bernardino. Kroc was still so convinced that this system of food service would work that he offered to buy the rights to the McDonald brothers’ concept and open his own restaurants under their name.

Kroc then left San Bernardino with the first McDonald’s franchise contract in hand. One year later, he opened his first McDonald’s Family Restaurant in Des Plaines, California. The success of the restaurants is one for the history books, as in the following years McDonald’s popped up everywhere in the country and became an American icon.

The first McDonald’s openings outside of the U.S. began in 1967 with Canada, Japan, Holland, Australia, and Great Britain. In the 1970s, there was continued success with restaurants opening in Germany, Hong Kong, Sweden, the Far East, and Latin America. With the fall of the Iron Curtain in 1989, McDonald’s expanded into Eastern Europe in Russia, Poland, Hungary, and the Czech Republic. As of 2005, McDonald’s Corporation operates more than 30,000 quick-service restaurant businesses under the McDonald’s brand in 122 countries around the world.2,3 Every five hours a new franchisee joins the McDonald’s chain.4

In 1976, McDonald’s began to build its base in Switzerland. Today there are 142 McDonald’s restaurants there. The Swiss affiliate has grown so much in the last 29 years that it now has 7,200 full- time employees. There are approximately 1.62 McDonald’s for every 100,000 citizens in Switzerland, versus 4.72 restaurants per 100,000 in the USA. Financial analysts have determined the market to be saturated in America, and it is a major concern in Switzerland as well. The Swiss head office of McDonald’s is based in Crissier (VD). The CEO, Urs Hammer, is well recognized by the public at large, because he comes from a well-known Swiss hotelier family.

In every country, one of the main concerns is the relationship that McDonald’s builds with its neighbors, local communities, and clubs. Children play an important role in the McDonald’s corporate plan: One quarter of all restaurants have a built-in “Playland” where children can play freely and parents can host birthday parties for their children. The restaurants incorporate a family atmosphere where the McDonald’s clown, Ronald McDonald, plays an important educational, as well as an entertaining, role.

Altered Market Circumstances

In 1965, McDonald’s held its IPO (Initial Public Offering) on the New York Stock Exchange. Today, their stock is an essential part of the Dow Jones index and is also exchanged in Tokyo, Toronto, Paris, Frankfurt, and London. Since 1990, one can buy and sell McDonald’s stock in Zürich, Basel, and Geneva. Within a few months—between November 1999 and February 2000—the stock declined from $48 to $32 per share. Why was there such a decrease in price share? The financial analysts sur- mised that McDonald’s in the U.S. had reached market saturation. Martin Huber, CFO of McDonald’s Switzerland and General Manager of the Swiss corporate office, concluded that every opening of a new McDonald’s restaurant intruded upon the revenues of other restaurants already in operation.

As a result, McDonald’s decided to pursue a “diversification” strategy: In pre-selected countries, General Management would develop core competencies, the purpose of which was 1) to build more profit and revenue-winning restaurants, and 2) to develop these core competencies for use as a model throughout the corporation. This “competency center” in each country would share its acquired knowl-

2 http://en.wikipedia.org/wiki/McDonald’s. 3 http://www.fifa.com/de/marketing/partners/index/0,1355,21,00.html. 4 See http://www.wemweb.com/chr66a/sbr66_museum/sbmcdonalds_history.html for historic details and pictures.

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

TB0109 3

edge with other restaurants so that new products or services could be implemented to generate new growth.

The Swiss Strategy

McDonald’s Switzerland, along with its CEO Urs Hammer, chose to pursue the “hotel” venture, and in 1999 received the green light from the executive board in Chicago. In the spring of 2001, two hotels with associated restaurants were scheduled to open. Alongside the centerpiece of this study (the hotel in Zürich-Rümlang), a second hotel was being constructed in Lully, near the A-1 interstate stretch Yverdon- Payerne.

The crucial factor in deciding to pursue the hotel strategy and create a synergy with the already existing restaurant and catering business was the fact that CEO Urs Hammer came from a hotelier background. The Swiss General Manager had presented the McDonald’s hotel concept to the corporate headquarters in Chicago three years before and got the nod to establish the world’s first McDonald’s Hotel. Should the Swiss managers succeed, there was the chance that they could manage operations of this strategic business unit for the entire corporation, from Switzerland.

Rümlang, a small town on the fringe of Zürich, was chosen as the first location. Zürich was on the upswing, and its hotel managers were thrilled to ride the wave of success. Their occupancy rates were high, and there was much diversity. Young people considered Zürich trendy, while older people enjoyed its culture and businesses. Almost overnight, Zürich, long classified as moderately interesting, for a long time became the destination for trendy insiders. Suddenly, guests were coming and the prices were paid.5

Even more promising was the airport area. The national airline SWISSAIR, focusing on a growth strategy by acquiring many smaller European airlines, used the Airport Zürich-Kloten as a hub. The hub, in turn, generated more demand for hotel beds by tourists, business travelers, and airline crews. A major expansion of the airport was likely to increase its capacity by 50% in the first decade of the new millennium.

The Hotel Project

With a 32 million CHF (Swiss Franc)—about $26 million USD—investment, the Swiss subsidiary of McDonald’s formulated a strategy to open a middle-class hotel in Rümlang. When the hotel opened it doors in March 2001, the five-story building featured 211 rooms, along with a 170-seat drive-through McDonald’s restaurant open 24 hours a day (very unusual in Switzerland). The restaurant was separated from the hotel so that only hotel guests had access to the hotel building. The plans also included a 110- car underground garage, as well as a 40-car above-ground parking lot.

Hotel Division executive Stefan Döni explained that with regards to competition, not only was the hotel competing with other four-star hotels like the Mövenpick and Hilton, but also with the world’s fastest-growing hotel group, the Accor-Group. Döni was so convinced that the hotel would be a success that he and his team adopted the McDonald’s service standards for their hotel, with high priority given to room cleanliness.

Two types of rooms were offered: room type I offered an oversized king-sized bed (200cm x 200cm), and room type II offered two oversized single beds (200cm x 140cm) (see Exhibit 1). The price range was set from 150 CHF to 200 CHF ($120 USD to $160 USD) per night. To ensure efficient luggage handling, McDonald’s developed a custom-made trolley for both hotels. In accordance with the McDonald’s restaurant philosophy, the hotel crew would consist of a similar, permanent, employee pool that could implement the consistent service standards for every task in order to better serve the

5 Ein Hotel in Zürich müsste man haben, NZZ (2000) 5 August, S. 41.

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

4 TB0109

guests. The motivational job rotation principle would therefore replace the traditional hotel industry- applied job specialization and hierarchy system.

Because of the different peak-period demands for restaurants and hotels, the synergy effect would also be used to assign employees different positions and tasks. In order to bypass the rush of the check- in and check-out process, guests would have the opportunity for self-check-in. Through the simple use of a credit card, the guest would have the opportunity to check in and out of the hotel at the airport terminal. In total, there would be nine meeting rooms with the possibility of being transformed, due to a foldable-wall technology, into a larger 30-person conference room.

To provide optimal comfort for guests, management decided against saving on beds and mat- tresses. Due to this, future McDonald’s hotel guests would lie in comfort on the same beds and mat- tresses as guests of the world-famous, five-star Quellenhof Hotel in Bad Ragaz. What made the room layout unique was the “curved wall,” which bestowed the room with a special atmosphere and design. The “curved wall” was a one-piece, ready-to-use design that would be patent-protected by McDonald’s Switzerland.

One feature of the hotel room design was a futuristic shower that projected into the bedroom. While it made the room look bigger, from the inside the glass tube was claustrophobic. Originally, the tube was completely transparent, but after guests complained about the lack of privacy (e.g., two busi- nessmen sharing a two-bedroom or a family traveling with teenagers), the glass was frosted6 (see Exhibit 2).

The Market

The nearest hotel was a family-owned Airotel Rümlang (5 km from the airport, three stars), with 34 rooms and no airport shuttle. The room rates were 120 CHF ($96 USD to 170 CHF ($137 USD). A more significant competitor was the Allegra Hotel in Kloten, since it competed in the same price range, but Allegra was closer to the airport (2.2 km), had more rooms, fewer (but larger) meeting rooms, and a fine-dining restaurant. It was owned by the Wohlgemuth family who owned and operated several hotels in the Zürich airport market. Another hotel they operated was the 44-room, four-star Airport Hotel Glattbrugg.

Very close to Golden Arch’s property was the Mövenpick hotel (1.5 km from the airport) with three restaurants and large meeting rooms. Mövenpick offered a frequent-guest rewards program and operated more than 50 hotels around the world. A direct competitor was Novotel, which was located directly at the Autobahn between Zürich-Airport (3km) and Zürich downtown, close to several major business centers (e.g., Headquarters of Zürich Insurance, General Motors Europe, World Trade Center, and the Textile & Mode Center). Several other new projects had been recently announced. One hotel was to be built directly at the airport, with many conference facilities already built nearby.

In the Zürich region (city of Zürich and the airport area), there were 17 new hotels, as well as two extensive enhancements planned, currently under construction, or already finished (see Exhibits 3 and 4). Within three years, the 7,500 hotel rooms were to be supplemented by around 3,000 more rooms, or a 40% increase.

By far, the largest increase in hotel rooms has emerged on the Zürich-Airport axis. The hotel chain Accor alone contributed 738 rooms to this additional volume. Of these, 457 rooms were put into operation at the beginning of May next to the Technopark near downtown Zürich. The building would contain an IBIS-Hotel (two stars), an Etap-Hotel (three stars), and a Novotel-Hotel (four stars). An additional 281 rooms were being built at the World Trade Center in Seebach (Ibis, Formule 1). Besides

6 Bernstein, Fred, “Want Fries with that McDonald’s Room?” Washington Post (2002) September 1, S. E 05.

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

TB0109 5

the four new projects, the first Women’s Hotel was being built in Zürich downtown and the exhibition hotel, Turicum, was being planned.

But even with the 3,000 additional hotel rooms, growth continued. The hotel chain Hyatt had been planning for a long time to build a convention hotel in Escherwiese, even though the project had been blocked for several years. Hotels were also planned in the consumer electronics complex in Oerlikon called Magic Park, and in the Diax-Towers in north Zürich or in Eurogate.7

“The current events are blowing us away,” said Guglielmo Brentel, President of the Hotel Associa- tion. At the beginning of the year, he expected the development of 2,000 additional hotel rooms in the city of Zürich and the airport region within the next two to three years. This amount was greater than one-quarter of the then-current supply of 7,500 hotel rooms (as of January 12, 2000). Even six months later, Brentel admitted that there were actually many more: 3,000 rooms, or 40%.8

Business was still excellent for the hotel operators. In the city of Zürich, hotel occupancy rates in 1999 were 73%, and in the previous year 71%.9 The region around the airport was up to 80% capac- ity—like in the boom of the 1980s. According to Brentel, it would be another one or two years before the hotel managers felt the effects of the extra capacity, because contracts with the tour operators were booked in advance: “If all of the projects realize, the market will not be able to absorb them. The market might be able to assimilate 1,000 additional rooms; 2,000 under certain circumstances—if the economy continues to flourish, the airport is expanded, and a convention infrastructure is created, and if the Olympic Games take place in Switzerland.” Anything over an additional 2,000 rooms, according to Brentel, would be too many.10

It seems that managers do not learn from history. In the early 1970s, Hotel Atlantis (now Arabella Sheraton), Hotel Zürich (now Marriott), Hotel International (now Swissotel), and Hotel Nova Park (now Inter-Continental) were built. A little later, the first hotels in the airport region added to the offering with the Holiday Inn (now Mövenpick Hotel Airport) and the first part of the Hilton. Between 1970 and 1975, capacity increased by 2,500 hotel beds in the four-star category. Although it was said that the new hotels would bring new guests and businesses, the hotel bed occupancy rate dropped from above 70% to a tight 50%.11

It also seems that the hotel managers overlooked another challenge in the Swiss hospitality indus- try. Indeed, three-, four-, and five-star hotels can be built quickly. The construction industry has the ability and capacity to build them. However, running these operations is more difficult. It takes person- nel. The Swiss human resources market was dried out. It was almost impossible to find cooks and chefs. Staff for the reception desk was also rare. Domestic workers were preferred in hiring, but with so many jobs needing to be filled, who would perform the simple work? This was problematic because quite a few conservative hoteliers who asked for foreign labor also complained about the high ratio of foreign- ers. If many low-budget hotels had no staff, Zürich would not create a destination market, no matter how trendy it was. For this reason, it was suggested that those who intended to build a hotel in Zürich should be required to secure the operational staff first.12 Reputable experts also acknowledged that this would not be possible without labor piracy, i.e., luring away staff from existing hotels.

7 Hosp, Janine, Bald blässt ein scharfer Wind, Tages-Anzeiger (2000) 17 Juni, S. 13. 8 Ibid. 9 Reported 59.2% occupied beds, and 74.5% occupied rooms, according to http://www.zuerich.com/about/ de/statistiken/jahresstatistik_2001.pdf. 10 Hosp, Bald blässt ein scharfer Wind. 11 Ein Hotel in Zürich müsste man haben, NZZ (2000) 5. August, S. 41. 12 Ibid.

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

6 TB0109

Market Analysis

Most analysts were not very convinced that this expansion fit well with McDonald’s overall strategy. “I’ve just came back from lunch at McDonald’s. But I can’t imagine staying at a McDonald’s hotel on a business trip,” said Rene Weber at Bank Vontobel.13 Erwin Brunner, an asset manager at Brunner Invest AG, was more open-minded: “I usually stay in five-stars. But if there isn’t one around, why not stay at McDonald’s?”14 Peter Oakes, an industry expert at Merrill Lynch, was less optimistic, and “would be surprised if the Golden Arch Hotel expands to other countries.” Robert LaFleur, an analyst with Bear Stearns in New York, noted that while McDonald’s had a favorable brand image associated with conve- nience, hospitality, and cleanliness, he didn’t expect the company to begin rapid expansion of hotels in the next few years. LaFleur described the Swiss venture as a blip on the radar screen for major U.S. hotel chains:

I don’t see this as a competitive threat to the lodging industry. There are 38,000 hotels with about four million rooms in the United States, and this is a test in Switzerland. It will be interesting to see if this succeeds. But even if it is wildly successful, I still don’t see it as any short-term or medium-term risk to hotel players in the United States. Switzerland is a small market, and the penetration of branded hotels is much lower in Europe than it is in the United States.15

Mr. Hammer, McDonald’s Switzerland CEO, was a frequent traveler and knew exactly what customers wanted in a hotel. “On arrival, there will be an automatic check-in,” said Beat Kuhn, man- ager at the Golden Arch in Rümlang. “An electronic key will give guests access to the facilities. The room will be equipped with a large bed that has three built-in motors for a variety of positions. It will also have Internet and computer facilities, with the TV screen serving as a computer screen, and a cable- free keyboard.” As Urs Hammer argued: “Our restaurants serve 74 million customers in a country with a population of 7 million. If only one in 1,000 of those guests chooses the Golden Arch Hotel, the project will be a success.”16 McDonald’s planned to watch the progress of the hotel, but there was no plan for a widespread launch of McDonald’s-branded hotels, according to U.S.-based company spokes- person Walt Riker. “Each of the 100 countries where we operate is free to unleash innovation and new ideas to develop the brand. This is an individual, innovative approach by one company in our system.”17

Customer Experience

Nancy Stephens, a professor from Arizona, stayed in the Golden Arch Hotel in 2001. She was surprised that she had never heard about McDonald’s move into the hotel industry before she actually gave a guest lecture in Switzerland. She recalls her stay at the Golden Arch:

The beds go up and down electrically, like a hospital bed. The green part of the hotel room floor was hard as rock and extremely uncomfortable, even a bit painful, to walk on. The bar, downstairs behind the lobby, is cold and unwelcoming. It feels like a lounge in a small city airport. Plastic all the way. The only bar snacks were chicken McNuggets and party mix (pretzels, nuts, etc.). The bar has large windows looking out on a scene of green grass and trees. I found it more suggestive of having a picnic than having a drink in a bar. Not the right ambiance at all. The rooms are somewhat noisy, being located right by the airport. The Internet keyboard is wireless, very advanced for summer 2001, when I stayed there. I believe the hotel had just opened; there weren’t many people around and it had the feel of a large, empty hotel. The only food available is McDonald’s, at the restaurant attached to the hotel. Furthermore, the hotel is relatively isolated. There isn’t much of anything in walking distance,

13 Studer, Margaret, und Jennifer Ordonez, “The Golden Arches: Burgers, Fries and 4-Star Rooms: McDonald’s Plans to Open Two Hotels in Switzerland, Will Business Travelers Bite?” Wall Street Journal (2000) 17 November, S. B1. 14 Ibid. 15 Zuber, Amy, “McD Eyes Hotels on the Swiss Horizon,” Nation’s Restaurant News 34 (2000) 49, S. 1-2. 16 Studer und Ordonez, “The Golden Arches: Burgers, Fries and 4-Star Rooms.” 17″Swiss McDonald’s to Open Two Hotels,” 2000, www.cnn.com/2000/TRAVEL/NEWS/11/17/ leisure.McDonald’s.reut/, November 17.

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

TB0109 7

making one a captive market for McDonald’s food or forcing one to spend money on a cab to a restaurant, which would be expensive in a fairly non-urban location. As I think about this hotel visit in retrospect, the entire feeling was one of oddity and discomfort. It just felt off and I’m not sure I can say exactly why. Maybe it’s the sum of all my particular memories. I don’t think of it as anywhere I would want to return.

Fred Bernstein liked the experience when he stayed at the Golden Arch in Lully. After visiting the Swiss National Exhibition, he was looking for a room and learned that the rate was 180 CHF ($120 USD). When he asked whether there was a better rate available, the receptionist offered the post-9 p.m. walk-in rate of 83 CHF ($55 USD) since he did not have a guaranteed booking for a higher rate:

For $55 USD, we weren’t expecting much. But the room, though garishly painted, was exceedingly cheerful. Large windows, excellent air conditioning, and comfortable furniture made the room seem like a bargain. Better yet, at the touch of a button, the beds (twins pushed together) adjusted to every conceivable position. Plus, there was an Internet access, via the TV, with a wireless keyboard—so I could lounge in bed and answer e-mail. There were subtle reminders that we were in a McDonald’s hotel, including headboards shaped like the Golden Arches, but I found them witty rather than cloy- ing.18

Upendra Dixit, an Indian businessman who lived and worked in Germany for five years, recalls his only experience at the Golden Arch Hotel in Lully:

One long weekend, we were traveling towards Lausanne from the Interlaken area escorting my fa- ther-in-law. We had left Stuttgart in the morning, spent time at the Rhine Falls at Schaffhausen, then the best part of the day in the Interlaken and Jungfrau region. Late evening we were heading for Lausanne where we wanted to spend the night. The next day, we had a plan to spend the morning there and head out to the Zermatt region. At the Bern junction of the two highways coming from Basel and Interlaken, our car had an accident with some construction barricade material and was dam- aged. We were shaken up after experience and wanted to stop for the night. We came across our familiar McDonald’s restaurant on the highway at Lully and stopped for dinner. Till then, despite our several visits, we had not noticed the hotel, which was quietly situated to the side. The signage was not that prominent. This time we did notice it and felt that it was a good place to stop. First, the Golden Arch Hotel was immediately associated in the mind with the McDonald’s brand. We expected that the hotel would be one to two stars, matching the McDonald’s brand image. We noticed that the hotel was unusually quiet, with not much activity and few cars parked outside. One concern for the family was safety. Was it safe to stay on the highway with so few people around? When we entered the lobby, it was very quiet with no activity and no one at reception. This was different from McDonald’s restaurants where there was immediate service. So for the family, this was a very unwelcoming expe- rience, especially since we were all a bit upset after the accident. While we had no intentions to do much that evening, and it was already late, we noticed that there was not much that could really be done there, so it was ideally a bed-and-breakfast kind of place for an evening’s stay. All this had an association with a certain price expectation. When we finally rang the bell and got someone to come to the reception desk, we were told the tariffs would be around 150 CHF ($120 USD), which was a very high and upper-class hotel range. We were also told that we needed three rooms for five people. We felt that this was too high compared to our expectations. Given the low occupancy, there was little effort to sell the rooms to us and the front-desk person was not very friendly or welcoming either. Thus, we decided not to stay there and continued on to Lausanne where we had a miserable experi- ence in the other direction with Formula 1 hotel, but that is another story.

Daniel Deutscher, owner of DEKA Treuhand, a hospitality consulting firm in Frauenfeld (TG), was very surprised when he learned that the Golden Arch Hotel was positioned as a four-star hotel:

In Switzerland, McDonald’s restaurants are perceived as cheap fast-food places, while a four-star hotel means luxury. In order to receive four stars (by the Swiss Hotel Association (www.swisshotels.ch), you have to provide at least two hot meals and room service from noon to 2.30 p.m. and from 7:00 p.m. to 9:30 p.m. It would have never crossed my mind that a McDonald’s restaurant would qualify as a four-star hotel. They should have positioned the hotel in the three-star range or built a second, fine- dining restaurant in addition to a hamburger place.

18 Bernstein, “Want Fries with that McDonald’s Room?”

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

8 TB0109

Mr. Deutscher was also very surprised when he learned that the chosen brand name was “Golden Arch.”

While in the English-speaking world, the term “Golden Arches” is easily identified as McDonald’s logo, it does not translate into the German language. Most Swiss people do not know how to translate “arches.” Even worse, the word is pronounced similar to the German word for posterior.

Segments

A typical airport hotel served several segments simultaneously, and Golden Arch would be no excep- tion. The largest segment was made up of groups that were booked by tour operators and airlines. Tour operators booked airport hotels for outgoing guests (people living in Switzerland, Southern Germany, and Eastern Austria using Zürich Airport as their take-off base) and incoming guests (people from all over arriving in Zürich). Group business was usually strong in the summer and over the weekends. Average room rates were just a little bit higher than 100 CHF ($80 USD) and most rooms were occu- pied by two guests, driving the cost per guest and night down to 50 CHF ($40 USD).

Airlines needed rooms for their crews and for layovers. Accommodating airline crews was a tricky business. First, crews liked to stay at the same hotel whenever possible, and, therefore, there were usually long-term relationships between the individual hotels and the crews. Second, airlines often had con- tracts with hotel chains to accommodate their employees in the same hotel chain around the globe. Third, it was important that the captains and co-pilots have better rooms than flight attendants, e.g., suites versus standard rooms. Crew members also liked hotels with a certain level of dining options.

“Layovers” were passengers who missed a flight or who had to stay close to an airport once a flight had been cancelled or delayed. Airlines usually paid less than 100 CHF ($80 USD) for layover rooms, and flexibility was crucial. The hotel could get a phone call at 5 p.m. asking whether they could take 60 layovers for that night. If they only had 30 rooms left, the airline might check with another hotel that could accommodate more passengers in order to reduce complexity.

A third subsegment of this group was long distance buses, driving from the Netherlands, Scandi- navian countries, or Germany to France or Italy. They chose hotels in close proximity to the Autobahn. Golden Arch was only one kilometer away from the Autobahn.

The second largest segment was business travelers. They paid a higher average price than groups, but companies usually got a 20% discount off the rack rate (official room rate). Key accounts were large companies that had settled high-volume contracts with certain hotel chains. For example, German technology company Siemens had a contract with Choice Hotel group for 100,000 rooms per year. Golden Arch was close to Zürich Messe (exhibition area), which generated additional bookings during exhibition time (when occupancy rate was high everywhere and rates were going up). Because of the small-to-medium sizes of the meeting and conference rooms, Golden Arch was not able to host larger conferences, which was considered a fast growing market for four- and five-star hotels.

The third group was frequent individual travelers (FIT), who usually paid the highest price. Be- cause Switzerland is a small country and most travelers could drive to the airport easily, there was not much outgoing business. Therefore, individual travelers were guests from mainly Europe, the United States, and Asia.

Profit Model

There are two main profit drivers to consider in this kind of hotel property: occupancy rate (number of rooms sold of percentage of number of rooms available), and average revenue per room. Since most of the costs are fixed, profit maximization leads to a similar result as revenue maximization. Based on industry benchmarks, an occupancy rate of 72% (ranging from 78% in August to 65% in January) was

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

TB0109 9

forecasted. The breakdown by segment (based on rooms, not on guests) was 31% business, 42% groups (paying the lowest rates), 21% individual tourists (paying the highest rates), and 6% others (see Exhibit 5 for details). Based on this breakdown, an average room rate of 128.78 CHF ($103.52 USD) was projected, resulting in room revenues of 7,134,500 CHF ($5,735,129 USD) per year (Exhibit 6).

On the cost side, fixed costs were roughly 360,000 CHF ($289,389 USD) per month. Since room cleaning and laundry were outsourced, variable costs per room were 34.13 CHF ($27.43 USD), addi- tional variable revenues (conference rooms, minibar, phone, parking, etc.) were 11.97 CHF ($9.62 USD), resulting in a net variable cost per room of 22.16 CHF ($17.81 USD). Furthermore, credit card commissions averaged 1.97%, and travel agency commission averaged 2.73% of total revenues. An- other 1.09% went to debtor write-offs, flowers, decorations, newspapers, magazines, etc. (see Exhibit 7 for cost details).

Based on the volume of the building, the hotel part was nine times larger than the restaurant part, resulting in an investment of 28.8 million CHF ($23.15 million USD); 20% was equity, 80% was financed by a three-year mortgage for 3% per annum. The standard depreciation was 5% per annum of the nominal investment. The projected profit before taxes of 1,165,566 CHF ($936,950 USD) would lead to a 20.24% annual return of the 5.76 million CHF ($4.63 million USD) investment in a country with almost no inflation (see Exhibit 8 for a cost breakdown).

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

10 TB0109

Exhibit 1 Pictures of the Golden Arch Hotel in Rümlang

Shower outside of the bathroom“Sleeping under golden arches”

Lounge

© Pictures by Nancy Stephens, 2001

Hotel entry with Golden Arch airport shuttle bus

Hotel (left) and McDonald’s restaurant (right)

Front with Golden Arch logo

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

TB0109 11

Exhibit 2 Floor Plan of the Golden Arch Hotel in Rümlang

Floor plan of two rooms

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

12 TB0109

Exhibit 3 New Hotels, Planned Extensions, and Planned Hotels in the Zürich Airport Area

Zürich Area 1. Novotel***, Ibis**, Etap*, 457 rooms 2. Ibis**, Formule 1*, World Trend Center, 281 rooms 3. Turicum***, 250 rooms 4. Women’s Hotel, 27 rooms 5. Bellerive au Lac****, 51 Zimmer 6. Stadthotel***(*), 20 Zimmer

Airport Area 7. Flughafen Airport Hotel**** (at the airport), 300–350 rooms 8. Golden Arch****, 200 rooms 9. SAP Hotel***, 50 rooms 10. Astron***(*), 140 rooms 11. Allegra***, 132 rooms 12. Kopf*** Bülach, 34 rooms 13. Hilton*****, plus 100 rooms 14. Mövenpick****, plus 50–100 rooms 15. Seminarhotel, 300 rooms 16. Airport Park****, 245 rooms 17. Business Hotel****, 180 rooms

Status as of June 2000 1, 5, 11, 12: recently opened 2, 4, 8: in construction phase 13, 14: extension planned 3, 6, 7, 9, 10, 15, 16, 17: development planned

Source: Hosp, Janine, Bald blässt ein scharfer Wind, Tages-Anzeiger (2000) 17. Juni, S. 13

8

17

12

7 11

13

14 15 10

169

2

3

1

6

5

4

5 Kilometer5 Kilometer

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

TB0109 13

Source: Bundesamt für Statistik, Bern und “Ein Hotel in Zürich müsste man haben,” NZZ (2000) 5 August, S. 41.

Number of Hotels

Number of Lodging

Nights Number of

Beds Utilization

Basel 40 53,804 3,855 45.0% Bern 32 50,624 2,796 58.4% Geneva 92 176,295 10,380 54.8% Lausanne 37 58,084 3,700 50.6% Lugano 72 95,669 5,979 51.6% Luzern 52 107,225 5,364 64.5% Zurich 102 186,777 10,130 59.5% Airport Region1 20 58,672 3,142 60.2%

City Comparison Hotel Industry May 2000

1 Bassersdorf, Dietlikon, Kloten, Lufingen, Niederhasli, Oberglatt,

Opfikon(-Glattbrugg), Regensdorf, Ruemlang, Wallisellen, Winkel.

Exhibit 4 Statistical Data

Source: BFS.

Year Number of

Hotels Number of

Beds Utilization

May 2000 102 10,130 59.5% 1999 99 9,516 58.7% 1995 98 9,654 50.8% 1990 104 10,193 57.8% 1985 112 10,397 61.8% 1980 119 10,629 58.1% 1975 125 10,931 53.9% 1970 133 8,489 72.9% 1965 124 7,548 41.4% 1960 126 7,107 75.9% 1955 128 6,914 67.8% 1950 105 5,074 73.8%

Zurich’s Hotel Industry Since 1950

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

14 TB0109

Exhibit 5 Monthly Forecast of Occupancy and Rates by Segments*

*Disclaimer: All financial figures are based on industry benchmark data for this type and size of hotel in the Zurich Airport Area. No figures have been provided by Golden Arch or McDonald’s.

Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Occ% 65 68 68 71 72 75 78 78 75 72 71 70 71.92 Rooms 4252 4017 4448 4494 4710 4748 5102 5102 4748 4710 4494 4579 55404 Revenue CHF 539322 535203 591123 658909 601500 569985 591574.6 620758 586601 631029 617831 590652 7134488 Avr. Rate CHF 126.84 133.23 132.90 146.62 127.71 120.05 115.95 121.67 123.55 133.98 137.48 128.99 128.77 Guests/Room 1.30 1.40 1.30 1.4 1.5 1.55 1.7 1.7 1.55 1.55 1.55 1.45 Guests 5528 5624 5782 6292 7065 7359 8673 8673 7359 7301 6965.7 6639.6 83262

Occ% 65 Jan Occ% 68 Feb Occ% 68 Mär Rooms avail 6541 Rooms avail 5908 Rooms avail 6541 Rooms sold 4252 Rooms sold 4017 Rooms sold 4448

% Rooms Rate % Rooms Rate % Rooms Rate Business 40 1701 135 229589 Business 39 1567 145 227186 Business 33 1468 145 212831 Groups 25 1063 95 100977 Groups 25 1004 95 95414 Groups 33 1468 95 139441 FIT’s 30 1275 147 187498 FIT’s 17 683 166 113372 FIT’s 25 1112 168 186811 Diverse 5 213 100 21258 Diverse 19 763 130 99231 Diverse 9 400 130 52040

100 4252 539322 100 4017 535203 100 4448 591123 Average Rate 126.84 Average Rate 133.23 Average Rate 132.90

Occ% 71 Apr Occ% 72 Mai Occ% 75 Juni Rooms avail 6330 Rooms avail 6541 Rooms avail 6330 Rooms sold 4494 Rooms sold 4710 Rooms sold 4748

% Rooms Rate % Rooms Rate % Rooms Rate Business 36 1618 155 250782 Business 32 1507 145 218522 Business 32 1519 145 220284 Groups 34 1528 105 160447 Groups 44 2072 100 207219 Groups 50 2374 95 225506 FIT’s 23 1034 197 203637 FIT’s 17 801 166 132903 FIT’s 12 570 153 87164 Diverse 7 315 140 44044 Diverse 7 330 130 42857 Diverse 6 285 130 37031

100 4494 658909 100 4710 601500 100 4748 569985 Average Rate 146.62 Average Rate 127.71 Average Rate 120.05

Occ% 78 Jul Occ% 78 Aug Occ% 75 Sep Rooms avail 6541 Rooms avail 6541 Rooms avail 6330 Rooms sold 5102 Rooms sold 5102 Rooms sold 4748

% Rooms Rate % Rooms Rate % Rooms Rate Business 21 1071 145 155355 Business 29 1480 145 214538 Business 28 1329 150 199395 Groups 65 3316 100 331629 Groups 53 2704 100 270405 Groups 60 2849 105 299093 FIT’s 10 510 153 78060 FIT’s 14 714 153 109284 FIT’s 8 380 167 63427 Diverse 4 204 130 26530 Diverse 4 204 130 26530 Diverse 4 190 130 24687

100 5102 591575 100 5102 620758 100 4748 586601 Average Rate 115.95 Average Rate 121.67 Average Rate 123.55

Occ% 72 Okt Occ% 71 Nov Occ% 70 Dez Rooms avail 6541 Rooms avail 6330 Rooms avail 6541 Rooms sold 4710 Rooms sold 4494 Rooms sold 4579

% Rooms Rate % Rooms Rate % Rooms Rate Business 23 1083 150 162478 Business 40 1798 145 260669 Business 28 1282 135 173075 Groups 45 2119 105 222525 Groups 27 1213 100 121346 Groups 28 1282 100 128204 FIT’s 28 1319 168 221536 FIT’s 29 1303 163 212446 FIT’s 40 1831 148 271059 Diverse 4 188 130 24490 Diverse 4 180 130 23370 Diverse 4 183 100 18315

100 4710 631029 100 4494 617831 100 4579 590652 Average Rate 133.98 Average Rate 137.48 Average Rate 128.99

Source Rooms Revenues Rate

Business 17423 31% 2524705 35% 144.91 Groups 22993 42% 2302204 32% 100.13 FIT’s 11532 21% 1867196 26% 161.91 Misc 3455 6% 440383 6% 127.47

Total 55402 100% 7134488 100% 128.78

For the exclusive use of J. Zhang, 2020.

This document is authorized for use only by Jennie Zhang in HTM531 – Spring 2020 taught by Sybil Yang, San Francisco State University from Jan 2020 to Jun 2020.

 

 

TB0109 15

Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)