Boutique Chic Hits Mainstream Peak

Faced with a rapidly changing consumer, the biggest hoteliers are changing their approach. In doing so, however, they threaten to almost entirely alter the hotel industry.

The hotel industry is not usually one known for innovation. In the last 40 years, hoteliers have introduced only minor changes coming few and far apart: Holiday Inn debuted the Double Queen bed room, someone painted a white wall grey, and a few have finally managed to add Wi-Fi. But a new wave of guests, the oft-discussed millennial generation, is demanding a new type of hotel that poses to fundamentally alter the industry. Initially dismissed as outlandish, the boutique hotel model is entering the mainstream, falling into favour with the latte-and-laptop generation over the carbon copy boxes championed by brands like Hilton, InterContinental, and Marriott. But responding to these needs is more than a momentary race for market share. As the big hoteliers move into the boutique game hoping to recapture the modern-day traveller, they are altering the industry at its roots, and perhaps unknowingly, sowing the seeds for a whole new way of doing business in the hotel space.

Traditionally the major players in the hotel industry left innovation to avant-garde boutique hotels. These city-based concepts that rose to prominence in the 1980s were viewed largely as fads. Hotels like the Bedford in San Francisco and The Blakes Hotel in London catered to an insignificant group in search of a sophisticated, unique, and off-beat hotel experience. For these people the boutiques acted as a counterweight to the unchallenged standardisation of the bigger chains. As the New York Times’ David Brooks explains in the The Edamame Economy, “instead of offering familiarity, they offered difference. Instead of offering beige, they offered edginess, art, emotion and a dollop of pretension.”

Avant Garde: Boutique hotels reimagined the guest experience, but most took it too far for the average consumer

Standing strong behind staggering economies of scale and multi-brand loyalty programs, the larger hotel groups did not consider the forward-thinking boutiques a threat. This belief was reinforced as they expanded globally throughout the 1980-90s. The chains employed a growth model that demanded the standardisation and commoditisation of their products, giving rise to what is now known as the ‘box hotel concept.’

Not exactly something to rave about: Box-like hotels offering a consistent and uniform experience can be found all over the world

All around the world, hoteliers adhere to cookie-cutter methods that centre on a number of familiar core products and capabilities. Standard Operating Procedures (SOPs) delineate exactly how hotel staff must behave to maintain the brand’s image. A 2010 Hilton manual outlines how a caller’s name must be used twice during a call. Housekeeping staff at Marriott famously follow a 66-point checklist for guest room servicing and ensure the sheets in Kuala Lumpur have same specified thread-count as those used in London.

While the consistency of these brands is a remarkable accomplishment, the ‘McDonaldisation’ of the hotel experience has made the experience what The Economist calls an “emotional failure.” Inherently, the model continues to see economic success due to its established reliability and worldwide network. After all, the familiar red Marriott logo remains one of the surest signs of comfort and a decent night’s sleep. Undeniably however, there is a  growing segment of travellers looking for more. Currently only serviced by boutique hotels, more and more big hoteliers are looking to tap into this market of affluent, trendsetting travellers.

The Modern Guest

As the larger hotels look to the boutiques for their pioneering insight, the greatest difference is surely the type of guest. The modern traveller, who is as likely to step out of a sleek black Uber wearing a tailored suit as arrive in a t-shirt and jeans after using the Tube, is one of the most significant changes in the hotel industry’s recent history.

Unpredictable: The millennial generation is one less characterised by age than by style, interest, and diversity.

“Guests used to come for one of two things: business or pleasure,” says Patrick Tan, a student at Cornell and front-office supervisor at the school’s esteemed Statler Hotel. “Now it’s a mix of work and play that involves everything from business meetings and art gallery visits to city tours to drinks at the city’s best bars”

Tan’s statement is supported by market research. A 2013 survey conducted by a Hilton Garden Inns saw 45% of respondents cite new experiences as the best part of business travel. For 65% of the survey-takers exploring a new city was the number one motivator to extend a business trip.

More than ever before, the hotel guest has transcended the confines of their hotel. Keen to explore, curious, social, and often combining work and weekend trips, the modern traveller and guest no longer looks for the uniformity offered by the larger business chains.

“People are seeking unique experiences. They are seeking hotels that are distinctive from others in style, design and service.” writes Veronica Waltdhausen in a study for leading Hospitality Consultants HVS.

In the golden age of hotels, people came to be pampered and surrounded themselves with luxury. It was under this model that the star system, where the number of stars equates to higher price point, came into being. But the modern-day traveller is no longer looking for a money-driven experience. Instead of status symbols they seek experiences.

“Do they really want a Nespresso machine in their room (the proud new addition to most hotel rooms),” Waldthousen asks. “Wouldn’t a guest be much more likely to relax in a bar in the hotel’s lobby lounge and drink a coffee surrounded by other people?”

This movement away from the tangible product to an experiential one is complemented by a change in what millennial consumers look for in hotels. Rooms at CitizenM, the contemporary Dutch hotelier that was one of the first players to act on these new demands, feature plush beds, high-powered rain-showers, and free WiFi and movies. Advertisements for the hotel, however, centre on the actual guest experience, highlighting “a great night’s sleep” and “a love for free movies on demand.”

The lobby of CitizenM’s Bankside property in London features contemporary art and furniture, a happening bar-scene, and some of the capital’s coolest meeting spaces

The company’s mantra – affordable luxury for the people – does away with unnecessary luxuries over which many hotels compete. The hotel’s lobby swapped out doormen and luggage carts, favouring automated check-in kiosks that set room temperature and mood lighting to a personalised preference upon a guest’s arrival. A buzzing bar and eatery is complemented by sharp but inviting italian furniture, contemporary art and books, as well as dynamic meeting spaces right off the lobby-floor.

“The lobby is more like a living room than anything else,” says Noreen Chadha, CitizenM’s Commercial Director. “The room is the place to sleep and relax while the lobby is the perfect place to work, meet, eat, and drink.”

As Chadha explains, the physical boundaries that once distinguished hotel lobbies, bars, and restaurants are blending together. The open-space lobbies of hotels like CitizenM or the Ace Hotel simultaneously entertain an array of work meetings, lunch dates, happy hours, and even musical performances. For the hotels, the lobby’s transformation works to bring in both guests and city residents. Whereas the typical hotel bar and restaurant sits mostly empty, these venues hum and buzz, drawing in both the hotel guests and local crowds. For these kinds of hotels, the restaurant can move from being a money-losing nicety to a key asset. According to a Business Journals report, hotels that share their vision and values with restaurants can see up to 20% of revenues coming from food and beverage operations.

The hotels also benefit by being able to generate more revenue per square foot. While the larger corporate hotels may have higher occupancy levels and even feature several restaurants, a comparably-priced boutique hotel that optimises its space and plays host to more guests and visitors in its bar, restaurant, or lobby will have greater revenue per square footage. So while it is difficult to make an apples-to-apples comparison, the boutique model almost certainly presents a better deal.

Historically, the big hoteliers looked on passively on from the sidelines. Business guests and foreign tourists built work trips and holidays around the reliable and consistent nature of the big chains. From Caracas to Mumbai, a Hilton was a Hilton.

But as the millennial generation approaches its peak, a new type of guest is emerging. No longer impressed by turn-down service and trouser presses, they seek unique experiences and interactions. Generation X and Y already make up more than 50% of hotel bookings. And with the boutique industry expected to increase at 6.5% annual rate between 2014 and 2019 according to an IBIS World report, each of the major chains is now keen to capitalise on this growing industry.

Bringing in the Big Boys

With the hospitality industry continuing its post-recession recovery, the large hoteliers are looking to diversify their portfolios. Though boutique hotels took a 12.7% hit in 2009 with revenue per available room (RevPAR) falling as much as 30%, the segment typically yields high profit margins. During times of economic upswing, boutique hotels are more attractive than ever. Generally low-cost investments, they attract an affluent customer and offer an exciting opportunity for brand building. Among the hotel industry’s largest operators, these projects are being fast-tracked by forecasts about the vastly different needs of the rapidly expanding millennial segment.

Screen Shot 2014-05-07 at 14.17.49

Source: IBIS World

Besides the substantial research pointing to the millennial opportunity, one of the industry’s largest players, Starwood, is already knee-deep in the boutique world. The company, whose 10-brand portfolio demands about 12% market share in the boutique industry according to IBIS World, owns some of the industry’s leading names. Its W, Aloft, and Element hotels and franchises have proved to be  “game-changing” for the company and continue to lead and “disrupt” their respective industries, according to Starwood’s 2012 report. In each market, these Specialty Select Brands (SSBs) continue to drive growth*. In Canada, the hotelier’s Element brand debuted just last year but has already overtaken its competitors on the popular comparison website TripAdvisor.

Early Adopters: W Hotels have brought the boutique model to a global audience

Given Starwood’s demonstrated track-record, more and more of the major players are launching brands into the space. Next year, Marriott will debut its Moxy brand in partnership with the Swedish design giant, IKEA. Despite it being the world’s largest hotelier’s first foray into the millennial space, the hotels feature a now-familiar model of design, approachability, and affordability. By a similar token, the parent of the normally no-frills Radisson brand plans to spend $140 million building or acquiring the first five properties of its new, daring Radisson Red brand. The hotel, which channels the concrete, loft-like feel of a modern art gallery joins Starwood’s Aloft, Hyatt’s Andaz, and InterContinental’s Hotel Indigo brands .

Carlson Redizor’s new Radisson Red concept brings a boutique-element to its normally no-frills approach

It goes without saying that the entry of the larger players has dramatically increased the size of the boutique industry. As explained by IBIS World, the industry is “on its way up to the penthouse,” with industry growth expected to surpass pre-recession levels before 2019. Fielding heightened demand from a 3.1% and 2.7% annualised increase in the number of international arrivals and domestic trips respectively, hotel operators will see a surge in demand in both domestic as well as foreign markets.

On the rise: Domestic trips and international arrivals are driving up hotel occupancy numbers

A Boutique Bubble?

While the numbers point to a triumphant ‘go,’ questions remain about the viability of this new model. For one it seems as though both boutique and big brands occasionally lose sight of the purpose of this modernisation. From a literal standpoint, critics of Marriott’s upcoming Moxy brand claim the brand’s fast-paced rollout – which hopes to build 150 Moxy hotels in Europe over the next 10 years – may be too ambitious. Others cite the location of its first property next to Milan’s Malpensa airport as too far removed for the economically-minded millennial.

In a 2007 article for The Wall Street Journal, Darren Everson highlights some of the industry’s more fundamental issues. Everson sketches the stay of a University of Southern California graduate student staying at the W Chicago City Center hotel, citing confusion and discomfort.

“There is a backlash brewing against boutique hotels,” Everson writes. “[While] W’s are still thriving, the…segment is finding that some customers – even once loyal ones – are getting tired of their tragically hip ways.”

Indeed, as the industry giants skip from baby steps to a full-steam sprint, they risk alienating their newest customer before they even arrive at the hotel’s doorstep. In the age of cut-throat competition and review sites like and TripAdvisor, just a few negative reviews can result in being crossed permanently off the list.

So, while the millennial guest has almost certainly swapped room service and bidets for contemporary design and free Wi-Fi, certain elements remain, and are perhaps more relevant than ever. Though veterans of the old-model, consistency, loyalty incentives, and good service remain at the top of the list for many consumers. The form follows function principle continues to reign supreme (as this author found out when water from his shower spread cooly across the entire bathroom floor at The Standard Hotel).

Form over function: The Standard Hotel in NYC features some of the industry’s coolest, and most inconvenient, designs

For the boutique industry, the entry of everyone from Hyatt to Hilton ushers in an unprecedented era of competition. For the full-line producers however, the move into the boutique space may be the first step to fundamental change the hotel industry as a whole. While currently still limited to one or two brands in the portfolio, the tenets driving the change: change in the core customer, promises to revolutionise the field.

As Jeffrey Catrett points out in his article for Hotel Business Review, similar changes to the retail and other service sectors have forced industry-wide overhaul. For the standardised hotel industry, the costs of changing thousands of properties around the world seems almost unimaginable. The ageing core products of these hotels – behemoth conference spaces, spas, and other amenities – may soon be more or less obsolete. While the luxury segment, particularly resorts, will be sure to carve its own niche, the mainstream hotels may soon face something of a crisis. Indeed, changing consumer trends sometimes stirs trouble. For the hotel industry and the biggest players in particular, however, they just might change the way they do business entirely.

*Starwood’s Annual report does not provide a financial breakdown of each brand, making it difficult to quantify how much each contributes to the company’s overall profitability and growth.

The Indian Election and its Economy

On May 16, the world’s largest democracy is expected to announce its election results. The ongoing Indian election, which began on April 7, will see more than a 100 million newly eligible voters go to the polls to make an Indian electoral population of 814.5 million. The country’s elections have long been seen as an exercise in political opportunism, voting by personality over party platform and marred by false promises of handouts and subsidies. But this election year, the subcontinent’s 16th since independence, is shaping out to be dramatically different. Faced with slowing GDP growth, dysfunctionally inefficient bureaucracy, and the fading of India’s ‘economic miracle,’ the candidates’ economic posturing is more relevant than ever. To Indians and foreign investors alike, the results of the election and the ensuing government coalition’s make up is sure to usher in a new chapter in India’s economic story.

Rahul Gandhi is the youthful icon of the ruling Indian National Congress party

Despite its massive size, the Indian candidature is not as complex as one might expect. Since India’s 1947 independence from British rule, the centre-left Indian National Congress (INC) has dominated the political landscape. Fronting the ruling Congress Party this election is Rahul Gandhi, the promising and youthful graft of one of India’s most distinguished families – which itself includes three former Prime Ministers. On the other side is one of the year’s most talked-about political figures: Nahendra Modi. The self-made leader of the Bharatiya Janata Party (BJP) is known for his 12-year success story in the North-Western state of Gujarat. Since Modi took office as Chief Minister in 2002, the state’s GDP growth rate has been almost double that of its national counterpart (See Figure I). It’s no wonder then that despite Modi’s controversial past (he has been broadly associated with the death of 1000 people, many of whom were minority muslims, in a 2002 riot), much of the Indian electorate is tapping him as their next leader.

Chief Minister Modi of Gujarat and the BJP party are said to be leading the vote

Figure I

Since its 2004 election, the ruling Congress party has developed a rotten reputation for its economic management. Throughout the 2000s the party had reason to be proud, enjoying the effects of the INC’s major economic reforms enacted during the 1990s that paved the way for India’s growth spurt. Riding high on economic success, many in India and abroad were prepared to look the other way. But as the country’s economic miracle has all-but ground to a halt, the party’s shortcomings have been pulled into focus. Critics of the ruling INC have abundantly pointed to the party’s political infighting, corruption, and inability to overcome congressional gridlock as a major cause of India’s inaccessible business climate and, by extension, its economic lag. Indeed, India ranks 199th on the Heritage Foundation’s Index of Economic Freedom and an equally high 132nd on the World Bank’s ‘Doing Business’ list. Similarly staggering, businesses both foreign and domestic must obtain as many as 70 certifications to operate in India.

Unsurprisingly, Modi and the BJP’s realignment from a vehicle of Hindu nationalist agenda to a pro-business, growth-oriented, hardline driver of economic freedom has resounded amongst businesses and investors alike. Indeed, in contrast to Manmohan Singh’s manner of rule, which has been mostly weak and sluggish, Modi’s is decisive, fast-paced, and transparent. Indeed, as Edward Luce points out writing for the Financial Times, “files rarely gather dust in Gujarat. Investments get swiftly approved. Projects are executed on time. And bribes are rare. Gujarat continues to outpace most of India in terms of its investment flows and per capita income growth.”

Modi and his fellow policymakers hope to employ the Chief Minister’s economic model for success, which has been hailed and praised in Gujarat, to revitalise the Indian economy and attract more foreign direct investment. Internally, Modi hopes to restructure the government by reducing its current entanglement in business and cracking down on corruption. But seeing as a even the soundest BJP win these elections will result in a coalition government that must reach agreement in both the lower and upper houses of parliament, Modi is sure to face stiff opposition. On an external and national basis, Modi’s manifesto is one of urban development and infrastructural improvement. Echoing a showpiece project taking place in Gujarat, Modi hopes to transform rural villages into ‘smart cities’ that reduce the strain on current cities and drive up employment and economic growth. Modi’s mix of public spending to incentivise private investment is something that has so far been unachievable under India’s current government.

Nevertheless, for Indian’s both at home and abroad Modi’s economic freedom platform holds a lot of promise. Though the details of its execution remain scarce, there appears to be significant confidence in the marketplace. Compared to the gloomy economic mood just a few months ago caused by high inflation, stagnant GDP growth at less than 5% and major capital outflows, the Indian economic climate has calmed. An increasing number of India’s intellectuals, economists, and elites have thrown their support behind Modi and the BJP. Bloomberg’s Businessweek recently linked market optimism to an economic phenomenon named the “Modi bounce.” Finally, some of India’s more positive economic outlook may stem from the actions of the Federal Reserve Bank of India’s newly appointed central banker, Raghuram Rajan. Rajan has received much acclaim for the RBI’s successful regaining of investor confidence and  recovery from last year’s financial instability caused by capital flight.

Raghuram Rajan, the current Governor of the Reserve Bank of India

What Modi and BJP will accomplish remains very much to be seen. While the tune of the party’s agenda is clear, its finer notes remain unclear. But despite the ambiguity, Modi and BJP’s platform brings forth  a decisive and confident action that has been unheard of India as of recent, leaving the markets and most Indian investors optimistic. From a non-economic standpoint however, both Modi and the BJP have questionable origins that certainly give voters pause. But whatever the final verdict, you can be sure that Modi’s India will represent something drastically different.

The Airline Industry: Eligible for an Upgrade

The airline industry has an image problem. Plagued by delays, lost bags, impossibly small seats and high ticket prices, flying has become almost synonymous with discomfort, stress, and expense. Indeed, the industry has long been hindered by fundamental problems: sky-high operating costs, spikes in the price of jet fuel, cut-throat competition, and a loss of consumer goodwill. But while the aviator and concorde-filled glory days of air travel are certainly a thing of the past, the industry is undergoing significant changes and an upswing which serves to benefit everyone from passenger to pilot.

Historically, airlines have long-struggled to balance their costs and profits while maintaining passenger satisfaction. In 2012, the industry made an aggregate profit of just $7.6 billion on revenues of $638 billion, a meagre 1.2% net profit margin, according to the International Air Transport Association’s Annual Report. Of the other 98.8%, over two-thirds goes to the airlines’ fixed costs. Of these, labour and jet fuel make up almost half of operating expenses, with the price of jet fuel alone more than doubling in the last decade (See Graphic I).

Graphic I: The price of jet fuel alone has more than doubled in the last decade

In addition to the industry’s inescapable dependence on the fuel, the price of jet fuel rises and falls almost in tandem with that of crude oil, making it highly susceptible to shifts in global politics. Strong industry-wide unions resistant to technological automation prevent airlines from laying off staff. Finally, cut-throat competition complemented by the advent of price comparison sites like Kayak and Expedia have created broader awareness and price sensitivity in the marketplace. Even with these heightened costs, airlines have been unable to raise prices or work to distinguish themselves to gain more market share due to mounting and inescapable financial obligations. As a result, all of these costs have often translated directly to the airlines’ bottom lines.

Sites like and Expedia have made consumers more sensitive of ticket prices

“That airlines made any money at all [in 2012] with GDP growth at 2.1% and oil averaging a record high of $111.8 a barrel was a major achievement,” says Director and CEO of the International Air Transport Association (IATA) Tony Tyler in the industry association’s annual report.

Indeed, despite seemingly insurmountable challenges, the airline industry has shown remarkable robustness in fulfilling its role. During the recession, the airlines saw the first decline in passenger numbers since the decreases caused by September 11th. Even with lowered fuel costs, reduced per capita disposable income and economic activity reduced the demand for air travel (See Graphic II). In the aftermath of the recession however, the airlines have worked hard to dramatically consolidated, trimmed, and altered the industry.

Figure II: Per capita disposable income reduced demand for air travel

Graphic II: Per capita disposable income reduced demand for air travel

In the U.S. market, the major airlines have consolidated and transformed control of the industry. According to a review of the aviation industry by the Office of the Inspector General, of the ten major American airlines controlling 90% of market share in 2009, just five in 2012 (and now four) remain in the market with a share of 85% of domestic passengers. Through such mergers, the major carriers have been able to strengthen their market position and cut costs, reducing price wars and allowing them to get away with charging new service fees. In 2013, the major U.S. carriers racked up more than $6 billion as part of these new ancillary fees. These fees aside, merger-driven consolidation of the major airlines together with the continued growth of low-cost carriers like SouthWest and JetBlue continues to stimulate essential competition between airlines.

Key to their increased profitability, airlines across the board have succeeded in improving their efficiency. According to a PWC industry trend report, the airlines significantly advanced their capacity discipline, or load factor. Since 2008 there has been an 8% reduction in the number of flights, but just a 1% reduction in number of passengers. More tellingly, though the price of jet fuel now approaches that of its 2008 peak, the airlines have maintained a non-fuel operating cost close to previous levels despite rising costs in fuel. So though the total cost per available seat-mile (CASM) has grown, for example, most of the increase is derived from rising fuel costs (See Graphic III).

Figure III: Cost Per Available Seat Mile was maintained with exception of raised fuel costs

Graphic III: Cost Per Available Seat Mile was maintained with exception of raised fuel costs

In spite of these efficiencies, airline expenses remain high. The rising cost of maintenance, higher salaries (demanded by unions as part of merger negotiations), and environmental taxes contributed to a decline in the average industry operating income per seat-mile of 0.28¢ in 2012. But overall confidence in the airline industry is up. Air freight, an important industry indicator that underwent a significant decline in the last three years, is expected to see growth of 4% in 2014 according to an industry outlook report. Airlines will also see long-terms gains as a new, more fuel-efficient generation of planes is delivered. 

Boeing’s new 787 Dreamliner promises increased fuel efficiency and more passenger comfort

How it all affects the traveller remains to be seen. Though industrywide customer satisfaction is on the rise according to the latest American Customer Satisfaction Index (ACSI) report, passengers continue to complain about the actual flying experience. Reduced delays, worldwide alliances and loyalty programs, as well as more efficiency and stability in the marketplace stands to improve, at least minimally, the traveller’s experience. In changing the way we fly, however, it might be best to look to start looking not at the airlines but the technological manufacturers at Boeing & Airbus et al.

A New Brew for Millennial Drinkers

From bartop to supermarket aisle, the familiar bottles of Heineken, Budweiser, and Tsingtao are no longer alone. These recognisable brands, hailed by purists for their age-old recipes and whose advertisements reach everywhere from the Super Bowl and to frat parties, now rub shoulders with a whole slew of new beers. From hipster, moustache-sporting micro brewers to unfamiliar liquor-instilled brews, the beer industry is undergoing an unprecedented change.  Faced with a stagnant global economy and shrinking market share, global brewers like Anheuser-Busch InBev, SABMiller, and HEINEKEN International are stepping up efforts to find viable alternatives to beer and recapture the changing palette of their drinkers.


“Historically, beer has not been an innovative industry,” says at HEINEKEN’s Director of Innovation Xavier Mahot in an interview for Bloomberg. “But this is changing, and the new generation of drinkers that is coming are looking into other categories.”

Millennials make up  a rising figure of more than 26% of drinkers and 35% of beer drinkers, according to Nielsen. Recapturing this consumer segment has become a major priority for brewers across the board. As Mahot points out however, the changing tastes, lifestyles, and demands of millennials demand that the mainstream and historically traditional brewers change their tune.

The New Bud Light Lime-A-Rita line combines a light beer flavour with stronger fruity tastes.

In response to this, many brewers have begun introducing their own varieties of beer mixed with other flavours, alcohols, or spirits. In the U.S. AB InBev put $35 million behind the launch of its new lime-flavoured Bud Lime product. Its Bud Light Lime-A-Rita variations have shown “strong growth” and are “key drivers” of the company’s beer-only segment, according to the its Q3 2013 earnings report. At the same time, the brewer’s Shock Top brand is the highest performing ‘craft’ beer in the country commanding 16% of the craft beer market share.

AB InBev’s Shock Top beer is not made by a ‘craft beer’ microbrewery but is the fastest selling ‘crafty’ beer in the U.S.

Across the pond, HEINEKEN International’s Desperados brand, which blends French beer and Mexican tequila to appeal to young-adult drinkers, grew by 26% in 2011 compared to just 5.4% volume growth in the Heineken brand. In addition, HEINEKEN debuted the Radler brand – a lemon soda and beer mix – to 19 markets around Europe last summer. Though the brand’s financial results remain unclear, HEINEKEN touts it numerous times in its 2013 annual report citing it as the “cornerstone” in its strategy to get 6% of sales a year from new products.

An advertisement for Amstel Radler reads ‘double refreshment’ and touts the product’s all natural ingredients

In the U.S. market HEINEKEN plans to launch several new brands including Amstel Radler, Dos-A-Rita, Dos Equis Azul, and two ciders similar to Strongbow. In Asia, HEINEKEN’s Indonesian arm called Bintang is planning to move into the soda market in response to increasing alcohol bans.

Across the board, the global brewers are adapting to meet the demands of a new generation of drinkers. As more and more millennials peer into drinks menus for the first time, the question remains whether the traditional taste of beer will succeed in beating out its stronger and more sophisticated counterparts in the spirit and wine industries.

The Changing Face of Brick & Mortar Retailers: The Rise and Fall of the Shopping Centre

Edited & Updated

Growing up surrounded by expats in a foreign environment, days at the mall were often a nostalgic subject among my American schoolmates. Indeed, the mall was something of a hallmark for American society to many of us non-Americans. Yet only a few years later, the sprawling shopping centres that were once the favoured activity of families and teens across America, have become relics of a bygone era. Mall mogul and C.E.O. of one of America’s largest privately held real estate companies, Rick Caruso, went so far as to call the traditional mall a “historical anachronism – a sixty-year aberration” that no longer meets the needs of retailers, communities, or the general public. Once known as the ‘temples of consumption,’ the American mall has become outdated and obsolete. Years of haemorrhaging to e-commerce sales has left its mark, driving under anchor retailers and leaving traditional malls increasingly empty. Up from 0.6% in 1999, e-commerce has grown ten times, with sales reaching 6.0% of total retail sales in Q4 2013, according to the U.S. Census Bureau. Meanwhile, total retail foot traffic for the key shopping period of November and December saw declines of 28.2% in 2011, 16.3% in 2012, and 14.6% in 2013. Over the same period, online sales increased at more than double the rate of its brick-and-mortar counterpart. As retailers physical sales as a percentage of the revenue stream drop and e-commerce’s market share burgeon at an expected compound annual growth rate of 13.6%, they are faced with a chilling prospect – adapt or perish.

growth_bigFor malls and brick-and-mortar retailers, the emphasis now lies on what Rick Caruso calls the need for “reinvention of the shopping experience.” Rather than be what was once, according to a 1971 news article, a “monument to big spending and the shopping spree,” the modern mall looks to capitalise on a growing demand for experiential shopping.

“The future of malls is about experience, creating a destination,” says Executive Vice President of Business Development for Mall of America, Maureen Bausch, in an article for Fortune. “It’s about giving the customer an experience they’ll leave their laptop for.” In response to the rising threat posed by e-commerce and declining foot-traffic, real-estate investors and retailers alike have grudgingly initiated plans for the costly redesign and rebuilding of malls across the country. The vision: expand the massive structures to become lifestyle hubs, complete with fitness centers, cinemas, farmer’s markets, massive and unconventional attractions like indoor ski slopes and aquariums.

Rick Caruso, CEO of Caruso Affiliated, speaks at the National Retailers Federation’s annual convention in New York.

Before launching into the spectacle and staggeringly high cost of this overhaul however, it is worth noting the hesitation caused by a culture of surefire investment in commercial property that has hindered, and in some cases, already doomed particular malls and retailers.

The Rise of the American Mall

Following their inception in the 1960s, the spread of malls to suburbia grew rapidly and confidently as downtown areas fell into decline. In a review of one of America’s first enclosed malls, Architectural Record called it  “more like downtown than downtown itself.” As these malls grew in popularity, so too did their bankrolling parents – the Real-Estate Investment Trusts (REITs). Created by Congress in the 1960s, REITs are companies that own and often operate income-producing real estate. These large-scale proprietors enable ‘average investors’ to purchase equity in commercial projects. REITs provide investors with a  pro-rata share of income while offering an easy gateway to the benefits of real estate ownership without the common obligations, risk, or expenses. REITs investors also enjoy special tax treatment – an REIT is exempt from paying federal income tax so long as it pays out 90% of its net income to common shareholders. Though REIT stock took a hit in 2008-9, with many forced to slash dividends to investors in order to free up cash flow caused by the recession’s contractions, most of these dividends rebounded in 2010-11 thanks to severely lowered interest rates. Because REITs borrow money short term to fund their purchase of long term investments, they benefit from the Federal Reserve’s ‘tapering’ or quantitative easing policy. By increasing the money supply, the Fed drives down interest rates to the benefit of REITs.

REIT stock has risen significantly, mirroring lowered interest rates.

This benefit has not, however, translated into economic recovery for most malls. Following the 2008 collapse, consumer and personal spending as well as retail sales sunk to record-lows. Bottoming out in 2009, personal spending was down -1.5% from a high of 0.6% while retail sales slumped to -3.0% over the same period. Yet across the board, these losses were expected to reverse along with rising economic activity. As Jeff Jordan points out in his 2012 blog post for Quartz, however, vacancy rates and rents have “shown virtually no improvement” despite economic revival. As REITs and retailers have reshuffled their finances to accommodate for this lag, the focus has shifted to luxury goods and overseas sales. The rising demand for value or luxury items has been well-documented, in the fashion industry, between supermarkets, and even with malls. This polarisation has resulted in a widening gap that leaves many middle-market brands (and their respective malls) in a literal no-man’s land. For example, mid-market retailers like J.C. Penney and Sears, concerned with market saturation and oversupply, have begun cutting back on stores, raising mall vacancy rates across the country. In contrast to the relative stability achieved between 2002 and 2008 vacancies at regional malls spiked to 9.4% in Q3 2011, according to a Reis Report. The mid-market, as a whole, is expected to decline by 1-2% per year through to 2017, according to a recent article in Forbes.


Industry-giants like Simon Property Group have already adjusted for this market shift. The group recently isolated its ‘traditional’ properties saying that “it will spin off into a separate company its strip centers and smaller enclosed malls.” At the same time, REITs have capitalised on the rapid recovery of the nation’s affluent, seeing increased performance in Class A malls, which demand the highest rents. In comparison, Class B and C shopping centres that serve lower- to middle-income crowds remain in deep trouble. While vacancy rates for Class A malls have dropped back to and even below their pre-2008 levels, B and C malls are faring significantly worse with vacancies still 40% above pre-recession levels. The future of these malls, who occupy the mid-market position and are removed from the now-bustling and hip areas in-town, is bleak. Though some have been successfully converted into community centers, churches, and schools, their ultimate demise (and demolition) seems almost inevitable.

Middle-market stores like J.C. Penney have seen a crippling decline in foot traffic and sales-per-square foot.

Towards the Future

Despite this apparent impending doom, however, there is hope for the better-off malls and retailers to achieve success. Many malls have adjusted their offerings for the digital era, selling products less conducive to online sale, like jewellery and sporting apparel. At the same time, a more diverse selection of stores, particularly small brands, keeps things interesting.

“The industry was effectively finished, no one wanted to shop at a store anymore,” says Ton Van Dam, a Dutch businessman and shopping center tycoon. “But we have evolved, and now they come to try and compare different brands, to engage with the product.”

Ton Van Dam

A founding partner and former investor in Multi Corporation, a shopping centre developer responsible for more than 180 shopping centres across 12 European countries, Van Dam stresses the need for a complete shift in the way retailers operate.

“It is all about selling and sharing the experience” he goes on to explain. “The main focus now is experiential shopping, creating an in- and out-of-store experience and community that…motivates people to be part of it in person, to share it with their friends.”

The experiential focus Van Dam describes is already a fast-emerging trend among retailers. British fashion-house, Burberry, made waves as was one of the first to offer a digitally-integrated shopping experience. In its flagship store, full-length mirror screens in the fitting rooms correspond with radio chips in clothing to show the item being worn on the runway. Store associates recommend products based on data from iPads that log all the items a customer has previously purchased in store or online, allowing for a more personalised shopping experience.

“The aim of these efforts is to bring Burberry’s online brand environment, to life in a physical space for the first time” says Burberry Chief Creative Officer Christopher Bailey.

Burberry’s in-store experience merges the digital feats of its ecosystem with the personalisation and attention to detail in its stores.

In the US, Verizon Wireless debuted its first ‘Destination Store’ at the Mall of America. A dynamic space that allows customers to interact and engage with the products on offer, the store includes six ‘lifestyle zones,’ that give customers the opportunity to use the technology in scenarios relevant to them.

The Verizon Destination Store encourages customers to interact with products in scenarios relevant to them.

Malls have like the Mall of America have diversified their offerings by expanding into non-retail categories. The Minnesota-based mall is hoping to become more of a destination, planning to include an office tower and J.W. Marriott on site. The Dubai Mall, the world’s largest, plays host to 75 million people a year. It features a 10-million litre aquarium with over 400 sharks and rays, as well as a ski slope and an ice rink.

The Aquarium at the Dubai Mall, the world’s largest.

Harnessing the power of e-commerce as opposed to resisting it, these malls and retailers are working to transform the shopping experience. Digital and online sales offer a host of measurable metrics that allow companies to form a deeper understanding of their customer. Basic tactics include the personalisation of the shopping experience, dynamic pricing strategies, and easy-access to post-sales service.

“The digitalisation of our brand has been one of the biggest challenges faced by the company,” says John Clarke, Vice President of External Communication at the 140-year old HEINEKEN International. “But it has also given us fantastic ways through which to better understand our customer, their habits, their preferences. It has really altered the way we approach our communications.”

In addition, digital sales have greatly altered the supply chain. Customers now visit stores to compare products, only to buy them online later. Similarly, customers can request in-store pickup, allowing retailers to stock precise amounts of particular products and offer a more tailored product selection. Today, the shopping experience begins end long before customers cross the threshold of a physical store. More and more the brick and mortar environment feeds off of what is happening online, anticipating customer needs. In Apple’s retail stores, ever the shining beacons of forward-thinking retail, technology called iBeacon, which uses short-range technology to track how customers move around in-store, sends relevant promotions in the form of push-notifications.

The integration of digital into the actual product, too, has gained stead. Heineken created “the Sub,” a pressurised countertop  beer tap that chills a chosen ‘torp,’ a mini-keg of torpedo-like design in order to pour the perfect beer without even leaving the kitchen. HEINEKEN International offers several of its 250 different beer brands in torp-format. Merging physical and digital, the Sub measures which torps are consumed most frequently and makes recommendations via a smartphone app to order more torps of the same or similar brand when they run low.

The Heineken ‘Sub,’ allows beer enthusiasts to swap different beer brands in the form of ‘torps.’

The number of behemoth malls that dot the American and global landscape almost certainly prevent them from going extinct, however bad business may be. But for many of these malls, which occupy the traditional space, their success depends on the ability of management and brick and mortar retailers to enhance the mall experience.  The nation’s top malls leverage their sheer size to go beyond retail, moving instead to engage their customers with a relevant, changing tenant mix and exciting design, their success shows there is still viability in the mall model.

The Resurgence of Some and the Death of Many

The number of malls that dot the global retail landscape almost certainly prevent them from going extinct, however bad business may be. Success, though, hinges on the ability to adapt to the changing retail climate. For many of the malls in the traditional space, their age, location, and design mean it may well be too late. Built for a past retail heyday, the already uphill battle to transform retail combined with a massive oversupply of property, the fate of these malls is mostly decided.

For the nation’s top malls, though, the ability to leverage their sheer size to go beyond retail, moving instead to engage their customers with a relevant, changing tenant mix and exciting design, and achieve success shows there is still viability in the mall model. For now, the experiential shopper is entertained. But one must ultimately wonder, for how long?

Indian Gastropub Adds Spicy Twist to Downtown LA Buzz

“The most badass chicken tikka out there,” that’s what Badmaash LA, Downtown Los Angeles’ revolutionary Indian Gastropub, offers. Mention Indian food and the natural instinct is to think of a staid restaurant with faded red carpeted floors and sitar-music.

Enter Nakul and Arjun Mahendro, the two Canadian Indian brothers who started Badmaash. Serving traditional indian food icons with an innovative twist, the brothers have brought subcontinental flavour and western favourites to Downtown LA (DTLA) while taking advantage of the area’s economic upswing.

“We wanted to create a cool restaurant with great food and a fantastic atmosphere,” says Nakul.“Something that pays homage to our past but departs from the traditionally drab Indian restaurant. We want to redefine the indian dining experience as a whole.”

image Walk into Badmaash and it becomes instantly clear what the brothers are talking about. The familiar overwhelming buffet-style dishes are replaced with portion sized plates paired with a selection of hand-picked artisan beers. The LCDs blaring Bollywood songs are gone, swapped for a cool, silent Indian classic projected on the large wall. A set of Warhol-like portraits of Mahatma Gandhi wearing coloured aviators lines the wall.

Debuted in May 2013, the two ‘americanized desi boys’ have turned Badmaash, the Hindi word for ‘badass,’ from a risqué and somewhat idealistic concept into a veritable business. Almost a year later, the buzzing eatery, has put the figurative spice back into the subcontinental cuisine.

Badmaash’s location in Downtown LA, I found out from Nakul, puts it at the start of more than just a culinary revolution. The brothers entered the Downtown market just as it began gaining speed. In 2000, the Median Sales Price for DTLA hovered between $150K and $200K. After a steep decline during the recession worsened by its own micro-housing bubble, DTLA rates climbed back to almost $550K by end 2013. 

Median Sales Prices are steadily rising as the economy recovers and Downtown becomes more popular

Median Sales Prices are steadily rising as the economy recovers and Downtown becomes more popular

Debuted in May 2013, Badmaash has managed to evade most of the economic instability. Today investments in Downtown LA are “sound and growing” stresses Nakul. But business has not always been easy. The brothers’ previous Toronto-based restaurant, Jaipur Grille, felt the effects of recent economic turmoil. The restaurant group that worked with Jaipur Grille, Nakul explains, had to accept significant losses and dramatic dips in business.

Indeed, though many industries worldwide slipped into decline after the 2008 Wall Street Crash, few were as hard-hit as the restaurant industry.

According to data released by the Federal Reserve and the Bureau of Economic Analysis, overall consumer spending dropped dramatically from 2008 through 2010. In addition, a comparative analysis by Beacon Economics details how taxable sales for the City of Los Angeles, which bottomed out in the Q2 of 2009, saw a 18.6% decline from peak to trough. A triple hit, lowered consumer spending complemented by heavy job loss and the inherent increase in available time to cook, meant few people were inclined to eat out.

Consumer spending dropped dramatically during the crisis. Restaurants suffered significant losses in 2009 in particular.

Consumer spending dropped dramatically during the crisis. Restaurants suffered significant losses in 2009 in particular.

In my conversation with Nakul my questions about the economy’s impact required little elaboration. With spending reduced to bare-necessities, eating out became a luxury most could no longer afford. 

More interesting, however, was his positive outlook.

“This is an extremely great time for the U.S. and an event better time for Downtown LA,” he said. “Everyone is look to Downtown LA as the next great American city.”

In the last few months, publications like GQ have written about Downtown LA, painting it as a crossroads of innovative cuisine, alternative shopping, and an edgy, somewhat nostalgic culture. It was interesting to hear about the area’s rise from someone with an on-the-ground perspective. Nakul explained that Downtown LA is growing rapidly, just less noticeably.

Traditionally, the Downtown economy is restricted mostly to the daytime, catering to the office workers that file in and out of its high-rises each day. By night, its derelict and supposedly ‘crime-ridden’ streets make for a disheartening vision.

Yet, as Nakul points out, the area is rapidly changing. According to a survey by the Downtown Center Business Improvement District, there was a 6% rise in Downtown’s population between 2011 and 2013. More than 92% of people reported they ‘lunch out’ at least once a month. Notably, 93% of permanent residents (i.e. not employees or visitors) dine out at least once a month. Finally, close to 68% of respondents said they wanted more mid-level restaurant options.


Asked what the increase in population might mean for Badmaash, Nakul underscored that heightened demand means more supply must be created.

“The more people that move here, the more demand for eating options. The more restaurants that open up, the better” he said. At such an early stage there is still ample opportunity and room for expansion without the risk of market saturation, it seems. 

Nonetheless, Downtown property rates have “skyrocketed,” according to Nakul. With the openings of establishments like the Ace Hotel, Downtown’s micro-economy is certainly on the rise.

Economic indicators notwithstanding, I realised from my conversation with Nakul that Downtown’s business environment is actually much more promising for small businesses than that of its West LA counterpart.

The saturated, unfamiliar, and expensive market of Beverley Hills or West Hollywood is hardly conducive to starting an unconventional restaurant concept, especially without financial backing.

“In Hollywood, the chairs alone were $1000 a piece. It would have completely changed our business. In Downtown, we found ones for $100,” Nakul highlighted to me.

Interestingly, though Downtown’s low-cost economic environment made it easier, the City of Los Angeles’ policies, as other interview posts have mentioned, left much to be desired. 

Nakul described the process of opening a restaurant  in LA as “very bureaucratic, almost inaccessible.”

More importantly, he emphasised the need for more support for starting small businesses, particularly in a budding micro-economy like that of Downtown LA. Support from the Downtown Business Improvement District helped push through a lot of Badmaash’s permits. Beside this however, Nakul stressed the need for a city- or country-wide program to provide micro/local economic stimulus through support of small businesses. Assuaging the need for capital through long-term loans,while lowering the barriers for entry are essential if Downtown is to continue growing, he said. 

“Restaurants can become a sinkhole of money, a purveying nightmare,” he explained. “Access to capital is extremely important and any restauranteur knows that initial capital investment has to be really small, making funding and low costs all the more crucial.”

All in all, my interview with Nakul of Badmaash LA was enormously interesting and illuminating. As mentioned, Downtown is often said to be ‘on-the-rise,’ but this is only gradually becoming evident. This aside, Badmaash’s and Downtown LA’s burgeoning success points to the ability of unlikely, written-off economic environments to be a huge hotbed for small business success. Could this be extended to entire economies? Who knows…

BaadmashLA is located on 108 West 2nd Street #104 in DowntownLA. Be sure to visit if you’re ever looking for a fantastic place to eat!