Landmark Case of Stouffer Valley Forge Hotel
Here is the story behind a landmark court case in 1992 that led to the foreclosure of the Stouffer Valley Forge Hotel, sparked by a collision between its owners and management. I served as an expert witness for the plaintiff in this case.
It is no surprise that management disputes are increasing in these difficult economic times. Hotel owners become unhappy with management companies who insist on operating the hotel with unrealistic brand standards and unreachable average daily rates.
This is not the first time in hotel history that such an environment occurred. In a landmark decision in 1994 that sent shockwaves across the hospitality industry, the U.S. Penn Hotel Associates was awarded $7.8 million from the Stouffer Corporation for breach of fiduciary duty, tortuous breach of contract, misrepresentation and gross negligence.
The story behind this landmark decision is a cautionary tale of a management company who didn’t know enough about the marketplace, didn’t commission the necessary research, didn’t permit the local management to prevail in positioning strategy, didn’t provide flexibility on rates and pricing, and didn’t follow the basic precepts of yield management and revenue maximization. The management company tried to impose a four-star market position on a three-star hotel by fiat. Despite all the evidence over a five-year period, Stouffer insisted on a four-star operation. The upshot of this myopia was this landmark decision against a major hotel management company.
In 1987, U.S. Penn Hotel Associates purchased the Stouffer Valley Forge Hotel in King of Prussia, PA, from the Stouffer Hotel Company for $25 million. At the time, the decision to purchase the Hotel seemed sensible. The Hotel was then the market leader in terms of rates, profitability and stability.
Stouffer retained responsibility for the management of the Hotel and received management and other fees during the life of the agreement. In order to cancel the agreement (which had a 20-year term and provided Stouffer with the option to extend) the owner was required to pay Stouffer a termination fee of as much as $8,000,000.
In November 1992, after five years of ownership, the lender foreclosed on the Hotel because it no longer produced a cash flow sufficient to pay the mortgage. During the period they owned the Hotel, U.S. Penn received virtually no return on its investment despite the fact that it committed significant resources to improvements of the Hotel’s physical plant. Indeed, during this 64-month period, the Hotel went from making a $653,000 profit (in 1987) to losing $1.4 million in the year bank foreclosed (1992).
In contrast, during this same period Stouffer collected more than $3.5 million in management fees, marketing fees, reservation fees, and assessments for national advertising. Under Stouffer’s management, the Hotel lost 61 percent of its individual guests in four market segments. This deterioration occurred despite the fact the consumer demand in these market segments grew by 34 percent during the same period of time. Moreover, although the Valley Forge hotel market experienced some ups and downs, it proved to be relatively stable over the long term. Indeed, the occupancy and average rate of the Hotel’s direct competitors was virtually unchanged from 1987 to 1993. However, during the same period of time, the Stouffer Hotel’s overall occupancy declined by 21 percent. Thus, whereas the Hotel was the market leader in 1987 with an occupancy advantage of six points, it had fallen to a position at the bottom with an occupancy of ten points below the market.
Market research showed that four of the Hotel’s direct competitors improved their occupancy, while four other hotels fared poorly by comparison to the market. Interestingly, each of the four hotels that fared well adopted prices that were consistent with the value they offered to consumers. Conversely, each of the four hotels that fared poorly had increased their rates to the point that there was a significant disparity between the price charged and the value offered. Though it was the market leader in 1987, the Stouffer Hotel performed worse than any of its direct competitors during the period it was managed by Stouffer.
We tested a variety of factors to determine the cause of this precipitous decline in the Hotel’s performance. The results were conclusive: Every hotel that offered rates lower than their perceived quality gained in occupancy while those who charged more than their relative quality ranking lost occupancy and market share.
The results of our survey indicated that the Hotel provided high-quality service and that the guests found the Hotel’s facilities to be more than satisfactory. However, the vast majority of past guests who no longer stayed at the Hotel left because of the high rates charged.
As part of our research, we interviewed the General Manager and other senior managers at the Hotel regarding the rationale for Stouffer’s pricing philosophy, as well as their efforts and experience with rate adjustments. Much to our surprise, Stouffer’s on-site management team told us that their repeated requests to reduce rates selectively had been rejected by Stouffer’s senior management.
We also learned that Stouffer’s senior executives canceled several historically successful and critical promotions, thereby making the situation even worse, Moreover, the on-site management team also reported that Stouffer insisted that the vast majority of the Hotel’s advertising budget be spent on national advertising campaigns which promoted Stouffer’s luxury image, but which were not appropriate for the local Valley Forge market.
Stouffer took the position that the following factors were responsible for the hotel’s failure: weak national economy and insufficient market demand.
In this regard, our market research shows that Valley Forge was fortunate in that most of its industry is concentrated in the pharmaceutical business which did not suffer from the recession to the same degree as many other industries. There is relatively little defense, military or major banking business, all of which were heavily hurt by the national recession.
In summary, from 1987 to 1993, the economic conditions in Valley Forge actually were favorable for the hospitality industry; indeed, the market experienced a growth in demand of 43 percent during the period in question. Therefore, the financial failure of the Stouffer Hotel was not caused by the general weakness of the U.S. economy.
During 1987, Marriott opened a suites-only Courtyard Hotel and Guest Quarters in the Valley Forge area. The opening of these hotels did not directly affect the Stouffer Hotel, which was able to increase its occupancy to 72.5 percent (up 1.4 points), and to increase its average rate by $3.57 (to $84.51). Indeed, the Hotel achieved a record profit of $653,000 in 1987. This record-breaking performance was accomplished by adding over 2,000 occupied room nights by individual travelers of more than $100 per night.
However, in 1988, with the opening of an additional Courtyard, a new Hilton and several limited service hotels (Residence Inn, Days Inn, Hampton Inn and Lodging Unlimited), the Stouffer Hotel began to lose occupancy. Though Stouffer added 2,700 group room nights, it lost 5,400 non-group room nights, for a net loss of 3.9 percent in occupancy. In spite of this declining occupancy, the Stouffer Hotel almost achieved its 1987 profits by raising its prices (group up $2.20 and non-groups up $3.16) and by cutting some costs.
In the 1989-1991 period, Sheraton opened an attractive 160-room hotel in the Valley Forge area. Marriott also opened a full service hotel nearby (Conshohocken), and three additional low-priced hotels (Hampton, McIntosh and Summerfield Suites) started operation. However, these later hotels, which offered rooms from $39 to $65, did not impact the Stouffer Hotel, which was offering rooms at more than $100 per night.
It is interesting to note that, of the four hotels that performed poorly, three – the Stouffer, Sheraton Plaza and the Great Valley Hilton – actually raised prices, rather than lowered them during the time others were cutting prices.
Our market research revealed that Stouffer priced rooms for single occupancy $32 above Marriott, which had a very strong Frequent Guest Program. Naturally, this disparity led many customers to select the Marriott. Similarly, the Guest Quarters offered a suite of rooms for under $90, as compared to a standard single room offered by Stouffer at $125. Thus, it is not surprising that Stouffer lost most of its individual guests during the years the Hotel was owned by U.S. Penn Associates.
Stouffer simply would not allow the local management of the Hotel to lower its prices as necessary even to retain its long-time customers who were happy with the hotel.
Hence, the Stouffer Hotel’s loss of business was neither a function of the weak economy, nor of depressed occupancy in the local market.
Rather, the financial collapse of the Hotel was caused by Stouffer’s mismanagement, as demonstrated primarily by Stouffer’s adamant unwillingness to adjust prices, when better quality hotels were available at lower rates.
The General Manager should have been permitted to manage and operate the Hotel in accordance with his local analysis and recommendations, rather than the dictates of Stouffer’s home office. Had this occurred, we believe that the Hotel would have enjoyed the success realized by some of is competitors and would not have been lost in foreclosure.
About the author: Stanley Turkel, MHS, ISHC operates his hotel consulting office as a sole practitioner specializing in franchising issues, asset management and litigation support services. Turkel’s clients are hotel owners and franchisees, investors and lending institutions. Turkel serves on the Board of Advisors and lectures at the NYU Tisch Center for Hospitality, Tourism and Sports Management. He is a member of the prestigious International Society of Hospitality Consultants. His provocative articles on various hotels subjects have been published in the Cornell Quarterly, Lodging Hospitality, Hotel Interactive, Hotel-Online, Blue MauMau, Hotel Resource News, etc. Don’t hesitate to call 917-628-8549 or email [email protected]