The Nassetta agenda

In an exclusive Travel Weekly interview, Hilton’s CEO addresses group commission cuts, OTAs, Airbnb, loyalty programs, nationalism, the economy and his most memorable hotel stay.

By Arnie Weissmann

Hilton CEO Chris Nassetta with staff at the Hilton Colon Guayaquil in Ecuador. He poses this question to intermediaries: “How do we do business with you that isn’t just paying you for what we can do but is paying you for something that you do that’s unique?”

Hilton CEO Chris Nassetta with staff at the Hilton Colon Guayaquil in Ecuador. He poses this question to intermediaries: “How do we do business with you that isn’t just paying you for what we can do but is paying you for something that you do that’s unique?”

Hilton CEO Chris Nassetta with staff at the Hilton Colon Guayaquil in Ecuador.

Following the Marriott-Starwood merger, Hilton’s Chris Nassetta suddenly found he was CEO of the No. 2, rather than the largest, hospitality company in the world.

But he still sees plenty of reasons (and metrics) to celebrate.

During the Americas Lodging Investment Summit in January at L.A. Live in Los Angeles, Nassetta sat for a lengthy interview with Travel Weekly editor in chief Arnie Weissmann. He had not yet announced 2018 fourth quarter earnings, which showed net income at $769 million, down from $1.09 billion the prior year but reflecting a 2% systemwide increase in revenue per available room, largely driven by an increase in average daily rate. He attributed the dip in net income to slower transient and leisure travel, particularly in China and the U.S.

Perhaps the most encouraging news for Nassetta that emerged from the final quarter results was that direct web bookings grew at triple the rate of other, presumably more costly distribution channels and that the Hilton Honors loyalty program also surged in both membership and engagement throughout last year.

The implications of these particular shifts are not lost on the ecosystem of third-party distribution channels, notably travel advisors, meetings planners and OTAs. The interview began with the topic of intermediaries.

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Nassetta on a visit to the DoubleTree by Hilton Johor Bahru in Malaysia. “We’ll continue to lead the industry in performance. Not to be arrogant or too self-confident, but we’re good at this.”

Nassetta on a visit to the DoubleTree by Hilton Johor Bahru in Malaysia. “We’ll continue to lead the industry in performance. Not to be arrogant or too self-confident, but we’re good at this.”

Nassetta on a visit to the DoubleTree by Hilton Johor Bahru in Malaysia.

Arnie Weissmann: You’ve made several moves to strengthen your direct business and lower distribution costs, which have had an impact on intermediaries. Following the reduction of base group commissions from 10% to 7% a little more than a year ago, some competitors began offering bonus commissions to try to lure that business away.

Chris Nassetta: We love the group intermediaries. We have no beef with them. We just have to work with them in an intelligent way. I know they don’t like it, and to them it can feel like we’re whacking them. That’s not what we’re trying to do.

Think about it this way: We are an intermediary. We don’t own any of this real estate. The owners have invested all this money, and they’re trying to get a return. They’re under pressure. Costs to build, particularly in the U.S., have gone up at a really rapid pace. Wages are going up, and labor is hard to find in a lot of markets. So they’re paying more and more and having a harder and harder time. They’re coming to us and saying, “No mas!”

As a fiduciary, we’re trying to make sure we’re super thoughtful about doing what’s right for our owners, so we’re looking at all of our intermediaries and all of our embedded distribution costs. What we’re saying to group intermediaries is, “We’re sorry, but ultimately we do this to make sure that the business is healthy and that distribution costs do their part to add to the bottom line. Otherwise, it’s not good for any of us.” We’re not trying to stick a needle in their eye, but we have to think about our systems differently, and they’re going to have to, too. It can’t just be the same thing every year.

There are some people in that space who do a really good job and really add value and some who do a less good job. Those who do a really good job will get bonuses and things and will end up doing fine.

AW: Do you expect to see relations between large hotel groups and OTAs evolve significantly in 2019?

CN: The OTAs are another story. It isn’t that we don’t want to work with them. We just want to work with them for a certain type of business, and we don’t want them confusing our customers by saying that [customers will get] a better deal [through OTAs]. They won’t, for our core business.

I would say our relationships have been incrementally changing over five years. We’re going to have a long-term relationship with them and, like in any negotiation, it occasionally gets hot and bothered. There are a whole bunch of things we’re going to be trying to accomplish, but I feel pretty good about where we are with, you know, the two. There are others, but it’s really the two [Expedia and Booking.com].

It’s all about incrementality, right? We have 85 million, soon 100 million, Hilton Honors members who want to be loyal and want to book direct through us, and that’s our lowest-cost channel. So we don’t want anybody messing with that, and we’re going to be unbelievably aggressive about that.

There’s a whole bunch of other people who aren’t Honors members, are very infrequent travelers, generally leisure, weekend. And the truth is, OTAs have better cost-efficient access to them because they spend a ton of money on TV ads and everything else. I want to work with them on that kind of business and with other customers where there’s a nice synergy. How do we do business with you that is not just paying you for what we can do but is paying you for something that you do that is unique?

We want to have a healthy relationship with them. And occasionally, we fight.

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AW: You’ve likely noticed that the relationship between Google and OTAs is changing and that Google shows signs of adopting behavior more typically associated with an OTA.

CN: I have indeed. And that’s not all bad. Competition is healthy. In the distribution space, it’s good for customers. More competition means better prices.

AW: How would you feel about Google or Amazon overtly taking on an OTA role?

CN: These megaplatforms — Amazon, Google, Facebook, Apple — are building massive customer bases. Everybody will fight about who owns the customer. We all would have a part ownership of the customer, but if we do our job, we would own most of the customer because we are the only ones that have the physical connection. We’ve got 400,000 people that are in front of them every day, and none of those other guys really are in the business of fulfillment.

So, we’ve got to build an incredible culture, make sure we have an unbelievable product and service delivery and have the amenities and everything else the customer wants. And most importantly, that the hearts and souls of the 400,000 people are doing a good job fulfilling their needs. And if we do that, well, we’ve been around for a 100 years, and we’ll be around another 100 years.

Could Amazon say, “We’re going to start managing hotels?” Maybe. I doubt they’re going to ever want to do that.

AW: You’ve put a lot of focus on cultivating Honors members to drive loyalty and lower distribution costs. But is it not true that when you have more brands and properties, you’re in a stronger position to leverage loyalty programs? Are you feeling disadvantaged because, following the Marriott-Starwood merger, you no longer have the most hotels and now have many fewer brands than they do?

CN: Well, scale matters, but we have plenty of scale, so I would not say that because they have incremental scale that it is advantageous. I would say there’s a point of diminishing returns after you achieve enough scale and are in enough places. I would argue there aren’t that many of us — there are a couple — that have the ability to say, “We’re big enough” and have both the geographic and chain diversity. Even in the post-Starwood world, we have the highest average market share, we’re growing faster, and we’re growing organically more than anybody else.

What I think is more important than numbers once you’ve reached a certain scale is: Is [the program] relevant? What we’re really focused on is not just how many members we have. We’ll have 100 million this year. We finished last year with 85 to 86 million. We’re a little bit lower than Marriott, but we’d be more than they would have been alone. What’s really important is how many members are engaged, and the number of truly engaged Honors members is skyrocketing.

So we’re growing the system by 25% to 30% per year, but the engagement is growing much higher. It’s not just about points; it’s about everything. It’s about the value proposition. It’s about the technology. It’s recognition on property. It’s upgrades. It’s about the experiences, about our relationship with Formula 1 and Live Nation and all the private clients. It’s all the stuff beyond points that says, “I’m a member of this club, and it makes me feel special.”

We’re big enough and growing. We ended last year with [about 905,000] rooms, so we’ll be close to a million rooms this year, and we’ll have bought nothing. We’ve grown the system, I think, 60% since I got here without buying a damn thing. And by the way, returns for shareholders, when you do it that way, are really good.

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Nassetta interviewed Goldman Sachs CEO David Solomon at the Americas Lodging Investment Summit in January. Among other topics, Nassetta asked what the investment banker had heard earlier that month at the World Economic Forum about the possibility of a recession. Solomon replied the consensus was that for 2019 there was only a 15% chance. For 2020, it was 50%.

Nassetta interviewed Goldman Sachs CEO David Solomon at the Americas Lodging Investment Summit in January. Among other topics, Nassetta asked what the investment banker had heard earlier that month at the World Economic Forum about the possibility of a recession. Solomon replied the consensus was that for 2019 there was only a 15% chance. For 2020, it was 50%.

Nassetta interviewed Goldman Sachs CEO David Solomon at the Americas Lodging Investment Summit in January.

AW: You’re predicting 2019 is going to be the best and most dynamic year ever for Hilton. What could happen that would make it better than you think it will be, and what could cause it to fall short?

CN: Well, I’ll start with the second part first. We’ll fall short if we don’t achieve our goals, but I’m highly confident we will. We’re going to open more hotels in 2019 and perform better in terms of market share than ever before in the history of the company. We’re at the tip of the spear in the industry with innovation, and there’s more of that to come, particularly with Connected Room, because Digital Key is pretty much rolled out in the whole system. We’ll achieve new heights and recognition for our culture.

Now remember, about 70% of our growth is coming from the new-unit side, and we have a lot of them out there under construction with a delivery date. Others will be conversions that are up and operating. We’ll continue to lead the industry in performance. Not to be arrogant or too self-confident, but we’re good at this. What could go wrong is we don’t do our job.

AW: Or we could enter a recession.

CN: I think the broader macro environment is going to be reasonably good. The underpinnings of the U.S. economy — and for that matter, most of the bigger economies around the world — are reasonably good. There’s a lot of noise. You’ve got an election coming up in the U.S., trade wars. All that stuff is not helpful and will probably serve to maybe moderate growth a little bit. But I look at a lot of data, and I talk to a lot of customers. I think we’re going to have a reasonably good year this year.

AW: How long can the upswing last? We’re already in record territory for economic growth.

CN: That I don’t know, but I am reasonably optimistic, I think, for good reasons. But you’d be sort of crazy to say, you know, it won’t get a little bit weaker when we finish the year just because of some of the things going on. This has been a long growth cycle, and cycles don’t go on forever.

It would be silly to say, “I don’t care what my stock price is,” but the thing I love about our model is I don’t need to sell any of it. I’m a buyer of it. We’re using all our free cash flow to buy back the company. So the lower the price, the more shares one dollar buys. You wake up in five or 10 years, and we’re going to have bought a lot of the company back. What happens every day doesn’t matter. What matters is what it looks like in five to 10 years.

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AW: You’re one of the few hotel groups that isn’t doing a vacation home rental experiment as a hedge against Airbnb. Why not?

CN: We’ve looked at it, spent crazy amounts of time thinking about it and thinking about them and thinking about our competitive position and the threats that not just they but other disruptive players mean for us. What I think right now is it’s a different business, and I don’t think that customers come to us for that. I’ve got a lot of supporting science behind that in terms of focus groups and research.

Customers come to us because they want a high quality, consistent, branded experience with products, service, loyalty, all of that connected. They go to them for something different, which is a value proposition. There’s really little or no service. It doesn’t mean it’s bad, it just means customers go to them for something else, and the two don’t mix right now.

That’s my view. That doesn’t mean that’s my view tomorrow or the next day. The one thing I’ve learned as I’ve matured is: don’t be stubborn. When you’re wrong, you’re wrong, and you change. I think I’m right right now, but I don’t know what’s going to happen with them.

Nassetta expects Hilton to have close to a million rooms and 100 million Hilton Honors members this year. “We’ve grown the system, I think, 60% since I got here without buying a damn thing.”

Nassetta expects Hilton to have close to a million rooms and 100 million Hilton Honors members this year. “We’ve grown the system, I think, 60% since I got here without buying a damn thing.”

Nassetta expects Hilton to have close to a million rooms and 100 million Hilton Honors members this year. “We’ve grown the system, I think, 60% since I got here without buying a damn thing.”

AW: Even before you became chairman of the World Travel & Tourism Council last year, you were very engaged in efforts to facilitate and encourage international travel. Does the rise of nationalism across the globe concern you in that regard?

CN: As nationalism rises around the world, the reality is they still have economies, they still have people who need jobs, and we are a means to that end. We just have to make sure they understand what the positive contribution is of travel and tourism: One of the biggest industries on Earth, 10% of global gross domestic product. One in 10 jobs in the world. One in five new jobs in the world. It’s an engine of opportunity.

And it’s important that we make sure governments around the world understand there’s also the responsible contribution. That’s why the sustainability part of it matters a lot. I think we are such a constructive and positive force in the world that it’s hard to deny us.

I’m not worried. Everything in life ebbs and flows. You have these waves of things that happen, and then the pendulum swings back and forth.

AW: Earlier today when you interviewed Goldman Sachs CEO David Solomon onstage, you asked what his most memorable hotel stay was. I’ll finish with the same question to you.

CN: It is always the last one I was in. So where was I last? Oh, I was at a DoubleTree in Little Rock, Ark. My in-laws just had their 60th anniversary, and they celebrated it in the same chapel where they got married, and they renewed their vows. I had a spectacular time. The team was amazing. All my kids flew in from all over the country, and the staff couldn’t have been more hospitable. The property is nice, but the people were amazing. So as always, my most memorable stay was my most recent.

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