Marriott turns to international markets in face of slowing U.S. growth

The Kansas City Marriott. Photo credit: Marriott International (THG kicked off its renovation celebration on April 11 with a ribbon cutting ceremony and travel themed entertainment from around the world, followed by tours of the 381-room property.)

Marriott International likes what it sees internationally, part of the reason why it's putting a larger development focus on destinations such as Greater China and other Asia-Pacific growth regions.

First-quarter 2018 numbers are in for the Bethesda, Md.-based hotel company with comparable systemwide revenue per available room rising 3.6 percent worldwide versus the same time last year. Of that growth, 7.5 percent came outside North America. In the quarter, the company added nearly 15,000 rooms, including roughly 1,600 rooms converted from competitor brands and approximately 5,800 rooms in international markets.

Asia-Pacific was a standout, accounting for double-digit RevPAR growth of 10 percent, stronger than the mid-single growth Marriott expected. Greater China RevPAR was up 12 percent in the quarter year-over-year.

In India, the fastest-growing economy in Asia, Marriott opened its 100th hotel in April, the Sheraton Grand Bengaluru. Marriott now has roughly 20,000 rooms in the country.

With half of Marriott's pipeline outside North America, CEO Arne Sorenson was clear about the development picture: "It skews toward fast-growing international markets," he said. 

Marriott's partnership with Alibaba is further evidence of the company's strategy to expand market share in the region. Through the new partnership, Chinese users are able to book Marriott hotels directly through Alibaba's website, and will be able to use the popular Alipay payment app when staying at select Marriott properties.

At quarter-end, Marriott's worldwide development pipeline increased to more than 2,700 hotels and nearly 465,000 rooms, including roughly 34,000 rooms approved. First-quarter reported net income totaled $398 million, a 7-percent increase from prior year results. 

In Europe, RevPAR was up 4 percent, deflated somewhat by London, which saw flat RevPAR growth, hampered by weaker demand from financial services that was likely Brexit related. 

The U.S. story is different. Cost pressures have made it tougher on operators, resulting in narrower margins, and made it tougher on developers and owners to build new hotels. 

Sorenson's comments on the operating environment were relatively bleak. "We have seen the cost of land increase, the cost of construction increase, the development period take longer, which impacts cost of capital, and we are on the front edge of seeing the cost of debt increase," he said. Somehow, Sorenson remains sanguine. "There is a strong sense," he continued, "that even though returns are less, [the industry] is still healthy compared to returns on other real-estate classes or investments."

Select-service hotels continue to be a developer's best bet for returns, in part because of less volatility, Sorenson said. "There is increased proof that those hotels can last and be competitive for decades. While RevPAR growth at 2 percent to 3 percent is not that robust, hotels in absolute terms are trading well; there is strong occupancy and performance. There are still attractive investments."

Sorenson cited propitious news around its U.S. development pipeline, with signings up 10 percent in the first quarter versus same time last year. He cited new Marriott brands Moxy and AC as helping drive it. 

Still, getting a hotel built and up and running is an increasingly arduous project. Sorenson cited construction delays that stem from a tighter labor market. Construction resources, in the U.S., are dispersed on account of, Sorenson pointed out, hurricane recovery work in Florida and Texas and other nationwide infrastructure work. "It's adding up to put pressure on construction resources," he said.

Sorenson also pointed to a more recent trend in hotel development: select-service suburban projects are falling to the wayside in favor of similar select-service hotel stock that is being constructed in urban cores. He said that this change has happened in the last few years and said that urban build-outs have become more customized and take longer to be completed than suburban properties.

Home-Sharing Play

One of Marriott's larger announcements in Q1 was its entry into the home-sharing space with a six-month test trial in London that it launched in April in partnership with Hostmaker, a London-based homestay property-management company. The trial is being done via Marriott's Tribute Collection brand. By visiting, travelers are be able to book a stay in London homes that will be considered members of Marriott’s Tribute Portfolio.

Sorenson was coy to make any determination on Marriott's future in the home-sharing space, but he said the company did not get into it if it didn't feel there was runway. "It will take us a few months to learn the lessons, but if it all goes well, we’ll look to extend to other cities," he said. "Our plan is to learn as we go. We want to make sure we are delivering a high-quality service experience and whole homes."

The home-sharing platform skews toward the higher end of the market, where, Sorenson said, "branding can make a difference."

No definitive decisions have been made as regarding what cities might be next and, furthermore, what brands could be attached to it. Sorenson said that Marriott had been watching the space for years, but wasn't ready to dive in until he knew it was right. Part of his reluctance, Sorenson said, was due to his overall distrust of the home-sharing space. And while not calling out Airbnb specifically, Sorenson raised his concerns, referring to home-sharing at one time and still in some cases "fundamentally illegal."

"Many started with a business model that didn’t comply with the law," he said. "We didn’t jump in quickly. Now, we've figured out we can run it in a way that fully complies with the law; payment of lodging taxes, including compliance with regulatory rules, the number of nights a home can be rented out, etc.

"Some of these platforms have grown to millions of units, a paralyzing array of choices. There is a lack of branding and product; we can bring our brands and deliver a better product."

The home-sharing platform will also be linked to Marriott's loyalty program, a connection, Sorenson said, that could also lead to business travel in the sector. Home-sharing skews toward leisure. "This could be an advantage," he said.

Marriott's dip into home-sharing is an inflection point for the company, which has been traditionally a hotel operator/franchisor. Now, the company is looking to get into businesses peripheral to its own, yet within the travel landscape. Beyond home-sharing, how about cruise? Last month, Marriott announced The Ritz-Carlton Yacht Collection, a new venture from the hotel brand that includes three yachts with the first to launch in 2020.

Sorenson also said the integration of Starwood is running smoothly. He said that by fall 2018 there will be a single unified reservations system. Hotel owners, he added, are seeing cost savings as the integration continues.