THE REGAL CARNATION HOTEL, GUAM

Jim Kayalar wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or

ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to

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Steve McKenzie, a management consultant from New Jersey, looked out the window of a United Airlines

Boeing 747 at the fading shoreline of the island of Guam.

Their 2007 Easter vacation now over, McKenzie and his wife were returning home with somewhat fond

memories — “Fond memories of the island,” McKenzie thought. The hotel they had stayed in was a

different story. “Think overpromise and under-deliver,” he grumbled to himself.

In retrospect, as McKenzie thought more and more about his hotel stay, he contemplated writing to the

hotel to share his insights with management. But would writing to them be of any use and was there

anything new he could say that they didn‟t already know?

Guam Background

The island of Guam, an unincorporated territory of the United States, had a population of 175,000 and lay

in the Philippine Sea. The island of Guam was three times the size of Washington, D.C., and boasted a

turbulent history.1 The island was first put on the map by Portuguese adventurer Magellan, who was sailing

under the Spanish flag, in 1521.2

It was ruled by the Spanish until 1898 when it was ceded to the United

States. Japan ruled the island between 1941 and 1944 during the Second World War and Guam was since

then an organized territory of the United States.

The United States had two permanent bases in Guam that benefited the local economy:

1. Commander Naval Region Marianas Main Base

2. Andersen Air Force Base

1 www.cia.gov/library/publications/the-world-factbook/geos/gq.htm, accessed August 8, 2008.

2

http://www.justice.gov.gu/SuperiorHistory/hist_02.htm, accessed August 8, 2008.

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The American military presence on Guam was a serious economic factor for Guam‟s economy. Tourism

was the other big revenue generator and provided 60 per cent of the island‟s gross revenue and 35 per cent

of total jobs on Guam.

3

Tourism Industry

Guam‟s tourism industry started developing in earnest after 1962 when President Kennedy lifted travel

restrictions to the island. 1967 was an important milestone; it was when the first Pan Am World Airways

jet landed on Guam, carrying 109 Japanese visitors.4

After a phase of rapid growth, the tourism industry was by 2007 in the maturity stage. Numerous new

tourism destinations had entered the market and were successfully vying to bring potential customers to

their countries through elaborate promotional campaigns. Guam‟s recipe for success based on sea, sand,

sun and duty-free shopping had been matched and surpassed by competitors with additional cultural

offerings, events and attractions. Occupancy rates and hotel prices had fallen from their all-time high in the

1990s (see Exhibits 1 to 6).

Guam‟s geographic position made it susceptible to typhoon damage and its unique position as a U.S.

military checkpoint made it more sensitive to being affected by negative macro economic and political

developments, such as the post-9/11 War on Terror, the 2003 invasion of Iraq and outbreaks like the SARS

scare.

Guam Hotel Inventory

There were approximately 30 to 35 hotels in the one-star to five-star range in Guam, with branded hotels

like the Sheraton, Hilton, Marriott, Hyatt Regency and Westin present in the market (see Exhibit 7). One

million plus tourists visited Guam annually.

Average hotel occupancy rates on the island hovered around the 60 to 65 per cent mark, with beachfront

hotels outperforming the rest and realizing 80 to 85 per cent occupancy.

The majority of hotel properties on Guam were in the four- to five-star range. The three-star hotel market

was differentiated based on the availability of a beachfront. Guam also had numerous one-star hotels and a

single two-star limited service hotel, which had opened in 2002.

Guam Visitor Profile

Approximately 80 per cent of tourists visiting Guam originated from Japan. Guam was a 3.5- to 4-hour

flight from most Japanese cities. Ten per cent of visitors came from Korea and the rest came from nearby

countries like China, Taiwan and Hong Kong. The average Japanese tourist stayed on the island for three

to four days and spent approximately $585 during their stay. It was thought that for most it was their first

overseas trip and the first time they set foot on U.S. soil. Most of them would not return. Repeat Japanese

visitors made up approximately a third of total arrivals.

3

http://visitguam.org/members/?pg=ar, accessed August 8, 2008.

4

http://visitguam.org/members/?pg=ar, accessed August 8, 2008.

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Page 3 9B08M070

The average Korean tourist spent an average of $506 during their stay. Eighty per cent would not return

back to Guam for a repeat visit.5

A small number of Americans tourists visited the island every year, mostly to sample the Second World

War heritage. There was also a steady inflow of Americans on official U.S. government business.

Weather

The weather on Guam was very pleasant, with average temperatures ranging from 80 to 90 degrees

Fahrenheit throughout the year, which made it an ideal location for tourists who wanted to escape the cold

of the winter months.

Other

Seaside resort hotels with their own beachfront comprised the most-sought category of hotel in Guam.

Market research showed that duty-free shopping and sampling “Americana” were the other reasons for

visiting Guam. Guam also boasted the largest Kmart in the world.

Most Guam hotels advertised special rest and relaxation room rates and packages for U.S. military

personnel. Most of the hotels were based on Hotel Drive, a two-mile-long stretch of road in the capital,

Hagatna.

Hotel Drive boasted the best beaches in Hagatna and offered a fine choice of shopping, dining and night

life. As Hagatna had been built to capacity as regards beachfronts, some hotels had chosen to locate outside

the capital.

THE REGAL CARNATION HOTEL BACKGROUND

The Regal Carnation Hotel was a relatively new three-star property with 150 standard rooms and was

situated at a distance of 300 feet from the seafront, along a major road that separated it from other hotels

that were based next to the ocean. The Regal Carnation was located about four to five miles from the city

center.

The Regal Carnation was built after the first wave of hotel-building in Guam in the 1980s when it became

apparent that the tourism industry in Guam was a success and was there to stay as a result of continued

strong demand for hotel rooms.

“The Regal Carnation is a „me-too‟ investor trying to piggy back on the success of hotels with their own

beachfront,” McKenzie thought. With no direct access to the sea, most Regal Carnation guests made use of

the beach facilities of the other hotels for a certain fee or used the small stretches of unkempt public beach

between the adjacent hotels.