Marriott International said that it expected be able to push up rates due to ongoing limited supply, while also rapidly expanding its own portfolio.
The company, as with many of the other global operators, is relying in large part on the strengthening US economy to support its plans, while benefiting from less exposure to China than some of its rivals.
The group said that it was at a “record-setting pace” for room signings with 80,000 to 90,000 expected during 2014. The development pipeline grew to nearly 225,000 rooms during the third quarter, approximately 40% of which are under construction.
Fifty-four per cent of the pipeline is in the US. President & CEO Arne Sorenson told analysts at the group’s third-quarter earnings call: “Of all the hotels under development in the US, something like 25% are headed towards our brands. That would suggest that we ought to see our supply growth stepping up in the US from the levels we were at a couple of years ago.”
Looking further ahead, the company said that it expected revpar in its domestic market to rise by 5% to 7% next year, 4% to 6% outside North America and 5% to 7% worldwide. Given the strong development pipeline, the company anticipated 6% to 7% worldwide gross room additions in 2015, up from the 3% average net growth over the past four years.
Supporting a large chunk of the company’s hopes was the North American market, where it said that “nearly all” of its incentive fee improvement in the quarter was derived. Sorenson said: “When you look at demand … the US economy is a big piece of that. And we see nothing to suggest that those trends are likely to moderate in the near term.”
The group referred to data from STR, which estimated that US lodging room supply would increase by only 1.3% in 2015, with Marriott International adding that it didn’t believe it would see supply growth reach 2% until 2016 or “maybe” 2017.
CFO Carl Berquist added: “While supply growth is modest, there is still considerable demand from investors for hotel real estate. Year-to-date, 10% of our North American limited-service hotels and 4% of our full-service hotels have changed ownership. As hotels change hands, renovations are frequently accelerated and our relicensing fees increase.”
Total fee revenues for the quarter were USD448m, up 19% on the year.
Outside the US the picture was mixed. The group saw revpar up 3% in Europe for the third quarter, against 8% across the group and Sorenson commented: “We expect Europe will continue to muddle along sort of the way it has this year and last year in low single-digit land.”
In contrast to many of the other operators, Sorenson remained optimistic about the market in China. The group added 3,700 rooms to the development pipeline in Q3 in Asia Pacific, with Berquist describing 65% of it as under construction. He commented: “Those properties … might slip a little bit, but based on everything we know right now, those hotels will be completed and delivered.”
Sorenson added: “Weakness also gives rise to some opportunities, which is hotels that are under construction that are not committed to a brand, or maybe some conversion opportunities. My guess is that those are an upside, which is not quite as significant as the downside would be in terms of extended opening dates.”
The company has benefited from having expanded later into China than its rivals. As a result it is not as exposed to the secondary and tertiary cities, the poor performance of which has been a feature of this results season, but is more heavily concentrated in the key cities.
Sorenson said that, in terms of the group’s current distribution in the country “we are way at the top end”, commenting that, with the Ritz-Carlton brand “we’re absolutely convinced is the leading luxury brand in China”. In addition to the geographic benefits it is currently experiencing, Sorenson added: “We don’t really have small, limited service hotels in anyway comparable to what we have in the US.”
HA Perspective [by Chris Bown]: With every fourth new hotel going under a Marriott brand, the company is still convinced there’s plenty of opportunity in the home US market. But such a pace means increasing market share, something that must ultimately be a concern. As Tesco – and Warren Buffet – have recently found to their cost, being the dominant brand in a market does not equate to being loved by consumers. Marriott’s recent fining for its wifi blocking activities at some of its US hotels – and its less than contrite public response – hints that the head office is in danger of losing contact with its market.
Europe appears to be given a low priority, dismissed as a low growth continent for now. New brand Moxy is expanding behind the promised launch schedule, while other successful brands such Marriott’s extended stay Residence Inn are proceeding at a glacial pace.
Let’s hope Sorenson’s confidence about Marriott’s presence in China is well placed. Timing is everything in business and, by being late to the party in terms of embracing China over its home market, Marriott has stumbled upon some good fortune. However, there are plenty of others piling in to take advantage of the Chinese market, at all levels. And a low degree of brand awareness among Chinese consumers means the market is wide open, with the earlier movers such as IHG standing to gain most.