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Luxury is back, but not everywhere

June 10, 2011: 10:54 AM ET

Ritz-Carlton still sees weakness in parts of the U.S., but it's finding surprising strength in certain corners of the world, particularly China. It's even coming back in Bahrain.

Ritz Carlton

Ritz Carlton in Qatar

FORTUNE -- Is luxury back? It may not feel quite that way in the United States, but on Thursday, the Ritz-Carlton Hotel Company announced plans to add 36 hotels to its current roster of 75 by 2016, in locations stretching from Puerto Rico to Vietnam.

Revenues, occupancy, and average daily rates are up in 2011, and the company is back to doing things in the style its customers are accustomed to, such as opening the world's "highest" hotel in Hong Kong -- it occupies floors 102 to 118 of the island's International Commerce Center.

Fortune caught up with president and COO Herve Humler to talk about China, the Arab Spring, and what he calls the "AIG effect."

What does it feel like to be a luxury brand at this point in the global economic cycle?

It certainly feels better than it did a few years ago. We're coming back from a long slowdown. The two years of 2008 and 2009 were the worst for the industry. We lost 24% of our top line. But in 2010, we saw a recovery we didn't forecast. We estimated 1% growth, but ended up with 11%. We're still down 16% from 2007, but this year, I am up an additional 12%. We're hoping by the end of the year to close the gap. But when we look at the 4th quarter, we're seeing a bit of a slowdown. So I'm a little worried about getting that done.

Your group business fell off sharply after the bubble burst. Is it back?

At Ritz-Carlton, we pretty much have one group account, and that's financial institutions. Remember when AIG (AIG) was criticized for using TARP money to hold conferences at luxury hotels? After that, it pretty much all disappeared, so I call it the AIG effect. But it's back again. It's our number one account. We recouped everything in 2010. Group is strong. I did 180,000 group nights in 2010, which is more than I was budgeting. We're up an additional 10% this year. So finance is back 100%. That's one good sign.

You have a large presence in the Middle East. How has the Arab Spring affected your business?

We definitely saw business fall off in both Egypt and Bahrain. But the UAE has done quite well. People still have conferences and people are still traveling, so instead of going to Bahrain, they went to the UAE or Qatar. We have two hotels in the Emirates and two in Qatar. In Bahrain, though, we went from 80% occupancy to 20% occupancy overnight. It's coming back, though.

What about Saudi Arabia? You're about to open a hotel there, right?

We are, with a hotel in Riyadh opening in September. Riyadh is an important hotel for us. We have no presence there. It's a gorgeous hotel, with 450 rooms. There is more marble in that hotel than the rest of the Ritz-Carlton combined.

We're also taking over management of the legendary Al Bustan in Oman in July. That was the first grand hotel in the Middle East, opened 48 years ago. It's a great name. They did a $220 million renovation, and then the Minister of Finance called us and said they wanted us to take over the hotel. So we're excited about that.

You only have nine hotels in Europe, some of which don't even carry the Ritz-Carlton brand due to licensing issues. And yet you're about to have nine hotels in China alone. Is Asia where all the action is in luxury these days?

We have nine hotels in Europe. We have seven hotels in China – two in Beijing, two in Shanghai, Shenzen, Guangzhou, and our resort in Sanya. And we're going to open two more, in Chengdu and Qingdao Green Town. They call Shenzen and Guangzhou secondary cities, but they still have eight to ten million people living in them. In a 200-kilometer stretch, Guangzhou accounts for something like a quarter of all the manufacturing the world.

We run the most expensive resort in China, in Sanya, on Yalong Bay. We have about 80% occupancy at the resort, and 90% of our customers are Chinese, none of which pays less than a $400 daily rate. And let me tell you this: They love to eat. They love to drink. And they know how to drink good wine too.

Hong Kong is also doing spectacularly. The hotel is sold out. Food and beverage is sold out for next 60 days. You can't make a reservation if you're not a hotel guest. Asia is booming.

Has being owned by Marriott (MAR) been helpful in these tougher times?

Absolutely. Marriott provided us with additional resources when we needed them. This is a company with 4000 hotels around the world. Start with the obvious: they give us technology—like reservations systems—that we could never otherwise afford. They also help us with development. They have offices all over the world, and we have people in some of those offices selling Ritz-Carlton. And they helped us with our rewards program as well.

So what keeps you up at night?

Our U.S. business. There isn't much positive out there right now, starting with the unemployment numbers. That said, California is pretty strong right now. Florida also did well in the first four months of the year—and you have to make your budget in the first four months of the year in Florida, because you're always going to have a long summer. The weakest part is the northeast corridor, from Boston all the way down to Atlanta. All I can say there is that we're behind where we'd like to be.

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About This Author
Duff McDonald
Duff McDonald
Contributing Editor, Fortune

Duff McDonald is a contributing editor at Fortune. He has also written for New York, Vanity Fair, Condé Nast Portfolio, GQ, WIRED, Time, Newsweek, and others. In 2004, he was the recipient of two Canadian National Magazine Awards -- best business story (gold) and best investigative reporting (silver) -- for "Conrad's Fall" in National Post Business. Last Man Standing, his biography of Jamie Dimon, chairman and CEO of JPMorgan Chase, was published by Simon & Schuster in October 2009. He is also the co-author, with Owen Burke, of The CEO, a satire.

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