Report Overview

In September 2016, Marriott International acquired Starwood Hotels and Resorts for more than $13 billion, propelling itself into the spotlight as one of the largest, most dominant players in the global hospitality industry with 1.3 million rooms across 30 different brands and over $5 billion in annual revenues (excluding cost reimbursements).

In this report, we focus on two aspects of the monumental task of integrating two gigantic hotel companies — the Sheraton turnaround and the merging of the loyalty programs — and what they could mean for the combined company. The success of both could mean millions of incremental fee revenue for Marriott. However, the actions Marriott is taking also demonstrate its dedication to reducing costs for hotel owners while improving the overall experience for hotel guests, thereby demonstrating why it is such a formidable, dominant hospitality company.

What You'll Learn From This Report

  • An overview of Marriott by the numbers: Sales, earnings, supply, and pipeline
  • A comparison of Marriott before and after the Starwood acquisition: Past, present, and future
  • Three hypothetical analyses assessing the potential financial benefit of the Sheraton turnaround
  • Consumer and hotel owner views on the merging of Marriott’s loyalty programs
  • Analysis of potential incremental revenue from improving the loyalty program’s contribution to occupancy for legacy-Starwood brands
  • A description of other areas of strength for the company
  • Skift Research forecasts for Marriott’s 2018 RevPAR, revenue, and earnings
  • Company risks

Executives Interviewed

  • David Flueck, Senior Vice President, Global Loyalty, Marriott International
  • Julius Robinson, Senior Vice President and Global Brand Leader, Classic Full Service Brands, Marriott International

Executive Summary

Marriott International. What started as a simple root beer stand in Washington D.C. over 90 years ago has evolved into one of the most dominant players in the entire global hospitality industry. Today, the company has 1.3 million rooms categorized under 30 different brands across 130 different countries with over $5 billion in annual revenues (excluding cost reimbursements).

The more than $13 billion acquisition of Starwood Hotels and Resorts in September of 2016 propelled Marriott into the spotlight. Suddenly, Marriott was the largest public hotel brand company in the world, with a monumental task of integrating two gigantic companies into one — all the way from financial systems on the back end to loyalty programs on the front end.

Almost two years later, Marriott’s stock price is up 80%, but the integration work continues on. In this report, we focus on two aspects of the integration — the Sheraton turnaround and the merging of the loyalty programs — and what they could mean for the combined company.

Our research indicates that the success of both the Sheraton turnaround and merging of the loyalty programs could result in incremental room revenue to the tune of hundreds of millions of dollars for hotel owners and millions of additional fee revenue for Marriott. But, perhaps more importantly, the actions Marriott is taking demonstrate to us that the company is dedicated to reducing costs for hotel owners while improving the overall experience for the hotel guests. Thus, Marriott is creating a circular reference — the more it works on lowering expenses and enhancing experiences for customers, the more it reinforces why it is such a formidable, dominant hospitality company.

Company Overview

Upon acquiring Starwood Hotels and Resorts (Starwood) for $13.3 billion in September 2016, Marriott became a behemoth of a hotel company, complete with 30 different brands, 1.3 million rooms across 130 countries, and over 110 million loyalty members.

According to Skift Research estimates, today, Marriott has a 7.5% global market share based on number of rooms, and room revenues coming from Marriott properties make up 10.4% of the total estimated global lodging revenues. Regardless of how you measure it, Marriott is critically important to the hotel industry.

Marriott by the Numbers

As of 2017, Marriott has over $5 billion in annual revenues (excluding cost reimbursements), $3 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA), and revenue per available room (RevPAR) of $115.02. The company has also continued to improve EBITDA margins over the past five years.

Marriott primarily earns revenue via fees from franchise or management contracts rather than through the ownership over hotels. We discuss the general structure of these types of contracts in great detail in our report, “A Deep Dive Into Operating & Branding Strategies for Hotel Owners.“ Fees make up approximately 65% of Marriott’s revenue, which has been an increasing proportion over time as the company has shifted its focus toward franchising and managing rather than owning given the business models are generally more stable, more profitable, and warrant higher valuation multiples.

Marriott’s high fee revenue and incremental sales from owned hotels comes from its portfolio of 1.3 million rooms which has been growing steadily over time.

Marriott: Past, Present, and Future

Marriott previously only competed in the upper half of chain scales (segments determined based on average room rates) and was heavily weighted towards the North American market.

With the acquisition of Starwood, Marriott became even more heavily weighted towards higher-end chain scales, Upper Upscale and Luxury. Marriott’s Upper Upscale segment went from 38% of rooms prior to the merger, to almost half of its portfolio today.

Looking forward, the company is increasingly focused on brands in the Upper Midscale and Upscale categories, making up 59% of its pipeline. Included in these categories are brands such as Courtyard, Fairfield, Moxy, and AC Hotels, as Marriott is currently seeing increasing demand for select service hotels (versus full service) in the United States as well as in international markets like Asia (noted during Q1 2018 earnings).

Historically, Marriott was mostly a North American hotel company. Acquiring Starwood resulted in significantly more international exposure for the company, at 33% of rooms versus 23% prior to the merger.

The international opportunity presented by the Starwood acquisition is significant, given the comparatively low level of branded hotels abroad. While the U.S. is primarily a branded market, with approximately 70% of hotels branded, we estimate the international hotel market is just 46% branded. Today, more than half of Marriott’s pipeline is in international markets: 30% is in Asia Pacific, 9% is in the Middle East and Africa, 8% is in Europe, and 4% is in the Caribbean and Latin America.

Marriott Performance Versus Peers

It’s one thing to talk about Marriott by the numbers. It’s another to consider how Marriott compares to its major peers. For the charts that follow, we included Hilton, Intercontinental Hotels (IHG), Wyndham Hotels, Accor, Choice Hotels, and Hyatt as Marriott’s primary peers.

As of year-end 2017, Marriott has the largest supply of rooms as well as the largest pipeline of rooms out of all of its peers. The company also has the highest EBITDA out of its peers, as well as one of the highest RevPAR numbers and EBITDA margins.

Marriott: Valuation and Investor Focus

While Marriott’s stock price is up 80% since the closing of the Starwood acquisition in September 2016, it is actually down 8% year-to-date, underperforming the S&P 500, which is up 7% year to date. The stock has also been underperforming that of its main competitor, Hilton. We expect this is primarily due to management missing expectations for revenues in both of the first quarters of 2018 as well as a reduced outlook for net unit growth announced in Q2 2018.

As a result, Marriott is now trading at an enterprise value to forward EBITDA just slightly below that of its historical average since the closing of the acquisition.

The reduced outlook for net unit growth was primarily due to deletions (properties removed from the system), and had less to do with fewer owners signing on for new agreements. Management indicated on the Q2 2018 earnings call that the reductions were essentially due to hotels with contract expirations that will not be renewed, hotels with product quality issues that do not have the capital required to bring them up to standard (or the capital required is too costly), and hotels that were negatively impacted by the hurricanes and earthquakes such that management assumes it will take some time to bring them back into the system, if at all. In our view, Marriott’s aggressive decision making with regard to property product quality and taking out properties that are not meeting standards should be viewed favorably.

With regard to revenue and earnings expectations, we expect it will still take some time to see all of the financial benefits of acquiring Starwood flow through results. Alas, investors are not always patient and tend to be easily spooked.

 

Deep Dive: Assessing the Potential for the Sheraton Turnaround

Part of measuring the success of Marriott’s acquisition of Starwood hinges on the company’s ability to successfully turn around the Sheraton brand. As Julius Robinson, senior vice president and global brand leader, classic full service brands, of Marriott International, indicated, “The success of Sheraton is vital. It is a top priority for the company.”

Starwood had been struggling with the Sheraton brand for a number of years as a result of the brand trying to be a little too much of everything to everyone. While it was trying to be a high-end business hotel catering to corporate travelers, sticking to that identity was ineffective, particularly in North America, where one could find varying levels of service and product, with even some motor inns featuring the Sheraton name. However, internationally, Sheraton was more of a luxury product, only adding to the confusion.

Sheraton’s RevPAR on a dollar basis, as well as from a year-over-year growth perspective, had been underperforming Starwood’s systemwide results for a number of years. On a dollar basis, RevPAR for Sheraton was on average $19 below that of Starwood’s company-wide RevPAR for the five years leading up to the acquisition by Marriott. We estimate that RevPAR growth on a same-store, constant-dollar basis, was 107 basis points below that of the entire Starwood portfolio on average over the five years leading up to the merger.

Today, Sheraton is Marriott’s third largest brand at 12% of total rooms, coming after only Marriott and Courtyard by Marriott. The brand is also the company’s largest brand outside of North America as well as the most geographically diverse with properties in 72 countries. Leeny Oberg, Marriott’s chief financial officer, told Skift that Sheraton is the company’s “third largest fee generator of our brands and in a couple of our continents, it’s the number one generator of our brands.” As a result, getting this turnaround right is critically important for the company in the eyes of investors, owners, consumers, and other stakeholders in the industry.

Marriott’s Strategy for a Sheraton Transformation

Since the merger, Marriott’s basic strategy for turning Sheraton around involves major renovations at underperforming Sheraton properties and exits or conversions (to brands such as Delta, Four Points by Sheraton, or Courtyard) for a number of properties that are not up-to-snuff or that would require too much work. The primary focus is on Sheraton properties in the United States, about 50 of which, as indicated by management during the 2017 Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference 2017, are the primary laggards in terms of RevPAR index (a metric to assess fair share of available hotel revenue calculated as the property’s RevPAR divided by the RevPAR of its competitive set), product quality, guest satisfaction indexes, etc.

With regard to renovations, the company settled on a prototype for Sheraton guest rooms and in June 2018 rolled out a new concept for the public spaces of Sheraton hotels. Skift Hospitality Editor Deanna Ting described the new public spaces, which she observed in a demonstration at the NYU International Hospitality Industry Investment conference in June 2018:

“The space was, more or less, an amalgamation of some perennial themes and trends we’ve seen in hospitality as of late: co-working, all-day dining, flexible meeting spaces, and the kind of tech-enabled integrations you might find in today’s more updated airport lounges, like the ability to order food from your mobile device.”

Julius Robinson of Marriott highlighted, “When consumers think of ‘Sheraton,’ we want them to think of community and a place of gathering … We are a place that inspires connectivity and productivity. In our transformation, we aim to create this energy in our public areas providing guests with an approachable feel that is true and authentic to Sheraton’s heritage, in a fresh and relevant way.”

Hotel owners appear to be getting on board with the idea of a sleek business travel hotel brand concept with co-working influences. According to the Sheraton Transformation press release in June of 2018, 25% of Sheraton hotels globally have committed to renovations with some already underway, which based on 444 reported hotels (includes Sheraton Residences) in Q2 2018, is approximately 111 properties. Julius Robinson also indicated that “60% of Sheratons globally are committed to undergo renovation by 2020 … We have estimated half a billion dollars committed in investment for renovations by owners in US alone.”

During the Q2 earnings call on August 7, 2018, Marriott CEO Arne Sorenson indicated that about 75% of the Sheraton portfolio “is on its way towards meeting … brand standards. Now that includes those that are already there as well as hotels which are scheduled for renovation or maybe even under renovation.” As a result, that leaves approximately one quarter of Sheraton hotel owners with which Marriott is still negotiating next steps.

As far as exits go, as of June 2018, 6,000 Sheraton rooms have left Marriott’s system since the merger and another 2,000 are expected to exit by the end of 2018. At the same time, “5,000 rooms have been signed to the portfolio,” according to a Marriott June 4, 2018, press release, “Marriott International Announces Vision For Sheraton Transformation.”

History of Success with Large Potential Gain

Marriott has a history of successful turnaround stories. Starting 2003, Marriott implemented a Fairfield Inn and Suites brand turnaround which included a complete overhaul of the brand. Today, Fairfield has the largest pipeline out of any other brand in the Marriott system, with 370 hotels as of the investor day last March.

In 2012 and 2013, renovated Courtyard branded hotels saw a five point lift in RevPAR index following a brand transformation of Courtyard that included a new lobby design, new guest rooms, and a new restaurant concept called The Bistro.

However, the transformation most worth taking a look at is the Marriott Hotels brand repositioning, as it is most comparable to Sheraton in terms of chain scale (Upper Upscale), segment (primarily business travel), as well as strategy for the transformation, which included new guest rooms and the M Club Lounge spaces for loyalty members and guests to work, relax, and refresh. Marriott even bought a Sheraton property in Phoenix, Arizona, to showcase its plans for the Sheraton brand and use it as a lab, in essence, to test out new concepts, which is exactly what it did with the Charlotte Marriott City Center in 2016.

CEO Arne Sorenson noted that Sheraton “probably, on average, will be a fraction lower than where the core Marriott brand is,” during the Q2 2018 earnings call, “What we’re seeing is good buy-in from our owners and franchisees to move the average quality of the Sheraton portfolio up meaningfully from what it was when we closed on the acquisition of Starwood.”

In order to estimate the potential gain as a result of the Sheraton turnaround, we performed three hypothetical analyses looking at RevPAR Index, RevPAR, and Loyalty Contribution to Occupancy based on company filings for the Marriott Hotels brand as well as Franchise Disclosure Documents (FDDs) available publicly online. We note that three states, Wisconsin, Minnesota, and California, have FDDs publicly available online. We used Minnesota and Wisconsin websites, because their filings were user-friendly, easily accessible, and included the relevant information.

All analyses are hypothetical, and changes in different variables would imply different results. Nevertheless, we hope the analyses demonstrate what the potential financial benefit could be for the Sheraton transformation.

RevPAR Index Analysis

During the investor day presentation in March 2017, management indicated that one year after the implementation of the new guest room design, Marriott Hotel branded properties were seeing RevPAR index lifts of 6.3%. More recently, management noted in June 2018 that renovated Marriott Hotels have seen market share (as demonstrated by RevPAR Index) gains of 9%, on average.

As a reminder, RevPAR Index is calculated as the property’s RevPAR divided by the RevPAR of its competitive set and is used to estimate how much a property is getting of its “fair share” of available hotel revenue.

In this analysis, we assume Sheraton properties receiving the transformation could see RevPAR Index gains in a similar range — we used a range of 5% to 10%. This implies, based on numerous assumptions, cumulative incremental room revenue of $75 million to $150 million for all properties being renovated. This incremental room revenue would be 0.8% to 1.6% of Sheraton’s current property revenue, which management indicated is around $9.2 billion.

All assumptions are provided in the Appendix of this report.

RevPAR Analysis

Because the latest Franchise Disclosure Document (FDD) is as of 2016 and only considers franchisees (we assume at least some hotels going through renovation are managed by Marriott), we also looked at 2017 RevPAR reported by Marriott for the Sheraton brand for North American properties, which was $115.99. Under the same assumptions of a 5% to 10% increase being reasonable (Julius Robinson of Marriott did indicated that “when Marriott hotels went through a similar transformation, we saw RevPAR growth north of 6% for a sustained period of time.”), we apply the same analysis to determine incremental room revenue would be $90 million to $180 million, or 1% to 2% of Sheraton property revenue.

All assumptions are provided in the Appendix of this report.

Loyalty Contribution to Occupancy Analysis

Lastly, with the merging of the loyalty programs, there should be incremental loyalty contribution to occupancy given the previous limited overlap between the two programs (Marriott indicated during its March 2017 investor day that only 11 percent of Marriott Rewards and SPG members were members of both programs.), resulting in incremental revenue. In addition, the loyalty contribution for that of Marriott Hotels is greater than that of Sheraton, suggesting that when Marriott renovates Sheraton properties, we should see an improvement, and corresponding financial benefit.

We used data provided by Franchise Disclosure Documents (FDD) on the State of Minnesota Commerce Department’s Commerce Actions and Regulatory Documents website for both Sheraton and Marriott Hotels as of 2016. Marriott Hotels had a loyalty contribution to occupancy from Marriott Rewards of 53.6%, while Sheraton’s was 44% from Starwood’s Preferred Guest (SPG) program.

We estimate that if Sheraton had received the same proportion of loyalty nights as a percent of available nights as Marriott Hotels, the brand’s occupancy would have been 77.5%, which is a 6% increase over what was reported in the FDD (71.6%).

If we apply this new occupancy percentage to the average daily rate (ADR) for the 136 Sheraton properties accounted for in the latest FDD to determine the new RevPAR, we estimate incremental room revenue to be $118 million (See exhibit below).

We did two analyses to think about if the Sheraton properties being renovated were to achieve this incremental loyalty contribution to occupancy — one using the new RevPAR calculated from the FDD and one using the 2017 reported ADR to determine a new RevPAR for Sheraton. The two analyses yield $124 million and $105 million in incremental room revenue, respectively.

The three analyses using the new occupancy are 1.1% to 1.3% of current Sheraton property revenue.

All assumptions are provided in the Appendix of this report.

 

Potential Customer Satisfaction Gain

From a more qualitative perspective, improving customer satisfaction is critical to having any financial benefits at all.

The Marriott Hotels brand redesign significantly improved guest satisfaction. In June 2018, Marriott management indicated that “intent to recommend” scores from customers for renovated Marriott Hotels properties were on average eight points higher than non-renovated hotels.

With Sheraton brand’s “intent to recommend” scores already up two points year-over-year, we expect guest satisfaction will continue to improve as the renovations play out.

Good Things Ahead, But it Will Likely Take Time

As a final note, these analyses looked at incremental room revenue, which would benefit hotel owners. Marriott would benefit as a result of some percentage of fee growth. In the summary table below, we provide an estimate for potential fee revenue that would go to Marriott. Given limited overhead and high margins of the business, this incremental fee revenue would essentially be mostly all flow-through to the bottom line.

There were a considerable number of variables taken into account for these analyses, but we hope they offer readers a way to think about the potential benefit for the Sheraton turnaround story.

Based on our analyses and assumptions, we think that Sheraton renovations could potentially add $75 million to $180 in incremental room revenue, which could potentially translate into $4 million to $18 million in incremental fee revenues for Marriott corporate. In addition, the Sheraton brand achieving the loyalty contribution to occupancy like that of Marriott Hotels’ could boost occupancy for the brand by as much as 6%, worth a further $100 million to $125 million in room revenue, which could potentially translate into $5 million to $12 million in incremental fee revenues for Marriott corporate.

 

Brand transformations do not happen overnight and take years to see demonstrated financial benefits as a direct result of a repositioning. Thus, while these hypothetical analyses demonstrate considerable incremental revenue, seeing those benefits show up in Marriott’s income statement will likely take some time.

Nevertheless, CEO Arne Sorenson indicated on the Q2 2018 earnings call that the company is “making great progress on Sheraton … RevPAR index for the brand is now above fair share, … we feel really good about the momentum.” Julius Robinson of Marriott noted that “Sheraton’s business engine is gaining market share – global RevPAR index, occupancy index and ADR are all above 100 for the first time in five years.”

Sheraton’s pipeline demonstrates that owners are excited about the potential opportunity as well: Marriott has 80 additional Sheraton projects in its pipeline. By 2020, the brand’s footprint is expected to expand to 90 countries versus 72 today.

Deep Dive: Assessing the Power of the Combined Loyalty Programs

On August 18, Marriott merged all of its loyalty programs, Marriott Rewards, Starwood Preferred Guest (SPG), and The Ritz-Carlton Rewards under one set of unified benefits. This created the largest hotel loyalty program as measured by number of members.

According to management, members will earn on average 20% more points for every dollar spent versus the prior programs. Members will now have one single account and be able to have access to Marriott’s entire portfolio on all apps and websites without having to toggle between Starwood and Marriott portfolios. Rather than having to earn status in one platform or the other, stays in all properties will count toward elite status. Points also no longer have to be transferred between accounts. Overall, it should be a much more seamless experience for members, although a unified name won’t be released until early 2019.

Owner Views on the Loyalty Programs Merging

We discussed in our report, Perspectives on Hospitality Loyalty Programs 2018: A Challenging Road for Real Customer Loyalty, how hotel owners bear the costs associated with redeemed nights from loyalty members. The hotel brand companies (i.e. Marriott) are responsible for paying a redemption value to the hotel owners, which is intended to reimburse them for the cost of giving the guest a free night’s stay and other benefits and is calculated based on a formula that includes occupancy as an input. The higher the occupancy, the higher the redemption value. If the redemption value comes out to be well below a normal average daily rate (ADR), the owner would potentially be better off renting that room to someone else in the market, rather than letting a loyalty member stay there for the night.

The other option for the hotel owner (and a historical issue in the industry) is to dramatically discount rates to boost the property’s occupancy in order to get a higher redemption value from the brand. This likely results in other hotels having to discount to keep up with competition, reducing overall RevPAR for the market.

David Flueck, senior vice president of global loyalty at Marriott explained that, with the merging of the loyalty programs, the company is “moving from a sliding scale to a smoother, more transparent system of demand-based pricing where more nights are compensated as a percent of ADR.” During the Q2 2018 earnings call, CEO Arne Sorenson stated, “We believe this will reduce incentives for hotels to cut room rates at the last minute.”

Hotel owners also pay Marriott access fees to be a part of the loyalty program, called charge-out rates. As a random example of these charges, the Franchise Disclosure Document for Renaissance Hotels indicates “Certain costs of the Marriott Rewards program are billed as follows: (i) 4.4% of the total guest folio (i.e. the total bill), including an average room tax component, generated by guests earning Marriott Rewards points or miles, is charged to your hotel (waived for new hotel enrollment first stays); and (ii) for a group event (involving at least 10 guestrooms) and/or a catering event arranged by a meeting planner or other individual earning Marriott Rewards points or miles for such event, 0.95% of the gross revenues generated by each such group or catering event, up to a maximum amount of $500 per event, is charged to your hotel.”

During the Q2 2018 earnings call, Sorenson noted that “In the third quarter, most owners should see additional savings as we make further reductions in loyalty charge out rates.” David Flueck highlighted, “The consistency and standardization of charge-out rates by property type is going to help lower hotel owner costs. It simplifies the programs’ value proposition and drives greater consistency. This enables owners to more easily manage their properties – especially for those who manage multiple brands and understand clearly how the financials work.”

Marriott’s ability to lower the hotel owner royalties that support the loyalty program is due in part to its renegotiated contracts with co-branded credit card companies, JP Morgan and American Express, both of which have to pay more for the right to offer credit cards bearing the Marriott name.

Marriott appears to be focused on cutting costs for hotel owners and limiting potential negative impacts of the programs merging. In order to better understand how owners feel about the merging of programs, we asked a couple of hotel real estate investment trusts (REITs) for their anonymous opinions, which we provide below.

What do you think will be the advantages and/or disadvantages of the merging of the two loyalty programs — Marriott Rewards and SPG? What are your overall expectations for the merging of the two programs and how this will influence your business?

“With minimal overlap in the membership between the two loyalty programs, we feel there is an opportunity to capitalize on increased bookings from SPG members at our legacy Marriott hotels, especially in the select service segment where Starwood brands have had much less distribution … We anticipate we will benefit from an additional reduction in the loyalty program charge-out rate next month and an increase in our expected revenue from redemption reimbursements.”

“The merger will definitely be of great benefit for consumers, effectively allowing many more “points players” to stick with a single program given the breadth and depth of hotel offerings in many markets. Marriott has put a lot of thought into integrating point redemption levels that we think will result in more rational choices by consumers when redeeming points. We see very little downside for consumers from the merger, despite some continued fear from legacy SPG players. For owners, lower-rated hotels will have their reimbursement rates moved up and we think the graduated scale of reimbursement at progressively higher occupancy levels will benefit those hotel owners, as it will likely result in less ‘dumping’ of rooms to achieve premium reimbursement rates. For these hotels, there could be a fairly significant net benefit. As with any large-scale rollout, some properties may be disadvantaged under the new program, particularly large resorts that will now have to provide higher cost amenities that they did not have to provide previously.”

Consumer Views on the Loyalty Programs Merging

Several news articles have highlighted various stories of “road warriors” (frequent business travelers who stay in hotels hundreds of nights a year) worried about how their perks, status, or redemptions will change as a result of the two programs combining.

An article from The Points Guy calls out various ways loyalty members can get hurt by the new system, including award night price increases at lower-tier levels and luxury brands of both Marriott Rewards and SPG programs, as well as increases at Marriott Vacation Club, VISTA, and certain Disney resorts which may hurt families.

Nevertheless, Marriott appears to be doing what it can to limit negative impacts. The company is implementing the breakfast offering and other perks highly valued by SPG members at many legacy Marriott brands, and has demonstrated its willingness to adjust the system should there be any issues. David Flueck of Marriott explained, “As an example, we had allowed Marriott Lifetime Platinum members to earn Lifetime Platinum Premiere, so they wouldn’t lose some of the benefits they receive today, but we didn’t have a similar opportunity for SPG members.  Upon hearing our SPG members’ concerns, we realized this was a mistake and revised our policy that allowed members of both programs to earn Lifetime Platinum Premiere. Overall, however, we feel really good about the program we’ve created for our members and think it is unmatched in the travel industry.”

He also indicated that “Over 70% of our properties require either the same or fewer points for a redemption stay,” demonstrating Marriott’s desire to make it easier for loyalty members to use points for free nights.

In addition, in our report, Perspectives on Hospitality Loyalty Programs 2018: A Challenging Road for Real Customer Loyalty, we found that consumers still regard Marriott’s loyalty program very highly.

Skift Research worked with Crimson Hexagon, an AI-powered consumer insights company, to perform an analysis of online consumer sentiment toward these loyalty programs. We assessed consumer sentiment for eight hotel loyalty programs (Starwood was separated out as it has not been joined fully with Marriott) during the time period of January 1, 2013 to December 31, 2017. The sites or programs monitored included Twitter, Facebook, QQ, Reddit, Blogs, Comments, Forums, Tumblr, and Instagram, and the search was performed so that the commentary had to include terms such as “loyalty” or “loyalty program.”Based on this analysis, we found that Marriott’s loyalty program has had the most positive consumer sentiment on average over the past five years, while Choice had the lowest.

In addition, we compiled the rankings provided by U.S. News, FlyerTalk, IdeaWorks Company, The Points Guy, and J.D. Power to determine the current standing of numerous hotel loyalty programs on a normalized basis using z-scores (A z-score measures a value relative to the average in a group of values. This statistical measure is used to analyze datasets with comparability issues relative to each other.).

Under this analysis, Marriott came in second, while Starwood Preferred Guest came in fourth. It will be interesting to see how the program ranks once the two are combined. Please see the report for our in-depth analyses and assumptions.

Our proprietary Loyalty Brand Matrix (also in the report) ranked Marriott the highest on average across seven metrics, which included loyalty members, loyalty contribution, rooms per member, rooms per country, direct traffic, social following rank, and average consumer sentiment based on the Crimson Hexagon work.

Loyalty Contribution Analysis

One overarching benefit of combining the programs is that hotel guests now have access to more breadth — rather than having access to approximately 900,000 rooms in one program and 400,000 in the other, they now have access to a portfolio of approximately 1.3 million rooms. This is an unprecedented amount of access to international distribution.

As a result, Marriott has the opportunity to have a greater contribution to its occupancy from its loyalty programs, as loyalty members will have less of a need to look outside the Marriott portfolio for a certain type of property that they need for a specific type of trip.

We used data provided by Franchise Disclosure Documents on the Wisconsin Department of Financial Institutions website for both legacy-Starwood and legacy-Marriott Hotels as of 2016 to analyze the potential incremental revenue from improving the loyalty program’s contribution to occupancy for legacy-Starwood brands. Legacy-Marriott brands had an estimated weighted average loyalty contribution to occupancy from Marriott Rewards of 56%, while legacy-Starwood brands’ was 48% from SPG.

We estimate that if legacy-Starwood brands had received the same proportion of loyalty nights as a percent of available nights as Marriott Hotels, the brand’s occupancy would have been 79%, which is a 5% increase over the weighted average reported occupancy of 74%.

Using that new occupancy on legacy-Starwood brands implies incremental revenue of $255 million. If we use the new occupancy to calculate a new occupied room nights for legacy-Starwood brands and use that in an analysis for all Marriott brands, it implies $239 million in incremental revenue.

Below, we also provide an estimate for potential fee revenue that would go to Marriott. Given limited overhead and high margins of the business, this incremental fee revenue would mostly all flow-through to the bottom line.

Note this analysis is for the entire company; it assumes legacy-Starwood brands are able to achieve the loyalty contribution to occupancy like that of legacy-Marriott brands (The analysis earlier only considered the Sheraton brand versus the Marriott Hotels brand.). All assumptions, as well as our calculation of weighted average loyalty contributions, occupancies, etcetera, are provided in the Appendix of this report.

Similar to the overall integration, we expect there will be bumps along the way in terms of the merging of all loyalty programs. Nevertheless, the merger is a necessary hurdle in order to provide all hotel guests a seamless experience across all Marriott hotels. We expect management to continually focus on cutting costs for owners and providing the best experience possible for guests.

“We think all of those [changes in the loyalty program] should drive increased share of wallet, greater strength in the loyalty program,” CEO Arne Sorenson stated on the Q2 2018 earnings call. “It is a very hard thing to predict what the upside is going to be, but we’re optimistic that we will see a greater strength from this stronger loyalty program.”

Global Chief Commercial Officer Stephanie Linnartz indicated during the March 2017 investor day, “We plan to give our guests the strongest, most valuable program with all the brands and location choices they could ever wish for. There really will be no need for them to join any other hotel loyalty program.” David Flueck also noted, “We will never stop moving forward, innovating and improving upon the value for our members and owners, which will continue to keep us as the top loyalty program in the world.”

Marriott may have a lot of work ahead, but we expect them to continue to fine tune its loyalty program and enhance value for owners and guests.

Other Areas of Company Strength

While this report has centered on the Sheraton turnaround and the merging of the loyalty programs, there are other areas of focus for the company that should be highlighted.

  • Marriott Moments. In announcing the plan for unifying its loyalty programs in April 2018, Marriott also revealed an enhanced Moments marketplace, catering to travelers seeking experiences over material things. The marketplace features 110,000 experiences, from shark cage diving in South Africa to master classes with chefs and athletes. Rewards members earn points for Moments purchases, and 8,000 experiences can be redeemed for points with the expectation that all will be redeemable in the future. In Q2 2018, management indicated on the earnings call that Marriott Moments revenue almost tripled versus Q1 2018, “enhancing returns to owners and increasing guest engagement and loyalty.” There remains considerable opportunity in this regard to provide enhanced targeted marketing in order to drive additional bookings as well as provide a higher level of more personalized concierge services.
  • Asset Sales. Marriott surpassed its 2016 outlined target of $1.5 billion in asset sales during Q2 2018, reaching almost $1.8 billion. We expect there to be additional asset sales as Marriott increasingly shifts asset-light and focuses only on management and franchise, which are higher margin, more stable, higher valuation multiple businesses. Any additional asset sales will simply be incremental cash that can be reinvested into the business.
  • Alibaba Partnership. Marriott formed a joint venture with Alibaba in summer 2017 to better target Chinese guests. Earlier this year, the company launched a redesigned storefront on Alibaba’s travel website, Fliggy, featuring Marriott’s global inventory with a mobile-enhanced, user-friendly experience. Marriott also plans to roll out Alipay’ Post Post Pay, a hotel payment service to 1,000 hotels globally in 2018. Given that 30% of Marriott’s pipeline is now in the Asia Pacific region, it makes sense for the company to improve guest experience for its international markets. The company noted that the partnership has allowed them to better engage with Chinese guests and increase loyalty enrollments. We expect the company to continue to evaluate the potential benefit of partnering with other companies to provide better service to hotel guests.
  • Additional Cost Synergies. Marriott continues to focus on cutting costs, as CEO Arne Sorenson indicated on the Q2 2018 earnings call, and not just at the company level, but also for hotel owners. Marriott cut commission rates for intermediary group business, which should improve house profit margins at convention hotels and plans to bundle above-property charges, including reservations, sales and marketing, revenue management and mobile guest services in 2019, which should reduce costs at many hotels. We expect additional efficiencies will come from standardizing loyalty charge-out rates by chain scale, additional procurement savings, and productivity improvement. During the Q1 2018 earnings call, CFO Leeny Oberg indicated that the company estimates “efficiency improvements and synergies contributed an average of 50 basis points to worldwide property-level margins in 2017. And our goal is to add another 50 basis points, apart from the impact of RevPAR growth on average in 2018.”
  • Direct Channels. Marriott continues to focus on increasing bookings through direct channels. Management indicated during Q2 2018 earnings that approximately 70% of business is coming from calling the hotel, calling call centers, and digital platforms (brand.com websites and apps) and that digital continues to grow while voice channels are declining. In addition, business booked through branded websites and mobile apps increased significantly faster than business booked through online travel agencies (OTAs) in Q2 2018. As a reminder, the cost of direct bookings is typically lower than commissions charged by OTAs.
  • Co-Branded Credit Cards. Marriott reached new agreements with JPMorgan Chase and American Express for co-branded credit cards at the end of 2017. The credit cards allow Marriott to enhance value for its loyalty program as customers are able to earn points on everyday purchases and redeem those points for free nights and other rewards. In turn, Marriott receives solid license fees from the credit card companies every time consumers use the card, brand visibility, and access to consumer data. During Q2 2018 earnings, management noted that JPMorgan Chase has rolled out a new Visa card and “customer response has been great,” but that American Express won’t roll out a product until late August 2018. An anonymous hotel REIT we interviewed noted that the “impact from lower credit card fees should be beneficial to owners without any disadvantages … We believe that ultimately, given the strength of the loyalty program, consumers will stick with any card that keeps them earning in the combined program.”

Company Forecasts

We built a model for Marriott to forecast 2018 results based on various ongoings at the company. We provide our expectations versus management guidance below.

  • We forecast 2018 systemwide comparable RevPAR growth of 3.4% (versus 3.1% in 2017). This is based on our expectation that North America RevPAR growth (of 2.2%) will be softer than our expectations for the overall U.S. Forecasts as generally in the 3%-range for 2018 for the overall U.S. and Marriott generally underperforms the overall U.S. by approximately 100 basis points. On the other hand, we expect international results to continue to be strong and forecast 6% RevPAR growth versus management guidance of 5% to 6% outside of North America.
  • This translates into approximately $21,285 million in 2018 revenues. Excluding cost reimbursements, we forecast $5,285 million in 2018 revenues, which represents 3% growth over 2017.
  • We expect margins to continue to improve, resulting in 2018 EBITDA of $3,485 million, which is in line with management guidance of $3,450 million to $3,495 million and represents solid growth (11%) over last year.

Company Risks

We would be remiss not to include any risks to Marriott’s current strategies and financial performance.

A broad, macroeconomic slowdown or recession or a deceleration in demand would hinder Marriott’s ability to continue to improve results.

Our current expectations are for steady, stable growth in the U.S., and solid growth internationally for the hospitality industry.

Particularly in North America, wage increases may pressure margins and profitability, and tightened labor markets may result in lengthened construction timelines and therefore reduce Marriott’s ability to turn its pipeline into supply growth.

 

Marriott should be able to offset margin pressures through further cost reductions and improving efficiencies at the property level. CFO Leeny Oberg noted during the Q1 2018 earnings call that “efficiency improvements and synergies contributed an average of 50 basis points to worldwide property‐level margins in 2017 and our goal is to add another 50 basis points apart from the impact of RevPAR growth on average in 2018.” Some of these cost savings will come from standardizing loyalty charge-out rates by chain scale, additional procurement savings and productivity improvements, the roll‐out of shared services to more properties, and ongoing merger synergies.

Marriott’s foray into homesharing with its pilot, Tribute Portfolio Homes, could present additional challenges for the company given other hotel brands, like Hyatt and Accor, have had to take recent impairment charges on their investments in Oasis Collections and Onefinestay, respectively.

 

A couple of differences stand out to us: Marriott’s handpicked 200 homes in London will be marketed under a brand already in existence, Tribute Portfolio, and immediately tie into the company’s loyalty program. Arne Sorenson noted on the Q2 earnings call, that the pilot “allows us to distinguish a little bit both in terms of size and in quality from sort of the average home‐sharing thing. [And] so far, it’s going great.”

Issues with the integration of Starwood or slower than expected implementation processes could negatively impact financial results. During Q2 earnings, hotel real estate investment trusts (REITs) Pebblebrook Hotel Trust and Diamondrock Hospitality Company noted integration issues associated with transitioning to a new salesforce system disrupting their ability to sell to meeting and event groups in the past year at hotels that were previously Starwood properties.

Our view is that, sometimes, change can be hard, and when you’re merging two of the largest hotel companies in the world, not everything is going to go smoothly. Things will take time, potentially several years, but the benefits will outweigh the disadvantages in the long run. Sorenson reassured listeners during the Q2 call, “each hotel is going to have a different story. We’re not saying for a second that there couldn’t be circumstances in which there has been staffing implications to the integration that’s been done and there’ve been distractions or there’ve been other issues, but what we see generally across the system is not an integration impact to the performance that we’ve had, but just the reverse, a remarkable strength in the midst of all the change which is underway.”

Marriott may be overextending itself by getting into tours and activities as well as experiences with Moments.

While some may argue that tours and activities are outside of the realm of Marriott’s expertise as a hotelier, we believe experiences are a natural extension of hospitality and concierge-like services. The Moments marketplace creates a way for Marriott to offer more personalized experiences for its guests, and while it may take some time to work out kinks, reception so far appears positive. David Flueck of Marriott noted, “Mr. Marriott has a saying, ‘success is never final.’ We take that to heart, challenging ourselves to innovate, and provide our members endless inspiration for their travels.”

Brand proliferation may result in cannibalization for hotel owners. The more brands a hotel company has, the higher the risk that hotel owners’ financial results are negatively impacted from cannibalization within the same brand family.

 

While there are Areas of Protection that limit the number of the same type of brand that can be in a given area, Marriott simply has so many brands that it risks hurting existing owners as it continues to add more brands and properties everywhere. Marriott is focused on developing each brand’s niche and ensuring that each brand occupies a specific segment targeting a certain type of consumer. The success of maintaining differentiation amongst all brands will be critical to not negatively impacting existing owners.

Technology, from back-end operations to IoT-connected guest rooms, continues to be a ongoing challenge for the hospitality industry.

 

In our report, The State of the Hotel Tech Stack 2018, we discussed how the hospitality industry is behind when it comes to tech due to a number of issues, including the fact that it is, first and foremost, a services industry, hotel ownership is generally fragmented resulting in the usage of a lot of different technologies, and the industry is generally complacent with legacy systems.

David Flueck highlighted, “We are … focused on removing friction from the entire member experience. This includes working with our technology partners to create systems that enable our associates and members to have one continuous conversation regardless of where they left off and what device they use next. No more starting over when moving from device to device.”

Marriott is certainly not immune to these industry-wide issues, but continues to invest in different tech capabilities, testing out what works and makes sense for consumers and properties.

Appendix

Sheraton Turnaround – RevPAR Index Analysis Assumptions

  • Based on the most recent available Franchise Disclosure Document on the State of Minnesota Commerce Department’s Commerce Actions and Regulatory Documents website, Sheraton brand’s 2016 RevPAR Index was 95.6 and RevPAR in dollars was $97.07. This is for 136 reporting franchise hotels in North America, and, therefore, does not apply to all Sheraton properties in Marriott’s portfolio. The implied RevPAR for the competitive set is, therefore, $101.54 to achieve a RevPAR Index of 95.6.
  • Because we have no basis for how the RevPAR of the competitive set would change (This is subject to the discretion of the property), we hold this RevPAR constant. The 5% to 10% sensitivity is, therefore, applied to both the RevPAR Index and RevPAR ($). The growth is the same for each.
  • In the Marriott press release, “Marriott International Announces Vision For Sheraton Transformation,” from June 4, 2018, management indicated that “Globally, 25 percent of Sheraton hotels have committed to renovations with some already underway.” The press release also states that Sheraton generates $9.2 billion in property revenue globally.
  • This analysis only assumes that 25% of properties will be renovated. As Julius Robinson indicated that 60% of Sheratons globally are committed to undergo renovation by 2020, our analysis is likely understating the potential incremental revenue by a significant amount.
  • Estimated rooms to be renovated is calculated as 25% of total properties in the portfolio (444 as of Q2 2018), which is 111 properties. We assume these are primarily North American properties, given management indicated properties in the United States are the primary laggards in the portfolio. We estimate rooms to be renovated as the rooms per property for North America Sheraton hotels (382 rooms) and apply that to 111 properties to get 42,360 rooms to be renovated.
  • This analysis inevitably assumes that the RevPAR Index applies to, or is similar to, that of the rooms being renovated, on average.
  • Available room nights is calculated as rooms to be renovated times 365 days. We are therefore assuming that all rooms were available all nights of the year.
  • We multiply the new RevPAR numbers by available nights to get estimated total room revenue of $1.58 billion to $1.65 billion.
  • This implies incremental revenue (versus our 2016 estimated total room revenue) of $75 million to $150 million.
  • This analysis does not take into account return on invested capital, in which case, the cost may not justify the incremental revenue.

Sheraton Turnaround – RevPAR Analysis Assumptions

  • We employ the same assumptions as provided in the list above for the RevPAR Index Analysis for estimated rooms to be renovated, available room nights, and current Sheraton property revenue of $9.2 billion.
  • We assume 2017 North American RevPAR of $115.99 applies to, or is similar to, that of the rooms being renovated, on average.
  • We multiply the new RevPAR numbers by available nights to get estimated total room revenue of $1.88 billion to $1.97 billion.
  • This implies incremental revenue (versus our 2017 estimated total room revenue) of $90 million to $180 million.
  • This analysis does not take into account return on invested capital, in which case, the cost may not justify the incremental revenue.

Sheraton Turnaround – Loyalty Contribution to Occupancy Analysis Assumptions

  • Loyalty contribution to occupancy was previously defined differently by each company. Starwood previously defined the “average SPG contribution to occupancy” by “dividing the total net consumed room revenue by the number of guestrooms booked by SPG members, for which Starpoints were earned.” Marriott defined the “average percentage of Marriott Rewards contribution to Occupancy” as “the percentage of occupancy derived from dividing the number of Marriott Rewards-occupied room nights for the North American (N.A.) Included Franchised Hotels by the total occupied room nights for the N.A. Included Franchised Hotels.” For the purpose of this analysis, we used the Marriott definition as we did not have the SPG-relevant ADR to back into the appropriate numbers for the Starwood definition. We also assume Marriott will be using its definition going forward, making it a fair calculation.
  • Because the numbers of franchised rooms were not included in the FDD, we estimated it based on the ratio of franchised rooms per property reported in 2016 and applied that to the number of properties included in the FDD (136 for Sheraton and 191 for Marriott Hotels).
  • Based on our calculation, Marriott Hotels loyalty occupied nights were 37.4% of available nights, versus 31.5% for Sheraton.
  • We assume the non-loyalty occupied room nights remain the same and add those to the new calculated loyalty contributed occupied room nights.
  • The two analyses assume that only renovated rooms get the increase in occupancy contribution. We use the same assumptions as in the RevPAR Index and RevPAR analyses including estimated rooms to be renovated, available room nights, and current Sheraton property revenue of $9.2 billion.
  • This analysis does not take into account any additional cost required to attain a higher loyalty contribution, in which case, the cost may not justify the incremental revenue.

Company-Wide Loyalty Contribution to Occupancy Analysis Assumptions

  • We utilized the latest available Franchise Disclosure Documents for 8 legacy-Marriott brands and 7 legacy-Starwood brands that we could find on the Wisconsin Department of Financial Institutions website.
  • The FDDs are only for North American franchised properties, and not all properties in the data provided. We estimated the number of rooms included by calculating the ratio of North American rooms per property as reported by Marriott and applied that to the number of properties included in the FDDs. The reported rooms and properties used to calculate the estimated rooms included in the FDD are included in the far right of the table below.
  • Using the estimated rooms included, we calculate the weighted average loyalty contribution, occupancy, ADR, and RevPAR for the legacy-Marriott brand and the legacy-Starwood brands.
  • We estimated loyalty contributions for SPG brands of 48% and Marriott Rewards brands of 55.8%. We view these estimates as reasonable for the overall given Starwood indicated in its last 10-K filing (financial results as of 2015) that it was “approximately 50%,” and Marriott indicated in its last three 10-K filings (financial results as of 2015 to 2017) that its loyalty contribution to occupancy was “over 50%.”
  • As loyalty contribution was defined differently by Starwood versus Marriott (as discussed above), for the purpose of this analysis, we used the Marriott definition as we did not have the SPG-relevant ADR to back into the appropriate numbers for the Starwood definition. We also assume Marriott will be using its definition going forward, making it a fair calculation.
  • We used the estimated rooms included to determine total available nights (x 365). We are therefore assuming that all rooms were available all nights of the year.
  • We used our estimated weighted average occupancy for each legacy-brand set to apply to available nights to determine occupied room nights and then used our estimated weighted average loyalty contribution to determine loyalty occupied room nights.
  • We assume the non-loyalty occupied room nights remain the same and add those to the new calculated loyalty contributed occupied room nights.
  • To calculate incremental revenue, in the first analysis we apply the new occupancy rate (79%) to our estimated weighted average ADR for legacy-Starwood brands to determine a new RevPAR and apply that to available room nights to get an estimated new room revenue. The incremental room revenue is the delta between the new calculation and the original calculation.
  • In the second analysis, we add the new loyalty contributed occupied room nights to the total occupied nights and divide that over total available room nights for all Marriott brands (Starwood and Marriott included) in order to determine a company-wide occupancy. We apply that to our estimated company-wide weighted average ADR to determine a new RevPAR and apply that to total available room nights to calculate a new estimated room revenue. The incremental room revenue is the delta between the new calculation and the original calculation.
  • This analysis does not take into account any additional cost required to attain a higher loyalty contribution, in which case, the cost may not justify the incremental revenue.

Further Reading