A Four Seasons' Case Study: The Ultimate Test for Isadore Sharp's Recession

In early May 2009, Isadore Sharp released a much awaited book about his business brainchild. The founder and CEO of Four Seasons Hotels and Resorts, a company he spent nearly five decades building out of a motor lodge in Toronto, Sharp shares the secrets to his astounding rise in the most unpredictable of industries. ‘Four Seasons: the Story of a Business Philosophy’ ends as the company and the lodging industry enter a crucial period of existence, with the dawn of an unprecedented economic downturn on a global scale.

Having given numerous interviews on creating one of the most recognised and respectable brands in the industry, Sharp now has to answer questions on the feasibility of the company’s business model in the current economic situation. Four Seasons has been through a number of recessions in the past, having survived and even prospered on two instances, most significantly during the slump post-9/11. However, Sharp acknowledges that the extent of the latest slump is the most extreme, and definitely worth worrying.

He has done a reasonable job in keeping promises of not cutting down on hotel amenities, reducing services, or laying off members of staff at any of its properties. But the company has had to cut back almost 10% of its 400 odd employees at the Toronto headquarters. A further reduction was carried out at one of its premier hotels when a total of 323 employees at the Four Seasons Park Lane, London were made redundant prior to the hotel’s closure for an 18 month refurbishment, starting September 2008.

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Nonetheless, in true Four Seasons style, a third of the employees were absorbed in other hotels in the group, and for the rest the company organised a massively successful job fair which had 52 employers attending and recruiting. Consequently, such measures have resulted in minimal reductions in its famously high prices, at a time when the rest of the industry is competing on slashing prices to stay in business. According to Sharp, ‘exceptional guest experiences’ are a fundamental part of the business, irrespective of the economic situation.

It is worth noting that even though the company’s business philosophy lays considerable emphasis on creating shareholder wealth, it is sometimes overshadowed by the duty to act responsibly towards its customers and employees. Sharp personally takes immense pride in the fact that Four Seasons is one of only 13 companies that have featured on Fortune ‘100 Best Companies to Work For’ ratings every year since its inception in 1998 and has consistently been the highest ranked hotel company on this list.

In 2006, Four Seasons became one of only five companies worldwide to receive Great Place to Work® Respect Award from the Great Place to Work Institute, recognising the company’s pioneering work in creating a comprehensive management process which requires newly hired managers to initially perform duties of employees reporting to him/her in order to understand and respect each position. Speaking of maximising wealth, David Segal, writing for The New York Times takes an interesting view on the situation of hotel owners that work together with Four Seasons.

He talks about the company’s reluctance to let hotel owners cut costs on any aspect of operations, starting from the number of fresh flowers bought everyday to the thread count of bed sheets. For hotel owners, who still have to maintain these lofty standards and continue paying management fees and a percentage of gross income, the pressures might be getting too high. (http://www. nytimes. com) Such increasing pressures of the economic slowdown added to the policies of Four Seasons have led to some hotel owners voicing their displeasure publicly.

On March 27, 2009, representatives of Broadreach Capital Partners , owners of Four Seasons Resort Aviara seized accounting ledgers and changed security locks during their feud with Four Seasons. Broadreach then proceeded to take legal action towards terminating its contractual agreement with the company. Broadreach may have been pushed to a corner by Four Seasons, and therefore have had to react drastically, but Hushmand Sohaili, a lawyer for another Four Seasons hotel owner, probably puts the situation in perspective.

Speaking about Four Seasons and its powers in terms of contractual agreements with hotel owners he says, “They manage all aspects of operations and that gives them significant leverage, if they choose it….. They make it clear that it is in your best interest to not oppose their plans. ” Another instance of the adverse effect of the economic downturn has been felt at the Four Seasons Hotel, San Francisco. Millennium Partners , the hotel’s owners, have defaulted in the payment of their two-year old $90-million CMBS loan.

Though this was done intentionally, to convince the lenders for restructuring of the debt and make use of more convenient payment solutions, it is worth noting that with decreasing property prices, the value of the San Francisco hotel was lower than its total debt. (http://trendsupdate. com) In 2007, Isadore Sharp sold all but 5% of Four Seasons’ shares to two investors he thought had the right mindset and would believe in the way the company was being managed in his hands.

Microsoft chairman, Bill Gates and Prince Al-Waleed bin Talal, the nephew of the king of Saudi Arabia bought the company for an astounding US$3. 8 billion. The prince reiterated his commitment to the company and his faith in Sharp’s abilities at the helm when, during the height of the recession he said, “We’re doing it for profit. But we have to face reality. The world is in a recession. But it will be over in a year or two. ” Sharp uses his massive experience of handling Four Seasons during economic recessions, having done so very successfully in the past using his unique and unusual techniques of management.

For instance during a downturn in 1981, luxury was suddenly out of fashion for organisations, and managers and executives who had been staying at luxury hotels were regularly being booked into mid-scale properties. According to Sharp, the “reliable, time-saving service” offered by the Four Seasons made people return hastily. Further awards came their way when in 2006 the company was included in the 30th-anniversary issue of the Robb Report , which celebrated the most exclusive brands of all time.

The company was named alongside 19 other brands such as Ferrari, Rolls-Royce, Cartier, Armani and Chateau Lafite Rothschild as Icons and Innovators Who Define Excellence. (For complete list see Appendix A) During lacklustre periods of business, employees were willing to take pay cuts and work lesser hours and the company had an incredible history of never having to resort to cutting jobs. Sharp even raised financial budgets for advertisements during such phases in an effort to remind people of ‘the Four Seasons quality’ and instead of looking to reduce costs, the company invested heavily in renovating and upgrading its hotels.

Key Plantes, an MIT educated economist and business strategy consultant, looks at this particular recession as being different from previous such instances, notably the dip after September 11, 2001 attacks in New York City. Her concern for Four Seasons stems from the fact that businesses may be reverting to the trend of the 1960’s when basic cleanliness was the only major requirement in hotel rooms. She proceeds to ask questions regarding permanently changing customer needs, such as reducing travel expenditure and opting for value over prestige.

On the other hand, she also speculates that increasing work pressures could lead people to indulge in mini breaks at luxurious getaways as a stress buster. (http://www. plantescompany. com) Plantes suggests interesting pointers that could potentially enhance Four Seasons’ business during the downturn. She is highly appreciative of the company’s refusal to cut back on employees but suggests that the management should expect and prepare for a permanently reduced demand at its highest priced properties.

She also predicts that some hotels in the pipeline might be more successful by reducing the number of rooms and only offering facilities such as in-room dining instead of separate dining rooms, without compromising on quality. In an article for the Wall Street Journal’s hospitality column, author Laura Landro notes that Isadore Sharp is different from most hotel company bosses who believe that housekeepers, bell boys, porters and clerks, often the lowest paid staff are the most dispensable. At Four Seasons they have always been the most important people in the organisation since they can “make or break the five-star reputation”.

Sharp has single-handedly disproved the credibility of the traditional top-down management theory and empowered front line staff members with the ability to take decisions, solve problems and remedy failures on the spot. Sharp also admits that he has had to spend many years picking and choosing managers who are in sync with his business philosophy and do not look at front line workforce as just an extra cost. He often sends out reminders to managers telling them “to keep their egos in check and let the people who work for you shine. Four Seasons properties are renowned for being built with the local environment and designs in mind. Unlike overtly opulent luxury hotel chains like the Ritz-Carlton, Four Seasons blends with the surrounding culture and its properties are often considered an important part of the community.

Plantes suggests that sourcing local ingredients and initiating a culture similar to the Slow Food movement in certain areas would help in increased affection and loyalty towards the brand, especially during tough times. The Four Seasons brand is also synonymous with exceptional quality in bedding and bath products in their hotel rooms. The company could explore selling these products in high end home design chains and luxury supermarkets, enabling consumers to have a Four Seasons experience at their homes. Warren Bennis, professor of Business at University of Southern California speaking of Mr Sharp and the Four Seasons says that their inception and consequent success is “not just another rags-to-riches story”.

He goes on to state that Mr Sharp’s leadership is about three essentials – trust, integrity and optimism and that his success is attributed to an uncompromising stance on his values and principles at all times. As Chip Conley, Founder and CEO of Joie de Vivre Hospitality , contrasts the concepts of Sharp’s book to those written about falling prices in the digital marketplace by Chris Anderson in his book Free – The Future of a Radical Price. Conley’s article focuses on the emergence of travel websites such as Expedia and Priceline which has led to room rates dropping to new lows.

In the past year itself, room rates of high end luxury chains have decreased by 25% due to a far more efficient digital marketplace. (http://www. huffingtonpost. com) Conley started out in the hospitality industry with a motor lodge similar to Sharp, and has now built a chain that currently boasts 38 hotels. He writes in the article that he tends to understand Sharp’s mindset of not allowing the Four Seasons brand to follow a “commoditised” approach to the business.

Conley’s concern is whether Isadore Sharp is willing to learn and adapt to a radically changing marketplace. Placing himself in the position of hotel owners under contractual agreements with Four Seasons, Conley admits that even he would be inclined to raising objections if his hotel was to lose millions of dollars every month trying to keep up with the management company’s service standards, refusals to cut costs and priorities of preserving reputation over running a sustainable business.

Predictably the owners of The Island Hotel Newport Beach (formerly the Four Seasons Hotel Newport Beach) decided not to renew their contract with Four Seasons, citing that there was too much effort in creating great customer and employee experiences and it had a negative impact on profits. Recently though, Four Seasons seems to be succumbing to the increasing pressures of the downturn in certain quarters of the business.

Isadore Sharp has authorised an unprecedented ‘third night free’ offer for guests which, in a way, is a reduction on its usually undiscountable room rates. The company has also been offering packages at lower than normal rates, a concept that was previously untouched within the chain. Third party travel websites and loyalty programme memberships (such as the American Express Fine Hotels and Resorts ) have also been able to offer the same Four Seasons rooms at cheaper rates than the ones quoted on the company’s official website.

In an interview with Sheridan Prasso, contributor to Fortune magazine, Sharp seems quietly confident that having seen his company through a number of economic downturns in the past, Four Seasons will eventually come out of this one without any permanent damage to its identity. Having sold a major stake in the company to two people he feels are patient investors, Sharp believes that there is no pressure to bounce back immediately, or return enormous profits during tough times.

He accepts that growth and development will be slower than predicted, and some new projects might not go ahead as previously planned, if at all they do, due to weak financing. But he strongly believes that projects that can see through the tough times and are ready for launch when the recession is over, will enjoy good times ahead. In his book, Sharp repeatedly focuses on the rather quaint sounding company doctrine of following the Golden Rule which is to treat others as you would want to be treated. His firm ideology has a profound impact on employees at headquarters and throughout Four Seasons properties around the world.