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How to Start a Boutique Hotel

Smaller, luxurious hotels have become popular as consumers look for more out of their vacation spending. Here's how you can start a successful non-branded independent hotel.

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The Chelsea Hotel, a boutique hotel in Atlantic City, NJ that competes with big casinos and chain hotels.

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Luxury hotels were a big deal in Atlantic City in the 1920s, as depicted in HBO's hit series Boardwalk Empire. In the 1950s and 60s, Atlantic City was actually known as the "Queen of Resorts" before gambling was legalized in 1976 and monstrous casino hotels took over the landscape. So when New York City-based companies Cape Resorts Inc. partnered with Normandy Real Estate Partners L.L.C. a few years ago, they wanted to re-create the luxurious boutique hotel of Atlantic City's historical past. They developed the only boutique, luxury, and non-gaming hotel in Atlantic City, The Chelsea, to cater to travelers looking for a refined, independent experience away from the casinos.

"We recognized that there wasn't a natural market for this type of resort at the time we were developing The Chelsea," says Jane Mackie, vice president of marketing at Cape Resorts, a company focused on smaller properties built on the principles of luxury, comfort and service. "But we also recognized that there were no options in town for the upscale traveler who might just want to get away, spend some time near the water and do something different. People want a hotel experience sometimes more than just a bed and breakfast or motel, and less than the large casino hotels."

Opening in May 2008, The Chelsea features 330 rooms and two suites, but is focused on an intimate and exciting experience that doesn't revolve around gambling. From a design perspective, it fits much in the mid-century form of the town, and philosophically it focuses on its waterfront location with a full-service beach, two outdoor swimming pools and an upscale nightclub. Since opening, the resort has outperformed a volatile market in town, catering namely to leisure guests on weekends with high amounts of disposable income.  Unlike the casino resorts in town, no rooms are complimentary.

Starting a boutique hotel in a time of economic volatility as seen in the past few years is a risky proposition, but if done correctly, it can be a profitable business venture. As travelers change their vacationing patterns, they want more out of their experiences than some of the traditional big-brand hotel chains can offer.  In this guide, we will discuss what exactly a boutique hotel is, the principles to focus on when opening one, and how marketing yourself differently can lead to success even with competition from larger, branded competition.

How to Start a Boutique Hotel: Definition of a Boutique Hotel

Ask three different people to define a boutique hotel, and you'll get three extremely different responses. At the most basic level, boutique, or what some refer to as lifestyle hotels, offer a level of intimacy in an increasingly impersonal world. For many travelers, it's the element of surprise, in a positive manner, which helps them choose a boutique hotel over a branded facility. But how many rooms does it offer? How big is the property? And what makes a boutique different from any other small lodging options?

"To me, a boutique hotel is no larger than 150 to 200 rooms that can sometimes operate as part of a brand but more often are known for independent ownership," says Rick Swig, owner and founder of RSBA & Associates, a San Francisco-based consultancy firm for many in the hospitality industry. "They're usually not very cookie-cutter in terms of design or experience, and they display distinct characteristics of the target market. So when a customer walks in, they see customers who look like them, think like them and has common values."

Boutique hotels were by many accounts invented in the 1980s, with the first noted as The Morgans Hotel in New York City, The Blakes in London and the former Bedford in San Francisco. As time went on, customers became disenchanted with the similar service they had always received from larger chain hotel brands, and wanted something unique and different, in terms of look, feel and level of personal service delivered. What many customers say when asked what they prefer about boutiques is the connection they as guests have with the hotel staff, a level of personalized service that isn't achieved in larger hotels.

"To put it quite simply, you need a clean hotel designed to fit the needs of the customer you're looking to attract," says Joe McInerney, president and CEO of the Washington, D.C.-based American Hotel & Lodging Association. "You need the right design, the right destination and the right location. If you don't have all of that, you're not going to be successful."

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How to Start a Boutique Hotel:  What to Focus on When Opening a Boutique Hotel

From the very start, as McInerney notes, the biggest factor in success as a boutique hotel is destination and location. In terms of destinations, you need to look at cities that can attract a pretty diverse market segment, from the traditional leisure traveler to the business traveler and then events and conventions.

Dating back to the days before it was a casino town, Atlantic City has been a destination for wealthy urban residents from three of the largest metropolitan cities in America. It is located less than three hours by car from Philadelphia, New York City and Washington, D.C., making it an ideal weekend or even overnight trip. These facts were critical in choosing Atlantic City as the location for The Chelsea.

Ideally, those cities are not seasonal destinations, and there are visitors both during the week and on weekends.  Regarding location, you need to be centrally located to the other things in that particular destination that are going to drive business to your hotel.

"My favorite exercise when you're looking to buy or develop a hotel is to stand on the proverbial roof of the building and look around you," says Swig. "You need to look at what other businesses are going to send customers your way, and if you can't see enough of that within a one mile radius, you're probably in the wrong location."

To Swig, the keys to measuring success with a boutique hotel are as follows:
•    Defining the hotel's purpose and/or niche
•    Developing a high-quality product created to appeal to an underserved clientele
•    Conveying a clear, interesting message to the target market
•    Not spending too much money in development to make profitability with your product difficult to achieve

As you design the hotel, you should be forward thinking in terms of amenities but also consider the market you are in. For The Chelsea, they focused on Atlantic City's past while also incorporating modern amenities. There are historical photos throughout, but a salt-water swimming pool, restaurants with floor-to-ceiling windows overlooking the water and distinct post-modern design scheme.

"It's important that it look good, but sometimes there's too much emphasis on style," notes Mackie. "Through our experience with other properties, we've learned that the largest driving force in return customers or repeat business is an overemphasis on service. It's easy to get people to come once, but the hospitality industry is all about getting people to come back again and again. So we focus on making the experience unforgettable."

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How to Start a Boutique Hotel: The Cost of Opening a Boutique Hotel

In the last few years, the industry has seen a rise in rooms for luxury and middle-tiered hotels with a decrease in supply from older hotels and many economy-based. There is certainly opportunity for a boutique, which could fit between the middle and high-end of that spectrum, but you need to be smart about your investment. According to a recent cost estimate guide published by HVS, a global industry consulting firm based in San Francisco, "the expectation is that projects will return in the second half of 2010, with an overload in 2012 similar to what happened during the post-9/11 recovery."

In terms of start-up costs, buying an existing property and renovating to fit your needs is much more cost-effective than developing an entirely new project. Cost will also vary based on how many rooms you are building, as well as the additional amenities of the resort. This is considered a per key basis, or how much money is spent on the resort compared to how many room keys exist. According HVS and their 2009 end-of-year study, the cost per room (when factoring in land costs, site improvements, soft costs and working capital) could be anywhere from $75,000-$400,000, depending on the hotel and location. To determine the local per-key sales figures, check out the HVS study or find a local hotel industry consultant in the market you are targeting to figure out the going rate.

For many in the hotel industry, it's a minimum-wage (tip-based job). For a boutique hotel, you need to hire experienced hotel workers with great customer service skills. As Mackie says about Cape Resorts, "Customers always say, 'My God, you have so much staff, how can you afford it?' And that's exactly what we want. We just say that is really what the brand is about. The whole experience is delivered by the staff and its emphasis on training, so you need to find the best."  Smaller staffs should be paid more based on the level of service you're asking them to provide.

The limited overhead as a smaller hotel both help boutiques post larger profit margins than many bigger brands, according to Hotel Investment Advisors, another industry consultant. Part of the profit margin is the cost you can charge your customers, which can sometimes be double what the larger local brands are offering for similar rooms but without the personal touch. Initially you won't have the brand equity that the larger brands have built up over time, so it may take you longer to reach the point of breaking a profit.

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How to Start a Boutique Hotel:  How to Market Your Boutique Hotel

An oft-overlooked aspect of opening a smaller hotel is your product distribution, or how you market yourself. Because you don't have that existing brand recognition of the larger chains, you need to get the word out there about your resort. By defining your resort as a brand of one and communicating your standards in the same way that larger resorts do, your customers will gain a level of comfort and familiarity with your resort. Telling a unique story behind the location or history of the hotel (for The Chelsea, it's nod to Atlantic City's past) can put you over the top in terms of occupancy and success.

The good thing for many start-ups is that the Internet has made this marketing aspect considerably easier. You can now put your boutique hotel on a level playing field with some of the larger branded properties thanks to the benefits of travel search engines like Expedia, Bing, Hotels.com and more as a great way to raise your brand recognition.

No matter how you break it down, it comes down to your return on investment as a boutique hotel. But with no franchise fees and the opportunity to operate with your own customer service ideas and brand characteristics, boutiques offer the chance to succeed as an independent hotel.

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