The Ritz-Carlton is arguably one of the most recognizable brands in the world. The hotel chain has built a reputation as a leader in luxury within the travel industry, so it may be surprising to learn about the humble beginnings of the company’s co-founder and former president, Horst Schulze. He grew up in a small village in Germany where there were no hotels, yet before he was even a teenager, he told his parents he wanted to work in the hospitality business. His journey began when they found him a job as a busboy and dishwasher in a hotel about 60 miles from home. His often-quoted business philosophy is, “Ladies and gentlemen serving ladies and gentlemen,” and he stresses the importance of putting the customer first. It’s a philosophy he carried to Capella Hotels and Resorts, which he started after retiring from The Ritz-Carlton.
Schulze visited the Knowledge@Wharton radio show on SiriusXM to talk about his new book, which encapsulates his life experiences in the hotel industry. It’s titled Excellence Wins: A No-Nonsense Guide to Becoming the Best in a World of Compromise.
An edited transcript of the conversation follows.
Knowledge@Wharton: Do you believe that excellent customer service is what made your hotels the best?
Horst Schulze: That’s correct, yes. We concentrated on the market, on the customer and on the individual. If I want to concentrate on the individual, I have to first understand the market as a whole and then adjust to each individual person. And we did that with total concentration. We simply believed that if we concentrate on the product — in our case, service — we will in the end make more money. That’s exactly what happened.
Knowledge@Wharton: Your story started at a young age. Can you tell us more about it?
Schulze: Believe me, I don’t know why, and my parents don’t know why. But for some reason, I started begging them to work in the hotel business, even though I’d never been in a hotel. I must have read something. They initially reacted and said OK because they thought it would fade away. But it didn’t. So, they reluctantly supported me because at that time in Germany, you went for technical jobs…. But they then inquired and made sure that I started in a first-class hotel. I went to boarding school for six months, and they placed me then in a busboy job in a hotel. At 14, I lived away from home in a dorm room in a hotel 100 km — 60 miles — away from home.
Knowledge@Wharton: During an internship at a hotel, you came up with this adage of “ladies and gentlemen serving ladies and gentlemen.” That’s a unique perspective at a young age.
Schulze: I was 16. Mind you, once a week we went to hotel school and were asked to write an essay about what we think about the hotel business. The maitre d’ where I worked was a truly unique human being. We were told we are servants, we are servants. But I could tell when he approached the table that the guests were proud that he came to their table.
“If I want to concentrate on the individual, I have to first understand the market as a whole and then adjust to each individual person.”
I said, “Wait a minute. This is a reversal.” When I contemplated that, I saw that was really true, for every guest thought that he was the most important person in the room. So did the employees. I contemplated that and wrote an essay. What I identified is that he defined himself as a very fine gentleman. Consequently, [he was] proud. And I said at that time, “We can be ladies and gentlemen, if we deserve it, if we define ourselves like that at work.” So, we are ladies and gentlemen — unless we sentence ourselves to be servants by not being very good.
Of course, that was driven by the fact that everybody looked down at me when I said I wanted to work in the hotel business. I [thought], “No, I can be like this maitre d’ if I am excellent in what I’m doing.” The first day I started working there, that maitre d’ said, “Don’t come to work to work ever. Come to work to create excellence.” That went over my head at the time. How do you define excellence when you wash dishes and clean floors? But the light bulb went on, and then I got it. I thought, I’m defining myself every single day here. The impact stayed with me. The impact was created because I got an A for the essay, which I never had before. It was the first A that I ever had, so it impacted me dramatically.
Knowledge@Wharton: Shouldn’t excellence be the expectation of every hotel guest, no matter where they stay?
Schulze: Well, very true, but wouldn’t that be the same expectation if you enter a hardware store or any other business? That’s why my book is not for the hotel business. It’s for everybody. It’s a concentration on delivering excellence to your customer. Of course, you can only accomplish that through employees who want to be excellent, which in turn can only be accomplished through excellence of leadership.
Knowledge@Wharton: It seems like more businesses have figured this out, that there is more emphasis on the customer experience these days than before.
Schulze: I think so, too. I believe somewhat that, when we created The Ritz Carlton, we impacted that as a whole because of our willingness. Hundreds and hundreds of companies have come to us to learn what our processes are to accomplish this. I think we impacted the industry as a whole and created consciousness in service delivery and attention to the customer.
Knowledge@Wharton: What was a luxury hotel guest experience like when you were young and coming up in the industry?
“If I compromise on the things that make money, sooner or later my competitor is going to win.”
Schulze: In a way, we are going back to that. Of course, everything was much more formal and stiff at the time, and sometimes we had more knowledge in the business. The waiters were too elegant. Elegance without warmth is arrogance. There were nearly snotty, but that was accepted. But the real excellence for the customer was individualization. Our guests at the time were staying more than they do now. It’s a stay of one or two days now because it’s all business travelers, but the traveler at the time stayed longer. It started off as a spa, and guests came to spend 10 days, two weeks. We had repeat guests every year. They wrote a letter before they came. “I want table No. 3. Here’s how I want to be seated. On Monday, I want red roses, and change them on Thursday to yellow tulips,” and so on. They individualized their product. That’s what’s happening again today, much because of the millennials. They say, “Do it my way.” They’re saying, “I want my hamburger with two slices of pickle and a sliced tomato.” They want it their way, and that’s what existed. That had gone away, if you will. We had kind of forgotten that. We commoditized.
Knowledge@Wharton: There will be situations in which you’re trying to achieve excellence, but there are limited resources. How do you reconcile that?
Schulze: Absolutely. That’s the problem with business altogether, because business is all large companies today. The company headquarters is in Chicago and the business unit is in California somewhere, so the whole judgment of that business unit in California is bottom line. Consequently, compromises are made on the product. In other words, the concentration is on money. The applause is on money. It’s not on the product, and it’s not on the various things that make money. If I compromise on the things that make money, sooner or later my competitor is going to win.
That was our point in starting The Ritz-Carlton. I looked at how I am going to beat the competition. What does the customer want? What does my market want? And I will create all processes around what the customer wants. Consequently, I was able to charge more. I had a higher occupancy. We were the leader in each market segment where we opened a hotel because our concentration was on what the market wants, and that’s how you make more money. That’s how we can afford to do it.
The other way, at the same time, is eliminating the mistakes that you make. Rather than make the soap a little smaller so you make more profit, eliminate your own mistakes. Work on your own processes and continue improvement and eliminate costs, consequently. Every time I eliminate a mistake permanently, I save money and improve my product at the same time. That is efficiency. Any fool can do cost-cutting. You can book an auditor right now and say, “Don’t have the piano playing in the afternoon anymore,” and you save money. But you’ve taken away from the customer. Cost-cutting means you take something away from the customer, but that’s how businesses think today.
“We were the leader in each market segment where we opened a hotel because our concentration was on what the market wants, and that’s how you make more money.”
Knowledge@Wharton: In the book, you shared that the company had instructed employees to spend up to $2,000 to correct any mistake. Can you tell us about that?
Schulze: Yes, every employee was empowered to do that. Of course, that created fireworks. I was sued for that, and all kinds of things happened. But it was an economic decision. I determined very clearly that the average age of our customer was 43 years old. They had the chance to travel for 30 more years. I knew how much a repeat customer spent every stay, and how often a party stayed every year. I knew that a repeat customer lifelong was worth about $200,000 to the company, so I was willing to move heaven and Earth to keep that customer so that they spent this $200,000 with me, and not with my competitor. That included teaching every employee problem resolution and saying, “You can spend up to $2,000.”
Nobody ever spent $2,000, but they bought breakfast or sent a food basket or some cookies and so on, and the guests were amazed. We created instantaneous loyalty. That was an economic decision. It was not a decision to throw away money.
Knowledge@Wharton: How much has the experience of being a business owner changed because the expectations of the customer today may be different than 30 or 40 years ago?
Schulze: Well, I work in the luxury business. There’s nothing right or wrong. It’s really, in a way, all the same. It’s a concentration on this specific market. In my specific market 30 years ago, luxury meant chandeliers and marble and being a little nice. Today luxury means “do it my way.” That means adjusting relentlessly to the individual. At Capella, we call everybody who makes a reservation when we can and say, “What can we do for you here? What do you specifically need? Do you have a diet? Do you have an allergy? Do you want us to make a theater reservation?” So, adjusting to the individual. For example, we don’t have a check-in time and check-out time, because we know the guests don’t like it.
It’s much more a concentration on the individual. This is true to more or less an extent in all market segments. It’s true in a Red Roof Inn, too. [Customers] want it more their way — it’s true in every business today.
“I was willing to move heaven and Earth to keep that customer so that they spent this $200,000 with me, and not with my competitor.”
Knowledge@Wharton: How has your career with The Ritz-Carlton informed what you’re doing with the Capella Hotels and Resorts Group?
Schulze: It was very clear 20 years ago that normal luxury was changing into affordable and ultra-luxury. Take cars. If you would have asked 20 years ago, “What’s a luxury car?” — everybody would have said Mercedes. Today, many people will say Bentley. The same thing is true in my business. I saw this and said, “I want to do a little work in that particular market segment, in ultra-luxury.” I wanted to start it, and I’m now moving away from it and selling the company, because there’s a time when you have to slow down.
But we are extremely successful in that ultra-luxury business. What do we do differently? Well, we do everything for you — as long as it’s legal, moral and ethical. And we knew that there is a market who wants that. That market doesn’t care for airline points or stuff like that. That market says, “I want you to do everything for me the way I want it.” And that’s what we’re doing.