Structure of the Westin Business Model

Because the income statement for an average Owned & Operated property is similar to that of a Franchised property with the exception that franchised properties, we will model Westin Corporation$$s earning potential in this way:

$1.$ Create a baseline model for an owned hotel.

$2.$ Copy the baseline model and adjust it to take into account any franchise fees.

$3.$ Multiply the baseline model from $(1)$ by the number of Westin Owned & Operated properties.

$4.$ Multiply the franchise fee amount from $(2)$ by the number of Franchised Westin properties.

$5.$ Add $(3)$ and $(4)$ to arrive at how much money Westin Corporation earns from both owned and operated, and franchised properties.

To Model the Value of the Service Renewal Initiative

We expect Westin$$s service renewal initiative $($Personal$,$ Instinctive, Renewal $-$ PIR$)$ to boost Q and P$.$ We also expect some costs to go up too. Thus, to model the value of the PIR initiative, we will:

A$.$ Recalculate $(5)$ only for the incremental changes to Q$,$ P$,$ and costs.

B$.$ Make assumptions about how much one$-$time implementation costs are for PIR.

C$.$ Subtract how much PIR costs Westin from the outset $($B$)$ from how much more money PIR is supposed to bring in every year $($A$)1.$

$1$ Technically, subtracting $($B$)$ from $($A$)$ is not fair, since $($A$)$ is to be earned every year going forward. To be financially correct, $($B$)$ should subtracted from the perpetuity of $($A$).$ From Finance $350$: $$

WESTIN HOTEL BASELINE MODEL

Figure $1.$ Basic Hotel Model

$1$

# Rooms Available

SALES $/$ REVENUE x Occupancy $\%$

Quantity Sold $2$; $2$a; $2$b $=$ # of Room Nights Sold

x Price # of Properties

$=$ Total Revenue x # of Room Nights Sold

$=$ Rm Nights Sold Acros s Sys tem

COST OF GOODS SOLD

Quantity Sold

x Variable Cos t $/$ Room

$-=$ Total Variable Cos t Recruiting

Hiring

GROSS MARGIN Training

Total Revenue Unemployment

$-$ Total Variable Cos t Cos ts of turnover?

$==$ Total Gross Margin Meas urement systems

Bonus es

OPERATING EXPENSES Rewards

$-$ Human Res ources Benefits

$-$ Maintenance Enabling Programs A portion of:

$-$ Occupancy Cos ts PP&E

$-$ Depreciation & Amortization FF&E

$-$ Sales $,$ General & Adminis trative IT$/$IS long term inves tments

$-$ Information Sys tems $/$Technology $($ongoing$)$

$-$ Marketing Expens es Cus tomer Reward Programs

$-$ Other Operating Expens es Loyalty Programs

$3-=$ Total Operating Expens es

$=$ Net Operating Profit

$1.$ Average Rooms Available $/$ Hotel

$2.$ # of Westin properties$2$ during $2007$ a$.$ Westin Owned & Operated b$.$ Franchised as a Westin

$3.$ Average Total Operating Expenses as a Percent of Sales or Revenues $($use Starwood numbers in

Exhibit $6).$

$2$ Use information provided in Exhibit $2$a; page $9$; page $5$ footnote $12$; and page $3$ of the case. You will need to make some educated assumptions.

WESTIN SERVICE RENEWAL VALUATION EXERCISE

Please use Excel to set up the answers to these questions. Use equations that reference to $$assumption cells.$$ Do NOT hard$-$code numbers that should be calculations.

Assume that in $2006,$ Starwood still owns and operates ten $(10)$ Westin properties, and that there are $128$ franchised Westin properties. Also assume that Westin Corporate, and by default Starwood, charges the following as its standard franchise fee:

$3\mathrm{.}0\%$ of franchisees$$ total sales, and

Based on the information in the case, consider the revenue implications of Westin implementing the service renewal initiatives $($Personal$,$ Instinctive, Renewal $-$ PIR$).$ For now, assume there are no incremental costs associated with implementing PIR. Please provide analysis of the following:

Create a Simplified Funding Mechanism Model for a SINGLE, Average Westin Hotel

$1.$ Reproduce the sample income statement from Figure $1.$ This will be the baseline model for any single Westin hotel.

a$.$ Leave the numbers blank for now, and just have the line items labe