ITT Sheraton Corporation

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ITT Sheraton Corporation

60 State Street
Boston, Massachusetts 02109
U.S.A.
(617) 367-3600
Fax: (617) 367-5676

Wholly Owned Subsidiary of ITT Corporation
Incorporated: 1941 as Standard Equities Corporation
Employees: 125,000
Sales: $4.38 billion

The world’s leading international hotel company and third-largest hotel company in terms of number of rooms, ITT Sheraton Corporation owns, leases, manages, or franchises some 450 hotels, inns, and resorts in 65 countries on five continents. Servicing 22 million guests worldwide each year, ITT Sheraton has been the hotel industry’s leader in a number of areas, including the use of new technology for reservations and the penetration of new international markets. After some lapses in quality during its expansion into franchises, the company instituted a rigorous system to ensure consistent worldwide standards in both corporate and franchised properties.

Ernest Henderson and Robert Moore, the hotel chain’s co-founders, had not originally intended to enter the hotel business. Harvard classmates in the 1910s, they tried many businesses, from assembling Model-T cars and radios, to importing paper-fiber suits and German shepherd dogs. Shortly after the stock market crash, with stock prices low, they turned to securities. Henderson, Moore, and Henderson’s brother George bought an investment company—Beacon Participations—relatively cheaply. From there, they embarked on highly unorthodox financial paths that frightened off some stockholders but led, after the purchase of two more investment companies—Atlantic Securities and Standard Investing Corporation—to what became the Sheraton Corporation of America. The group chose the hotel business because it believed that real estate, and in particular hotels, would recover most quickly after the Depression.

The Henderson brothers and Moore developed a pattern of buying lagging properties and turning them around at a substantial profit—the backbone of Sheraton’s early success. Shortly after 1933—a year in which industry-wide hotel occupancy rates dropped to the lowest ever, 51%—they purchased the Continental in Cambridge, Massachusetts. The Continental had first opened its doors the day the stock market crashed; six months of declining business led to foreclosure, and, a few years later, to the closure of the bank that had foreclosed. For a very modest sum, therefore, the Hendersons and Moore started in the hotel business.

After paying off mature bonds, the remaining assets of their third investment company, Standard Investing Corporation, were used to buy the 200-room Stonehaven Hotel in Springfield, Massachusetts. A few years later, they consolidated Standard Investing with International Equities Corporation to form the Standard Equities Corporation. By that time, the Hendersons and Moore had purchased three hotels in Boston, one of which later gave the chain its name because the hotel’s electric sign—which bore the words “Sheraton Hotel”—would have been prohibitively costly to replace.

Within a few years, they purchased the Copley Plaza, a world-renown Boston institution. This was, according to Ernest Henderson—president and spokesman for the company—their introduction to the major league. After the Copley, they began to seek out projects that would yield two dollars in value for every dollar expended.

Throughout the 1940s, domestic expansion continued with purchases of hotels stretching from Maine to Florida. Competition lay in the form of the growing Hilton, Statler, Pick, Knott, and Milner hotel companies. The success of Henderson’s company, which put it in the running with these other chains, was due to its pulling itself up by its bootstraps and by sheer frugality. Ernest Henderson—his brother had dropped out of the picture by now—was known to go on endlessly about the need to extinguish unused lights.

The company received one substantial infusion of outside capital. In 1946—a booming year for the hotel industry with its highest-ever industrywide occupancy rate of 95%—Standard Equities merged with U.S. Realty and Improvement Company, a holding company, to form the United States Realty–Sheraton Corporation, which was shortly thereafter renamed the Sheraton Corporation of America. As part of this merger, Henderson and Moore acquired several office and apartment buildings in New York City, which were later resold for a profit, in addition to some other nonhotel properties, including the Martin Electric Company of Detroit.

From that time on, Sheraton brought innovations to the hotel industry, particularly with technological advances. In 1948, Sheraton was the first to use the telex system for a reservations network. In 1958, it introduced Reservatron, the industry’s earliest automated electronic reservation system, which made Sheraton the first hotel chain to centralize and computerize reservations. In 1967, Sheraton updated that system with Reservatron II, a computer system for personalized reservations. In 1970, Sheraton was the first to institute a toll-free 800-number system, allowing customers direct access to reservations.

Henderson used federal depreciation allowances to reduce Sheraton’s taxable income, thus increasing its cash flow and freeing up funds for expansion. The 1950s saw the growth of loosely banded hotel groups and the construction of new properties, particularly motels. Sheraton followed suit by building newer, more expensive hotels in 1957 as well as motor inns, partly in response to the development of interstate highways and increased air travel. At this time, Sheraton chose to build new as opposed to fixing up old because the supply of poorly run existing hotels was exhausted. The company fully utilized its audit potential by mortgaging its hotels and four of its office buildings. In order not to bring down the whole company if a depression were to hit, the hotels were held in subsidiary corporations.

Not content with simple domestic growth, Sheraton’s international expansion began with the acquisition in 1949 of two Canadian hotel chains, the Laurentien Hotel Company and the Eppley chain. Ten years later, Sheraton went beyond North America with a flourish that would mark its future: four Hawaiian properties were purchased and the stage was set for Sheraton’s eventual dominance of the Hawaiian hotel market, with 12 luxury hotels. Sheraton followed with a 1961 Middle East project in Tel Aviv, then hotels in Puerto Rico and Jamaica, and in 1963 with its first South American hotel, the Macuto Sheraton in Venezuela.

In the United States during the 1960s, as family vacations by car became increasingly popular, the dominant chains were taking root. Despite the increase in hotel business from family car trips, some industry analysts considered the lodging industry overbuilt and predicted doom for many hotels. Increased air travel, although it cut the number of stopovers, led to an increase in hotel business. Sheraton had started the decade strong. With the highest cash flow in the hotel industry in 1958, Sheraton sold approximately 30 to 40 hotels between 1945 and 1960, most of them at substantial profits. Times were lean, however, with the glut, and a few years later, Sheraton was forced to sell more hotels to reduce the company’s debt.

Up until this time, the most importance difference between Sheraton and Hilton, the top U.S. chains, was that while Hilton was the largest operator of hotels in the world, largely because of its network of leases, Sheraton was the largest owner of hotels. Even though other hotels had been hit by bankruptcy and many were in the red because of overcapacity, Sheraton was still making money in real estate. In fact, Sheraton was in the red quite a bit of the time—but only on the surface. Ernest Henderson’s clever accounting kept profits low even though assets were substantial.

In the early 1960s, the Sheraton style began to change. In order to spread its name without tying up funds, the company managed hotels owned and built by others. In 1962, recognizing the merits of franchising and the prospective demand of other hotels to use Sheraton’s well-known name along with its advanced reservation system, Sheraton followed the industry trend by forming a franchise division. Henderson seemed to be looking forward to the fall-out from the 1960s glut, that is, the opportunity to buy bargain-priced hotels, in the same way that he was able to buy hotels and survive the fall-out of the 1930s.

Henderson died in 1967 and the chain passed to his son, Ernest III, who had become president and treasurer in 1963. With the elder Henderson’s death, Sheraton was up for sale. International Telephone and Telegraph Corporation (ITT)— long the international equivalent of AT&T and in the 1960s a leader in the conglomerate merger wave—acquired Sheraton as a wholly owned subsidiary in 1968. Harold Geneen, then president of ITT, wanted companies that were capable of a minimum of 10% annual growth rate, and those that would bring to ITT a greater degree of public recognition. Geneen’s policy was to attach the ITT name to all its subsidiaries. Sheraton fit well into ITT’s line of consumer services, particularly as ITT already owned a rental car company and an airport parking company; the trend toward package travel service had begun.

Given this new ITT affiliation, Sheraton began to depend increasingly on consumer and market research when making development decisions. Just after the acquisition, Claude Feninger, former product manager for hotel operations of ITT—ITT had previously had 16 Holiday Inn francishes in the U.S.—was named president of Sheraton-International, the overseas properties division. Ambitious plans were laid to fashion a global network of business and convention hotels, luxury hotels and resorts, as well as inns.

Howard “Bud” James, who became ITT Sheraton president and CEO in 1970, moving the younger Henderson into the chairman slot, is often cited as the reason that Sheraton moved so far ahead, particularly because he saw the value of decentralized management, domestically and globally. Sheraton’s U.S. division, therefore, has regional managers who are responsible not only for their “own” hotels but six or seven other properties as well. Internationally, Sheraton’s properties are divided into four geographic divisions, along with a franchise division, for management purposes.

After the early 1970s, Sheraton underwent a change in its development philosophy. Prior to that time, as was Henderson’s way, Sheraton operated almost all of its hotel properties. Under the guidance of ITT, Sheraton evolved from a real estate company with heavy equity involvement into a hotel management company with low equity involvement. It did so by relying more heavily on franchises and management contracts. For Sheraton and the other prominent hotel chains, such as Holiday Inn, Hilton, Marriott, and Ramada, franchising and managing, rather than owning and operating, certainly had their virtues: financial risk was greatly reduced, and because of the elimination of depreciation, Sheraton was able to maintain steady earnings flow from its old properties. Such arrangements do not guarantee high earnings. If demand for rooms fall, Sheraton’s revenue decreases because that revenue is simply a percentage of operating profits.

By the mid-1970s, Sheraton was the industry leader in selling franchises and management contracts, which had by this time become widespread among the big national chains. In 1976, Sheraton’s gross sales from owned, leased, managed, and franchised properties topped $1 billion. Despite the excitement produced by international expansion— Sheraton’s operations expanded from 4 to 55 foreign countries in just over ten years—in 1985, Sheraton owned only 14 of its 482 hotels, barely 3%. At that time, a flaw in Sheraton’s franchising system began to appear: loss of control over service quality. In the rush to expand with franchises, Sheraton had not devised a system for compliance with the high service-standards that the Sheraton name had originally implied. This problem, which had not fully surfaced until the mid-1980s, was addressed with a sweeping reorganization.

Through marketing campaigns and incentives, Sheraton targeted groups to increase sales. One concept to differentiate Sheraton in a crowded, competitive market, was the Sheraton Towers, the first of which opened in Boston in 1970. The Towers, designed for the business traveler, were essentially hotels within hotels, with fancier rooms, and unusual amenities such as concierge service. With Sheraton Club International, a frequent traveler program launched in 1987, Sheraton was highly successful in retaining repeat customers, particularly those in business. Such travelers along with the convention market, which is sometimes booked as much as ten years ahead of time, are an important part of Sheraton’s business. To take advantage of an aging U.S. population, Sheraton, in 1977, began offering a 25% discount to members of several senior citizens’ organizations. Weekend deals and family plans had been used since Sheraton’s early days to fill empty rooms on the weekend, after the bulk of hotel guests—business travelers—left.

As was the case in the 1930s and the 1960s, some analysts in the 1980s contended that the hotel industry was overbuilt, particularly the luxury segment, in which Sheraton has most of its properties. Because any night a room is empty can never be sold again, a glut in the hotel business can prove disastrous. Sheraton, however, denied the existence of such a glut, globally or even nationally, even though it admitted that pockets of excess capacity existed in certain cities, such as in Boston in the mid-1980s. Sheraton continued to respond to the competition with target marketing because it already had diversification ranging from the more utilitarian business hotels from its earlier days to the more luxurious hotels and resorts. Because of Sheraton’s worldwide spread of hotels and commitment to the long-term view, it was in a good position to ride out temporary difficulties that affected other hotels.

In 1983, the new Sheraton chairman, president, and CEO, John Kapioltas, former president of Sheraton’s Europe, Africa, Middle East, and South Asia division, who was promoted in part because of his development success, presided over an effort to bring to North America the same standards he had applied to five-star properties around the world

After expanding its domestic-resort network with new properties in California, Colorado, and Hawaii, Sheraton continued to lead the way with more industry initiatives. In 1985, it signed an agreement to operate the Great Wall Sheraton Hotel, Beijing, the first hotel in China to bear the name of an international hotel company. Five years later, Sheraton had four hotels in China bearing its name. Sheraton became the first U.S. hotel company to operate in Eastern Europe, with the 1986 opening of a Sheraton hotel in Sofia, Bulgaria. In 1989, it announced the first U.S.-Soviet joint venture to own and operate two hotels in Moscow, the first of which was scheduled to open in 1992.

Throughout the 1980s, Sheraton’s net income fluctuated widely. It and an ITT development in Florida had a combined net loss of $6 million on revenues of $626 million in 1984 compared to a net profit of $19 million on revenues of $540 million in 1983. This substantial reversal may have led to ITT’s 1985 announcement that it would welcome minority shareholders for Sheraton. Despite ITT’s scaling back across the board in the late 1980s, it was not likely to sell Sheraton outright, given the great visibility Sheraton afforded and the fact that in 1985 ITT outlined an $80 million plan to upgrade Sheraton technology.

In 1986, a five-year internal reorganization of Sheraton began with the removal of the distinction between corporately owned and franchised hotels. In the company’s early years, Ernest Henderson had stressed the importance of good reputation. By the mid-1980s that reputation was suffering: wherever customers saw the name they expected the same outstanding service—although, according to Sheraton surveys, they did not always seem to be getting it..

Over a period of five years, Sheraton sold and/or canceled the franchises for approximately 60% of its franchised properties that could not or would not meet its standards. To set itself apart from the competition, Sheraton launched a new ad campaign, “At Sheraton, Little Things Mean A Lot,” in addition to the Sheraton Guest Satisfaction System (SGSS), a concept designed to increase guest-service standards and monitor how employees work to achieve that goal. Standard requirements were upgraded as of 1989, including not only the new service standards and SGSS, but a new inspection program, life-safety standards, training, the upgrading of existing properties, and opportunities for future growth.

Despite the increasingly complex and competitive market in which mergers and acquisitions have become common, Sheraton continued to move with its program of selective growth. By 1990, Sheraton had 161 corporately owned and-operated properties and 293 franchised properties. Considerable sums were spent for existing property improvements, including major restoration projects of Sheraton’s U.S. landmark properties, such as the historic Carlton in Washington, D.C., and the luxurious Moana Surfrider in Waikiki Beach in Hawaii, both of which reopened in 1989. Money had also gone toward building new properties.

In 1990 ITT Sheraton had ambitions plans for the next decade. It intended to extend its world presence to at least 75 countries, with a greater emphasis on quality and uniformity. Internationally, Sheraton had in 1990 more than 50 projects under development, including plans for countries new to the system, as well as further developments in Europe, the Middle East, and South America. At the same time Sheraton was well-positioned for “The Pacific Century” with four new Sheratons under construction in Australia, and management contracts lined up for 23 Indonesian hotels. Domestically, ITT Sheraton had plans for several markets, including more convention hotels and all-suite hotels. As of 1990, more than 20 corporately-managed and franchised hotels were scheduled to join the Sheraton network in North America.

Sheraton continued to be in keen competition with Holiday Inn and the upscale Marriott Hotel chain, which had just edged Sheraton out of the number-two spot in number of rooms worldwide, for customers. A flexible attitude in joint ventures and other arrangements with a variety of institutions, dating back to the early days of Ernest Henderson’s unorthodox paths, continued to hold new options for Sheraton in the future.

With the help of ITT, Sheraton’s business was restructured and its service made uniform. That same company, just past its 50th anniversary was poised for the next century—with a policy of selective growth, high service standards, and rigorous checking procedures to ensure the strength of the ITT Sheraton name.