June 2008 Project #12819

1. June 2008 Project #12819 Food Industry. Facts. Insights. Consulting. Understanding the Hotel/LodgingFoodservice Segment A Strategic Evaluation of Trends and Opportunities A Common Interest Study Prepared by:

2. I. Introduction

3. Study Background • In recent years, lodging foodservice has been one of the fastest growing foodservice segments in the United States. It is, however, a complex segment that is not widely understood by the supplier community, and selling into this channel involves providing solutions within not only the restaurant area, but also banquet and catering, room service, bars and lounges, breakfast, minibars and a number of other areas. • To provide clarity and insights into this channel, Technomic has collaborated with the leading trade publication in this segment, Hotel F&B Magazine (HFB), to develop an omnibus, authoritative study on this critical segment. While the macro trends continue to favor growth in hotel foodservice, this study provides a greater understanding of the niches and sub-segments that contribute to the overall attractiveness of this segment. This study is intended to provide the basis for strategic and tactical planning purposes for any supplier that wishes to better target this segment. • Our methodology for this study was multi-faceted, which allowed us to gather the depth of intelligence that was necessary. From the outset, Technomic was tasked with conducting: • Segmentation of the market by type of property. • Evaluation and opportunity assessment of sponsor product categories within the lodging segment. • In-depth trade interviews with decision makers at all levels of hotel property types. • Quantitative research among a representative sample of unit-level food & beverage management. • Supplier/channel interviews. • A thorough review and analysis of the collected data. • The primary objective of this common interest study is to provide information, insights and perspectives to supplier sponsors to most efficiently target and exploit opportunities in the hotel foodservice area and its representative subsegments.

4. Scope of the Engagement • This study examined the current state of the hotel/lodging foodservice industry. The segment has numerous tiers, and Technomic provided a comprehensive and robust perspective on each: • Note that B&B (bed & breakfast) locations were not be included in the scope of this study. • For major property tiers, market size data are presented, generally in terms of food & beverage revenue or manufacturer shipment dollars. Given that this report is being issued in mid-2008, all figures shown are estimating the full year’s value.

5. Methodology • To meet study objectives, Technomic utilized a research intensive, multiple step methodology consisting of seven inter-related steps. • Step One: Program Initiation • Technomic met privately with each sponsor (in person or via teleconference) to review the proposal and discuss study goals, issues and deliverables. Proprietary requests are being reported confidentially to each sponsor at the conclusion of the project. • Step Two: Secondary Review • Technomic gathered and reviewed all publicly available information (e.g., industry trade publications, general and business publications) as well as Technomic’s prior non-proprietary research on the lodging segment, key players, and major trends. Our collaboration with HFB was also critical here, as HFB also maintains a large and relatively untapped database of available secondary insights. • This information was used as background to determine current and developing trends and issues in the segment. • Step Three: Initial focus group/roundtable discussion with hotel F&B executives • Prior to initiating research, Technomic convened a roundtable discussion together with Hotel F&B magazine. The purpose of this discussion was be to begin evaluating and assessing F&B executive perceptions regarding key issues, challenges and opportunities facing the lodging industry. This roundtable allowed our study team to develop hypotheses that were tested and confirmed throughout the course of this study.

6. Methodology • Step Four: Quantitative hotel foodservice operator research • Technomic assessed attitudes and behavior with an in-depth survey of hotel F&B executives at the unit level. In total, Technomic conducted 456 interviews at the unit level. The purpose of these interviews was to understand operator issues, preferences and plans, and to gather usage data to develop and update macro market size estimates as well as individual sponsor category information. • Step Five: In-depth corporate/headquarter interviews • In addition to obtaining unit level data (see previous step), Technomic also targeted and interviewed approximately 30 of the largest hotel and casino chains including both franchisors and franchisees. The purpose of these interviews was be to gather more strategic perspectives on the segment, potential opportunities, unmet needs, supplier requirements, and other issues included in the final scope of this study. We obtained a wide cross section of opinions and insights from executives in each tier/level of lodging property. Technomic’s membership in, and association with, the Advisory Board of Hotel F&B magazine, provided unique access to key F&B decision makers in this segment. This step included a series of half-day, in-person meetings with the food and beverage management from the largest Las Vegas hotels. • Step Six: In-depth distribution channel interviews • Technomic conducted a series of in-depth, qualitative one-on-one interviews with important links in the distribution channel. Broadline distributors and specialists were targeted, and all of the major players were interviewed. The purpose of these interviews was to obtain a detailed understanding of the hotel segment, and the sponsor product categories as they relate to the distribution channel. • Step Seven: Developing a Strategic Analysis • At the completion of all field work, Technomic prepared this written report to document study results and conclusions. This report will provide each manufacturer sponsor with recommendations for how to leverage the opportunities within the lodging segment, including which types of venues/properties provide the best prospects. It also provides a baseline of industry and Technomic’s projections regarding likely future developments.

7. Property Tier Segmentation/Definitions • Throughout this report, a number of definitions are used to segment property types and tiers. In most of the tables, Technomic has used definitions as set forth by Meinrad LLC. These definitions are more concrete and rely less on relative room rates within geographic areas, and all of the major brands are defined and included in only one segment. Those definitions are: • Luxury: Affiliation with a major luxury hotel brand (i.e. Four Seasons, Ritz Carlton, etc). Also includes any 5 star Mobil or 5-Diamond AAA property. • Upscale/First Class: Affiliation with one of the upscale brands (i.e. Marriott, Hilton, Sheraton, etc.). Also includes any 4 star Mobil or 4-Diamond AAA property. • Midscale: Affiliation with a mid-market brand (i.e. Best Western, Holiday Inn, Hampton Inn, Courtyard by Marriott, etc.). Also includes a 2 Diamond/Star or 3 Diamond/Star by AAA or Mobil. • Economy: Affiliation with an economy market brand (i.e. Days Inn, Holiday Inn Express, Comfort Inns, Super 8, Motel 6, etc). Also includes a 1 star Mobil or 1 Diamond AAA property, or rated as a 2 Diamond AAA property with no F&B. Also includes any property that specifically positions itself as “budget” or “low price”. • Throughout certain data tables, operators are further defined into Upper Upscale and Upscale and Full Service Midscale and Limited Service Midscale. These definitions correlate more closely to definitions as laid out by Smith Travel Research and are self-identified by survey respondents as they completed the survey.

8. Structure of This Report • Given the large amount of data and insights included in this report, it is broken into a number of sections, each of which explores a specific area of interest for the sponsors. The overall structure of this report is as follows: • Executive Summary of Findings and Recommendations • Segmentation and Review of the Lodging Segment Overall • Review and Segmentation of Lodging F&B Revenues • Daypart Findings • Best in Class Supplier Attributes • Food & Beverage Findings • Equipment Findings • Opportunities within Las Vegas • Supplier Sourcing and Selection • Distributor Perspectives and Outlook • Appendices

9. II. Executive Summary and Recommendations

10. Current Size and Segmentation of the Lodging Segment • In total, there are over 46,000 hotel properties and nearly 4.5 million hotel rooms in the United States. In addition, there is a robust pipeline that indicates new hotel construction will be consistent through at least the early part of 2010. Some other key facts about the lodging industry include: • The Southern U.S. has the largest number of properties and rooms • Independent hotels account for almost half of all units • Over 90% of properties are midscale or economy hotels • Roughly 60% of hotels are branded hotels • Some of the largest hotel companies are household names. From a food and beverage size perspective, leading hotel chains in the country include: • Within the 46,000+ properties are over 15,000 restaurants. It should be clear that only 26% of hotel units maintain restaurants, a figure that is shaped by the fact that only 1 in 10 economy hotels operates a restaurant on-site. Implications:The hotel food and beverage industry is large and complex, with rather large differences in service styles and offerings by type of property. Overall, Technomic believes that there are above average opportunities within the lodging segment. This report provides the baseline insights necessary to evaluate the go-to-market structure and activities to more effectively reach this market segment.

11. Lodging F&B Overview – Size of the Industry • The U.S. lodging foodservice industry currently generates over $33 billion in revenue. The market has shown steady and generally above average growth over the years. More recently, the industry has shown renewed signs of vibrancy as hotel operators dedicate greater resources toward expanding their foodservice offerings. • Upscale properties, with their market presence and higher number of foodservice outlets per property, lead the market with revenues of over $18 billion. Economy hotels have a very large presence in the U.S., but their lack of complete foodservice solutions (they typically focus on breakfast; often complementary) leaves their revenue share of the market far behind other property tiers. • From the perspective of service area revenue generation, banquet and catering operations are the biggest F&B business for hotels. On-premise full service restaurants are #2 in revenue generation. These top two service areas account for approximately 2/3 of hotel food and beverage business. Total Hotel F&B Revenues 2008 = $33.735 billion

12. Lodging F&B Overview – Growth and Outlook • Given the recent economic turmoil, Technomic is forecasting real declines in the foodservice industry for 2009. This holds true for hotel F&B as well, which is projected to grow at a nominal rate of 3% (-1.8% real) in 2008 and 2% (-2.5% real) in 2009. However, Technomic continues to see longer term opportunities within the hotel segment, and our three year projected growth forecasts emphasize that growth is likely to return over the next three years. • The chart below shows revised 3 year compound annual growth forecasts for each of the major property tiers/segments within the lodging segment, and also shows growth forecasts for the major service areas. As shown, banquets and catering are expected to continue to drive and support the growth in the lodging business, and the more upscale properties are expected to outperform the properties that are positioned in the midscale or economy segments. Technomic continues to be encourages by positives noted in our lodging segment report including: • Clear emphasis on F&B by hotel operators • Expansion of foodservice throughout properties (new service areas) • Strong new construction pipeline • Changing impression of hotel foodservice among consumers • Exchange rate attracting more international travelers • All things considered, Technomic anticipates growth in lodging foodservice to continue to outpace that of many other foodservice segments. Implications:While growth has exceeded the industry over the past several years, like the broader industry, hotel F&B revenues are expected to slow. Given the economic realities, having a stronger, more targeted program to reach specific hotel customers is critical for sponsors to continue to see above average growth. Note: Growth shown is a midpoint of a projected 3 year growth estimate

13. Daypart Evaluation • The two dayparts that receive the most attention from operators are breakfast and dinner. While all hotel operators emphasize breakfast offerings one way or another, it is only the full service properties that are generally making dinner a priority. Lunch is considered a slower daypart and a lesser opportunity by most hotel chains. • There is heated competition among limited service hotels to attract customers, and the competition is centered around breakfast offerings. Many value-oriented customers are making hotel selections based, in large part, on the quality, variety, and price of the breakfast offering. In turn, a high percentage (85+%) of limited service hotels are providing breakfast as a complementary service. So the competition has evolved into which hotels can offer the most varied, well rounded breakfasts for no additional cost. • Breakfast is also critical for most hotels because it “sets the tone” as far as guest perceptions. A poor breakfast experience will cause guests to seek out other meals elsewhere. • Dinner is considered the most profitable meal service for hotel operators. Like breakfast, consumers are looking for high quality meals. Unlike breakfast, the prices of these meals are often quite high. Executive chefs and their culinary teams throughout the industry are transforming the perceptions of hotel dining as they are offering menu items and culinary expertise that did not exist in lodging foodservice 5 to 10 years ago (except in the luxury segment). • Other dayparts, such as mid-afternoon snacks and late-night dining have not yet become a priority for most operators. There are some new developments in these areas but they are not commonplace. Implications:The breakfast daypart is one that all operators, regardless of tier/level, are actively focused on growing. Dinner too remains an emphasis, and suppliers need to provide daypart-specific solutions to their hotel customers. While other dayparts are receiving less emphasis, they may provide incremental growth and profitability options for both operators and suppliers.

14. Perceived “Best in Class” Suppliers • Throughout the course of this study, Technomic consistently asked hotel operators to identify the foodservice manufacturers that they consider best-in-class. While the questions were asked about specific service areas, for the purposes of this executive summary we are identifying the companies that were most often mentioned across the board. Leading-edge hotel F&B suppliers include: • Coca-Cola • PepsiCo • Starbucks • Sara Lee • Tyson Foods • Hormel Foods • The reasons for their best-in-class status often comes down to a combination of quality products, good availability and service levels that surpass the competition. High marks for service levels were based on such factors as collaboration on consumer insights, banquet and catering support, cross-training, and consistency in billing and pricing practices. Implications:Best in class sponsors were typically noted to be doing a higher level of volume with the hotels interviewed, and being “best in class” gives suppliers a competitive edge. Understanding the criteria operators use to rate best-in-class, and building the sales, marketing and promotional initiatives around these will provide suppliers with a differentiation factor that is extremely important in a slower growth environment.

15. Supplier Selection Criteria • Some of the most important selection criteria being used by hotel purchasing management include the following: • Quality • Health characteristics • Application flexibility • Service area flexibility • Brand image • Value • Consumer demand • Ease of use • However, in addition to these factors, hotel F&B executives were also asked during this study to provide insight into other, less traditional factors, with the goal being to assess tier two factors and those considerations that are becoming more important. Therefore, it has been recognized that the following are also important in the purchase process: • Manufacturer-supplied equipment or packaging to supplement product • Manufacturer-supplied training in food preparation or use • Strong reputation as a foodservice brand • Experience in using brand • Corporate specifications Implications:Many of the most important selection criteria are “table stakes” for entry, but suppliers need to first focus on these areas. Other lower rated factors may not be “critical” but can provide suppliers with a defining edge over competition, and it is in these areas that a “best in class” supplier may be formed.

16. Sourcing/Distribution Overview • All indications suggest there remain two camps in the industry as it pertains to food and beverage sourcing: those that are advancing the function with automation and advanced cost control practices and those who are laggards and are operating independently without any outside purchasing support. • It is also important to recognize that there is a wide range of approaches in the selection of products. Corporate mandates, approval lists, recommended lists, and unit discretion all continue to be viable alternatives. Manufacturers should be familiar with the practices of each individual hotel chain. Ultimately, the decisions around purchasing continue to be made by corporate food and beverage executives and independent hotel owners. Chefs have a very influential, but often supporting role in the decisions. • As expected, this study identified Sysco and US Foodservice as the two primary sources of distribution for the industry. Fifty-six percent (56%) of hotels named one of the two as their primary F&B distributor. Club stores are considered a valuable sourcing option, but only for small hotels or emergency situations. • During the research phase of this effort, many distributors echoed the forecasts developed for this report: the segment holds very strong potential but must overcome the tendencies to operate in a status quo manner. Distributor locations in metropolitan or destination cities were also far more likely to see the upside of lodging F&B. Implications:While “selling” corporate is typically a first step for suppliers to get a product placed, typically these provide nothing more than a hunting license to sell into the individual properties. Understanding differences by chain and type of property is a critical first step; distribution also plays a role here, as properties are more likely to “spec” a brand or supplier with strong penetration and national distribution.

17. Overall Assessment and Recommended Action Steps • The lodging foodservice industry is one that presents unique opportunities given the needs of hotel customers and the variability of hotel performance based on economic and political conditions. The segment is subject to many of the same trends as the greater foodservice industry, but has a unique customer base split by business travelers (“required” travel) and leisure travelers (“pleasure” travel). • Without question, there are opportunities across categories from entrées to sides to beverages to equipment. In order to take advantage of the opportunities, however, suppliers need to recognize the differences in needs between property types. Limited service properties and full service properties have very different goals and serve customers in different ways. Even within the larger classifications are sub-segments that are approaching the marketplace using distinct strategies. • As an outcome of this study, Technomic has prepared a number of recommended action steps. They are listed below and further described in the pages that follow. • Develop unique strategies for limited service properties, built around simplicity and minimal preparation • Build full service strategies around banquet and catering needs, but also promote secondary service area advantages • Prepare customer sub-group profiles in order to help banquet and catering managers target customers by event • Develop robust staff training programs to appeal to hotels’ need for multi-use flexibility • Recognize the unique nature of the hotel foodservice business and structure sales activities accordingly • Create action plans that take into account the sometimes opposite requirements of purchasing and culinary decision makers • Maximize R&D investment by emphasizing the extremes of 1) limited prep and 2) high quality and versatile product • Ensure that negotiated business is optimally profitable • Position your organization as a hotel foodservice consultant, presenting solutions for expanding foodservice throughout a property

18. Recommendation #1 • Develop unique strategies for limited service properties, built around simplicity and minimal preparation • Limited service properties are operating in a highly competitive, value driven marketplace. One aspect of the limited service hotel business that is most competitive is the availability of breakfast as a complementary amenity. Customers of these properties are choosing their hotel based on the quality level of a free breakfast. • The challenge for the hotel chains is that they are tasked with preparing high quality, high variety breakfast menus utilizing little kitchen or preparation space. There is a high level of dependency on manufacturers to develop products that meet the criteria of both the customer and the property (again, high quality, good variety, low cost of goods, low preparation time). • Manufacturers should approach limited service chains with products/product lines that appeal to the four criteria listed above. These properties will be seeking samples, demonstrations and customer feedback/analysis to support claims that a manufacturer’s products will help give a competitive F&B advantage.

19. Recommendation # 2 • Build full service strategies around banquet and catering needs, but also promote secondary service area advantages • Full service properties are experiencing their strongest food & beverage revenues and profitability in their banquet and catering service areas. It is therefore critical for manufacturers to make a case for their products being a fit for banquet and catering operations. More and more hotel operators are seeking flexibility between service areas (people and products), so crossover appeal is important for products. With banquets and catering being the #1 focus of full service hotels, that is where product fit and evaluation will likely begin. • Manufacturers should promote their understanding of the banquet and catering marketplace and the unique demands of those customers. The next step will be to develop a case for why certain products will be more successful than others in that service area. • Once it has been established that a product holds relevance for the banquet and catering group, the broader appeal of the item should be promoted. A clear argument must be developed to highlight the flexibility of a product and why it will also see strong results in restaurants, room service, kiosks, etc.

20. Recommendation #3 • Prepare customer sub-group profiles in order to help banquet and catering managers target customers by event • As mentioned in the previous recommendation, banquet and catering functions are critical to the success of a hotel’s food and beverage business. However, it must be understood that banquets and catering is a large segment that needs to be further compartmentalized in order to achieve optimal results. • Some properties have established a reputation as a wonderful wedding venue, but a sub-par corporate facility. Others have built their convention business but have little success in personal/family functions. Hotel operators are looking for support from manufacturers in further breaking down the banquet and catering business into event specialties. • Leading edge manufacturers have the capability of developing menu ideas based on event and can share insights into the preferences of different groups. Manufacturers that provide general support in developing event menus and strategies will be positioning themselves as a banquet and catering partner.

21. Recommendation #4 • Develop robust staff training programs to appeal to hotels’ need for multi-use flexibility • A growing number of hotels are emphasizing heightened flexibility in products, physical space, and employee capabilities. Manufacturers should be prepared to play an advisory role in all three areas. • Across classification levels, brands are trying to maximize space and generate new F&B revenue streams. For example, breakfast service areas are being transformed into luncheon coffee bars during the midday. Restaurants are being utilized for banquet gatherings when appropriate. And kiosks are being used for happy hour and sample displays during evenings. F&B managers are seeing more value in multi-use space, and expect manufacturers to be able to recommended ongoing improvements in space utilization. • Additionally, employees are being asked to “cross-train”. Front desk employees must be capable of working espresso or smoothie equipment and maids are being asked to learn skills that can assist in banquet operations. Hotels are determined to avoid problems associated with over-hiring. In the end, manufacturers are being asked to provide training materials, product education sessions, and food and labor safety seminars. Leading edge suppliers are establishing a semi-regular presence on-site as consultants.

22. Recommendation #5 • Recognize the unique nature of the hotel foodservice business and structure sales activities accordingly • The lodging segment is unlike the rest of the foodservice industry. There are any number of service areas to operate; there are price sensitive customers (most leisure travel) and price immune customers (many business travelers on an expense account); there is a strong breakfast component to the market as well as a vibrant late-night/alcoholic beverage business. Manufacturers must have a strong understanding of the hotel operator and the unique challenges they face. • Hotel executives are quite clear that the least capable manufacturers are often those that approach them with a general foodservice sales force focused on selling broad product lines using tactics that are not tailored to the hotel industry. Unless the products being sold are necessities, those manufacturers are often at a disadvantage because they are incapable of presenting creative solutions to purchasing management. • Use of a dedicated sales force or segment managers/champions is an increasingly important alternative to consider. Many operators are giving more credibility and consideration to organizations that have a segment expert on the sales/consulting team.

23. Recommendation #6 • Create action plans that take into account the sometimes opposite requirements of purchasing and culinary decision makers • The majority of hotel chains employ a Vice President or Director of Food & Beverage who is typically the primary decision maker for the organization. However, there is often a tremendous amount of influence wielded by executive chefs. • In many circumstances, there is a pull between the factors important to purchasing managers (price, marketing dollars, sales representation relationship) and the executive chefs (quality, health characteristics, versatility). It is critical that manufacturers develop sales strategies that address all concerns and emphasize the areas of commonality (value, reputation, availability). • The food and beverage director is usually the key contact person because of their involvement with all service areas. But failure to acknowledge the needs of the executive chefs is a major mistake, as they will be an important influencer on any banquet, catering, or full service restaurant decisions.

24. Recommendation #7 • Maximize R&D investment by emphasizing the extremes of 1) limited prep and 2) high quality and versatile product • The lodging industry is continually placing a greater emphasis on food and beverage service. However, there are the “haves” and the “have nots” in the industry when it comes to culinary and kitchen capabilities. Manufacturers need to be cognizant of the two very different groups. • Limited service properties consider the idea of foodservice to be a necessary evil in many cases. But they recognize it is a necessity that requires a great deal of attention and competitive positioning. Lacking kitchen and prep facilities, these limited service operators are heavily reliant on manufacturers to provide good quality products that require little labor, prep, or handling. • Full service properties are most interested in high quality, high flavor, versatility, and often healthy offerings. Preparation considerations are not a criteria for these properties that have the staff and equipment to prepare even complicated or elaborate meals. These properties are looking for products, both simple and value-add, that are very high quality and that are adaptable throughout service areas.

25. Recommendation #8 • Ensure that negotiated business is optimally profitable • Hotel chain purchasing departments are negotiating contracts at a National Account level, but often local properties are not taking advantage of the negotiated contract. Obviously, in many cases, these national contracts do not guarantee any level of sales volume. They merely establish a particular supplier as an approved or preferred vendor and provide a “hunting license” to obtain business from individual properties. At the same time, buying groups such as Avendra are providing purchase efficiencies to individual properties as well. While these negotiated contracts are often necessary first steps, there are compliance issues that generally diminish the overall value of this negotiated business. • Manufacturers are only now beginning to realize the inefficiencies in such a system. There is often “double” or “triple dipping” in terms of program and trade dollars spent, with corporate programs, Avendra, and often the distributor programs receiving credit on volume sold into hotels. In this segment, as in other segments that involve group purchase organizations or other 3rd party buying groups, managing these programs is critical, and profitable growth often rests on effective oversight. Many manufacturers do not understand the true costs to serve hotel F&B customers and do not take into account low levels of compliance or higher trade costs when evaluating these customers. • To ensure that this negotiated business is optimally profitable, manufacturers must: • Develop a system for tracking trade dollars and compliance to this segment. There are a number of software tools and other systems available. • Understand that hotel management at a corporate level is often frustrated by the fact that properties are not taking full advantage of these negotiated contracts. Corporate is often committed to increasing the percentage of properties that are “on the program”. Some properties even admit that they are not always fully aware of the benefits of these negotiated contracts. It is sometimes the responsibility of the supplier to inform the property. • Recognize that all hotel chains have a different set of reasons and objectives in establishing these contracts. It remains very important to negotiate at the national level and it is an important, but forgotten, step in the process to have corporate advise your company on the optimal way to approach and sell to properties. Most chains understand the “hot buttons” of their properties and can provide insights into key issues, selection criteria and positioning of the national contract.

26. Recommendation #9 • Position your organization as a hotel foodservice consultant, presenting solutions for expanding foodservice throughout a property • One of the more recent trends in the lodging industry that is emerging as a necessary growth vehicle is the idea of expanding foodservice to areas of a property that have not previously been a food and beverage destination. Areas such as lobby lounges, registration desks, bars/pubs/social spots, and reception areas. The conversion of these locations within the hotel is a growing priority for operators. They are trying to utilize space more profitably and are attempting to give customers more (and more varied) food and beverage options. • However, aside from a select few major hotel chains, operators are struggling with how to enact such a multi-use plan. Many hotels are engaged in “trial and error” efforts and are not experiencing much success. Many hotels are looking for manufacturers to present best-in-class ideas and insights into how the market leaders are making expanded foodservice successful. Manufacturers need to be prepared to review optimal locations, product mix, promotional success stories, employee training, and equipment needs.

27. Requirements For Success • Each of the recommended growth initiatives have different requirements and functional areas that will be required to drive success. While some are marketing driven, there are also sales, operations and general management areas that are required to assist in moving the business forward. As a summary, the following details the areas that will have primary and secondary roles in making each recommendation a successful piece of a lodging growth strategy: √√ = primary responsibility; √ = secondary responsibility

28. III. Segmentation and Review of the Lodging Segment

29. Introduction • The U.S. lodging industry is a complex segment that requires examination at a number of levels. From a macro-perspective, this is an industry that is greatly impacted by economic, political, and general consumer trends. For example, the dramatic decline in overall industry revenue in 2001/2002 as a result of terrorism/traveler fear was rather quickly overcome as consumer worries shifted and travel was again perceived as viable and important (albeit more difficult). • At a more micro-level, lodging foodservice must be reviewed by property tier, hotel size, and regionality (among other things) in order to get a real sense of performance and needs. Full service properties and limited service properties are serving very different customer bases with distinct needs and demands. The breakfast daypart, examined closely in this report, is a prime example of the differences between classifications. One set of customers is seeking a wide variety of meal solutions, menu items, and price points, while the other is seeking extreme value in a simplified setting. • All told, there is real growth in the lodging industry, both in terms of overall revenues and foodservice revenues. The first step in assessing opportunities is to take a comprehensive look at the overall conditions and statistics relative to the lodging industry as a whole. In this section of the report, we provide a high level of detail into the size of the industry, focusing on such details as segment, hotel size, brand affiliation, brand ownership and regionality. • Please note, much of the data included in this section was developed by Meinrad LP, an industry leader in tracking the size and growth of the hotel business. • Also, throughout this report, you’ll see reference to various segments and classifications. Technomic made every attempt to provide consistent definitions of segment and property tier, but there are some instances when that was not possible, as organizations in the industry continue to use different terminology and classifications to describe properties. Therefore, in some cases, you’ll note, for example, a classification of ‘upper upscale’ and elsewhere that segment would fall within a ‘luxury or first-class’ classification.

30. U.S. Hotel Industry Analysis – Regional Totals • The table below identifies the size of the U.S. lodging industry, by region and property tier. In general, the majority of properties and hotel rooms are located in the South, which accounts for 1/3 of properties and an even higher percentage of rooms. The North Central region offers the lowest number of properties and rooms. Region Lodging Totals by Segment Source: Meinrad LP

31. U.S. Hotel Industry Analysis – Brand Management Company Analysis • Below is a table indicating the number of hotels and rooms in the segment, broken down by management affiliation. As can be seen, corporate managed hotels tend to be more an exception rather than a rule. Only 14% of all properties are run by the corporate headquarters; midscale and economy properties are more likely to be managed by a 3rd party management company. Brand/Management Company Analysis by Segment Source: Meinrad LP

32. U.S. Hotel Industry Analysis – Brand Affiliation • The table below shows the number of hotels and rooms in the U.S. lodging segment by brand affiliation. “Branded” properties (representing those that carry a national chain brand) account for nearly ¾ of all rooms and 60%+ of total properties. Brand/Management Company Analysis by Segment Source: Meinrad LP

33. U.S. Hotel Industry Analysis – Regional Totals By Size of Hotel • Below is a regional assessment of the lodging industry, segmented by hotel size. Region Totals by Number of Rooms Source: Meinrad LP

34. Property Growth and Outlook • As mentioned earlier, the U.S. lodging industry took a significant hit in the early 2000s after 9/11. Not only did consumer travel decline sharply, but new hotel development projects were essentially put on hold. The rebound in new property development did not occur until 2004, but we are now in the midst of a lodging mini-boom. Every quarter since 2004 has seen an increase in the number of announced hotel construction and expansion projects. • The revitalization of the industry is expected to continue for the foreseeable future (though 2009). Construction into 2010 and 2011 will depend, in part, on the economic conditions, but the are a significant number of major chains with preliminary construction plans for that timeframe. • New construction room growth has risen 8 to 10% from 2007 to second quarter 2008. Sources: Technomic, Lodging Econometrics

35. IV. Review of Lodging F&B Segment

36. Introduction • Technomic believes that real opportunities exists in the lodging food and beverage segment. It is true that all of foodservice will continue to experience difficulty throughout the remainder of 2008 and into 2009, but this particular segment is one that has not been targeted to any real extent by foodservice manufacturers and even hotel operators until recently. Because of the renewed focus on the part of many suppliers in the industry, the long-term potential in this space can be significant. • Up to, and well into, the 1990s, many properties considered hotel foodservice to be a necessary evil. Hotels were providing basic service to customers, but clearly saw foodservice as secondary (or even tertiary) in importance to the business of selling room stays. On-site foodservice was basic in its presentation, and many hotel chains simply chose not to provide the amenity to their customers; customers were forced to seek meal service away from the property. • Within the past 10 to 12 years there has been a shift in the foodservice strategies of hotel operators; at first the shift was slow, but it has accelerated tremendously in the past 4 to 5 years. Foodservice operations are now considered a key to profitability, and full service properties are now in the business of attracting both guests and non-guests to their dining facilities. Foodservice is spreading throughout properties to include new and innovative service areas. And larger consumer dining trends (currently including healthy menus, exotic flavors, and grab n’ go practices) are all clearly evident in this segment. In many cases, leading edge hotel operators are at the forefront of some of these trends. • This section of the report begins our overview of the lodging food and beverage segment. It includes a thorough sizing of the opportunity from the standpoint of number of physical foodservice locations, as well as key high-level data on such key issues as kitchen availability and service area usage, .

37. U.S. Hotel F&B Industry Analysis The tables on this slide identify the total number of restaurants and bars/lounges in the U.S. lodging segment (by property tier). Also shown is the amount of function space in the segment (by segment). Source: Meinrad LP *Averages represent hotels with restaurants, bars/lounges and/or function space only

38. Other F&B Service Areas • The table below provides additional detail on the subject of smaller service area operations other than full service restaurants, bars/lounges and catering facilities. • The data is shown by property tier, and identifies the percentage of hotels offering food and beverage. Service Area Operations Q11. Do you offer food and/or beverage sold in the ________ areas?

39. U.S. Hotel F&B Industry Analysis The tables on this slide identify the total number of restaurants and bars/lounges in the U.S. lodging segment (by hotel size). Also shown is the amount of function space in the segment (by hotel size). Source: Meinrad LP *Averages represent hotels with restaurants, bars/lounges and/or function space only

40. Total F&B Revenues in the Lodging Segment, 2008 • Total revenues generated by the hotel foodservice segment totaled $33.7 billion in 2008. This is driven by revenue in a wide variety of service areas and from all types of properties. • Luxury properties, while only representing about 1% of total properties and 2% of rooms, nonetheless accounted for 12% of total revenue. • First class properties are similarly over indexed. These properties represent 8% of properties and 24% of rooms, but account for 55% of total segment revenue.

41. Average Size (Revenues) of “Typical” Hotel Properties • The average foodservice revenues by type of property varies greatly within the lodging segment. The average hotel generates just over $700,000 in revenue, but as the graphics show below, these numbers vary dramatically by type of property, with luxury properties achieving over $14 million per property. • When evaluated from a per room revenue basis, the “average” is about $7,500 per room, but there are again major differences by type of property. Average Annual Revenues per Property ($000) Average Annual Revenues per Room Source: Technomic

42. Total Hotel F&B Revenues, By Service Area • The table below shows total revenue broken out by service area. The overall share number is shown as well as a comparison by property type to indicate the relative strength (or lack of strength) of each service area in each type of property.

43. Profitability Evaluation By Service Area • In looking at the gross margins for each service area (defined as sales less food/beverage costs and labor), it can be seen that banquets and catering are incrementally more profitable to the lodging operator.

44. Total Manufacturer Shipments to the Lodging Segment, 2008 • For manufacturers of food and beverage, the total size of the lodging industry is $8.4 billion in shipment dollars. Food makes up the majority of this, with 61% of manufacturer shipment dollars from food. Beverage is 39%, with non-alcoholic (i.e. carbonated, juice, etc.) accounting for 26% of the 39%. Alcohol accounts for 13% of total shipments to this segment. • While luxury properties only account for 1% of total properties and 2% of total rooms, this sub-segment has a disproportionate share of purchases, accounting for 8%. Upscale accounts for half of all manufacturer shipments, while midscale accounts for just under 40%. Total Lodging 2008 Manufacturer Shipments$8.4 Billion Total Lodging 2008 Manufacturer Shipments$8.4 Billion *Includes food, beverage and non foods. Excludes equipment. Source: Technomic Inc. 43

45. Profiling the Top Ten • Although exact figures are difficult to determine, Technomic evaluated the major lodging chains properties to develop some estimate of total revenue for each. These estimates were based upon the number of restaurants, bars/lounges, function space, existence of limited service or breakfast areas, and other determining factors, such as the number of rooms. • The following pages describe the top ten parent lodging companies and shows details on total properties, rooms, function space, and provides additional details on volume for each. • The top ten are: • Marriott • Hilton Hotels Corp. • Starwood • Intercontinental Hotels & Resorts • Hyatt • Wyndham • Carlson Hotels • Four Seasons • Choice Hotels • Best Western • Several parent companies were not included in this top ten list; however, depending on how the revenue is calculated, these operators should be considered high volume: • Harrah’s • Walt Disney World resorts • MGM Mirage

46. Profiling the Top Ten Hotel F&B Chains: #1

47. Profiling the Top Ten Hotel F&B Chains: #2

48. Profiling the Top Ten Hotel F&B Chains: #3

49. Profiling the Top Ten Hotel F&B Chains: #4

50. Profiling the Top Ten Hotel F&B Chains: #5