How Four Seasons Learnt to Handle Recessions

The hotel industry is famous for being incredibly cyclical. A Morningstar report describes the entire sector like so:

People need to travel for business when the economy is expanding and want to travel when jobs and income are steady, but travel is one of the first things cut as confidence in the economy falls. Since hotel lease terms are for a single night, occupancy and rates get reset each day and quickly reflect changes in the economy. Prior economic cycles have seen two to three years of falling revenue per available room during a recession followed by five to six years of high-single- to low-double-digit revPAR (revenue per available room) growth. Typically, as growth slows, the economy enters a new recession and the pattern repeats.

Basically, the hotel business amplifies whatever volatility exists in the broader economy.

When Isadore Sharp started Four Seasons Hotels and Resorts, he knew nothing about hotels. He considered himself a ‘builder’ – a real estate man – which fortunately did mean he had some experience with the capital and credit cycles. (Real estate is also cyclical, though not as cyclical as the hotel business). But the hotel business is ultimately a different business, and the first recession he experienced as a hotelier caught him by surprise. 

Eventually Sharp figured out a way to operate through recessions — in a way that put Four Seasons ahead of its competitors. But it took him a couple of downturns to get there. 

This is the story of what he learnt – and how he came to learn it.

The Good Times

The period from the late 70s into early 1981 was busy for Four Seasons. 

Sharp purchased The Clift in San Francisco in 1976. It was the Four Seasons’ first property in the US. He then opened the Four Seasons Hotel in Vancouver. A year later, he managed to outbid a group of very determined competitors to secure a contract to operate the Ritz-Carlton in Chicago. In 1978, the company bought a property from Hyatt Hotels in Toronto, and the following year they opened the Four Seasons Hotel in Washington DC — the first American hotel bearing their name. Then the company opened several hotels and resorts in Texas. Finally, they entered New York with The Pierre, for many years its flagship US property.

To say that Four Seasons was on a tear was putting it mildly. These good times attracted calls from financiers and property developers from all over the US. They flooded Sharp with deals. 

At the time, Four Seasons was still a relatively small company, and it was trying to stand out in a market populated by the Hiltons, Sheratons, and Marriotts.

So did Sharp make a grab for the offers? He did not. 

Sharp had decided that Four Seasons would only operate mid-sized luxury hotels in the US — a strategy that shrunk the customer base. It would differentiate itself from its rivals and be known for delivering personalised high-end service, consistently. Sharp looked to his people to uphold this culture of service and adhere to the company’s credo, the Golden Rule.

(The Golden Rule was to treat guests, employees, partners, and suppliers as one would want to be treated oneself. It made respect, empathy, and personalised service the foundation of the company’s hospitality culture).

Now, Four Seasons was also going through a period of significant organisational change. Sharp was firing employees who failed to adhere to the Golden Rule while new hires were still settling into the Four Seasons culture. He was concerned that taking on new deals would overburden the employees and affect their ability to provide quality service.

He explains in his memoirs Four Seasons: A Business Philosophy:

Our strategy is to grow on strength. And that strength is you, our people. I’ve looked around at our senior managers, our back-room staff, and our front line, and I’ve visualized opening new hotels and who would staff them and run them, and we just don’t have enough people who know what Four Seasons is all about to expand any further at this time.

Sharp rejected every offer. Most financiers and developers saw the logic behind Sharp’s refusal and appreciated his honesty. They went away without a deal but later came back to do business with him. 

However, there was a mini uprising within his own company. 

Employees grow when their company grows. Budgets increase, projects scale up, and they are promoted and entrusted with larger responsibilities. So when Sharp said no to growth, albeit for a temporary period, his people feared they would stagnate. They became worried about their future in the company.

Sharp remained adamant and refused to step into the trap of over-expansion. He was not chasing quarterly results; he was building a brand. 

His decision would prove to be right, but in the most unfortunate of circumstances. 

The First Jolt

The recession of 1981-82 lasted, peak to trough, from July 1981 to November 1982. It came on the back of an earlier recession in 1980. So, the US economy was already fragile coming into the downturn. 

Throughout the decade of the 1970s, the Federal Reserve manipulated interest rates in an effort to curb high unemployment. But the ploy did not work in the long-term. Inflation rose and reached 11% in June 1979. Then, to curb mounting inflation, the Fed tightened their monetary policy — a move that triggered the 1980 and 1981-82 inflations.

Remember, hotels lag and lead the broader economy. Across the US, the slide in occupancy rates began before the official recession and ended well after it. Four consecutive years of demand declines and increases in the supply of hotel rooms caused occupancy rates to drop from a peak of about 72% in 1979 to a little over 60% by 1984.

Air fares rose by 32% in a single year. Business executives cut down on travel. Company banquets became infrequent and attendance at major conventions dwindled. The few executives who did travel, entertained less frequently. So, Four Seasons’ food and beverage revenue, already sliding, fell further. The scenario was similar in business hotels across the US.

Most of Four Seasons’ competitors responded by slashing costs across the board. They fired staff, cut back employee perks, stopped replacing carpets, and cancelled turkeys at Christmas. ‘They cut basics to the bone’, Sharp writes. 

Four Seasons’ employees thought their company should do the same. 

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