Marriott: Larger loyalty base, lower costs offset difficulties

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Marriott: Larger loyalty base, lower costs offset difficulties

Marriott International CEO Arne Sorenson said last week that a larger loyalty-program base, lower costs and better cross-marketing among its 30 brands will enable the world's largest hotelier to offset the impact of flattening demand, an increase in room supply and the challenges of integrating the 11 brands that formerly constituted Starwood Hotels.

Sorenson said that only 16% of the combined 85 million Marriott Rewards and Starwood Preferred Guest loyalty members belonged to both programs, giving the company an opportunity to gain substantial incremental business. He also said that Marriott will cut costs at both the corporate and property levels, primarily by negotiating more favorable OTA agreements for the former Starwood properties. Such cost-cutting will be essential, as Marriott is poised to expand its presence, both via room numbers and brand count.

While Marriott and the former Starwood properties will now account for about one in seven U.S. hotel rooms, the combined company accounts for more than a third of the domestic development pipeline. Globally, Sorenson forecast that next year Marriott will boost its room count, which currently stands at about 1.2 million, by 6%, or about 70,000.

Marriott is tasked with overseeing a glut of brands, especially in the upper-upscale market where Marriott legacy brands, such as its eponymous badge and Renaissance, had competed against Starwood's Westin and Sheraton.

"If we had not merged with Starwood, would we try to build 30 brands from scratch? Probably not," Sorenson said in a Nov. 8 conference call with analysts. "They all have substantial capital that has been invested in them, particularly by the hotel owners who have made deliberate bets about which flag they put on their hotels. And we don't have the power to, nor the desire to, try and convince them that those bets have not been good bets."

Sorenson made the comments the day after Marriott released its third-quarter earnings results, which included eight days during which Marriott owned Starwood after closing on the $13 billion acquisition Sept. 23. The results suggested that Starwood's performance lagged that of Marriott, whose legacy brands boosted the company's global RevPAR by 2.5% from a year earlier. In contrast, Marriott's pro forma RevPAR, factoring in Starwood's third-quarter results, rose just 2.2%.

Moreover, demand growth will likely slow. Marriott forecasted that RevPAR in both the U.S. and worldwide will advance about 1% next year.

"Clearly, North American demand growth continues to moderate," Sorenson said, citing declines in demand from both oil and natural-resources sectors as well as from inbound international travelers. "Corporate customers are clearly cautious."

Sorenson reiterated Marriott's previous estimate that it will cut the combined company's annual expenses by $250 million and that its business would benefit from "the portfolio effect" of cross-marketing all its brands via their websites, loyalty programs and mobile apps.

With such economies of scale in mind, the company will be able to withstand the challenges of running a larger company amid slower demand growth, he said.

"One of the New York tabloids ran a story suggesting that we had buyer's remorse and maybe didn't really want to close the [Starwood] deal," Sorenson said. "That story had zero factual support. We never lost any enthusiasm for completing this transaction, and now, seven weeks [after the] close, we are as enthusiastic as ever."

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