• Marriott’s ‘development machine’ not focused on Europe

Marriott International took the opportunity of its analysts’ day in September to reveal “the most aggressive growth strategy” in the company’s history.

The group said it expected to add between 200,000 and 235,000 rooms between 2014 and 2017, continuing to focus on “the top quality rooms”, but also looking to the “significant opportunity in limited services”. It was accelerating system growth, with 3% net CAGR between 2009 and 2013, rising to between 5% and 7% between 2013 and 2017.

Arne Sorenson, president & CEO, described the company as “a development machine” and said that: “Most hotel additions have little to no Marriott investment and we frequently underspend our own investment forecasts.”

Sorenson said he was looking to 6% revpar growth in 2014 and 4% to 6% compound revpar growth thereafter to 2017, something he described as “not forecast or guidance but ‘reasonable bookends’”. Investment spending was expected to be USD2.5bn to USD2.7bn over four years.

Aiding this has been the development of brands such as Edition and Moxy. Tony Capuano, executive vice president and global chief development officer, said: “We are growing with almost twice as many brand platforms now as we were in 2000. Twenty per cent of rooms are within brand platforms which did not exist five years ago.”

He added: “2011 to 2013 was the most productive period in Marriott’s history, adding 175,000 rooms to development pipeline. This pace has accelerated into 2014, as of September 1 we have signed 55,000 hotel rooms. We expect to set a new record in 2014.

“There are a number of drivers including market conditions, but we believe we have the industry’s strongest brand line-up, owner and lender preference for brands and our business model, which includes strategic investment.”

The company estimated that pre-tax fees from the new rooms would reach roughly USD360m in 2017, growing to an estimated USD450m annually when stabilised. North America continued to represent the largest component of the pipeline, at 53%, followed by Asia Pacific with 28% of global pipeline. EMEA, Middle East, Africa and the Caribbean each represented 6% to 7% of the pipeline.

Capuano said: “We expect to continue to leverage our North America footprint by filling in gaps, including big box convention hotels in cities like Austin and Houston, We also expect to aggressively grow our new brands and grow in high growth and high potential international markets. We believe there is a significant opportunity in limited services. Will this dilute our fees? Yes, but only modestly.”

Capuano said that he expected any drop in fees to be compensated by balancing through upscale “and pushing overall fees higher. We’re adding hotels quickly all over the world. Our measure of success is fees and value”.

The company is leaning on its franchisees for its expansion, with Capuano adding: “Our growth plan recognises the strength of the franchise community, particularly in Europe and North America.”

David Grissen, group president, added: “I would characterise the industry as ‘a flight to security’. This has driven developers to limited service hotels in North America. Much of our development has been led by franchisees.” Franchised hotels make up 90% of rooms pipeline in the region, driven by limited service.

The company is focused on attracting the Millennial traveller, with Stephanie Linnartz, executive vice president and chief marketing and commercial officer, telling analysts that the company’s “ultimate goal is to win their hearts, their minds and their wallets”.

Linnartz said: “We are positioned for the tremendous purchasing power and influence of Gen X and Y. They make up over 70% of the working population worldwide. In 10 years this increases to almost 90% globally, because over half of the baby boomers will have retired.

“We are expanding our brand experiences and introducing new brands with them in mind. They have been shaped by technology and the ways in which they live. They are distinctly different from the generations before them. Many Gen Y-ers are accustomed to luxury. They constantly combine work and play. Gen Y does everything all the time. They are tech-dependent.”

Helping to drive this, she said, was Marriott Rewards, one of the biggest programmes in the business, with 47 million members worldwide, expanding by 3.5 million members since last June. Globally members represent 50% of all paid and stayed nights and Linnartz said that research showed that reward members were prepared to travel 20 miles outside their destination to stay with them.  In the US, she said that over 60% of the new enrolments to the programme were Gen X and Gen Y.

The company was particularly proud of its mobile offering, with 40% of traffic to the Marriott.com website now via a mobile device. Linnartz said that Gen X and Gen Y in particular expected their in-travel needs to be met via mobile, adding that 81% of Gen Y travellers who had used mobile services said they would recommend Marriott based on them.

Linnartz added: “Mobile guest services can transform the guest experience, but only if it’s impeccable. It’s not enough to put a button on the app – you have to execute.”

The event was welcomed by analysts. Credit Suisse raised its price target from USD74.00 to USD80.00 (the share price at the time of going to press was USD68.02) and wrote: “Marriott’s first analyst day since 2012 was positive and well-attended. Management reiterated a number of long-term themes including capital return, brand diversification and strength, the state of its development pipeline and owner/franchisee relationships, technology initiatives, and other topics. We have raised our estimates and target in light of the company’s encouraging long-term outlook.”

 

HA Perspective [by Chris Bown]: Marriott remains at heart a US operator, and more than half of its impressively growing pipeline will be built in the USA. Capuano described expansion in this market “filling in gaps” – but with the company already a major force in the marketplace, how big are the gaps?

Marriott has shown it will invest heavily in growing brands at the luxury end of the market. But lower down, it is reliant on others. Outside its home market, growth has been steady and, with the exception of Marriott’s recent takeover of Protea, on an incremental basis. As an example, new brand Moxy has got off to a slow start. It was announced at the Berlin forum in early 2013, with the promise of a chain of 150 hotels across Europe within 10 years. Its first example, an airport hotel outside Milan, opened in late 2014. The pipeline now includes 10 sites, half due to open in 2015 and half in 2016.

The talk of expanding into lower fee, limited service offerings in the US can probably rely on established local franchisees to help drive pace. But in contrast there has been a slow pace of international expansion of Marriott’s most profitable sector, extended stay. At last summer’s serviced apartment summit in London – showcasing a booming sector – the big brands including Marriott appeared hamstrung in their efforts to sign sites in Europe.

The company is also well aware that its expansion plans mean it needs to draw in new investors. The group’s “head of diversity ownership” is tasked with broadening the type of investors who will develop a Marriott brand hotel. Currently just 17% of the portfolio is owned by “diverse” investors – that is people who are women or ethnic minorities. That translates to just 660 hotels – and the aim is to get the number to 1,000 by 2020.

[Additional comment by Andrew Sangster]: There are two sides to Marriott: domestic USA and international. In the former, Marriott is clearly a formidable machine with significant market power. But internationally, it does not have anywhere near such clout in any market. The current rate of organic growth, as can be seen by Moxy, is pitifully slow (although quite respectable when compared to peers).

International growth has been accelerated by the acquisition of Protea and AC Hotels. Surely there is much more of this to come if Marriott expects to move the needle on international expansion. But such deals are not easy and rarely of the quality Marriott wants.

CDO Tony Capuano said that the “historic deal volume over the last several years” [with openings 2014 to 2017, adding between 200,000 and 235,000 rooms] will create USD450m in incremental fees when stabilised.

Marriott is focused on the upper quality tiers – upscale, upper upscale and luxury – and locations in the highest revpar markerts. Together, according to Capuano, this gives Marriott the largest global revenue share of any hotel company.

On this basis, Marriott making a move on a large economy player in Europe looks unlikely. Don’t expect the company to enter the fray for Louvre, for example. While expansion of limited service is still on the cards, the company seems determined to remain weighted towards full service properties in terms of its global pipeline.

CEO Arne Sorenson, responding to a question on consolidation in the industry, said that Marriott would remain “very interested” in seeing if it could add brands, either generically such as Autograph or through acquisition like Protea.

One thing that also came through from the presentation, however, was how relatively unimportant EMEA is to the company. The region currently represents just 6% of the global pipeline against 28% for Asia (which referenced Indonesia and Japan along with the ubiquitous China) and 53% in North America (7% is Latin America).

In addition, while the heads of North America, Asia Pacific and the Middle East and Africa spoke, Europe was notably absent. It would be an exaggeration to say Europe has been sidelined but clearly the big growth ambitions are elsewhere.

Marriott now claims to be the world’s biggest hotelier by room count, 697,000 versus 694,000 for Hilton and 693,000 for IHG (STR numbers at June 30). But it is certainly not focused on becoming the dominant player in Europe.

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