Marriott Hotels: Strategic Analysis
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Executive Summary
Marriott International Inc. is a leader in the global lodging industry. Marriot has more than 4,400 properties spread across 87 countries. The company has also done well over the last 90 years and has transformed itself from a root beer stand in Washington D.C to a hotel behemoth. According to the 2015 survey conducted by American Customer Survey Index (ACSI) on hotel brands, Marriot is the most liked hotel brand in the world along with Hilton with a score of 81 (ACSI, 2015). Hotel industry was hit hard by the sub-prime recession in the USA and sovereign debt crisis in Europe. Due to sluggish demand, 0.7% YOY growth of hotel rooms from 2010 to 2014, in the existing markets and rising operating cost, 4.8% YOY increase in average input cost, the profitability of Marriott International has plummeted (US Travel Association, 2016). The following document analyses the hospitality industry environment using Porter’s five forces model and PESTEL and further dissects the internal strengths and weaknesses of Marriot using SWOT analysis and VRIO model. Based on the analysis, it has been concluded that Marriott has a competitive advantage over its rivals due to its established brand image (two Marriott brands, JW Marriott (1st) and Fairfield (3rd), ranks in top 3 among all hotel brands in ACSI 2015 survey), employee loyalty (Marriot is the only hospitality industry company to feature in Fortune’s “Best Companies to Work for” for all 18 years the survey was conducted), and economies of scale (759,330 hotel rooms available across the world) (Marriott, 2016). However, even with those advantages, the company is unable to garner a good profit, its 2015 profit percentage of 5.91% is lowest among its peers. To increase revenue and decrease operating cost, Marriot should take strategic initiatives, such as divesting non-performing assets, revamping green initiatives, introducing express check-ins for loyalty program members, expanding into emerging economies and revisiting its employee remuneration programs.
Introduction 5
History 5
Mergers 6
Brands/Products 8
Programs and Controversies 8
Porter’s Five Forces Analysis 9
SWOT Analysis 15
PESTEL Analysis 17
Political 17
Economic 17
Social 18
Technological 18
Environmental 19
VRIO Analysis 20
Employee Loyalty 20
Economies of Scale and Superior Reach 21
Recommendations 21
Conclusion 23
Bibliography 25
Introduction
History
Figure: Marriott Marquis, Washington DC. 4000th Marriott hotel (Marriott, 2016)
Marriot International Inc., more commonly known as Marriot, is one of the largest hospitality group in the world. Marriott was founded by John Willard Marriott in 1927 in Washington D.C as a root beer stand (Marriott, 2016). The first Marriott hotel was opened in 1957 in Arlington Virginia. J.W. Marriott Jr., also known as Bill Marriott, took over the company leadership in 1962 and in his 50-year tenure as the head of the company he made Marriott one of the largest hotel chains and one of the most respected brands in the world (Marriott, 2016). Marriot was the first hotel company to provide the option of booking Marriott hotels via online channels in 1995 (Marriott, 2016). JW Marriott Marquis Dubai is the tallest hotel in the world. Although in its initial 60 years of existence the company had grown organically, in the last 20 years, it grew primarily through mergers and acquisitions. The company posted revenue of $14 billion and a net profit of $881 million in 2015 (Morningstar, 2016).
Mergers
In the mid-1990s, Marriott was growing at a fast rate in the mid-segment. However, it also wanted to expand its high-end luxury segment quickly as it saw a huge opportunity in the US market. At around that time Ritz-Carlton, a luxury hotel chain based out of New York, was posting losses year after year in the 1990s (Marriott, 2016). Marriott could have expanded its JW Marriott brand (capital intensive option) but instead acquired Ritz-Carlton Hotel Company at an estimated expenditure of $331 million (Marriott, 2016). It was successfully able to turn around the fortunes of Ritz-Carlton brand and currently has about 80 Ritz Carlton hotels in its possession. At the luxury segment, Marriott now has two well-established brand.
Figure: Revenue by Geography – Marriot (Left) and Starwood (Right) (Marriott, 2016)
According to Fortune’s brand ranking, Starwood till 2014, was one of the top five hotel brands in the world. It earned 43.1% of its revenue from outside North America whereas, at that time Marriott earned more than 87% of its revenue from the USA only (Marriott, 2016). Additionally, unlike Marriott, Starwood has seen huge ups and downs in its operations and the processes were not standardized. This was a perfect strategic fit for Marriot. Merger with Starwood would diversify Marriott’s North America and international portfolio. Marriott would be able to use its vast knowledge of standardized operation to Starwood’s and would be able to make the brand profitable. It acquired Starwood Hotel chain in 2015. However, due to some disagreements in the price quoted, the deal is still not closed (Marriott, 2016).
Brands/Products
Figure: Marriott Hotels and Vacation Clubs (Marriott, 2016)
Marriott Hotels and Resorts is the signature brand of the company. Bvlgari, JW Marriott, and Ritz Carlton cater to the luxury segment customers. In the lifestyle and daily serve segment, Marriot offers lodging options such as Renaissance, Courtyard, Fairfield, Residence Inn and TownePlace Suites (Marriott, 2016). Additionally, Marriot has a presence in the timeshare market through its Marriot Grand Residence Club and the Residences at Ritz-Carlton. Marriott is the only hotel chain in North America to offer trans-fat free food in its hotels (Marriott, 2016).
Programs and Controversies
Marriot has its fair share of misfortune and controversy over the years. It has incurred huge property losses in terror attacks of 9/11 attack (Marriot World Trade Center), Islamabad bombing (Marriott Islamabad) and Jakarta bombing (Marriott Jakarta). In 2012, Marriot has been fined by IRS for manipulating the tax code to increase profit (FCC, 2014). Marriot also has been criticized for its “envelope please” tip program for housekeepers and Wi-Fi-jamming at its hotels (FCC, 2014). This paper will do an internal and external analysis to understand the current brand positioning of Marriott and what Marriott can do strategically in future to improve the situation.
Porter’s Five Forces Analysis
Competition
Figure: Market Share and Pipeline of Hotel Operators. Marriot and Starwood together are now the second largest behind IHG (Morgan Stanley, 2015)
High – Marriott is one of the largest hotel chains in the world. Despite being a behemoth in the hotel industry, it faces huge competition from all kinds of players, big and small, operating in the industry. Aside from dealing with big competitors like Wyndham, IHG, Hyatt, Hilton, and Accor, it needs to face competition from local boutique players as well in every segment of its business operation (Cheng, 2013). In the North American market, Marriott competes with Hilton (Embassy Suites, Hampton Inn) and IHG (Holiday Inn) in the mid-segment.
Figure: Luxury Segment Competitors (Morgan Stanley, 2015)
In the luxury segment (JW Marriott and Ritz Carlton) worldwide, it faces competition from Hyatt, Accor (Sofitel), IHG (Crowne Plaza and Intercontinental), Westin, Hilton (Hilton and Conrad hotels) and numerous local players (Cheng, 2013). In the European market, the main competitor of Marriot is Accor (Mahan, 2013). In the fast growing Asia Pacific market, Marriot not only faces stiff competition from the global players, but also from well-established local players such as Grand Hotel Group, Taj Group of Hotels, and Sheraton among others. Following the recession of 2008 in the USA and 2010 in Europe, the demand for the mid-segment hotels has gone up but the demand for luxury and upscale hotels has slumped. However, the competition in the mid-segment has intensified after the formation of Choice Hotels group, which offers a wide range of choices for customers starting from Econo Lodge (budget) to Quality Inn, Sleep Inn, Clarion and Comfort Inn (Mahan, 2012). With more consolidation happening in every market globally, Marriot is losing its advantage of economies of scale and multi-market knowledge.
Bargaining Power of Suppliers
Low – In the hospitality industry, staying profitable at a low margin volume is critical for suppliers. The main suppliers for hospitality industries are financiers (banks), food and beverage suppliers, energy and utilities, real estate suppliers and ancillary services.
Given the good financial strength of Marriot and lot of cash in hand, a lot of banks are willing to extend a loan to Marriott for future expansion of investment in properties. Therefore, banks are not in a position to bargain as Marriott has a lot of options (US Travel Association, 2016).
There are hundreds of food and beverage suppliers across the globe for Marriott. Marriott to reduce risk have developed different food and beverage supplier vendors region wise. This also has reduced the overall bargaining power of the suppliers (Cheng, 2013).
Only areas where Marriott has large suppliers with high bargaining power is the energy and utilities. Marriott buys energy from only two suppliers in the USA. Still the bargaining power of suppliers is less because there are other energy companies as well willing to jump in if current suppliers do not perform well (Cheng, 2013). Cost of switching is also minimal for Marriott. Similarly, for other utilities such as internet network, electronic appliances the supplier market is highly competitive.
Bargaining Power of Customers
High – For the customers, the product is more important than anything else. In the past, a well-established brand name ensured high-quality product and service and Marriot through its superior brand image was able to attract a large segment of customers. It still continues to do so but customers now have access to a lot more information. With the advent of internet, a customer can not only compare the facilities of one hotel room with that of others instantaneously but also can look into forums such as TripAdvisor for reviewing customer experiences (Cheng, 2013). Internet-based search engines and hospitality services providers such as hotels.com and expedia.com have connected all the service providers in one place. Customers can compare hotels based on features, customer rating and price for hundreds of hotels before deciding.
Figure: Hotel Bidding feature provided by Priceline
Additionally, some internet portals (Priceline.com) allow the customers to place their request and ask for bids from the hotels (Cheng, 2013). Internet technology has enabled easy availability of information in the hands of the customers which has increased the bargaining power of the customers significantly.
Threat of Substitutes
Moderate-High – There is no major threat for main products (hotels) of Marriott. However, due to cost factors, there is an increasing trend to avail timeshare properties and vacation rental homes over hotels among the customers. The model used by Airbnb is a great example where informal tourism accommodation choices are replacing the traditional hotel accommodation (Guttentag, 2013).
Figure: Phenomenal growth of Airbnb (Guttentag, 2013)
Owners of properties are turning their homes into rental properties to gain additional income. Marriot is planning to add 30,000 additional rooms per year for next 5 years. Airbnb is adding 60,000 rooms per month. This is a real threat to anyone in the hotel industry.
Threat of New Entrant
Moderate – There is always a chance for new players to enter the market. Many boutique hotels mushroom every year directly competing with Marriot in particular cities and geographies. However, entering into hotel industry is capital intensive, so the number of players entering is fewer compared to some other industry segment (Cheng, 2013). The main threat comes from the existing players and not from the new players in the immediate future.
SWOT Analysis
PESTEL Analysis
Political
Political factors make a huge impact on the hospitality industry, especially international travel. Any disruption in international travel due to political conflicts, terror activities and policy changes directly impact the hospitality industry. For example, ISIS bombing in Paris reduced the tourist inflow to Paris by almost 12-15% in the next 6 months (Marriott, 2016). Marriot is present in all major tourist destinations across the world. It operates in over 80 countries so international political stability and travel security are of paramount importance. Otherwise, Marriot and other hospitality industry players will be affected directly and indirectly.
Economic
There are several economic factors affecting Marriott’s business negatively. Strong US dollar, from 2011 onwards compared to all other major currencies, is hurting the revenue earned from outside the USA as the foreign exchange rate is negatively impacting both foreign revenue and profit. On the other hand, a strong dollar is also discouraging foreign tourists from visiting the USA. The same is also forcing organizations to cut down on business travel. Both these factors are hurting Marriott as the USA is Marriot’s biggest market.
China, where Marriot was growing at 24% YOY from 2010 to 2015 and started more than 100 hotels, is suddenly (after the Chinese currency devaluation) witnessing a slowdown in the economy (Marriott, 2016). In fact, the 2015 stock market crash in China and reduction in manufacturing output by 2% YOY (2014 to 2015) show a weakening economy. This economic trend will negatively impact Marriot China’s business. European economy continues to underperform. Apart from Germany, UK and a few other nations all EU countries are witnessing negative GDP growth in last 5 years (Cheng, 2013).
Social
One encouraging sign for Marriot is that international travel is witnessing significant increase. In the last two years, the number of travelers traveling internationally has increased by almost 25% (Marriott, 2016). Although the average outlay per travel has come down by 7% during that period, the overall revenue from the international travel has increased significantly. This gives an opportunity to Marriott to tap the international tourist market. For example, the number of Indians traveling to overseas destinations has increased by almost 96% from 2008 to 2013 (Cheng, 2013).
Technological
Technology is changing the way hospitality business is done. Technologies such as NFC can help the automation of check-in process and access to rooms. Loyal customers register with Marriott can set up passcodes that they can use in auto check-in kiosks after reaching the hotel. Marriott can provide constant Marriott cards to its loyal customers. These cards can be pre-authorized so that customers can directly go to their rooms without the need for check-in or check-out. Rooms can be auto-assigned and customers can use the constant card to get access to the rooms (Guttentag, 2013). This hassle-free check-in check-out experience will certainly be a differentiating factor for customers when they choose their hotels.
Environmental
Any sudden increase in fuel cost can reduce demand for travel as any mode of transport will be costly. This can negatively impact the demand for Marriott’s hotel rooms. Long term low fuel cost can positively impact demand. Additionally, the concept of “Green Hotel” is becoming a new trend. Almost 34% of the US customers of mid to luxury segment hotels prefer “green” hotels over others. Therefore, environment-friendly initiatives are necessary for Marriott to remain competitive with its main rivals.
Legal
Marriott operates in more than 80 countries and operates within the legal boundaries of the host country. In some cases, the standards maintained by Marriott is far superior to the standard law of some countries. However, this sometimes acts as a barrier as the overall cost to operate and maintain a highly standardized process costs more than that of the local players.
Legality of Airbnb model around the world will also be a major factor affecting Marriott’s business in the coming days (Guttentag, 2013).
VRIO Analysis
After doing the Porter’s five forces analysis and SWOT analysis above, it seems that two most crucial factors (except superior brand image) that create competitive advantage are employee loyalty and economies of scale and superior reach.
Employee Loyalty
As discussed above, Marriott is known for its great treatment of employees in terms of salary, training, family programs, and perks. As a result, Marriott employees stay longer in the organization creating a highly valuable, rare and organized knowledge pool (McGlasson, 2012). This creates a differentiation. Creating a great pool of employees is easily imitable and requires culture change among other things and therefore, it is time taking. This resource (employee loyalty) currently provides Marriott with a huge long-term competitive advantage over its competitors. However, in recent years, to reduce cost, Marriott has labeled the house cleaning staff as tip employees and reduced their salary to $8.50 per hour (Marriott, 2016). This has created a widespread dissatisfaction among employees and now threatens to destroy the resource (employee loyalty) that it has created with decades of effort.
Economies of Scale and Superior Reach
Marriott is among a few global hotel chain companies that have a global presence. It operates in over 80 countries and has over 4200 hotels and other vacation properties. Because of this superior reach and huge size, Marriott is able to achieve economies of scale by bundling demand. This resource (economies of Scale due to large size) is costly to imitate and provides value (low operating cost) to the company. However, this cannot act as a sustainable competitive advantage for Marriott. Currently, only a few players are as big as Marriott but in the future with more consolidation in the industry, a larger percentage of hospitality industry players will be able to imitate this resource and Marriott will lose its competitive edge. This resource only provides a temporary competitive advantage.
Recommendations
As discussed in the previous sections, Marriott is doing well in terms of increasing market share but it has one of the lowest profitability among its peers. Increasing competition, in-house programs like “the Envelope Please” and laidback green initiatives are hurting its brand image and future potential of profitability. Marriott can take the following initiatives to improve its strategic position in the market:
1) To increase low operating margin, Marriott should assess its assets and their utilization. It should either sell the loss-making hotels or convert them to some other brand, which is in demand, to increase operating margin. For example, Fairfield has a low operating margin and: Residence Inn has a good operating margin. Marriot can look at converting some of its Fairfield hotels to Residence Inn. Currently, more than 80 hotels in USA has capacity utilization of less than 20%. If Marriot closes them then they will have instant access to $50 million additional working capital.
2) Green initiatives like “Drop the Towel” when you want to change it is giving Marriott some brand recognition as a “Green” company but it is still way behind in terms of energy efficiency of Hilton Hotels or Intercontinental Hotels. Energy consumption is 10% of the total fixed cost, so a small reduction will directly improve profit. Marriott has acquired Starwood Hotels that have a stellar “green” initiative portfolio in terms of energy, water, and waste practices. Marriott can learn from Starwood and use its processes across the organization. If Marriott can reduce energy consumption by 20% then it will translate to roughly 1% increase in operating profit.
3) Marriott has given huge focus towards loyalty program over the years. Loyalty is an important factor to make repeat customers, but loyalty programs are easily replicable. Almost all the competitors of Marriott offer same kind of loyalty programs. Therefore, Marriott should introduce a loyalty feature that cannot be easily replicated. Marriot has superior access to IT technology. It can use that to provide express check-in to its loyalty program customers by providing them with permanent card and configure those in the backend based on their hotel stay.
4) Expansion in emerging market is important for the company to keep the growth rate going as it is witnessing slow growth in Europe, North America, and China. India and Middle-East should be the next target markets for Marriott for future expansion.
5) Finally, VRIO analysis showed that employees are a big factor for Marriott’s success. Therefore, instead of implementing initiative like “the Envelope Please” campaign, which is decreasing employee morale and tainting the Marriott brand image, Marriott should look at initiatives to restructure the salary of its employees and try to improve productivity through standardization and increase its efficiency.
Conclusion
Marriott is a successful hotel chain. Over the last 90 years, it was able to expand its business across the globe successfully. It offers a wide range of lodging options to its customers and Marriott brand means quality and consistency to many of its customers. However, even an established brand like Marriot is facing several issues. Its major markets such as North America, and Europe, the company is witnessing a sluggish growth in demand. Competition and consolidation in the industry have gone up. Marriot has also been involved in tax fraud and labor issues in recent years. Operating margin for Marriott is one of the lowest among its competitors. Marriot can start long term strategic initiatives such as the closure of non-performing assets, revamping green initiatives, introducing express check-ins for loyalty program members, expanding into emerging economies and revisiting its employee remuneration. This will help the company decrease operating cost, augment revenue growth in the long run and increase customer satisfaction through improved employee loyalty.
Bibliography
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