By Minu Agarwal and Prashant Das
In this article, we adopt a real estate perspective and explore the sustainability implications of hotels. First, we provide a background on sustainability, describe how it relates to the hotel sector and synthesize literature on the economic implications of sustainability. Further, we provide and explain trends on sustainability certifications, LEED in particular, in the US context.
What is Sustainability, Why is it Important?
The latest report by the inter-governmental panel on climate change (IPCC) has estimated that human activity has resulted in 1°C of global warming above pre-industrial levels. The report calls for reaching and sustaining net zero CO2 emissions to prevent further rise in global temperatures beyond current projections. Buildings contribute nearly a third of the greenhouse gas emissions and US buildings, in particular, contribute 38% of the total national greenhouse emissions. Governments, organizations and individuals are thus increasingly aware that buildings are critical part of addressing an increasingly urgent challenge -climate change. Growing knowledge of the impact of buildings on the environment and their occupants has led to wide scale reconsideration of how buildings are built and operated.
At the same time humans spend increasingly more time inside buildings and thus buildings have a large impact on our health, productivity, and wellness. Several sustainability metrics have thus been developed to address these and other issues.
How is Sustainability Incorporated in Real Estate?
A real estate asset could be perceived in terms of its building mass as well as the behavior of the people occupying it. Sustainability could be achieved from both standpoints. For example, using environment friendly materials and design will enhance the sustainability from the building standpoint. Similarly, improving business processes (such as sourcing local material and employees for hotel operations) may enhance sustainability from the human behavior perspective. While the definition of sustainability interventions may differ from one context to another, organizations such as the United States Green Building Council (USGBC) have devised building project certifications for various types of buildings, climates and geographical locations. USGBC was constituted in 1993 as a membership based non-profit organization. The Leadership in Energy and Environmental Design (LEED) certification, administered by the USGBC is continually re-examined by a large body of volunteer committees comprising of building professionals, developers and building systems manufactures. A wide range of parties are involved with the intent of keeping the rating system current and market relevant. Earlier in 1990, the Building Research establishment (BRE) developed the Building Research Establishment Environmental Assessment Method (BREEAM) rating system in the UK.
Since their inception, sustainability labels such as LEED and BREEAM -among several others- have grown in their acceptance rates and are increasingly popular design and performance assessment tools for building projects. While BREEAM is the oldest whole building sustainability rating system, LEED can be regarded as the most widely adopted system on several counts. It has been used in over 165 countries and in many parts of the world it is being adopted at a wider scale. For example, the City of Vancouver and City of New York have recently passed laws that require LEED certification at a pre-specified level to be achieved by all new-construction projects that meet specific byelaw criteria.
LEED regulates and certifies a building’s design or operations validating the buildings as less harmful to the environment compared to a standard building. LEED rates a project’s performance based on a pre-defined multi-criteria-credit system. The most important credit category relates to energy use and atmospheric emissions, the Energy and Atmosphere category (EA). The next big category of credits is related to human health which ensure minimum thresholds of daylight, thermal comfort, air quality and visual connection to the outdoors, the Indoor Environmental category (IEQ). Water-use is the third big category promoting efficiency in use and recycling, the Water Efficiency category (WE). LEED also examines the environmental impact of building projects within and beyond the site boundary and includes the environmental cost of daily transportation and site development, the Sustainable Sites category (SS). Projects with access to public transportation and pre-existing infrastructure receive additional credit.
These rating systems have a profound impact on the design and construction of a building and the ratings achieved are not simply a by-product of the design process. One study, for example, examined two residential projects in Italy and found them to score much higher on ITACA, a local rating system, but much less on the LEED system. Thus, designers must be much more efficient to earn the LEED label. LEED rating system has also duly recognized this and USGBC has released several different tracks that have been tailored to different building types and geographical locations.
How do Sustainability Labels Enhance Real Estate Performance?
Initial motivations for incorporating sustainability in real estate were primarily driven by the notion of corporate social responsibility (CSR). As such, sustainable real estate was considered an investment in the society and thus, a cost center. However, over the years, academic studies reported several economic benefits of sustainability in real estate.
Studies have shown significant association between green labels and commercial real estate performance metrics. Green-labeled properties show superior performance in terms of topline (revenue, rental rate), bottom line (net operating income), occupancy rate, operating expenses, and asset valuation (transaction price, capitalization rate). Some studies also report indirect financial benefits of green-labeled properties such as reduced absenteeism among the occupants, superior marketability, better perceived indoor air quality, and higher occupant productivity. Besides, green-labeled buildings are less volatile in terms of pricing and rental rates, providing a potential hedge against the property market cycles. Although opting for green labels may add up the investment costs by up to three percent, the multiple benefits from the topline, bottom line and valuation may facilitate a payback within a few years.
Sustainability Trend in Hotels: What to Expect and Why
Although tourism and hospitality industries were among the earliest to recognize the importance of sustainability in business, much less is documented about the financial benefit of green labels in hotels. A Beijing (China)-based study reported nearly 7% increased room rate and 20% less complaints about indoor air quality in green hotels. A US based study reported that although green labeled hotels enjoy significantly higher rental rates (ADR: average daily rate) the corresponding occupancy rate are significantly lower such that the revenues are not different from non-green-labeled hotels. The study argues that the revenue managers potentially become too optimistic with room pricing but should be able to benefit from increased revenue by keeping the same (or only marginally higher) room rate in green-labeled hotels. The bottom-line benefits (through reduced operating expenses) and pricing benefits (through reduced capitalization rates) may lead to further financial benefits. However, these benefits have not been scientifically documented yet. A recent study reports a somewhat positive (yet statistically insignificant) pricing effect of LEED label in US hotels, but argues that with a larger number of green hotels being transacted, the price premium in LEED-labeled hotels may become significant.
While other commercial real estate assets have longer-term occupants (owner-occupiers or tenants), hotels are occupied for very short tenancies (usually a day or a few more). Therefore, the motivation for green hotels needs to be analyzed differently. Due to their short tenancy, the enthusiasm for green hotels among hotel customers may be dominated by an expectation of superior comfort or experiential benefits. However, green hotels may not necessarily provide these amenities. In specific types of hotel (airport, conference, etc.) dominated by large, similarly-minded corporate clients, the CSR motivation may still exist, but will be relatively muted due to the presence of retail customers. On the owners’ side, the attractiveness of green labels will be correlated to tangible financial benefits, such as higher revenue, lower expenses and higher valuation. However, beside higher ADR, there is scant scientific evidence on other financial benefits of green hotels. Therefore, we should expect relatively modest popularity of green label in hotels which will gradually grow as more scientific evidence emerges supporting the financial benefits of going green.
What are the Trends for LEED labels in US hotels?
In December 2018, the USGBC database recorded over 112 thousand US-based projects of which nearly 1,600 included hotels. Anecdotal evidence (from reviewing the Real Capital Analytics reports) suggest that nearly 10% of commercial transactions are related to hotels, but less than two percent representation of hotels in the USGBC database is remarkable.
First, the projects are “registered” with the USGBC for a LEED label consideration. Exhibit 1 summarizes the US-based properties on which the certification decision has been taken by USGBC. We also extract statics on hotel-specific projects. Nearly 30% (34,743) of the 112,000 projects have been certified with less than 0.04% (39) projects which were “rejected” certification for some reason.
Exhibit 1: Summary of LEED Certification Decision on US-based properties
|LEED Level||All Properties||%||Hotels||%|
Data source: USGBC, based on data up to 1 December 2018.
The review process may take anywhere from a few months to over twelve years to complete after which a “certification” decision is taken. The average time for all properties is 2 years. Hotels, on average, need 3 years for certification processing. However, the processing time for hotel projects varies in a narrower range (up to 8 years). Exhibit 2 presents the trend of property registration and certification. The trends were reinforcing until the financial crisis. Academic research reports this as the “market acceptance” of LEED certification.
Exhibit 2: Number of Projects Registered and Certified for LEED in the US over time
Data source: USGBC, based on data up to 1 December 2018.
The number of projects registered waned in the aftermath of the crisis, but has witnessed increased enthusiasm in later years. 2017 and 2018 witnessed relatively smaller number of projects being registered of certified. The two peaks in number of registered projects seen in years 2009 and 2016 coincide with the years of change in versions of the LEED rating system. Registrations under version 3 (also known as LEED 2009) closed on Oct 2016. Version 3 was launched in 2009 marking the close of version 2. Release of new versions thus appears to be a driver for the timing of the registration depending on choice of the version of the rating system. Risk-averse parties may rush to register in the old version to avoid any unforeseeable changes in the new upcoming versions of the rating system. Some parties may wait to be registered in the new version to maintain the market-edge. Exhibit 3 presents the same analysis focusing on hotel projects.
Exhibit 3: Number of Hotel Projects Registered and Certified for LEED in the US over time
Data source: USGBC, based on data up to 1 December 2018.
USGBC awards different “levels” of LEED certification to projects based on the “points” achieved by them. It thus recognizes various degrees up to which a project may demonstrate achievement of the various sustainability goals. Currently there are four available levels of certification namely: Certified, Silver, Gold and Platinum requiring a minimum of 40, 50, 60, 80 points respectively. While the lower three levels of achievement appear equidistant in terms of additional points needed, the incremental design effort and cost may not be so. The energy related credits (EA category) are the strongest indicators of certification level achieved. Additionally, projects needed a mean increase of 3.51, 5.46, and 11.59 in EA credits in order to graduate from certified to silver, silver to gold and gold to platinum. Similar trends were found on the site related (SS) category as well, the next strongest category of credits after EA to indicate level of certification.
A large number of LEED credits deal with indoor environmental quality. While in the current version of LEED, 35% points are directed towards climate change related concerns, 20% deal directly with health and comfort of the occupants. LEED and other similar rating systems thus have a strong synergy with hotel buildings. Hotels can potentially derive direct financial benefits by ensuring comfortable and positive experience of the hotel guests.
Exhibit 1 provides the detailed breakup across the levels of certifications. Hotel project certification rates are lower at Gold and Platinum levels compared to their peers. In terms of mean credits achieved per category, hotels are among top performers only in the SS category credits which tend to be location driven. Energy-related expenses usually constitute a small part of hotel cash flows. The impact of location on hotel valuation is substantially higher. Thus, the importance of SS credits reflect an environment-friendly trend. On EA category, considered important for achieving higher certification levels, hotels were found to be the lowest achievers along with residential property types. This could explain the drop in Gold and Platinum level certification for hotels.
Although academics in tourism economics were among the earliest to study the importance of sustainability, scientific evidence on the economic benefits of sustainability in this sector is still emerging. Some recent studies within the hospitality sector hint towards positive effects of sustainability on business.
Survey-based studies are unequivocal about the positive impacts of going green in hotels: the customer satisfaction as well as the customers’ willingness-to-pay increases. Besides, less customers complain about the indoor air quality when the subject hotel is green. However, positive customer opinions about green hotels may not necessarily translate into their buying behavior. Unlike other commercial assets (e.g. offices), hotel occupants have much shorter tenancy and may assign relatively lower premium to pricing unless the advantages of green-ness to them are concrete. If going green compromises on the occupant comfort, the green attributes may have an adverse effect on revenues. Some studies have shown positive impact of green attributes on hotel room rates. However, the room rate must interact with the corresponding occupancy rate to generate revenues. It appears that hotel operators overreact to the green labels in terms of increased room rates. Such a behavior results in lower occupancy rates and an insignificant impact on the revenues. Further, concerns have been raised about higher expenses associated with green hotels, in LEED buildings in particular, which lead to lower bottom line.
We find that the enthusiasm for sustainability label in hotels has been relatively low, but the trends have been upwards in recent years. The need for hotels going green cannot be emphasized enough. However, the green strategic plan must include considerations about occupant comfort and requires a more tactical revenue management so as to maintain higher level of occupancy.
 “Global Warming of 1.5 ºC” Accessed December 6, 2018. https://www.ipcc.ch/sr15/
 Bond & Worzala (2014)
 Klepeis et al. (2001)
 Wilkinson (2011)
 “LEED | USGBC.” Accessed December 6, 2018. https://new.usgbc.org/leed.
 Vancouver, City of. “Passive Design Toolkit,” Accessed December 6, 2018. https://vancouver.ca Low energy intensity building requirements for certain capital projects LEED law, Pub. L. No. LL31/2016 (2016).
 Asdrubali et al. (2015)
 Miller, Spivey & Florence (2008) ; Eichholtz, Kok & Quigley (2010) ; Wiley, Benefield & Johnson (2010); Das, Tidwell & Ziobrowski (2011); Reichardt, Frantz, Rottke & Zietz (2012); Zhang, Liu, Wu, Zhang (2017)
 Pivo & Fisher (2010)
 Fuerst & McAllister (2009) ; Eichholtz, Kok & Quigley (2010) ; Reichardt, Frantz, Rottke & Zietz (2012)
 Chapell & Corps (2009); Dorsey & Reid (2012)
 Miller, Spivey & Florence (2008) ; Eichholtz, Kok & Quigley (2010); Das & Wiley (2014)
 Pivo & Fisher (2010) ;
 Miller, Spivey & Florence (2008)
 Chapell & Corps (2009)
 Zhang, Liu, Wu, Zhang (2017)
 Dorsey & Reid (2012)
 Das & Wiley (2014); Das, Tidwell & Zioborwski (2011)
 Dorsey & Reid (2010)
 Zhang, Liu, Wu, Zhang (2017)
 Robinson, Singh, Das (2016)
 Das, Smith & Gallimore (2017)
 Das & Wiley (2014).
 “Is LEED 2009 the Most Current Version of LEED? What Is LEED V 3? | U.S. Green Building Council.” Accessed February 4, 2019. http://www.usgbc.org/help/leed-2009-most-current-version-leed-what-leed-v-3.
 “LEED Registration Close and Sunset Dates | U.S. Green Building Council.” Accessed February 4, 2019. https://www.usgbc.org/articles/registration-close-and-sunset-dates.
 Wu et al (2017)
 Wu et al (2017)
 Zhang et al (2017)
 Zhang et al (2017), Robinson et al (2016)
Asdrubali, F., G. Baldinelli, F. Bianchi, and S. Sambuco. “A Comparison between Environmental Sustainability Rating Systems LEED and ITACA for Residential Buildings.” Building and Environment 86, no. Supplement C (April 1, 2015): 98–108. Bond, S., & Worzala, E. (2014). Green Buildings. Private Real Estate Markets and Investments, 234.
Chappell, T. W., & Corps, C. (2009). High performance green building: what’s it worth. Investigating the Market Value of High Performance Green Buildings: Cascadia Foundation.
Das, P., & Wiley, J. A. (2014). Determinants of premia for energy-efficient design in the office market. Journal of Property Research, 31(1), 64-86.
Das, P., Tidwell, A., & Ziobrowski, A. (2011). Dynamics of Green Rentals over Market Cycles: Evidence from Commercial Office Properties in San Francisco and Washington DC. Journal of Sustainable Real Estate, 1-22.
Das, P., Smith, P., & Gallimore, P. (2017). Pricing Extreme Attributes in Commercial Real Estate: the Case of Hotel Transactions. The Journal of Real Estate Finance and Economics, 1-33.
Dorsey, T. A., & Read, D. C. (2012). Best practices in high-performance office development: the Duke Energy Center in Charlotte, North Carolina. Real Estate Issues, 37(2-3), 26-31.
Eichholtz, P., Kok, N., & Quigley, J. M. (2010). Doing Well by Doing Good? Green Office Buildings. American Economic Review, 2492-2509.
Fuerst, F., & McAllister, P. (2011). Green Noise or Green Value? Measuring the Effects of Environmental Certification on Office Values. Real Estate Economics, 45-69.
Klepeis, N. E., Nelson, W. C., Ott, W. R., Robinson, J. P., Tsang, A. M., Switzer, P., … & Engelmann, W. H. (2001). The National Human Activity Pattern Survey (NHAPS): a resource for assessing exposure to environmental pollutants. Journal of Exposure Science and Environmental Epidemiology, 11(3), 231.
McGrath, K. M. (2013). The effects of eco-certification on office properties: a cap rates-based analysis. Journal of Property Research, 30(4), 345-365.
Miller, N., Spivey, J., & Florance, A. be formed about the costs and benefits of green in-vestment, yet a single case is seldom the prototyp-ical mean and there exists rauch local variation that adds to or reduces the marginal costs of going green. The current study goes well beyond case.
Reichardt, A., Fuerst, F., Rottke, N., & Zietz, J. (2012). Sustainable building certification and the rent premium: a panel data approach. Journal of Real Estate Research, 34(1), 99-126.
Robinson, S., Singh, A. J., & Das, P. (2016). Financial impact of LEED and energy star certifications on hotel revenues. The Journal of Hospitality Financial Management, 24(2), 110-126.
Robinson, S., Simons, R., & Lee, E. (2017). Which Green Office Building Features Do Tenants Pay For? A Study of Observed Rental Effects. Journal of Real Estate Research, 39(4), 467-492.
Wiley, J., Benefield, J., & Johnson, K. H. (2010). Green Design and the Market for Commercial Office Space. Journal of Real Estate Finance and Economics, 228-243.
Wilkinson, Sara, and Anita Bilos. “A Comparison of International Sustainable Building Tools – An Update,” Vol. 17. Gold Coast, 2011.
Wu, Peng, Yongze Song, Wenchi Shou, Hunglin Chi, Heap-Yih Chong, and Monty Sutrisna. 2017. “A Comprehensive Analysis of the Credits Obtained by LEED 2009 Certified Green Buildings.” Renewable and Sustainable Energy Reviews 68 (February): 370–79. https://doi.org/10.1016/j.rser.2016.10.007
Zhang, L., Wu, J., Liu, H., & Zhang, X. (2017). The value of going green in the hotel industry: evidence from Beijing. Real Estate Economics.
Minu Agarwal is a PhD candidate and researcher at LIPID Lab for interdisciplinary research in building performance and architectural design process at EPFL (École polytechnique fédérale de Lausanne), Switzerland. She acquired her MS in Sustainable Design from Carnegie Mellon University (USA) and a Bachelor in Architecture from Indian Institute of Technology, Roorkee (India). Earlier, Minu worked as a sustainability Consultant with IES Ltd. (Atlanta) and Buro Happold (New York) among other companies. She has been an entrepreneur and served as an external reviewer for the Green Building Certification, Inc. (GBCI).
Sustainability In Hospitality? How Legality and Authenticity Impact the Rationale for Integrating Sustainable Practices
Today’s hospitality conversations are rife with dialogue about sustainability, initiatives ranging from linen reuse programs, to donating toiletries, to auto dimming lights, to food sourcing, etc. Hospitality practitioners’ quest to define the ROI (return on investment) is often at foiled by a concept that includes intangible metrics and differing definitions of what “sustainability” really means. The oft-used “Triple Bottom Line – People, Planet, Profit” embodies the commonly agreed upon themes of sustainability, which include ensuring a healthy environment, improving economic prosperity, and implementing social justice initiatives that ensure the well-being and quality of life for current and future generations.
Companies struggle to determine what role they play in advancing and addressing social and global challenges while enhancing their brand, ensuring consumer loyalty, and expanding their market share. Many companies evaluate and refine their efforts for engaged brand activism, particularly through marketing, which they balance with efforts to implement higher standards for suppliers, improve equality among workers, and keep pricing competitive – falling in line with the general categories of most corporate social responsibility efforts: 1) environmental efforts; 2) philanthropy; 3) ethical labor practices; and 4) volunteering.
The “Arms Race” of Corporate Social Responsibility Reporting
For many companies, particularly in hospitality, corporate social responsibility (CSR) reporting has emerged as a key business approach to articulate the benefits to the company’s stakeholders through strategic initiatives. According to the Governance and Accountability Institute, sustainability reporting by S&P 500 companies increased from 19% in 2011 to 85% in 2017.[i]
Companies now appreciate the marketing value of CSR reporting, particularly as a mechanism to attract and retain customers. Increased societal pressure for greater regulation and transparency, coupled with research showing that consumers demonstrate a preference toward companies they perceive are more responsible, have resulted in a new “arms race” with companies are making operational decisions that are more tightly linked to ethical values, environmental stewardship, and respect for the human equity. They want to ensure those efforts are known to their stockholders, investors, and the public.
While many CSR disclosures are currently voluntary in the United States, there are increasing requirements mandated by various statutes. Such mandates, commonplace in the European Union, are increasingly required in the United States. In particular, there is growing market demand for a more responsible and transparent corporate supply chain. Current statutory requirements range from the Mandatory Reporting of Greenhouse Gases rule for large emitters of greenhouse gases to the California Transparency in Supply Chains Act of 2010 to ensure that large retailers and manufacturers provide consumers with information regarding their efforts to eradicate slavery and human trafficking from their supply chains.[ii] The Dodd-Frank Wall Street Reform and Consumer Protection Act, which impacted virtually every part of the US financial services industry also includes provisions for certain reporting on their exercise of due diligence in the source and chain of custody of certain minerals that are associated with armed conflicts in and around the Democratic Republic of the Congo, minerals that are associated with the manufacturing of devices such as cell phones, computers, and digital cameras.[iii] Most recently, the European Union’s sweeping Global Data Protection Regulations (GDPR) went into effect May 25, 2018. Intended to give EU citizens greater control of their own, widely-define personal data, GDPR has far reaching implications for any company doing business with citizens of the EU. For the hospitality industry, new processes are required to be implemented to protect things like IP addresses and cookie data, similar to the protections currently provided to ensure privacy for addresses and social security numbers. In the three months prior to GDPR going into effect, it was estimated that 79% of companies were unprepared.[iv] The mandatory disclosure landscape is changing fast, and hospitality is challenged to keep up.
Not All Changes Are Mandated
As consumers are holding corporations accountable for effecting social change in their business practices and beliefs, ultimately impacting the bottom line, companies refine their sustainability initiatives as a result of public advocacy, stockholder proposals, or consumer feedback. A 2017 study by Cone Communications illustrated some key elements, including:[v]
- 63% of Americans are hopeful that businesses will take the lead to drive social and environmental change in the absence of government regulation
- 78% want companies to address important social justice issues
- 87% will purchase a product because a company advocated for an issue they cared about; and
- 76% will refuse to purchase a company’s product or services upon learning it supported an issue contrary to their beliefs
To illustrate, on February 6, 2018, in a commitment associated with improved packaging in betterment of the planet, Dunkin’ Donuts announced it would phase out the use of polystyrene foam cups by 2020 and replace them with double-walled paper cups, estimated to have a net impact of eliminating over a billion cups annually from the waste stream.[vi] This was on the heels of McDonald’s announcing in January that it would phase out the use of foam packaging in all global markets by the end of 2018.[vii] Straws and stirrers make up over 7% of plastic found in the environment, an issue initially addressed (and banished) by George McKerrow, co-founder of the restaurant chain Ted’s Montana Grill, that has gained widespread attention as consumers are reminded that we use 500 million straws a day, a habit that widely impacts wildlife and the oceans.[viii] Just this month, Bon Appétit announced they were banning plastic straws from their over 1000 café locations in 33 states.[ix] As cities like Miami and Malibu have banned single use straws (and in Malibu, banned all single use plastic utensils and stirrers), we find some municipalities are forcing hospitality businesses to incorporate sustainable practices.
As hospitality companies seek to out-promote each other, they would be well-advised to avoid greenwashing – today’s version of “snake oil”, more akin to “eco-fraud” – when a company holds itself out as more environmentally friendly than it actually is in practice. Clearly consumer preferences demonstrate an increasing trend for purchasing products and services that are sustainable – for their impact on the environment, in how they are manufactured, and/or how the workers are treated. Between 2009 and 2010, the number of “greener” products increased by 73%.[x] In order to capitalize on this trend, many brands are trying to competitively out-do each other with their eco-credentials – exaggerating their claims, or at times, completely manufacturing them. In legalese, greenwashing may amount to deceptive marketing, misrepresentation, and/or fraud.
In the “sins” of greenwashing, hospitality entities would be wise to avoid vague, over-reaching, or unverifiable assertions. Hotels increasingly encourage their guests to embrace green practices – shut off lights, reuse towels, avoid changing the linen as frequently, etc. Research by faculty at Washington State University found that a perceived ulterior motive of a hotels’ environmental claims evoked consumer skepticism, which negatively influenced consumer’s intention to participate in the linen reuse program, as well as negatively effecting the consumers’ intention to revisit the hotel.[xi] At a time when as many as 79% of travelers agree that eco-friendly practices is an important factor in their choice of lodging, companies risk losing valuable repeat customers if their motives are self-serving. As a result, to avoid the negative aspects, hoteliers are cautioned to install comprehensive green programs, train their staff to implement practices, and ensure their green claims are accurate and not overreaching, perhaps through third party certification.
For Goodness Sakes, Don’t Greenwash the Food
Greenwashing is of particular concern in today’s environment, particularly in the context of food. For example, in 2016, organic food sales jumped 8.4%, to over $43 billion, while overall food sales only increased 0.6%.[xii] Similarly, organic non-food items jumped 88% to $3.9 billion in sales. As restaurants and hotels are asked questions by their customers about the source of their products, facilities need to be aware of the claims they are making to ensure they are not overreaching or deceptive, as greenwashing has become the “flavor of the month” in consumer class litigation. Claims challenging products advertised as “natural” are the most frequent suits encountered.
While no definition of “natural” is provided by the FDA, food products in the US labeled as “natural” make up roughly $40 billion in sales, and are growing by an average of 6.6% annually. According to Food Navigator, there were 20 food labeling class actions pending in federal court in 2008 – a number that rose to 425 by 2016. Cases that specifically focus on “natural” claims increased by 22% from 2016 to 2017, notably with suits against General Mills’ Nature Valley bars and Dr. Pepper Snapple’s Mott’s Apple Sauce. Of particular note is that three quarters of federal court food class actions are in four states: California (36%), New York (22%), Florida (12%), and Illinois (7%).[xiii] Many of the suits are rooted in claims that items such as high fructose corn syrup, high maltose corn syrup, soy flour, soy lecithin, and GMA yellow corn flour, as well as synthetically derived vitamins, are not “natural”, and thus such claims are fraudulent.[xiv] Overreaching statements can be a source of eroding consumer confidence, destroying customer loyalty, and/or litigation.
Sustainability initiatives will continue to be an imperative part of a hospitality entities’ brand, evaluated by all stakeholders. In order to ensure consumer confidence, it is imperative that those initiatives be authentic in their implementation, supported by third party verification, and in alignment with the legal requirements of the jurisdiction. In doing so, our efforts in supporting the three E’s – environment, economic, and equity – our industry will collectively rise in to improve the future for ourselves and for future generations.
[i] Retrieved May 30, 2018 from https://www.ga-institute.com/press-releases/article/flash-report-85-of-sp-500-indexR-companies-publish-sustainability-reports-in-2017.html
[ii] 40 CFR Part 9; and California Civil Code §1714.43
[iv] Retrieved April 6, 2018 from https://www.forbes.com/sites/forbestechcouncil/2018/03/27/u-s-businesses-cant-hide-from-gdpr/#33b76ef052c8
[v] Retrieved April 6, 2018 from http://www.conecomm.com/research-blog/2017-csr-study
[vi] Retrieved April 16, 2018 from https://news.dunkindonuts.com/news/dunkin-donuts-to-eliminate-foam-cups-worldwide-in-2020
[vii] Retrieved April 16, 2018 from https://www.bizjournals.com/chicago/news/2018/01/10/mcdonalds-phasing-out-foam-packaging-this-year.html
[viii] Retrieved May 30, 2018 from https://www.forbes.com/sites/megykarydes/2018/05/23/the-future-of-take-out-exhibit-how-we-can-eliminate-packaging-waste/#37a1213c7580
[ix] Retrieved May 31, 2018 from https://www.npr.org/sections/thesalt/2018/05/31/615580695/last-straw-for-plastic-straws-cities-restaurants-move-to-toss-these-sippers
[x] Retrieved April 6, 2018 form http://sinsofgreenwashing.com/index5349.pdf
[xi] Rahman, I., Park, J., & Geng-qing Chi, C. (2015). “Consequences of “greenwashing”: Consumers’ reactions to hotels’ green initiatives”, International Journal of Contemporary Hospitality Management, Vol. 27 Issue: 6, pp.1054-1081, https://doi.org/10.1108/IJCHM-04-2014-0202
[xii] Retrieved May 31, 2018 from https://www.foodbusinessnews.net/articles/9394-u-s-organic-food-sales-jump-more-than-8
[xiii] Retrieved May 31, 2018 from http://www.instituteforlegalreform.com/uploads/sites/1/TheFoodCourtPaper_Pages.pdf
[xiv] Examples include Janney et al. v. General Mills, 3:12-cv-03919, U.S. District Court for the Northern District of California; Rojas v. General Mills, Inc. 3:12-cv-05099, U.S. District Court for the Northern District of California; Bohac v. General Mills, Inc., 3:12-cv-05280, U.S. District Court for the Northern District of California; Van Atta v. General Mills, 1:12-cv-02815, U.S. District Court for the District of Colorado
As Founding Director and Professor of the Michael A. Leven School of Culinary Sustainability and Hospitality at Kennesaw State University, Dr. Hardigree oversees the Bachelor of Science degree program which houses over 260 majors and services over 1500 students enrolled in classes each semester. Addressing both “sustainability on the plate” as well as “sustainability beyond the plate” in terms of water, waste and energy efficiencies, this highly relevant management program provides a competitive advantage and discernible point of differentiation as the epicenter for teaching, research and best practices in sustainable culinary and hospitality management. The flexibility of the program’s curriculum allows students to emphasize careers in beverage management, event planning, specialized cuisines, and the hotel industry.
Christian conducts research and presents nationally at industry conferences as related to her areas of expertise, including food safety, risk management, sustainability, workplace violence and employment/management issues. She is a national expert on bed bug litigation, speaking across the country on the subject.
After obtaining her B.S., cum laude, from the William F. Harrah College of Hotel Administration at UNLV, Christian obtained her Juris Doctorate from the Walter F. George School of Law at Mercer University, focusing on employment discrimination, arbitration/mediation, and labor management relations. She is of counsel with the law firm of Parnell & Associates. Christian serves on a variety of committees and advisory boards, including the ConServe Sustainability Advisory Council for the National Restaurant Association, the KSU Brian Jordan Center for Excellence and Professional Development at LakePoint Sporting Community, and formerly on the Women in Lodging Advisory Council for the American Hotel & Lodging Association.
By Manisha Singal and Yinyoung Rhou
There is general consensus today that business plays an ever increasing role in society and a corporation’s responsibility goes beyond just making profits. The concept of corporate social responsibility (CSR) however has evolved from the understanding that a company should look after not only its investors and customers but also its employees, the larger society and community, and even the environment, thus giving rise to the triple bottom-line approach of enhancing profit, people, and planet. The hospitality industry, given its large footprint both in terms of employment (it employed 6 m U.S. workers in 2015), and consumption of natural resources like food, water, and energy has often been at the forefront of implementing practices geared to minimize the negative impacts of its business on the environment. These include attempts to increase fuel efficiency in airlines, reduction of food waste in restaurants, and water and energy saving in hotels. Not limited to environmental concerns, the industry also embraces other social issues and major hotel companies have implemented CSR initiatives related to community development, encouraging diversity amongst its workforce, and progressive employment practices, with the result that several of them, such as Marriott International, Kimpton Hotels (now merged with IHG), Hyatt Hotels, Hilton Worldwide, and Wyndham Worldwide, have been included in lists such as Fortune’s Best Companies to Work for and the World’s Most Admired Companies.
Engaging in CSR is important
While CSR initiatives are voluntary and discretionary, the benefits of ‘doing good’ outweigh the costs even if a firm is not looking for specific financial return on its activities. The nature and characteristics of the services industries and especially the hotel sector render social initiatives salient to several desirable outcomes. For example, a hotel’s involvement in CSR practices can improve its brand awareness and loyalty for customers. As services are intangible, and evaluated based on perception of quality, rather than tangible product attributes, the goodwill created by social initiatives taken by the firm, transfers to the brand image, creating differentiation, which can in turn create an advantage in a highly competitive industry that provides substitutable services like hotel rooms. Similarly, association of brand support for cause-related social issues (for e.g. Marriott’s support for LGBT issues) creates and maintains customer loyalty in an industry where customers are generally considered novelty-seeking (the mindset that says let’s try a different hotel or restaurant each time). Reputational benefits accruing from social initiatives also result in customers’ willingness to pay premium prices that often times enable hotel companies survive seasonal industry demand and unfavorable economic cycles. Demographic segments like millennials, socially conscious consumers, and tree-huggers create and nurture demand for green hotels, a growing niche which takes into account sustainability when making hotel decision choices. In fact, several studies have found that consumers are willing to pay a premium price (sometimes beyond 15%) for green and sustainable hotels and restaurants using local and or non-genetically modified or organic ingredients. Interestingly, customers aware of a company’s CSR initiatives are even more likely to “forgive” the firm for a minor service failure, thus allowing faster service recovery!
In addition, hotel companies with CSR practices can better attract, motivate, and retain their employees. Employees want to work for a company with a positive image and reputation for doing good. They experience higher job satisfaction which in turn reduces turnover – a long-standing problem in the industry. Moreover considering the global nature of the industry and the demographic realities of the workforce today, several hospitality firms, like Marriott and Sodexo among others, have invested in proactive diversity management programs that have indirectly helped not only the firm’s reputation and their ability to tap into non-traditional pools of human capital but also reap financial benefits. Several companies reap benefits of employee engagement when they match employee contributions to charities or donate time in the form of employee hours by giving employees time to volunteer at local non-profit organizations. Thus CSR initiatives become a component of an integrated high performance work system.
Environmental stewardship is one of the major areas where hospitality firms have made investments. Going beyond the 3 Rs of Reduce, Recycle and Reuse, and taking common measures like greening operations and supply chains, and energy audits aimed at rationalizing energy and water consumption through high-efficiency lighting, low-flow showerheads, water-efficient bathroom fixtures, and encouraging guest reuse of linens and towels, several hotels have invested in technology and innovation that will drastically change the future of energy consumption. Not only do hotels proactively seek to certify themselves as green with LEED, Green Key, Green Seal etc. but also build entire brands around the concept of sustainability (Element by Westin, Andaz by Hyatt, Home2Suits by Hilton) to attract and retain the increasingly growing green customer base.
Considerable reputational capital is also built by philanthropic activities by hotels and restaurants. The Fairmont Hotel’s attempts to rescue guests stranded during Hurricane Katrina and services provided by McDonalds’s Ronald McDonald House for sick children gain not only favorable media attention but also create a lasting positive brand image.
Lessons for Hospitality firms
Engagement in CSR should be motivated not only with the focus on return on investment but a genuine desire to create positive change in society. Very often companies use CSR as simply one more marketing tool and indulge in “green washing” – claiming more than what they do for the environment (or other stakeholders). This can result in negative consequences like backlash or loss of credibility and trust damaging the brand.
At the same time, careful and appropriate communication of CSR initiatives is also important as the benefits described above cannot accrue if consumers, employees, and other stakeholders are not aware of the “doing good” activities of the company. To this end most large firms publish a special sustainability report or social responsibility report and have extensive information about their CSR activities on their websites. As an example Marriott’s reports indicate that the company first set long term goals in 2007, to reduce energy and water consumption. Since then it has used three environmental performance indicators: energy intensity, water intensity, and GHG emission intensity, and implemented innovative conservation initiatives, such as a chiller diagnostic tool to help property engineers save electricity. In addition the company educates and motivates employees and guests to conserve and preserve natural resources and empowers hotel builders to develop green hotels. Their report indicates that compared to 2007, energy intensity, water intensity, and GHG emissions intensity in 2015 decreased by 9.4%, 9.0%, and 10.0%, respectively, while it strives to achieve a further reduction of 20% in energy and water consumption by 2020. The report (retrieved from Marriott.com) discusses company efforts not to green up the supply chain but also its efforts at empowering women by encouraging diversity in leadership.
It is also important to leverage a firm’s core competencies when taking socially responsible actions and creating opportunities for shared value i.e. hospitality firms innovate using new technologies, business models, operating and management processes to increase productivity while also contributing to social good. A key challenge for hotels and restaurants is to manage customer demands without compromising the service quality as customers often relate sustainability with a reduction of cleanliness or comfort. Successful sustainability management therefore needs customers’ involvement, in the form of input, time, and even effort often making their guests work as co-designers, co-producers, and co-marketers of green practices. For example, the Crowne Plaza hotel in Copenhagen, Denmark, encouraged its guests to produce electricity on exercise bikes. With 15 minutes of cycling, guests could generate 10 watt-hours of electricity as well as get a free meal voucher ($36 value) in the hotel.
When CSR activities are aligned with the firm’s competencies and strategy, the firm gains exposure to key stakeholders, and opportunities to impress groups that can endorse the actions of the firm in the future. This can be especially important in case of negative events or crises that can damage the reputation of the company. The reservoir of goodwill built via past social initiatives taken can bestow a kind of resilience against the onslaught of negative attention in these days of instant social media. Hence, a systematic and strategic plan of social initiatives can help mitigate risk or act as insurance even if no direct measurable financial rewards accrue from these initiatives.
In sum, in customer-centric and highly competitive industries like hospitality, earning and retaining the goodwill of all stakeholders via corporate social initiatives serves the firm well in times both good and bad.
Manisha Singal, Associate Professor of Hospitality Strategy in the Pamplin College of Business at Virginia Tech University, teaches classes in Strategic Management, Financial Management, Services Management and International Business. Manisha’s research on topics such as corporate social responsibility and its link to financial performance, subsidiary knowledge sharing in multinational corporations, and family business decision-making, have appeared in multiple top-tier journals. Manisha received her doctoral degree in Strategic Management from Virginia Tech, and a master’s degree in Economics from Eastern Michigan University.
Yinyoung Rhou is a PhD candidate in the Department of Hospitality and Tourism Management at Virginia Tech. With primary interests in corporate social responsibility, her research explores strategic management in hospitality business. Her research has appeared in International Journal of Hospitality Management and Journal of Hospitality and Tourism Research.
Hsu, J. (2010), April. Danish hotel pays its guests to generate electricity on exercise bikes. Popular Science. Retrieved September 5, 2016 from http://www.popsci.com/technology/article/2010-04/hotel-pays-guests-meal-vouchers-generate-electricity-exercise-bikes
Kotchen, M. J., & Moon, J. J. (2011). Corporate social responsibility for irresponsibility (No. w17254). Cambridge, MA: National Bureau of Economic Research.
Marriott International (2015). 2015 Sustainability Report. Retrieved September 5, 2016, from http://www.marriott.com/corporate-social-responsibility/performance.mi
Peloza, J., & Papania, L. (2008). The missing link between corporate social responsibility and financial performance: Stakeholder salience and identification. Corporate Reputation Review, 11(2), 169-181.
Porter, M. E., & Kramer, M. R. (2007). Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review, 85(6), 136-137.
By Emily Horton
Hostels: typically one’s mind pictures a grungy dorm-style hotel filled with overstuffed backpacks and its owner, a 20-something college student trekking their way through Europe. Huffington Post’s “22 Things You Should Know Before Staying in a Hostel” list captures popular American beliefs about hostels; they are home to bed bugs, mildewed showers, future life-long friends from around the world, and well-vetted insider information about any given city. Despite many backpackers willing to stay in these ultra-affordable lodgings that are known to lack amenities and sometimes cleanliness, is there more to the hostel consumer than meets the eye?
The Hostel & Lodging Landscape in America
Hostels do exist in America, but according to Hostel World, they account for only three percent of properties [internationally] and 10 percent of global hostel revenue. Aaron Chaffee, Vice President of Hostel Development at Hostelling International USA says this statistic shows Americans’ reluctance to use hostels while in the United States due to a lack of cultural acceptance. Hostels are not remaining stagnant, instead they are rapidly adapting to changing consumer needs to help put American hostels in the lodging landscape.
New desire and needs from hostel consumers are fueling change in the industry. Even just 15 years ago, according to Chaffee, guests were merely looking for a place to rest their heads, kitchens to cook their own food, and a common room to meet fellow travelers. However, during the economic change over the past seven years, Carina Perkins of Big Hospitality reported that as of 2014, consumers drastically shifts towards luxury and budget hotels leaving the middle price range hotels without a large guest base. Many of those mid-range hotels in Europe switched to the hostel market, offering services that the Hostel Trend Report stated millennials are now craving: free wifi, on-site food and beverage, daily cleaning services, social events, bicycle rentals, libraries and media centers.
Along with the evolution of hostels themselves and the change in the hotel market, the introduction of new competition has altered how hostels must address guests’ needs. Airbnb, an online platform where any homeowner or apartment dweller can rent out rooms or entire abodes to travelers, upset the system when it was introduced in the fall 2008. The amenities that Airbnb provides, such as more privacy, home-like feel, cultural immersion with locals, and suitability for group travel, shifted the expectations of future guests. Already homes and apartments, Airbnb’s are designed to be comfortably lived in as opposed to hostel bunk beds with shared shower stalls. Airbnb’s offering is a heavy influence on the shift of hostel amenities and design to its already community-focused and low price value points.
Addressing Latent Needs: Separating Good from Great
During a phone interview, Aaron Chaffee discussed that merely adding new services is not what will draw people into hostels. “It is not just ‘bling’ to add fancy things.” Instead, he said hostels need to strategically look at what guests’ explicit and latent needs are and how to address them in a cost efficient manner. Explicit needs, like a bed, common area, or kitchen, may not be thought about in great detail because they serve as points-of-parity among all hostels. Meeting latent needs is what separates good hostels from incredible hostels. Chaffee explained that a hostel guest will not likely check-out and think, “That reading light, or shelf really made my trip,’ but addressing latent needs can influence a guest to feel, ‘That was a truly great experience.’
Addressing latent needs does not mean using notable architects to design the lobbies and entrances; these amenities could be a library of rental books or electrical outlets in the lockers so guests can safely charge their laptops while away from the hostel. These details are the small necessities that will create a satisfied guest experience; however, guests do not always know how to express these needs. Hostelling International – USA uses a combination of surveys, focus groups, and research studies to address the concept of latent needs. Research of this caliber is not always feasible for an independent hostel, therefore it relies on guest feedback, surveys, and industry trend reports.
The hostel industry experiences classic hospitality barriers of intangibility, inseparability, variability, and perishability with marketing and product explanation, therefore addressing latent needs becomes vital in the comprehensive hostel experience. When a guest books a hostel, he or she can only base expectations off of reviews, photos, or website copy. If a hostel, or any hospitality business, sets the expectations at the correct level, amenities that address latent needs can be used to enhance the value of the experience. These small amenities cannot be gauged by online search; it is near impossible to estimate expectations that a guest does not even know he or she has. Yet attempting to find and meet those needs will improve the consistency of guest satisfaction because there is no variability with most structural amenities, such as the aforementioned reading light. As long as amenities and expectations are well maintained, it can be expected that most guests will be satisfied, therefore increasing the overall value of a hostel stay.
Crashpad: A New American Hostel Experience
Crashpad, based in Chattanooga, Tennessee, is an example of a hostel that has done just that; acknowledged latent needs in order to provide a fulfilling and satisfying experience for a variety of guests. The hostel was started by Boston-area rock-climbing enthusiasts Max Poppel and Dan Rose. The pair relocated to Chattanooga, a rock-climbing mecca in the United States, and noticed a lack of lower priced lodging options (<$100 per night) that still offered the amenities of a budget hotel. At first, the two attempted to start a campsite, but the start-up fees and zoning issues created a more challenging barrier than excepted. A hostel became the best middle ground, offering the comradery of a campsite and running water, year round functionality, and access to a broader age-range of customers. In a phone interview with the author, Bethyn Merrick-Nguyen, General Manager of Crashpad, explained that the company’s target market is focused on outdoor aficionados, which is whom Chattanooga generally appeals to as a whole Most of Crashpad’s employees are avid rock climbers, kayakers, or hikers who can provide expert recommendations to guests.
Environmental & Local-business Friendly
Knowing its clientele are primarily outdoor adventure seekers, Crashpad offers specific types of amenities to its guests, many catering towards latent needs. For example, Crashpad is a LEED Platinum certified for its sustainability and resource efficiency efforts, a quality that is in-tune with its many environmentally conscious guests. Whether staying in a sustainable environment is a latent or explicit need, it is a quality that is appreciated by most of its guests. The poured concrete building with an open concept allows for adequate individual space, quite floors, and less need to open and shut doors. Merrick-Nguyen explained that although most guests do not consciously say that this is a great benefit, no one likes to hear the dorm door opened ten times a night and have their bunk-mate walk over old wooden floors to get there.
Crashpad also created multiple partnerships with local green businesses. The pantry is stocked with local spice blends and coffee beans, the bathroom has hand-crafted soaps, and even the bed frames and concrete sinks were handmade by local craftsmen. The company’s appreciation for local, eco-friendly products permeates through its purchasing patterns, eventually influencing how guests perceive its brand. Crashpad also utilizes its partnership with a local bakery to provide breakfast ingredients for all of its guests at no additional cost. After weighing the costs and benefits, the owners chose to only supply ingredients, giving the guest freedom to create their own meal.
Utilizing the hostel kitchen is just one of the gastronomical options that Crashpad provides. Two years after opening Crashpad, the owners opened Flying Squirrel, a neighborhood restaurant and bar right next door. According to an article on Noog.com, the goal of the hostel is to breakeven while the goal of the restaurant is to generate profit; however, the hope is that the combination of the two attractions in such close proximity will create a close community atmosphere (Morrison). Guest trends show preference to hostels that included attached or in-building food and beverage operations, similar to that of a budget hotel that shares a building or parking lot with a restaurant. However, just as guests’ expectations for accommodations are increasing, their expectations of food and beverage quality are too. The Flying Squirrel is meant to achieve the perfect combination of hostel amenity within a vibrant neighborhood dining scene.
Change in Perception Leads to Change in Demand
As hostels continue to improve and cater to new guests’ needs, a change in American perception of hostels needs to occur in tandem in order to achieve greater success. Chaffee explained, “If you describe a situation where a college student takes a summer trip, or right after graduation someone travels around Europe and they use a EuroRail pass, they stay ____________, and ask them to fill in that blank, people will say hostels. It is not that Americans do not know what hostels are, they just don’t think to use them in America.” Chaffee explained that in Europe, weekend trips are taken more often while children are growing up, and families often use hostels as an affordable, social accommodation with easy access to a city. There is both a plethora of hostels and a high demand from local residents and foreign travelers, creating the perfect model for growth of the hostel market.
In the United States, however, demand is lacking. Even travelers who are just staying one night in New York City rarely think of staying in a hostel. Chaffee attributed this to both a lack of supply and a lack of integration within American culture. Hostels do not maintain a high place of mind for consumers, therefore there is a correlating lack of demand. Lack of demand leads to a gap in hostel supply, overall creating a cycle of decreased supply and lack of demand within the culture. Both Hostelling International USA (HI-USA) and independent hostels are tackling this in their own way. HI USA is placing more emphasis on what hostels can provide besides just an overnight stay, such as broadening cultural experiences. Chaffee explained that HI USA hopes to create an image where an experience at a hostel is seen as a truly authentic one that can create cultural understanding and awareness. He elaborated, “A hostel stay isn’t just an affordable and cheap stay – it offers a new sense of tolerance and a new way to learn about cultures.”
Crashpad’s strategy is helping to erase the stigma that hostels are filled with old sheets and dirty showers. “Getting people in the door is the most important thing to change peoples’ minds of what a hostel is. Most people are very open, some even come in saying, ‘What is a hostel, explain it to me’ and we do,” said Merrick-Nguyen. The company’s website and social media channels provide an inside look at the experience by sharing photos of the design and cleanliness of the building. Additionally, user-generated content on social media allow guests the opportunity to publicize their experience and influence lodging habits, hopefully towards hostels.
Between balancing latent needs and explicit needs, along with creating an overall positive and inviting guest experience for a low cost to the owners and a low price to the customers, running a hostel can seem like a fruitless pursuit with such low demand in the United States. However, with the increase of quality in supply, especially in California and the Northeast, Americans are starting to gain US hostel experience. Combined efforts of the international hostel groups and independent hostels are making task of increasing awareness become more manageable. Through all these changes, hosteling in the United States shows promise of becoming a popular and enjoyable alternative to low cost hotels, especially for those who crave an authentic social experience.
Emily Horton is a recent graduate of the Boston University School of Hospitality. With experience in both front and back of house of notable Boston restaurants, along with experience in social media marketing, she plans on working in all aspects of the food and beverage industry, wherever in the world it may take her.
By Christopher Muller
A conversation between Mr. Howard Schultz, CEO of Starbucks, and Dr. Christopher Muller during the September 2011 12th annual European Food Service Summit in Zurich, Switzerland (edited 2014).
[Muller]: So we get to just have a conversation. Can we talk about Starbucks and social responsibility, the leadership of how you drive not just your own business, but through the decisions you make how you affect the rest of the community? You led with healthcare, you led with higher wages, flex time, great benefits. Have you seen it as having an impact on the industry?
[Schultz]: Well first off, I would say, and I think people would be surprised by this, we can prove year in and year out that the decisions we’ve made about the environment and social responsibility, our commitment to the continent of Africa, the way we purchase coffee, healthcare and other things that we’ve done; we can absolutely, quantitatively prove this has been good for business and good for the bottom line.
Now, you have to have faith and confidence that these decisions are the right ones. But the truth of the matter is that I haven’t seen a groundswell of support for these practices within the industry. In fact I think certain companies have tried to wrap themselves in the cloth of this without the authenticity of it. It kind of hurts you, in a way, because you’re trying to compete on a level playing field but they aren’t investing nearly as much.
So the bottom line, in regards to competition and the other companies in the industry, is we’ve said we’re not going to allow other forces to define who we are. We’re going to do the right thing and, over time, our customers will realize the leadership and authenticity of our company.
You’re back in a leadership role. Your book (Pour Your Heart Into It) was all about building a company. Your later book (Onward) is about how to save a company. You say that you like the challenge of survival: it gives you backbone. How do you instill that same sense of urgency in your people?
I might have said I like the challenge of survival, but nobody wants to go through what we’ve gone through! But having gone through it, I think it gave the company and the organization a new level of muscle memory and discipline that has made us a strong organization
In the first month after I came back I was reading a magazine from somewhere and I saw this poster in the magazine and it turned out to be a great metaphor for what we were doing. I blew the poster up and put it in the boardroom of Starbucks. It was a picture of someone’s hand in mud with a line that said “Success will only come to those willing to get their hands dirty.”
Now Starbucks employs 200,000 people around the world. I can’t expect 200,000 people to understand what it was like when we were starting and building the company. But I have to be able to tell that story to people. In the first year we were opening stores, my wife was pregnant, we had no salary, and we were trying to decide which vendor to pay and basically telling a story to one vendor versus the other—literally fighting for survival.
I mentioned in my remarks that in the years 2000–2005 I can tell you nobody at Starbucks was in the mud. They were driving fancy cars and building big houses and doing all kinds of things as a result of the success of the last 25 years. We had to get back in the mud.
In addition to that, as the leader, my responsibility was as a fiduciary to the shareholders and the other 200,000 people who were relying on us to save and preserve the company. So when I realized that certain people, good people with good values, were unwilling at this time in their careers or lives to get back in the mud, I made some changes.
I’m here to tell you that when I arrived back at Starbucks in January of ’08, I had 11 direct reports and 6 months later, 9 of them were gone. Good people, but they just did not believe we were capable of turning it around. And they didn’t have the inner fight to do what was going to be necessary and make the sacrifice.
One of the things they teach you in all business schools is you’ve got to have a mission statement, it’s got to be authentic, and you’ve got to stick to the mission. Yet you came back and changed the mission statement of your company. How did you decide that was a crucial part of the turnaround?
Well it wasn’t only the mission statement. I think we developed what we loosely described as a “Transformational Agenda.” The objective was, “Let’s put on one piece of paper what we’re going to try and do over the next year or two to turn things around.”
If you were the president of a division or a part-time, 20-hour-a-week barista who did not go to college you could read this, understand it, and most importantly understand your role and your responsibility in it. The mission statement was refined and changed for the time.
I think we all create documents and put things on the wall but this was a living document that we had to begin to institutionalize in the company. We had to begin to measure and reward the right things. One of the dangers of the years that went bad at Starbucks was that we were measuring and rewarding the wrong things. And you know, I did something the first couple of months after I came back and people thought, “This guy really is crazy.” We closed every single store in the United States, at a cost of $10 million, for retraining.
Think about that. We said to the world, “We’re not good enough anymore. We’re going to retrain.” I’m not talking about retraining on meaningless stuff—we’re going to retrain on making coffee! That’s like training someone to walk. And the signal internally was the degree of honesty and truth about what it is we were going to do.
In addition to that, we assembled 10,000 store managers in New Orleans and we had this meeting. This was not a convention, this was not a celebration, this was an unbelievable time when we all had to face in the same direction. Most importantly 10,000 store managers, the most important person at Starbucks, all had to recommit heart, body, and soul, to the objectives and take them back to the stores and make a difference. I think the hardest thing for all of us is convincing a store manager or a part-time person in a store that the work that they do every single day is much more important than the work I do.
In fact there’s a sea of mediocrity in terms of consumer experiences all over the world. We at Starbucks, from this point on, are going to exceed the expectations of our customers in such a way that they’re not only going to want to come back, but they’ll tell a friend. That is our new job and that is what we’re going to measure and reward and celebrate. Not the stock price. Not profitability
Another one of the things that people thought you were kind of crazy for doing was buying the Clovers, an $11,000 coffee machine that was actually going to slow down the production of a cup of coffee. My local store on Commonwealth Avenue in Boston has two of them. I think it’s a significant difference. You also changed the store design. The place looks different than it did four years ago. How did you decide to bet the farm and buy this ridiculously expensive coffee machine?
[laughing]: Well, you know, I don’t have a business degree and I’m not an MBA!
I don’t either! I haven’t got one of those either.
I’m not that schooled and respectful of a lot of research, you know? And whenever I interview a Harvard MBA, he talks to me about his belief in research. That meeting, it just doesn’t go very well. We have 17,000 stores around the world and I think I could go into a store and get a lot of research, but enough about that.
You asked about Clover and we found the machine that makes the most extraordinary cup of coffee in the world. We said as a result of what we’re trying to do—our mission—to really rebuild the coffee authority of the company, let’s buy this company and create a Starbucks reserve, not unlike the wine industry, around Clover. And that’s exactly what we’ve done and it’s been a very big success for the company
And then the other new product, one of the really, truly innovative introductions was Via. You also took a lot of grief for coming out with an instant coffee when everybody said, “We don’t want it.
Via is probably the poster child for the last two years. A $24 billion global category in terms of instant coffee, not much innovation in the last 50 years, dominated by one great company, Nestlé. We said we think we can bring something to the category—we could replicate, through technology, the quality and taste and profile of Starbucks in an instant form. Obviously, people said, “This is a desperation move. This is going to fail.” But Via will be a billion dollar business in just a few years.
Going sort of one step further, there’s been a huge growth in Keurig single-cup machines, and Nescafé has made a huge business, especially in Europe, with their competitive machines. But you haven’t entered that market yet. Dunkin’ Donuts just came out with its K Cups. Is that a product that is of interest?
Nestlé has done an extraordinary job with Nespresso and Keurig has done the same in the U.S. We did just create a partnership in which Starbucks is going to be in K Cups with Keurig that will be launched next month in grocery stores in the U.S
Yes. You know these are early days for us in terms of the growth and development. We’re building a consumer products business. We’ve had great success in China; we’re going to open up in India and Vietnam in the next year or two. So these are good times. Thank you.
Innovation is not just inventing things but adapting to changing moments.
I think if you’re not cannibalizing yourself, someone else is going to cannibalize you. I think innovation is the key to the future but you can’t make a lot of bets. I also think a great lesson we’ve learned this year is: you should push the envelope enough to fail, but fail fast and don’t fail again on the second idea. But I think if you’re not having some degree of trepidation and concern, you’re not pushing hard enough.
Actually, that might segue nicely into some of the non-business things that you’ve done in the U.S. especially that have been quite newsworthy. As the CEO of a publicly traded company, how far do you think you can actually go pushing your global perspectives on things like human rights and social issues—because clearly, you’re doing it.
Yeah based on my remarks I think you can see I’m quite concerned about the political situation around the world and the U.S. I’m a registered Democrat—I want the president to succeed but the leadership in Washington is not giving us what we need. I felt strongly that we have a role to play based on civility and respect and not just taking a position—just encouraging the leadership within Washington to do the things necessary to preserve the American dream.
I have been outspoken and I think most of our customers, and certainly our people, have embraced the fact that we’ve kind of hit a nerve. We had a town hall meeting about a week and a half ago that was webcast. With just three days’ notice 137,000 people were on the webcast from all over the country basically saying the same thing. That was that they didn’t feel represented and don’t recognize what’s coming out of Washington. I think this is a time in our world when our leaders need to lead.
Two things happened recently—you were in Newsweek saying you’re encouraging other business leaders not to donate to either political party until some action is taken. And we heard that Warren Buffet has said that taxes need to be changed, what the president called, “the Buffet Effect.” Have you been called to lend your support to that too?
I spoke to Warren twice in the last couple of weeks. I have spoken to some of the elected officials and we have 161 public CEOs who have signed the pledge not to contribute to any incumbent reelection until we see more civility and results out of Washington.
That’s a major step. We often don’t see business leaders talking about issues that are important to the nation.
I don’t think this is a time when business leaders or citizens should be quiet. We have to remember something—the politicians work for us.
Sometimes they forget. When we look at social challenges, how do we rebuild a sense of commonwealth?
I think the majority of people are quiet and the vocal minority on both sides is capturing the dialogue in the world. What I’m trying to do is get people to realize that if their voice is not heard and heard soon, there could be unintended consequences and this is a very fragile time. And not only leaders need to lead, but basic people need to understand that we need to be represented and we’re not going to be represented unless we’re heard.
Do you encourage your store managers to get involved with community action?
Well, not in community action. The store managers have access to discretionary funds to support local activities but nothing political.
I mean just community. Do you as an organization choose three or four national issues for the local stores?
No, I think it’s really at their discretion. Hopefully they’ll make good decisions.
I don’t think it’s in one of the mission statements?
No, but it’s encouraged and people understand that.
I’m encouraging my student groups to do some community service work, some kind of pro bono work, as part of their professional development.
If you’re asking about community service, there’s certainly an understanding within the entire company about community service hours and what we do.
This morning I talked about the removal of trust in institutions; something we’ve lost, especially in the Western democracies, is our belief in church, government, news, and corporations. How do we rebuild trust between people and institutions? Do we need to recreate institutions?
I don’t think we need to create institutions. But people need to realize that we do live in a time when trust is at the lowest level from a historical perspective, in addition to the fact that poverty levels are at the highest levels. I think people are so hungry for leadership that if leaders emerge with great truth and authenticity and transparency trust is going to be there because people want it.But as we know, trust is something that takes a long time to build and seconds to lose. You’ve got to be consistently honest. I think people want that and they deserve it. And I think in building an organization of any kind today, that is sustainable and endures, there has to be an understanding throughout the organization that people believe in the leadership.
I have 3 kids who are of the Generation Y group in college now. My sense watching them grow up is that they are less about a sense of individualism and more of a “what do we think” mindset. They are a community generation. Part of hospitality is based on the community; we can’t be in business without opening our doors to others. It seems that we as an industry are poised to help bring back the sense of love of others—so how do you get that into 200,000 employees?
You can’t prescribe that. I think every organization has a memory, like a young child. I think the first three weeks of an employee’s life especially in our related industry… that imprinting period is key. I think if it goes badly in the first three weeks it’s almost impossible to bring it back. If people understand as managers and leaders to make those first three weeks right then I think we have a great chance. I think the culture of our organization self-selects those people that are consistent with the culture and audits people out. But it gets back to the leaders that are rewarding, recognizing, and celebrating the behaviors that you want the organization to be known for.
Christopher C. Muller is Professor of the Practice of Hospitality Administration and former Dean of the School of Hospitality Administration at Boston University. Each year, he moderates the European Food Service Summit, a major conference for restaurant and supply executives. He holds a bachelor’s degree in political science from Hobart College and two graduate degrees from Cornell University, including a Ph.D. in hospitality administration. Email firstname.lastname@example.org
By Rachel Black
Finding a neutral definition of the term terroir is not an easy task. For some, it can mean the soil and microclimate that imparts a distinct taste to a wine. For others, the concept of terroir includes the human expertise and craftsmanship that goes into growing grapes and making wine. In the end, terroir might sound like an extravagant French term to many people. However, it is a concept that has brought about a considerable amount of debate among academics and the wine industry. Why does terroir matter so much? Why is it becoming an important topic for producers of luxury food and wines in North America?
The Terroir Debate
Winemakers, importers, wine writers, and scholars have all hotly contested the concept of terroir. This is a debate that has been raging for a long time, but it was not until the 1990s, with a few exceptions, that academics started theorizing about the topic. Two camps of ‘terroiristes’ emerged: those who only considered the soil and microclimate, and others who included human interventions and culture in their definition. In 1998, geologist James
Wilson published a book entitled Terroir: The Role of Geology, Climate, and Culture in the Making of French Wines. In this volume, Wilson aims to show how, in the end, it is the uniqueness of soil that defines a wine and gives it a taste of place.
Master of Wine and Boston University lecturer Bill Nesto has taken a similar stance on the concept of terroir. He purports that the wines of Alsace offer an excellent case study because of the diversity of the soil types: “terroir is channeled through the soil in the vineyard, the husbandry of the vines, and the hoses, tanks, and casks in the wine cellar.” Wilson and Nesto do not give much space to human intervention in the terroir concept. They both agree that grape growers and winemakers should try not to intervene too much with the grapes. This can be seen as a ‘naturalist’ view of terroir. Nature, not human intervention, is responsible for shaping taste.
One of the main issues that social scientists and wine critics have with this ‘naturalist’ view of terroir is that it obscures the huge amount of technology and labor involved in producing wine. Amy Trubek’s book Taste of Place: A Culinary Journey into Terroiris one of the most recent publications to bring to light the necessity of including culture in the concept of terroir. She was not the first to make this point. Much earlier, the French historian Roger Dion also pointed out the idea that land created by nature or god is somewhat mythical.
The great vineyards of Burgundy are prime examples of the ways in which soil was brought from other places and entire hillsides were reshaped by human hands and later machines. The danger in naturalizing terroir is that we end up obscuring the complex human processes and reasoning that go into the construction of this concept. However, there are some interesting motivations for erasing human hands in winemaking.
Marion Demossier has brought to light the political and economic reasons for this emphasis on place rather than on production methods. Methods can be reproduced, but the naturalist argument for terroir makes a case for uniqueness. Here we can apply concepts of scarcity. A limited supply of a distinct wine that is in high demand will fetch a much higher price than a mass-produced alternative.
The creation of the Appellation d’Origine Contrôlée (AOC) system in France is a classic example of protectionist legislation. Laws about geographic designation go back to the fifteenth century and have been applied to not only wine, but also other food products, most notably cheese. Encouraged by wine producers, French legislation further developed AOC laws to protect against the wine fraud that was predominant in the late nineteenth century and early twentieth century.
Laws such as AOC politicize the construction of place and imply relationships of power between local actors. Demossier has argued that this process is about exclusion. The rich landowners are privileged and get to play a part in the creation of boundaries, while the laborers and small landowners are marginalized in this process. It is important to point out that the boundaries of AOCs are not constructed by nature. Sometimes there is a river or a hill involved in legitimating the mapping process, but in the end, the drawing up of these maps is politically and economically determined. AOCs are a process of human geography that has shaped mental and physical maps over time.
With all this historical baggage, is the concept of terroir exclusively French? There is some debate on this point as well. The idea of terroir seems to be most applicable to European food and wine, where there is a long history of artisanal production and negotiation of norms and regulations. Now and in the past, economic interests in the European luxury food and wine industries have heightened efforts to define authenticity and limit the production of certain foods and wine. In most European countries, you will find some sort of certification process that attests to the authenticity of foodstuffs and wine. Italy has Denominazione d’origine controllata (DOC) and Spain has Denominaciones de Origen Calificada(DOCa). Nearly all of these certifications tie authenticity foremost to place. In addition, the production methods for wine and food are outlined and codified in these certifications.
This produces some interesting challenges and reveals another layer of complexity in the concept of terroir. Who gets to decide what the correct production methods are? The actors involved and those who have been deemed part of the official place where production is allowed to occur negotiate these definitions. This is not a neutral process with everyone on a level playing field. Generally, large, and often industrial, interests come to the fore. Although these regulations are put in place to protect artisanal production, this is not always what happens. The codification process is also counter intuitive to the cultures that have created these wines and foods. Culture is in constant evolution, but these codes represent attempts to seal off cultural processes and artifacts in a static vacuum.
The need and desire to protect local products and practices are certainly motivated by issues of fraud, which are becoming more problematic with the global exchange of luxury products. One only needs to look to the wine trade in major auction houses to see that fraud is an issue. This is not a new problem. The French have been unsuccessfully attempting to assure the provenance and quality of wine for some time. High profile cases of auction house wine fraud have been making the international headlines lately.
A Taste of Place in the New World
Trubek, an anthropologist at the University of Vermont, has looked at the notion of importing
Terroir to the United States, arguing that all places can express unique characteristics, whether in wine or other food and drink. She first searches for a notion of the taste of place in the Old World, and then tries to see whether it also manifests itself in the New World. Many of the issues concerning place and taste are different in North America. There is not the same weight of history. New traditions are in the process of being invented, and there is a great deal of experimentation happening in the United States when it comes to producing distinctive food and drink.
The recent rise in American artisanal products – in particular wine, cheese, and beer – is in part a reaction to the largely industrial nature of the food supply. In addition, food safety issues have become a constant worry. Consumers are more eager than ever to know the source of their food. They want to meet their farmer, or at least know where their food is from. In this sense, the importance of place in American food and wine is different from the French concept and history of terroir.
Defining taste of place or expressing a terroir is a work in progress for much of the American wine industry. The growing of vitis vinifera (grapes suitable for making quality wine) in the United States only began with the arrival of European colonists, but the first commercial winery was not established until 1799. For grape growers, developing vines that would thrive and produce well in American soil and climate was the first challenge. Knowing your place was the key to success, and this is something that takes time.
The United States is the fourth largest producer of wine in the world, and wine is produced in all 50 states. California, which has had a thriving wine industry since the end of Prohibition, produces the majority of all grapes and wine. Napa is known for its robust Cabernet Sauvignon wines and rich Chardonnay. By contrast, New England, one of the first areas of this country to be colonized by Europeans, is only in its infancy when it comes to growing vitis vinifera and producing quality table wines.
A Massachusetts Terroir Story
Wine producers in Massachusetts are still struggling to define terroir. The extreme climatic challenges on the eastern seaboard have been the main impediment to production and the definition of a sense of place. Grape growers must find microclimates that are suited to the production of this somewhat finicky vine. In addition, understanding what kinds of grapes to grow and how to vinify them has proven challenging.
There is one success story that stands out in this small field of Massachusetts wine producers. Westport Rivers Vineyard & Winery is one of the few who have realized that the coastal microclimate in southern Massachusetts is well suited for growing Pinot Noir grapes. The Russell family purchased a farm on the south coast of Massachusetts in 1982, in what is now known as the Southeastern New England Wine Growing Appellation. Two brothers currently run the operation, Rob Russell grows the grapes and his brother Bill is the winemaker.
Unlike many grape producers in the northeastern United States, the Russells grow only vinifera grapes, and no hybrids. They have also realized that producing sparkling wines using a ‘traditional’ method is a great way to deal with the lack of phenolic ripeness in grapes, which is a somewhat regular occurrence in the region. The gravel and loam soil of this area makes tart, citrusy wines that are outstanding with the local oysters. The pinnacle of taste of place is when local food and wine come together in a perfect pairing such as this.
One could even see this as the beginning of terroir in the Bay State. However, the Russells have had a hard time convincing other growers and wine producers in the area that Pinot and bubbly are preferred. With everyone doing something different, and often with mixed results, it is hard to create a consistent sense of place and a taste that goes with it.
Although Westport is producing an exceptional product, the Russells have found it challenging to overcome the less than stellar reputation of Massachusetts wines. Sweet fruit wines and off-dry wines made from local hybrid grapes have been the mainstays of the local industry. In addition, many winemakers buy their fruit from out-of-state sources. Cabernet Sauvignon wine from Massachusetts, made with grapes from California, undermines the idea of locality and the connection to place. The wine industry in Massachusetts offers an interesting case for examining the challenges that occur when applying the idea of terroir to the New World.
Connecting Food and Wine with Place
The concept of terroir is not without its issues. At the same time, it fits well with the current interest in the United States with provenance. It is a powerful concept that has come to shape consumer demand.
The idea of connecting food and drink to place, whether to create exclusivity or ensure quality, is not a new concept. In an age of heightened globalization, differentiation through localization may be the key to creating successful luxury products. What remains to be seen is how Americans will go about defining their own sense of place. The Russell brothers at Westport Rivers have shown that it is possible to express the unique taste of place through wine, but what will it take for others to follow this example and dig a little deeper into their own soil? There is a hungry and thirsty world eager to hear the stories of people producing delicious food and wine
Rachel Black is Assistant Professor and Academic Coordinator of the Gastronomy Program at Boston University. She is a cultural anthropologist whose work looks at the production and consumption of food and wine in Europe and North America. Black is the author of Porta Palazzo: The Anthropology of an Italian Market (University of Pennsylvania, 2012) and co-editor of the forthcoming Wine and Culture: Vineyard to Glass (Berg, 2013).