Improving the Operating Strategy of Marriott
Improving the Operating Strategy of Marriott
The purpose of the report is to develop a recommendation for improving a company’s current strategy in order to remain sustainable in a highly competitive economic environment. The recommendation will be based on an analysis of both the external and internal factors that affects the company. This includes both qualitative and quantitative factors since the report is segregated into (1) environmental scan and risk analysis, (2) ratio analysis, (3) financial statement analysis, (4) weighted average cost of capital, and a (5) strategy development. The company chosen to be analyzed is Marriott International, which is principally based in Maryland, USA (Yahoo, 2017).
The core business of Marriott is the operation, licensing and franchise of hotel and timeshare properties (Yahoo, 2017). Though the company is based in the United States a majority of its managed properties are located in the North America region along with other International properties (Yahoo, 2017). The effect of the company’s diverse operations and markets means that Marriott needs to regularly modify its strategy to capture and retain the interest of their target markets (Ioncica, Tala, Brindusoiu and Ioncica, 2008, p.213). The increasingly competitive environment was further worsened by the number of local, regional, and international competitor brands such as Hilton, Intercontinental, and Holiday Inn (Yahoo, 2017).
But one advantage of the Marriott brand is that it is perceived as successfully embedding its strategy in the excellence of its guest services especially in its daily operations (Enz, 2011, p.207). The reason for this is that the company management trained its employees to always be aware of the company’s strategic position (Marriott, 2016, p.v) as reflected in its customer service when compared to other competitors in the hospitality industry (Enz, 2011, p.207). The result of a constant improvement in its guest service training is that Marriott was able to increase its adjusted EBITDA by 13% in 2015 when compared to the previous year (Marriott, 2016, p.i).
Marriott’s management expanded its potential growth by using the retained profits to reinvest into the company’s operations through competitor brand acquisitions (Marriott, 2016, p.ii). This was seen in the acquisition of competitor brands Delta and Starwood as well as the partnership agreement with Eastern Crown Hotels, which is also operated by Marriott (Marriott, 2016, p.ii). However, despite the decline in the number of national chain competitors the hospitality industry is perceived by Ioncica, Tala, Brindusoiu and Ioncica (2008, p.214) to be highly competitive. This is due to the fact that the industry is highly volatile because the tourists/guests create a high or low demand for hospitality products and services.
The reason for this is that hotel chains normally offer the same facilities such as health clubs, restaurants and bars resulting to little distinctions between competitors leading to a more intense competition for customers/guests (Kandampully and Suhartanto, 2000, p.346). But despite the high level of similarity between competitors the hotel brand can distinguish itself through a better service quality perception of the customers/guests (Mei, Dean and White, 1999, p.136). For the customers, the higher competition between hotels is considered to be beneficial since it increases their room choice as well as receiving better service and value for money (Kandampully and Suhartanto, 2000, p.346). This results to a higher dependence on the consumer/guests especially since the hospitality industry’s core product is the room along with the additional products and services (Ioncica, Tala, Brindusoiu and Ioncica, 2008, p.214).
Ratio Analysis
Liquidity Ratios
Figure 1. Liquidity
The current ratio and quick ratio is seen to have the same values due to the fact that Marriott (2016, p.54) does not have incur or report inventories in their consolidated balance sheet. The reason for this is that Marriott does not sell any tangible products but instead focuses on a service to its guests (Marriott, 2016, p.ii). The current ratio is seen to have declined in 2015 at only 1.24 when compared to the previous year of 1.30. This reveals that the company may have focused less on remaining liquid in order to expand its operations in order to remain profitable. This was concurred by the fact that Marriott is currently managing 1,663 properties with an expected addition of the 600 under construction and the planned acquisition of 160 more properties in the future (Marriott, 2016, p.ii).
The decline in liquidity was also concurred by the decline in the working capital to $264 million in 2015 when compared to the $372 million in 2014. The effect of the decrease in working capital is that Marriott may incur potential difficulties in paying off its immediate creditors and employees. But this was countered by the increase in the adjusted EBITDA by 15% as well as the improvement in the revenue per available room of 5% (Marriott, 2016, p.ii). This is because the company was able increase its average room occupancy in North America to 74%, which is higher by 5% from the previous year (Marriott, 2016, p.ii). The implication is that despite a decline in the liquidity focus Marriott management believes that this is not an issue with regards to acquiring additional working capital.
Asset Management and Efficiency
Figure 2. Asset efficiency
The exclusion of the inventory values in the balance sheet means that the asset efficiency analysis is further limited. Due to the fact that the company’s acquired revenues is based on the rental of rooms to guests then the receivable turnover increase is perceived as a favorable effect of the company’s strategy. The implication of a higher receivable at 13.13 in 2015 reveals that Marriott tightened its receivable days so that the customer/guest needs to pay for their room sooner. This was concurred by the lower receivable days of 28 in 2015 when compared to 29 days in 2014. The reason for this is that Marriott management may need to collect their receivables faster in order to have an adequate working capital due to a lower liquidity level.
The faster receivable collection is due to the fact that the company needs the funds to invest in additional properties. This focus of asset expansion was seen to have improved the asset turnover from 3.64 in 2014 to 5.08 in 2015 implying that Marriott management is maximizing its asset usage. This asset turnover improvement revealed that the choice of properties in previous years is seen to be highly beneficial to the company in 2015 since it generated higher revenues. Future improvements to revenues and profits are expected to be enhanced due to the current 600 properties under construction with an expected 97,000 more rooms to be added to the property lineup (Marriott, 2016, p.ii).
The benefit of a faster receivable collection period is that a company can pay off its obligations faster. This strategy was seen to be implemented in Marriott since it was able to pay its creditors at an average of 18 days in 2015 when compared to a longer 19 days in 2014. The implication of this faster payment strategy is that creditors are more willing to either lengthen the credit terms or allow a higher product and service value on credit. The additional benefit is that reliable creditors can expect to increase their sales from Marriott since the company is continuously expanding their operations (Marriott, 2016, p.ii).
Profitability Ratios
Figure 3. Profitability
The gross profit margin increased by 1% in 2015 at 15% revealing that the company was able to improve the control of its property costs. This was due to a lower cost on the owned and leased properties inclusive of its general and administrative management as seen in the most recent statement of income (Marriott, 2016, p.52). The effect of this improvement in cost was further reflected in the net profit margin since it was also better by 1% in 2015 at 6% when compared to the 5% in 2014. The implication of these two ratios meant that the company management was able to improve their profitability in 2015 due to a better control of costs.
One potential reason for this is that the company was able to retain valuable administrative and general operating employees due to a good profit sharing plan (Marriott, 2016, p.59). This employee management strategy was concurred by the fact that the revenue per employee improved to $113,616 in 2015 when compared to the $111,709 in 2014. Another reason for the better revenue may be due to the training given to potential employees to develop professional hotel careers (Marriott, 2016, p.iv). This was seen in the tie-up with the Rwandan-based Akilah Institute for Women where young women are trained to enhance the Rwandan travel industry (Marriott, 2016, p.iv). The customer-focused training given to Marriott employees was also reflected in the company profits as concurred in the improved net income per employee of $6,737 in 2015 against the lower $6,097 in 2014.
The improved profitability was seen in the higher return on assets at 2015 with 11% when it increased from the 9% in 2014. The implication is that the company management was able to further maximize its assets through a better control of costs as well as the choice of profitable property expansions. This assumption was reflected in the improvement in the asset turnover under the asset management analysis segment. This better profitability was also seen in the return on equity when it improved to -24% in 2015 when compared to the -34% in 2014. The negative value may initially be perceived as a negative indicator of financial performance but a close examination of the balance sheet revealed that this was due to a higher value in the treasury stock (Marriott, 2016, p.54). Marriott management focused on repurchasing some of its stocks in order to improve the shareholder value or return (Marriott, 2016, p.ii).
Gearing Ratios
Figure 4. Gearing ratios
The increasing focus to improve the shareholder values declined the shareholder’s equity to a negative figure. The resulting effect is that the gearing ratio was perceived to have significant increased to 2.26 in 2015 when compared to 1.58 in 2014. But a close examination of the ratio components revealed that the reason for this ratio increase was due to the higher shareholder equity deficit. The result is that the initial perception may be seen as highly negative by the company shareholders since the long-term debt increased from $5,995 million in 2014 to $6,439 million in 2015 (Marriott, 2016, p.54). However, this can be countered by the fact that the company was able to acquire $11,098 million in treasury stock when the company’s actual book value is only $2,826 million in 2015 inclusive of the additional paid in capital (Marriott, 2016, p.54).
The implication is that despite an increased dependence on long-term debt by another $360 million the company was able to decrease its equity dependence by $1,875 million (Marriott, 2016, p.54), which is more than 5 times higher than the added long-term debt. But the increase in debt also resulted to a higher interest cost of $167 million from only $115 million in 2014 (Marriott, 2016, p.52). The better profit and a higher dependence on debt was reflected in the times interest earned, which declined from 10.08 in 2014 to only 8.08 in 2015. The ratio revealed that the company may have a harder time paying off its interest obligations if it was unable to further improve the revenues or decrease its debt values. However this assumption was countered by the cash debt coverage when it increased to 15% in 2015 when compared to the 14% in 2014. The reason was that despite the increase in obligation values the company was able to improve the cash generated from regular operations to $1,430 million in 2015 from the $1,224 million in 2014 (Marriott, 2016, p.55).
Investment Ratios
Figure 5. Investment ratios
The effect of the various strategies implemented by management was initially perceived by its shareholders to be minimally improved since the dividend cover only increased by 0.02 to 3.40 in 2015. The reason for this minimal improvement was due to the fact that the dividend per share was increased from $0.77 in 2014 to $0.95 in 2015 (Marriott, 2016, p.52). This means that the shareholder returns was actually better in 2015 as concurred by the higher dividend yield of 141%. This is despite the fact that the market value of the share declined in 2015 at only $67.04 when compared to the $78.03 in 2014 (Yahoo, 2017). One potential reason for the lower market value may be due to the lower number of available for trade shares because Marriott has retained some of its shares under treasury stock.
Financial Statement Analysis
Figure 6. Financial statement computation (appendix a)
The cash generated from normal operations is seen to be significantly high at $1,430 million in 2015 (Marriott, 2016, p.55) but some are already allocated to various capital investments. This resulted to only $1,179.75 million in free cash flows which can be used for expansions and normal operations. The effect is that the implemented strategies are perceived to be operating effectively in generating more than enough profits for the company’s regular operations. The potential outcome is that the company can further expand its property operations as concurred by the planned development of 160 more properties in the future (Marriott, 2016, p.ii).
The decline in the market price of the company stock is perceived to be a potential decrease in the investment reliability of the shareholder as seen in the lower market value added at $21,509.79 million. However, this was countered by the negative value of the invested capital since it revealed that the company is holding back some of its previous profits in treasury shares for future property acquisitions. The purpose of which is to decrease the dependence on debt, which have been primarily used by other competitors such as Delta and Starwood for their expansion (Marriott, 2016, p.ii). But the wrong investment and expansion decision of the competitor brands has resulted to the sale of their company to Marriott, which is now part of Marriott’s hotel portfolio (Marriott, 2016, p.iii). This means that despite the declined perception of the shareholders as seen in the market value added Marriott is still able to generate a positive free cash flow, which could be used for its further growth expansion.
The better profitability of the company in 2015 was only minimally affected by the net operating capital value since the WACC has a negative value. The result of which is that the economic value added was increased by the product of the net operating capital and the WACC by $270.41 million and resulted to an EVA of $1,195.16 million. The implication is that the better profitability of the company was seen to be beneficial for the shareholder as concurred by the positive EVA value (Berk, DeMarzo, and Harford, 2012, p.971). The perception therefore is that the strategies implemented by the corporate management are seen to be financially beneficial to the company and its shareholders despite the lower market value, decrease in working capital and a negative WACC.
Weighted Average Cost of Capital
The WACC is perceived to be normally a positive value (Berk, DeMarzo and Harford, 2012, p.1026) but in the case of Marriott was generated to a negative value. The reason for this was due primarily to the shareholder equity deficit due to the higher treasury stock value when compared to the other shareholder equity component (Marriott, 2016, p.54). This was seen in the capital component of the WACC since the percentage of equity was also negative resulting to a negative 15.75% when compared to the positive 9.91% for the long-term debt. The negative value was seen to be higher for the capital component and thus resulted to a negative WACC value of 5.84%. The effect of which is that it implies that the company is perceived as a negative investment choice among its competitors and among industries on the part of a potential shareholder. This assumption was seen in the lower market value of the stock but this initial perception is actually false since the company is actually more profitable in 2015 when compared to the higher market valued stock in 2014.
Strategy Development and Recommendation
The operating sustainability of Marriott is primarily dependent on the hotel room decision of the customer, which needs to be prioritized by corporate management. The reason for this is that tourist destinations are also dominated by small and medium businesses that also offer the same services offered by hospitality chains but their distinction is the life experiences offered within each region (Ioncica, Tala, Brindusoiu and Ioncica, 2008, p.214). This means that the continuing focus of the company employees and management must be customer satisfaction since it will eventually result to customer loyalty. This can be achieved by providing unique services or benefits to their customers along with a greater value for money (Kandampully and Suhartanto, 2000, p.346).
Ioncica, Tala, Brindusoiu and Ioncica (2008, p.215) recommends that hotel chains need to innovate their interior décor in order to create a unique environment. This is done to reflect the distinctive factors of the different regions since it can increase the hotel room bookings and service sales (Ioncica, Tala, Brindusoiu and Ioncica, 2008, p.215). But the design innovation is not the only factor for strengthening the competitive advantage of a hotel chain since it will also require the adoption of technology as well as a continuing investment in human resources (Ioncica, Tala, Brindusoiu and Ioncica, 2008, p.215). This is especially useful in the hospitality industry since the hotel chain’s personnel can make the customer/guest feel at home (Mei, Dean and White, 1999, p.136). An unusual strategy recommended by Ioncica, Tala, Brindusoiu and Ioncica (2008, p.215) is considered to be a new trend, which is implementing an increased focus on environment protection (Enz, 2011, p.211). This is done by conserving natural resources through associate and guest engagements as seen in the 22% reduction in water intensity in 2015 (Marriott, 2016, p.iv).
One strategy recommended by Kwon, Bae and Blum (2013, p.81) is the adoption of technology in the form of development and use of mobile applications. The use of a digital platform was already implemented by Marriott when it disclosed that 28% of the hotel room booking came from the Marriott.com and Marriott Mobile applications (Marriott, 2016, p.i). But Kwon, Bae and Blum (2013, p.81) noted that the use of the mobile application were limited to individuals familiar and confident in their smartphone use. This implies that Marriott can further enhance this marketing strategy by encouraging the use of mobile applications through additional promotions. The recommendation therefore is to continue the property expansion, training of employees to improve customer engagement since it can result to brand loyalty, and encouraging the increased use of mobile applications for room bookings.
References
Berk, J., DeMarzo, P. and Harford, J. (2012). Fundamentals of corporate finance (2nd ed.). Boston: Prentice Hall.
Enz, C. A. (2011). Competing successfully with other hotels: The role of strategy. In. M. C. Sturman, J. B. Corgel, and R. Verna (Eds.), The Cornell School of Hotel Administration on hospitality: Cutting edge thinking and practice (p.207-226). New York, NY: Wiley.
Ioncica, M., Tala, M., Brindusoiu, C., and Ioncica, D. (2008). The factors of competitiveness in the hospitality industry and the competitive strategy of firms. South East European Journal of Economics and Business, 5(1), p.213-218.
Kandampully, J. and Suhartanto, D. (2000). Customer loyalty in the hotel industry: The role of customer satisfaction and image. International Journal of Contemporary Hospitality Management, 12(6), p.346-351.
Kieso, D. E., Weygandt, J. J. and Warfield, T. D. (2013). Intermediate accounting (15th ed.). NJ: John Wiley & Sons, Inc.
Kwon, J. M., Bae, J. and Blum, S. C. (2013). Mobile applications in the hospitality industry. Journal of Hospitality and Tourism Technology, 4(1), p.81-92.
Marriott International Inc. (2016). 2015 annual report. Marriott International, Inc. Retrieved from http://investor.shareholder.com/MAR/reports.cfm
Mei, A. W. O., Dean. A. M., and White, C. J. (1999). Analyzing service quality in the hospitality industry. Managing Service Quality: An International Journal, 9(2), p.136-143.
St Louis Fed. (2017). 20-Year Treasury Constant Maturity Rate (GS20). St Louis Fed. Retrieved from http://research.stlouisfed.org/fred2/series/GS20/
Yahoo Finance. (2017). Marriott International, Inc. (MAR). Yahoo Finance. Retrieved from https://au.finance.yahoo.com/q?s=MAR&ql=
Appendix A. Computation for the financial statement analysis
Appendix B. Computation of WACC
