MacDonald Hotels on creating a centre of excellence for the Scottish hotel industry

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Copany Profile March 2008 MacDonald Hotels

It’s endured a costly management buy-out, planning delays and allegations of political sleaze. But now Macdonald Hotels is back focusing on what it set out to do: treat staff well and create a centre of excellence for the Scottish hotel and catering industry 

Macdonald Hotels finally got the go-ahead in December 2007 for an ambitious holiday-village project at Scotland’s Aviemore resort, after five years of planning permission delays. But a month later, it was back in the news for the wrong reasons, when it transpired that the Scottish government had intervened with planners on the company’s behalf, after Macdonald threatened to withdraw.

The hotel group’s founder, Donald Macdonald, probably didn’t appreciate the association with political sleaze, since he’s reticent about talking politics. He does, though, support the SNP and is (according to a colleague) active in pushing for change. “I stuck my head above the parapet because of frustration,” says Macdonald.

That frustration is with a business environment rife with bureaucracy. It’s a general British bugbear and not unique to Scotland, but it is, according to some, more prevalent there. Macdonald has countless stories of planning permission delays in his own industry.

“It’s the areas outside of cities in Scotland that are the hardest to get through. In the borders, we were roped in by the bank to help a farmer who was trying to create a new economy and build 300 houses. It took him 14 years. He was a fantastic guy; but he might  have gone out of business had we not been brought in. It was pure bureaucracy—astonishing,” he says. “Nobody wants to rape the landscape, but you want to enhance it for the good of the people.”

Others share his frustration: “Nobody’s asking that things bypass the public interest, but at the moment it’s all loaded to delaying and interfering,” says Alex Pagett, an alumnus of bygone Scottish hotel group Stakis and the former communications director of the Bank of Scotland.

This is a particular problem for the hotel industry, he adds: “The difficulty this country is facing is getting the public sector to understand that, if they are to succeed in growing this industry, they’ll have to address the processes allied to it—planning, particularly. The government wants growth in the hotel sector of 50 per cent over the next five or six years. They are only going to get it if they unleash the potential of the private investor. If the private investor finds that, every time he wants to add another half-dozen rooms to his hotel, it’ll take two years and he’ll have to have consultation with Mrs McGinty, because she may have an interest… he’ll look elsewhere.”

Both Pagett and Macdonald, though, see positive change afoot. Macdonald believes he’s seen a bigger change in Scotland than at any time in the last 15 years, led by business-experienced ministers who understand risk and a balance sheet, and the challenges of competing at a global level against the lure of cheap, overseas destinations.

The nation has produced several hoteliers, among them Sandy Orr of City Inn and Ken McCulloch, who created the Malmaison chain, with whom Macdonald has been friends since their days together at Stakis. “We are just hungrier up here,” reckons Macdonald. “The further north you go, the harder it is to make money and you’ve got to do it well.”

Robert Barnard, the partner responsible for hotel consultancy at accountancy firm PKF, agrees that London snags the lion’s share of hotel spend. But figures from PKF for the sector show that Scotland’s 2007 room yield was up 6.7 per cent from 2006, underpinned by “a stellar performance” in oil-rich Aberdeen. This year may prove tougher. “The hotel market is inextricably linked to the UK economy,” notes Barnard, who is keeping a close eye on interest rates and inflationary pressures.

Keeping in clover, then, will be a challenge, so it’s surprising to hear Macdonald say: “We’ve never been a company that’s spent a lot of time planning. We have a strategic plan for the business as it is today, but we don’t really have a grandiose plan of building a hotel in every city in Europe. We’ve been fortunate in that we’ve grasped opportunities.”

Whatever the approach, it’s thanks to Macdonald’s industry acumen that he’s spotted those opportunities, which have helped him build an independent hotel group that is the largest in Scotland and one of the largest in the UK, employing nearly 5,000 people.

Born on Harris in the Outer Hebrides, he was going to go into accountancy, but when he finished a summer job at the Turnberry golf resort, the manager (another islander) talked the young Macdonald into making a career of the hotel business. He went on to do an apprenticeship with British Transport Hotels “which was tremendous, because you really had to go through every department”, before joining McCulloch at Rio Stakis’s group, then only four hotels. He talks in glowing terms of Stakis, a charismatic Greek Cypriot for whom even the Royal Bank of Scotland’s chairman at the time, Sir George Matthewson, had a soft spot.

“[Stakis] was a fantastic mentor,” says Macdonald, “because he had tremendous personal standards [and] very high family values, which were projected into the business. Whatever he did, he made sure it was really well done.”

The company was still quite small and Macdonald watched and learned. He was in his 20s when he opened the first hotel for Stakis; 33 when he joined the board as managing director of what was by then a publicly quoted company. He stayed for 21 years and he credits Stakis with shaping his own approach to people development.

“We were really well looked after; I mean, by the time I was 42, when I left Stakis, I could’ve retired, from a financial point of view. Everyone was rewarded; we had part-time cleaners who might’ve had up to £10,000 worth of shares. That’s a lot of money today; but 25 years ago it was a fortune. That was the principle by which Rio Stakis ran his company; he rewarded everybody very well.”

Macdonald left in 1989 when Stakis’s son, Andros, took over. “He wanted to drive the company in a different way to me and I’d always had a hankering to do my own thing.” There was little rancour and
Macdonald won’t be drawn into attributing Stakis’s subsequent difficulties to Andros, citing “extenuating forces” in the economy at the time. But he will acknowledge that being exposed to boardroom turmoil is “an experience that does you good for the rest of your life.”

He’d promised his wife he’d stay with two or three properties and “stop roaming to airports and waterways” and so, starting with a capital base of £1m, he, his chairman and ex-Stakis colleague Frank O’Callaghan, along with investors Orr and another Donald MacDonald, also at City Inn, gradually built on those three hotels and grew the value of the business eightyfold from 1990 to 1996.

It has enjoyed an enviable relationship with the Bank of Scotland (now HBOS) from the beginning. Hotels require a large capital outlay and within a few years, Macdonald had borrowed close to £10m: “Most banks would say to you, ‘You’d better make what you’ve got work before you come and ask for another 50 per cent of your existing debts.’ But they didn’t; they gave me the money.”

This is partly because Macdonald and his partners had proven reputations in the industry. In 1991, they had been asked to turn around a glut of ailing hotels bought in the late 1980s for inflated prices. “Within a year we turned all the businesses around; they still had negative equity but they were paying the interest on the original debt.” This cemented his banking relationships and established him as a safe pair of hands.

When Macdonald, Orr and O’Callaghan bid for 11 Rank hotels in 1992, just two years after starting up, the Royal Bank’s chairman was there to help and, because of last-minute complications, agreed to do the deal on a handshake. “It was £23m on top of the debt we already had, so we had to get some very severe hedging in place.”

Perhaps this influenced Macdonald’s decision to float the hotel group on the stockmarket in 1996, something he now regards as a big mistake. “I wanted to replicate for my people what Stakis had done, to share the prosperity of the business with those who created it. The other reason was that I wanted to create a new currency so we could do deals using paper.”

But the environment had changed since his days on the Stakis board. While the hotel group was thriving, with over 100 hotels and resorts in the UK and Spain and a turnover topping £240m, it was seen as small fry by the City, which “consistently undervalued” its share price.

“What were seen at that time as small cap companies were just below the radar. I think anything under a billion was considered small cap,” says Macdonald. The old-fashioned loyalty demonstrated to Macdonald by the banks was replaced by short-termism.

Says Macdonald: “The biggest frustration for me was that the City… didn’t take account of longer-term investments; they only wanted next year or the next half-year. I did a lot of things in the business… that I wouldn’t have done as a private company, because you’re keeping this machine going and throwing all sorts of fuel at it instead of putting the proper fuel in.” He bought four De Vere hotels “just to create more profit, but they weren’t assets that I particularly wanted or felt proud of” and he’s since sold them.

“Where we’d once increased shareholder value eightyfold in six years, sadly we only doubled shareholder value in the following seven. That destroyed the purpose of my trying to create value for our people.”

In 2003, Macdonald led a buy-out in partnership with Bank of Scotland, which underwrote the deal and now owns 50 per cent of the group. It was costly—in excess of £590m, according to Macdonald’s law firm, Stephenson Harwood. As part of the deal, the company sold 24 of its hotels to the Moorfield Group in 2007 for over £400m. But its founder has no regrets: “From my point of view I wouldn’t have stayed with the company had we not taken it private. I think I probably would’ve had no choice because we would’ve been taken over.”

It suffered tough trading figures as a result, but has benefited from being able to invest some £166m on refurbishment, purchase and redevelopment of sites and is focusing on four- and five-star hotel development. It picked up a handful of awards in 2007,
including AA Hotel Group of the Year and a National Customer Service Award, about which its founder is particularly proud.

The company has also been able to commit more time to its people-development plans and last year opened its Centre of Applied Tourism & Hospitality Management at Aviemore with the aim of creating “a centre of excellence” for the UK’s hotel and catering industry. (It already has an award-winning apprenticeship programme with Motherwell College.)

“I think some colleges have lost perspective on what’s required in both economic and skills terms,” says Macdonald. “We’d like to have a greater input into the service sector. We’re in a global arena here, and the better the service people get in the country, the better the country will be rated.”

Macdonald Hotels vital statistics

Name Macdonald Hotels
Sector Hospitality
Founded 1990
Employees 4,400+
Hotels 45 hotels and nine resorts in the UK and Spain
Turnover£194.7m (20 September 2006)
In their own words “We’ve never been a company that’s spent a lot of time planning. We have a strategic plan for the business as it is today, but we don’t really have a grandiose plan of building a hotel in every city in Europe. We’ve been fortunate in that we’ve grasped opportunities.”

macdonaldhotels.co.uk

By Joanna Higgins

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