• run with the bulls

    get your first month

    of hedgeye free


Pricing In The Restaurants Sector

Yesterday, Hedgeye Restaurants Sector Head Howard Penney hosted a conference call with Leslie Kerr, founder and CEO of Intellaprice.  Leslie built the pricing structure for Dunkin’ Donuts and has held brand management and strategic positions at Baskin-Robbins, PepsiCo Restaurant Services Group, and Disney Consumer Products.  After working in Coopers & Lybrand’s compensation consulting practice, Leslie founded Intellaprice, a recognized leader in pricing strategies, finance, brand management consulting.


Leslie presented a “Pricing 101” seminar for subscribers.  Investors almost never think about how a restaurant chain arrives at prices for its menu offerings.  Worse, many restaurant companies don’t think strategically about pricing.  Intellaprice focuses company managements to focus on pricing the same way they focus on areas such as inventory management, operations, or purchasing.


A pricing strategy reflects relationships within the company.  Who makles pricing decisions?  What is the company’s brand image and objective, and how does pricing work to achieve that objective?  Who is the actual customer of the company’s pricing strategy?  (It’s often the franchisee, not the customer.)  How does a company derive pricing information, and who uses that data?


Companies should view pricing in the context of brand identification.  What does a brand stand for?  What is the objective of pricing?  It’s not enough to say “we sell a premium product, so we charge more.”  A shop owner who says “I’m a discounter, so I’ll charge 25% less than the store across the street” has a pricing strategy.  Many major companies don’t even have something that basic.


Kerr says it is surprising how many major companies do not understand their own pricing data, and where no one is clearly responsible for pricing policy.  Despite tremendous quantities of price data flowing through a company, many companies do not compile this data into usable information to make available to operators.  Kerr says most point-of-sale (POS) systems are not set up to track pricing patterns, and many companies do not communicate a pricing strategy to their managers or franchisees, making it impossible for operators to make effective pricing decisions.


The goal of a pricing policy is to support franchisees and managers by laying out strategic reasons for corporate pricing decisions, and to make pricing a basic and ongoing part of business discussions.


Kerr says her research at Intellaprice shows that the return on investment to establish a pricing strategy can be over four times the cost of establishing that strategy, and she says her clients experience sales increases of up to 3% as a result of using her recommendations.

The “Five D’s of Pricing”: 

DEBUNKING – managers believe antitrust laws make it illegal to discuss pricing.  It is illegal to price-fix, but it is perfectly legal to have a corporate pricing strategy.


Companies let pricing decisions default to other functions: finance on the basis of profitability, marketing on the basis of sales volume.  But, says Kerr, successful companies see pricing as a component of brand definition.


Companies believe that the market dictates prices, or that technological solutions – expensive software packages – should make pricing determinations.


Kerr says all of these approaches lead to inefficient pricing.  Pricing must be part of a rigorous management decision-making process.


DEFINING – a price strategy is more than just saying “we’re a premium brand,” or “we’re a discounter.”  Management needs to identify business objectives and the role pricing plays in brand and company identity, what Kerr calls a “Pricing Philosophy.”


DIRECTION – pricing needs to be a defined and repeatable process that includes data collection and analysis, testing, and the development of optimal pricing.  This must be communicated clearly across the company.  The loop closes with performance analysis, which becomes the data collection stage for the next iteration of the process.


Kerr gave examples using four approaches to synthesizing information:

Competitive – compare with prices of comparable or substitute goods

Consumer – public perception of products and price sensitivity

Store – demographics and sales mix

Economic – cost, profitability and economic trends


She then laid out four pricing methods, citing pros and cons of each:

The Market-Based approach provides good price data on price behavior, but lacks predictive ability.

Consumer-Based measures price sensitivity and purchasing decisions, but is too costly to be used exclusively.

Price Optimization allows a company to leverage its own sales data but does not allow any non-price factors into the decision-making process.


Cost-Plus is the simplest to apply, but it ignores the customer’s willingness to pay for the product.


DATA – a company chooses among sources of information (its own POS data, competitors’ prices, customer sensitivity).  A number of services also offer statistical tools for various retail settings.


The database must be appropriate for the company and its industry.  Brand performance, customer traffic and comments and complaints are among the most useful sources of information.


DECISIONS – what makes a successful pricing decision?  It must be integrated into the company’s overall decision making.  It is grounded in reality.  It emerges from a continuous process linked to company objectives. The most successful pricing processes are built around pricing committees that work across functional areas of a company, communicating within the organization and harmonizing objectives.  The group responsible for pricing must also stay in communication with franchisees, brand managers, and other decision makers in the field.  Effective pricing managers have ongoing dialogue that also provides valuable information as an input to the pricing decision-making process.



Pricing has been a neglected component of corporate strategy.  Investors should ask: does this company have an established pricing process?  Who is responsible for pricing decisions – Where in the corporate structure does pricing “live”?  How robust is the pricing process?  What resources are committed to it?  Are senior executives involved in the pricing process?  What pricing data is used for decisions, and what other inputs does the process rely on?


Kerr’s analysis shows that companies have realized profits in excess of 400% of every dollar committed to developing a pricing strategy.  Yet this is an area that remains largely unexplored, even by some major firms.  In mature industries, such as restaurants, marginal differences in profitability can sometimes drive significant gains in stock price.  Investors who learn to ask hard questions about a company’s pricing strategy – or lack thereof – stand to be rewarded. 


Takeaway: We expect Q1 RevPAR to exceed guidance for most lodgers but we prefer HOT.

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.




  •  BETTER: Considering the impact of Sandy and the calender shift, 4Q was strong. Guidance and tone on the call was also better than other lodging companies


  • MIXED:  Group bookings are up 4% in room nights for 2013.  About 75% of group room nights for 2013 are on the books already.  Group revenue on the books for 2013 is up 6.5% in revenues, lower than previous guidance due to Sandy impact.  Mgmt is quite bullish regarding the group outlook in 2013.
  • PREVIOUSLY:  "Our activity for 2013 continues to show sequential improvement with revenues on the books now 8% ahead of the prior year. A great majority of this improvement is happening in our larger group hotels, which are benefiting as customers began to plan more proactively. Looking at the fourth quarter and into next year, we continue to be encouraged by the positive trends in group business. While current booking activity or current quarter booking activity will likely slow somewhat because fewer room blocks are available.  Overall, as we look at the quarter, we are still expecting group to be certainly up meaningfully in the fourth quarter. We do not expect group to be as strong in Q4 as it was in Q3."


  • SAME:  Occupancy has passed the 2007 peak, but still remain below its historic peak of 78%.  2013 REVPAR growth (+5-7%) will be driven mostly by rate.
  • PREVIOUSLY:  "While it's premature to offer any specific guidance relative to RevPAR or revenue growth for 2013, we do believe that the fundamentals for our business continue to be attractive. We expect to enter next year with an occupancy level higher than we had in 2007, the strong booking pace I referenced and supply at a near record low of 0.5% in our markets. We are very confident that our managers will have success in negotiating higher special corporate rates this fall. Additionally, international travel continues to grow at a high-single-digit rate, adding demands in our priority gateway markets. All of these factors should result in solid RevPAR growth in the coming year."


  • BETTER:  4Q REVPAR +10.2%, expect Boston to have another good year due to solid group bookings
  • PREVIOUSLY: "We expect our Boston hotels to have a good fourth quarter due to strength in group revenues and an expectation of continuing strong transient rates."


  • SAME:  REVPAR increased 10.9% (ADR: +6%, OCCU: 4%) due to favorable business mix.  2013 will be affected by the San Francisco Marriott Marquis renovation.
  • PREVIOUSLY:  "We expect our San Francisco hotels to continue to perform very well in the fourth quarter, as strong group and transient demand will allow us to continue to drive rate."


  • BETTER:  Outperformed expectations (+12.3% REVPAR, +4% occup, +7% rate); Hawaii market for 2013 will be strong due to group bookings though renovations will have some impact.
  • PREVIOUSLY:  "We expect our Hawaiian hotels to have a good fourth quarter."


  • SAME:  REVPAR increased 1.7% due to Hurricane Sandy and various renovations.  Expect New York to be a top performing market in 2013.
  • PREVIOUSLY:  "Results were affected by renovations at three hotels, driving ADR growth in New York has been challenging this year and we expect that trend to continue in the fourth quarter."


  • SAME:  RevPAR increased 8.8%; expect Chicago hotels to continue to do well in 2013.
  • PREVIOUSLY:  "RevPAR increased 3.5%, driven by an increase in rate of nearly 3%, a slight improvement in occupancy. We expect our Chicago hotels to perform much better in the fourth quarter due to better group and transient demand."


  • SAME:  REVPAR: -4.3% (Hurricane Sandy and renovations).  Expect 2013 to be better than 2012 though government spending will continue to be sluggish.   
  • PREVIOUSLY:  "Both group and transient demand were weak as there was little activity on Capitol Hill and election-year activities were outside of D.C. Results in the quarter were hurt by the rooms renovation at the Hyatt Regency on Capitol Hill. We have a series of meeting space and rooms renovations scheduled for the fourth quarter and we expect D.C. to continue to underperform the portfolio. We expect 2013 to be a better year for D.C."


  • SAME:  F&B revenues only grew 1% due to challenging comps.
  • PREVIOUSLY:  "We are anticipating lower growth in F&B revenue and profitability in the fourth quarter of this year due to an unfavorable comparison for 2011, where F&B revenue grew 6.8%, as well as the anticipated impact of the challenging holiday and election calendar."


  • WORSE:  Expect unallocated costs to increase more than inflation, particularly for sales and marketing
  • PREVIOUSLY:  "We expect unallocated cost to increase in line with inflation, particularly for sales and marketing where higher revenues will increase cost. We also expect utilities to decline in the quarter albeit at a much lower level of decline than we experienced in the third quarter."


  • SLIGHTLY BETTER:  Property taxes increased 5% in 2012
  • PREVIOUSLY:  "At this point, we expect the full year increase in the 6% area as we have been successful in reducing several current year assessments and challenging prior year assessments."


  • SAME:  Expects to be a net acquirer in 2013 and for M&A activity to be roughly equivalent for 2013 as for 2012 for the market as a whole. 
  • PREVIOUSLY:  "As we look at 2013, I would say that, while we're certainly happy with the disposition pricing that we seem to be attracting on the assets that we're looking at selling, I also think that we feel fairly comfortable that this is going to be an extended cycle. And so I would expect that we would continue to be active in 2013. Whether we're a net acquirer or a net seller probably depends more on how attractive the actual acquisition opportunities that develop over the course of 2013. But I think by and large our intent is to continue to be active in the year. And if I were trying to plan it out perfectly, I'd probably say we'd probably be about neutral in 2013."


  • SAME:  Total capital spending for 2013 (Redevelopment/ ROI/ Acquisition/ Renewal & Replacement) at the midpoint is $420MM, a substantial decline from the $638MM spent in 2012.
  • PREVIOUSLY:  "We're fairly comfortable that our capital spending in 2013 will decline compared to the levels that we had in 2012 and it should be by a fairly significant amount."

JOBS: Solid Improvement

For the second week in a row, the Department of Labor has put out data that shows underlying improvement in the labor market. The 4-week rolling average of non-seasonally adjusted claims, which we consider to be a more accurate representation of the state of the labor market, were down -4.2% year-over-year which is a sequential improvement versus the previous week's YoY change of -2.7%. This is good news, as it signals that the real labor market is, in fact, still strengthening.


JOBS: Solid Improvement - JS 1


Last week’s data was distorted by the incorporation of estimates for Connecticut and Illinois as both state offices were closed due to the snowstorm and unable to report official figures - meaning we had to wait for this week's data for a true update on the underlying labor market trend. All in all, the labor market shows solid signs of improvement 


JOBS: Solid Improvement - JS 2


JOBS: Solid Improvement - JS 7

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


Takeaway: HST's guidance was good and tone was positive. We like hotels right now and think MAR and HOT were too conservative with guidance.

Very upbeat conference call - certainly more positive than other lodgers - following solid quarter and guidance




  • Driven by solid group and transient demand they were able to significantly exceed the guidance they gave at this time last year
  • Calender quarter basis RevPAR increased by 6.8%. 
  • Sandy impacted RevPAR by at least 1% in 4Q
  • While occupancy exceeds 2007 levels by 50bps, they are still below their historic highs reached in the 90s
  • Key driver of their business was the more than 4% increase in their group room nights, which allowed them to price up other business
  • Group nights only increased 1.6% in 4Q but group revenues increased 4%. This was negatively impacted by Sandy.
  • Business generally shifted towards higher rated segments in the first 9M of the year but 4Q was discounted due to the storm
  • Transient increased 6% in 4Q
  • Average rates achieved in 2012 was 9% below their prior peak
  • Expect that supply in the UUP segment will continue to be constrained and demand will benefit from international visitation and group demand. Expect that RevPAR will be more driven by rate
  • Group booking pace is up 4% in room nights and 6.5% in revenues for 2013.  Expect a strong year for their group segments
  • Transient is also ahead of 2012 pace and expect a solid year
  • REVPAR:  March results are expected to slow due to the early Easter Holiday 
  • Remain focused on selling non-core assets and reducing their portfolio allocation to secondary markets. 
  • Transaction volumes in 2013 should be similar to 2012.  They expect to be a net acquirer in 2013, but their guidance doesn't assume any benefit from acquisitions. 
  • Should also benefit from over a 20% reduction in maintenance capex spending in 2013 and reduce ongoing business disruption.  Expect F&B and other to increase 2-4% in 2013.
  • Stock is currently trading at a 40% discount to their replacement cost and at their 10 year average multiple
  • Market color:
    • Seattle: 17.3% (9% increase occ./4% ADR). Top performer in 2013 due to transient & group demand
    • Hawaii: 12.3% (4% Occ/7% rate): Solid in 2013 due to good group bookings but may have 2H13 disruption from timeshare construction
    • Houston: 11.6% (6% occ/ 3% ADR): Good 2013 due to better demand allowing them to shift to better rated segments
    • San Fran:10.9%.   Expect a decent 2013, but impacted by renovation of Mar Marquis in 1H13
    • Boston: 10.3%; Expect another good year in 2013 due to group bookings
    • Chicago: 8.8%.  Continue to perform well in 2013 due to better business mix and more group business
    • NY: 1.7%: Sandy and renovations hurt their results.  Excluding downtown hotels, it would be 5.3% on a calender basis. Expect a very strong 2013.
    • DC: down 4.3%. Impacted by cancellations due to Sandy and renovation disruption. DC RevPAR was up 21% in January. Expect 2013 to be better than 2012 but weak due government budget cuts.
    • Orlando fell 3.9%
  • Expect Euro JV to have 2-3% RevPAR growth in 2013. 
  • Margin growth was impacted by Sandy and unfavorable holiday shift. F&B only increased only 1% and profit from F&B declined due to a difficult comp.
  • Property taxes increased 5% in the 4Q.  In 2013, expect RevPAR to be driven by ADR leading to good flowthrough
  • Unallocated costs to increase more than inflation in 2013.  Property insurance will also rise as will as property taxes (17bps).  Couple of initiatives from Brands will also pressure costs 10bps.
  • 2 items impacted comparability of FFO - 8MM gain on sale on land to JV in Maui. In 2013 the JV expects to start marketing the timeshare and their portion of expenses will be $4MM with no offsetting income.  Novotel Christ Church will reopen this year.  Combined, there are $19MM of FFO items in 2012 that will not be in 2013.
  • They recently moved to a calendar quarter year- they will provide comparable period comps when they report each quarter in 2013. 
  • Roughly 20% of FY EBITDA will be earned in 1Q; will provide quarterly guidance on their 1Q13 call


  • DC impacted January RevPAR by 1%.  They had 9% RevPAR growth in January.
  • Have 75% of their group room nights for 2013 on the books already
  • Total portfolio guidance for RevPAR:  Would be surprised if it would be dramatically different from SS RevPAR guidance. Will  be seeing a huge Helmsley increase, so it should be a tad higher.
  • F&B revenue has been more difficult to forecast than in the past.  In 4Q, excluding NY & DC they would have been up 4% - in-line with the rest of the year.  Given the uncertainty, they have chosen to go with a 2-4% growth rate which is hopefully conservative. 
  • F&B margins are 26-27% in general but flowthrough should be well above that - around 30-40% due to expected strong group business
  • They have not assumed that the sequester issues snowball into a bigger issue outside of the DC pain they should feel (and have seen some evidence of that already). Think that most of the impact will be felt in the Upscale segment vs. UUP.  Things could get worse but based on what they see today, things are solid.
  • In 2013, they would love to sell at least what they sold in 2012
  • Haven't really seen any significant impact from the sequester over the last 45 days. For the last 8-10 months they have been seeing reduced bookings from government sources.  However, assuming the sequester is coming they assume DC will be weaker. Think that government business is 6-8% of their bookings but this is a lower rated segment which they hope to continue to shift away from.
  • Would like to get to 3x leverage 
  • Given that they are in the process of selling / buying assets they don't want to give quarterly guidance right now 
    • Sounds like something material is underway - no? 
  • At this stage they still want to reduce leverage rather than buy back their stock
  • There are fewer opportunities in Europe (M&A) than the US. They are focused to acquire assets in Germany and London since they feel under represented there.
  • Think that less construction disruption will provide more than a 25-30bps RevPAR tailwind this year
  • The US gateway markets (Miami, California and Seattle) are the markets they are most interested in. They continue to be very bullish on the Brazilian market- preferably in existing assets and potentially in limited service new construction. Australia is interesting given demand trends and low supply.
  • They are looking to do some more development in the US.  Urban Limited service is what they are interested - but they will not make a big move to development.
  • The dividend they pay is to offset their taxable income. However, when they are at a point in the cycle where they don't want to be an acquirer of asset and will continue to sell assets, their dividend will increase.
  • Boston, NY, DC, S. Florida, San Fran, Seattle, etc is where they are focused on owning assets. Would like the bulk of their EBITDA to come from those markets. They already have 75% of their EBITDA coming from those markets already but would want to be even more concentrated. Think that they can reach their goal from just divestment but they are pre-disposed towards growth.
  • Think that they would get at least another 25bps of rate improvement if they were investment grade rated. Being investment grade also gets them better capital access. During difficult times, HY markets can shut down.
  • Most of the M&A activity has been in gateaway markets so far, but feels like people are starting to look outside of those markets now. 
  • While they have done a few large deals, they have built the company through smaller transactions 
  • Special Corporate rate increases are generally 5-6% 





  • The increase in total revenues for the fourth quarter and full year 2012 reflect the improved performance of the Company's owned hotels.... In addition, full year 2012 revenues benefited from the results of the ten hotels (nearly 4,000 rooms) that were acquired during 2011 and the acquisition of the Grand Hyatt Washington on July 16, 2012. These acquisitions increased revenues by an inremental $99 million for full year 2012.
  • Hotel RevPAR for the Company's joint venture in Europe increased 2.0%
  • 4Q Capex: 
    • Redevelopment and ROI ($22MM); Three properties with recently completed extensive redevelopment work, the Atlanta Marriott Perimeter Center, the Chicago Marriott O'Hare and the Sheraton Indianapolis, have performed exceptionally well, as RevPAR increased an average of 41% for full year 2012 compared to the pre-construction period in 2010
    • Acquisition ($39MM); HST completed the renovation of almost 750 guestrooms and opened the new concierge lounge in the Harbor Tower of the Manchester Grand Hyatt San Diego.... and began a $23 million renovation to all 888 rooms of the Grand Hyatt Washington. 
    • Renewal & Replacement ($121MM):  Major renewal and replacement projects completed during the fourth quarter included 459 rooms at the Washington Marriott at Metro Center, the 504-room North Tower of the Orlando World Center Marriott and 130,000 square feet of meeting space at The Westin Kierland Resort & Spa. 
  • Capex guidance for 2013:
    • Redevelopment and ROI: $90-100MM
    • Acquisition: $40-50MM
    • Renewal & Replacement: $270-290MM
  • On November 9, 2012 the Company entered into a joint venture with Hyatt Residential Group (the "Maui JV") to develop, sell and operate a 131-unit vacation ownership project in Maui, Hawaii adjacent to the Company's Hyatt Regency Maui Resort & Spa. The Company contributed a combination of land and cash to the Maui JV in exchange for a 67% membership interest and recognized a gain on the sale of land of $8 million. In addition to any profits from the sale of timeshare units, the Company also expects to benefit from synergies created with the existing hotel. Construction has begun and the project is expected to open in late 2014. 
  • On January 11, 2013, the Company sold the 1,663-room Atlanta Marriott Marquis...for ...$293 million and will recognize a gain on the sale of approximately $21 million in the first quarter 2013. 
  • On November 15, 2012, the Company sold its 94.8% interest in the 424-room Toronto Airport Marriott for proceeds of approximately CAD32 million ($32 million).
  • On November 30, 2012, the joint venture acquired a portfolio of five hotels consisting of 1,733 rooms in Paris and Amsterdam for approximately €440 million ($572 million) and the payment of an additional €10 million ($13 million) for the FF&E replacement fund. The acquisition was financed, in part, through the issuance of a €250 million ($325 million) mortgage loan by the joint venture. The Company's equity contribution of approximately €70 million ($90 million) to the joint venture in connection with this acquisition was funded with proceeds from the repayment by the seller of a €62 million ($80 million) note receivable that the Company had initially purchased at a discount of 38% in 2010, along with available cash.

Buyem: SP500 Levels, Refreshed

Takeaway: This is only the 3rd oversold cover/buy day our models have signaled in the past 35 trading days.



Let me re-phrase that: Buy Consumption, Short Commodities (and proactively manage the risk of the range).


Strong Dollar is finally getting oil. That was the only big headwind we had left in our model for both Asian and US #GrowthStabilizing. We understand our models are different. And we are comfortable with that. This is only the 3rd oversold cover/buy day our models have signaled in the past 35 trading days.


Across our core risk management durations (TRADE, TREND, and TAIL), here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1530
  2. Immediate-term TRADE support = 1502
  3. Intermediate-term TREND support = 1458


In other words, you buy securities that are signaling immediate-term TRADE oversold here, then you wait. If the Dollar was being debauched and Oil was ripping, the title of this note would probably say sellem. Not happening; neither is inflation.






Keith R. McCullough
Chief Executive Officer


Buyem: SP500 Levels, Refreshed - SPX



Takeaway: NSA claims show underlying improvement in the labor market for the second week in a row.

Last week's initial claims data was distorted by the DOL's incorporation of estimates for CT & IL as both state offices were closed due to the snowstorm and unable to report official figures - meaning we had to wait for this week's data for a true update on the underlying labor market trend.   With non-seasonally adjusted claims registering further sequential improvement, this week's data indicate that labor trends continue to strengthen. 


Below is the detailed, weekly analysis of the the Jobless Claims data from our Head of Financials, Josh Steiner.  Email  if you would like to trial Josh’s work.   



Labor Market Improves Further In Latest Week

This week's backup in initial claims (SA) was a bit of a negative surprise, as the last four years have shown steady improvement throughout February. As a reminder, the seasonally-adjusted tailwinds will be coming to an end in a few weeks. 


Prior to revision, initial jobless claims rose 21k to 362k from 341k WoW, as the prior week's number was revised up by 1k to 342k.


The headline (unrevised) number shows claims were higher by 20k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 8k WoW to 360.75k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -2.7%. This is good news, as it signals that the real labor market is, in fact, still strengthening.




























Joshua Steiner, CFA



the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.