Knowledge Network: Faculty & Research

By Stefan Michel, Thunderbird professor

Between November 1999 and February 2000, McDonald’s stock declined from $48 to $32 per share. The financial analysts surmised that McDonald’s in the United States had reached market saturation.

Martin Huber, CFO of McDonald’s Switzerland, concluded that every opening of a new McDonald’s restaurant intruded upon the revenue of other restaurants already in operation. As a result, McDonald’s decided to pursue a “diversification” strategy.

McDonald’s Switzerland, headed by CEO Urs Hammer, chose to pursue ventures in the hotel business and in 1999 received the green light from McDonald’s headquarters.

They soon began construction on two hotels. The crucial factor in deciding to pursue the hotel strategy was that CEO Hammer came from a hotelier background. Hammer hoped the hotels would continue “the spirit of McDonald’s hospitality philosophy.” Hammer also was a frequent traveler and knew exactly what customers wanted in a hotel.

“Our restaurants serve 74 million customers in a country with a population of 7 million,” Hammer argued. “If only one in 1,000 of those guests choose the Golden Arch Hotel, the project will be a success.”

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. 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.

In March 2001, McDonald’s Corporation opened its first hotel in the Swiss town of Rümlang. The 211-bed, four-star Golden Arch Hotel was situated close to Airport Zürich-Kloten and was built at a cost of about $26 million. A few weeks later the second hotel in Lully was opened.

The five-story Rümlang hotel sat next to a 170-seat drive-through McDonald’s restaurant open 24 hours a day, which is unusual in Switzerland. The restaurant was separated from the hotel so that only hotel guests had access to the hotel building.

Two types of rooms were offered: one offered an oversized king-sized bed and the other two oversized single beds. The price range was set from $120 to $160 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 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 was used to assign employees different positions and tasks.

In order to bypass the rush of the check-in and check-out process, guests had the ability to check in and out of the hotel at the airport terminal.

In total, there were nine small meeting rooms, which were able to be 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 mattresses and outfitted the rooms with the same beds and mattresses as a five-star hotel. The room’s beds had three built-in motors for a variety of positions.

What made the room layout unique was a curved wall that gave the room a special atmosphere and design. It 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. The rooms had Internet and computer facilities, with the TV screen serving as a computer screen, and a cable-free keyboard.

Rümlang, a small town on the fringe of Zürich, was chosen as the first location because Zürich was on the upswing. Occupancy rates were high, and there was much population diversity. Young people considered Zürich trendy, while older people enjoyed its culture and businesses. Guests were coming and paying the prices.

Even more promising was the airport area. The national airline Swissair 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 percent in the first decade of the new millennium.

The nearest hotel was a family-owned hotel with 34 rooms, three stars and no airport shuttle. The room rates were $96 to $137. A more significant competitor was in Kloten since it competed in the same price range, but it was closer to the airport , had more rooms, fewer but larger meeting rooms, and a fine-dining restaurant. Very close to Golden Arch’s property was a hotel, part of a chain that operates more than 50 hotels around the world, with three restaurants and large meeting rooms. It offered a frequent-guest rewards program.

Another direct competitor was located between the airport and downtown, close to several major business centers and corporate offices.

In spite of the surprising number of new hotels, business was still excellent for all the hotel operators. In Zürich, hotel occupancy rates in 1999 were 73 percent, and in the previous year 71 percent. The region around the airport was averaging 80 percent capacity.

The two McDonald’s hotels opened to great fanfare due to the uniqueness of the venture and the celebrity of the Swiss CEO, Urs Hammer. In spite of the media attention, and the attention paid by the visitors of the McDonald’s restaurants adjacent to the hotels, activity at the hotels was limited.

Occupancy during the first year of operation rarely, if ever, met industry average. Management negotiated to get some of the bus tour business, which is a large segment of Swiss tourism. While this caused occupancy to rise somewhat, the negotiated rate was far lower than the typical rate charged (closer to a two-star range).

Because of the high cost of construction, the debt service on the construction costs could only be recovered at a three-star price range and above.

During the first year, the hotels also experienced an unusually high rate of turnover among the staff. Finding qualified chefs and hotel staff was extremely difficult, and those who were valued tended to jump to other hotels for higher wages.

Consumers also found it difficult to believe that a McDonald’s Hotel could offer four-star accommodations, which is where the hotels were priced. Consumers expected that the hotels would be more in line with the restaurants, which, if not the best, were clean and affordable. Consumers also found it hard to believe that a four-star hotel would be connected to a McDonald’s restaurant.

In the end, a confluence of events hurt tourism in Switzerland and, therefore, the prospects of the McDonald’s Hotels. The outbreak of SARS, the terrorist attacks in the United States on Sept. 11, 2001, and the grounding and bankruptcy of Swissair combined to lower tourism numbers soon after the hotels opened.

Occupancy was also hurt by the increasing competition from new properties, which were brought on line at the same time as the McDonald’s properties.

Design issues with the hotel and the rooms also played a factor in the poor showing. On the whole, guests found the rooms well-designed and comfortable, but some found the décor “too plastic.” And while the transparent shower that abutted into the living space made the room look bigger, from the inside the glass tube was claustrophobic.

After guests complained of the lack of privacy (e.g., two business men sharing a two-bedroom or a family traveling with teenagers), the glass was frosted. Also, the lack of suites and sizable meeting space precluded hosting large business groups.

In the end, the hotels never approached the occupancy needed to break even on the investment. In August 2003, the two hotels were sold to another operator and became the Park Inn Zürich and Park Inn Lully.

Stefan Michel has been a professor of global marketing at Thunderbird since 2003. He has a Ph.D. in marketing and Masters in Business Administration from the University of Zurich, both awarded summa cum laude. In 2004, the Thunderbird Student Government named him one of the School’s top professors for “outstanding student involvement.” In 2005, his paper on marketing strategy won the best paper award at the American Marketing Association winter conference. He also is a regular columnist in CASH, a leading business publication in his home country of Switzerland.

Posted: 07|11|08 at 10:59 am.
Filed under: Global Finance, Innovation.
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