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Boutique concerns, part 2: Where are the opportunities?

by Mike Kitchen

November 7, 2011 - Categories: Blogs,

Boutique concerns, part 2: Where are the opportunities?

In 2009, when I sat with several dozen young hotel professionals at the recently opened theWit (a DoubleTree Hotel) in Chicago, the consensus was that the independent and/or “boutique” concept does not work in Chicago. After all, the city that snacks on 48-oz porterhouses doesn’t need all the fufu, right? Clearly our voices were not loud enough that day. Take a look at a snapshot of the most recent Chicago development pipeline:
  • Public (Ian Schrager Company) – Opened October 2011
  • Radisson Blu (Carlson) – Opening November 2011
  • Hotel Lincoln (Joie de Vivre) – Opening February 2012
  • Langham Hotel Chicago (Langham Hotels) – 2012
  • Virgin Hotel (Virgin Group) – 2013
With the exception of Langham, it’s safe to classify the rest as boutique. Not to say any of these won’t be successful, and given the investment basis on a few, I believe some will. But in a city that is already stricken by a comparatively low rate ceiling and where location is not only important, but essential, penetrating the core upper-upscale brands at par is easier said than done.
If my argument is that Chicago isn’t best suited for a truly boutique hotel, then where is? New York? San Francisco? L.A.? (Miami is too obvious.) These markets have the ability to push rate that may support inflated development costs, but market entry is challenging, competition is fierce and being a victim of OTAs is likely.

Over the last several years, I have seen more successful boutique openings (defining success as market penetration) in markets such as Austin, Texas; Charleston, South Carolina; Portland, Oregon; and Santa Fe, New Mexico, than in the aforementioned. Why? It’s the ability to be distinct in the market.  

If I were to say markets such as Louisville, Kentucky, and Milwaukee, Wisconsin, are ripe for boutique hotel development, most would laugh at me. But consider 21c Museum Hotel in Louisville and the Iron Horse Hotel in Milwaukee. Condé Nast readers recently voted both among the top 10 U.S. hotels. Their model is flawless: Build the best product in a secondary market, be the only product that is truly identifiable and blast through any artificial rate ceiling that market may have. There is no argument they are distinctively “boutique,” providing an overwhelming sense of place and driving tremendous energy through F&B outlets.  

While the development costs for an independent boutique hotel in secondary markets is extreme compared to branded counterparts, there are often many public financing mechanisms and tax benefits to bring down the basis and make the deal pencil.  

The developers of the recently announced boutique hotel renovation of the Whitney Building in Detroit are looking to take advantage of some of the 22 financing sources that made the Westin Book Cadillac come to fruition. These cities get excited about the prospect of a boutique hotel, and therefore, will work with a developer to make it work.

I’m not saying to go chase boutique deals in Louisville, Milwaukee or Detroit … unfortunately, you have already been beat to the punch! I’m saying now is the time to get creative. Of course, a lender may look at you sideways when you propose an independently operated boutique hotel. Have the ammunition to fire back. Take advantage of “funky money,” as Tim Dixon called public financing on our Boutique Conference panel a couple weeks ago. Understand the importance great pre-opening marketing and revenue management has on a boutique. Do your due diligence on reservation systems and affiliations that can bring value. And most importantly, create a genuine product that keeps guests coming back.

“Experts” predict the boutique segment will increase by five-fold this decade — most of the growth presumably in top markets. The long-term viability of “boutique hotel” will not be in city center lipstick jobs, however. It will be in the creative minds that can truly separate themselves from the pack. That will only grow to be more difficult in the markets we look to first.

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