Starwood 2008 Annual Report Download - page 3

If we learned one thing in 2008, it was to expect the unex-
pected, to prepare for the worst and to keep our nerve.
Business trends deteriorated throughout the year and this
negative momentum has continued into 2009. As part of our
ongoing efforts to prepare for a worsening macro environ-
ment, we began a rigorous cost-cutting program early in
2008, including a review of our spending with a focus on
reducing costs, improving productivity and reinvesting against
our growth priorities. I am pleased to report that we have
been successful in this task. In fact, our cost discipline helped
us achieve strong results in each quarter of 2008 despite a
rapid deterioration in lodging demand. In 2009, we will con-
tinue to focus on managing our costs without compromising
our long-term growth plans for the company.
I would like to take this opportunity to thank Starwood’s
talented team of Associates for delivering excellent results in
2008, despite the weakening environment and the
Company’s focus on dramatically reducing overhead and
property-level costs.
• We grew our managed and franchised revenues by
over 5% despite flat worldwide RevPAR.
• We added a record 87 hotels to Starwood’s global
platform, representing 10% gross unit additions dur-
ing the year.
• We increased our guest satisfaction scores across all
of our brands, including strong debuts for aloft and
Element.
• We sold six assets for cash proceeds of $320 million.
• We realigned our corporate and divisional struc-
tures, resulting in annual run-rate savings of over
$100 million.
• We implemented top-down and bottom-up initiatives
to significantly reduce property-level costs.
Looking ahead, the good news is that we remain strongly
positioned for one of the most challenging demand environ-
ments the lodging industry—and the global economy—has
ever experienced. In addition to working toward the Five
Essentials that will drive our success over the long term, we
are continuing to reduce our cost base. Cost control enabled
us to weather the deteriorating fundamentals that accelerated
throughout 2008. To put the operating environment into
perspective, worldwide owned RevPAR grew 5% in the first
quarter, but declined 16% in the fourth quarter. While the
severity and breadth of the slowdown surprised us, we were
well ahead of the curve from a cost reduction perspective
which helped drive our better than expected results.
Starwood’s efforts to reduce corporate overhead have created
immediate savings as well as lasting changes to our way of
doing business. We are using what we call Activity Value
Analysis, or AVA, which is a rigorous process to address our
costs and lay the foundation for future growth. Through AVA,
we eliminated costs by streamlining activities and removing
overlaps in our organization.
Let me take a step back to explain why this was needed.
Remember that Starwood came together in the late 1990s as
a patchwork of organizations—a small lodging REIT acquired
Westin, ITT/Sheraton, Vistana and, most recently, Le Meridien.
This resulted in a large organization with multiple offices and
duplicate functions. While Starwood has performed well in
spite of its complex structure, we saw the opportunity to save
even more money and become more agile. Equally important,
we wanted to ensure our corporate structure was positioned
to best support our properties and owners.
For example, through the AVA process we eliminated almost
100 positions in our North American Division alone. In addition
to focusing on cost cutting, as we went through the process
we also looked at identifying areas that could be strength-
ened to better meet the needs of our owners. This resulted in
reorganizing some parts of the owner relations team to
improve communication and support.
We also centralized many activities such as legal functions,
created a single service center for human resources, and are
consolidating certain accounts payable and payroll functions
in the United States. We also better aligned our development,
architecture and design, and hotel opening teams to streamline
the process from signing a contract to opening a property.
In total, the AVA process to date has generated a 30%
reduction in personnel costs across many of our corporate
and divisional functions. At Starwood’s Vacation Ownership
business, we were able to reduce G&A by 45% and eliminate
35% of our sales force. In addition to the AVA process, our
overhead cost reduction efforts also focused on compensa-
tion. This included benchmarking most positions, allowing us to
re-band jobs and make sweeping changes in equity compen-
sation. Like many companies, we have also frozen salaries for
2009. As mentioned earlier, the net result will be a run-rate
savings of $100 million, and this includes only those savings
already implemented.
The second area of our cost cutting focused on the property
level. We began two major initiatives in 2008—one is bottom-
up and the other is top-down. Between them, we should be
able to offset inflationary pressures, significantly helping our
results in 2009. To be clear, this is before the impact of any
variable cost savings associated with lower occupancy.
Our bottom-up approach is called ‘lean operations’ and
involves using our talent to reduce work and waste. For
example, we refined our staffing model to better match work
demand, outsourced bakery and butcher positions, and
expanded spans of control for managers and supervisors.
The lean operations team is working closely with our Six
Sigma team to implement these productivity enhancements
across our hotels.
Dear Fellow Shareholders:
Starwood Hotels & Resorts Worldwide, Inc.