How Marriott's Starwood integration led to Alibaba

Eight percent of Marriott's worldwide rooms are located in China.

Marriott International, already the largest hotel company in the world, is adding to its international wingspan. The company's Q2 2017 call started with a heavy focus on Asia—and with good reason. Arne Sorenson, Marriott's president and CEO, called into the session from Shanghai, where the company just launched a joint venture with Alibaba Group Holding, the largest e-commerce company in the world.

As part of the JV, Marriott will launch a new booking portal on Fliggy, Alibaba's travel service platform, in a bid to draw in direct bookings from Chinese travelers. Marriott will also allow the Alipay payment app to work at select Marriott properties worldwide. According to Sorenson, the plan is to increase the reach of the company's Marriott Rewards, Ritz-Carlton Rewards and Starwood Preferred Guest programs. In fact, over a period of eight weeks in 2016, roughly 600,000 new Marriott loyalty members joined the system, raising the bar for Marriott's expectations when working with Alibaba.

"We held an analyst meeting in China five years ago, and at the time it was the third-largest source market for outbound travel internationally behind the U.S. and Germany," Sorenson said. "Now it's No. 1, and it's maturing. Visa processes have improved to facilitate outbound travel, and most travelers now travel on their own as opposed to with tour groups."

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At one point during the Q&A session of Marriott's investor call, Sorenson remarked that the JV with Alibaba likely wouldn't have happened without the success of the company's acquisition of Starwood Hotels & Resorts Worldwide. Sorenson also said the integration of Starwood is on track, and while there remains a great deal of work to do, the guest and owner feedback Marriott has received throughout the process has kept spirits high.

"I am incredibly proud of the many people working on this integration, and they have our thanks," Sorenson said.

RELATED: How the Marriott and Alibaba JV will grab Chinese travelers

Marriott also has opened a dozen hotels in China year-to-date, with more than 170,000 hotel rooms open or under development in the region. Eight percent of the company's worldwide rooms are located in China, and revenue per available room was up 7 percent in the Asia/Pacific region in Q2 2017 over the previous year. The largest gains were in India (up 10 percent) and Greater China (up 8 percent).

The JW Marriott Austin

The Numbers

Occupancy in China hung around 70.8 percent during the second quarter, with a total occupancy of 71.4 percent in the Asia/Pacific region, prompting one investor to ask if it will take a few years to stabilize. Sorenson said he suspects these numbers will stabilize slightly lower than those in North America, which exceeded 78 percent.

“There are a number of hotels that have opened very recently [in China], and many markets there are just now being defined. As they mature, they will gain better occupancy,” Sorenson said.

Outside of the Asia/Pacific region, Europe's RevPAR rose 7 percent, which Sorenson credited to strong transient business. "Europe exceeded our expectations, as its bounce back from terrorist events in 2016 occurred faster than expected," Sorenson said.

Elsewhere, RevPAR in the Carribbean was up 4 percent Q2 2017 year-over-year, receiving a boost from slowly abating Zika fears. North American RevPAR was up 3.1 percent, with Sorenson describing Marriott's Q3 2017 guidance as "flattish" with an increase of 1 percent to 3 percent.

"The markets are less volatile than they appear," Sorenson said. "Activity in Washington due to the election in 2016, the shifting Easter holidays had an effect, and excluding shifting Jewish holidays and the [Democratic and Republican National Conventions] which took place last year, RevPAR would be up 1 [percent to] 2 percent. We could say 'steady as she goes.'"

More to Do

As for the company's development pipeline, Marriott is expected to reach 440,000 rooms under development in Q3. Furthermore, the company has $700 million in asset sales planned through 2018, with 18 hotels planned for recycling. Twelve of these hotels are legacy Starwood properties, with the majority located in the Americas and two in Asia/Pacific.

During the Q&A portion of the call, Sorenson was asked if corporate travel is holding back potential RevPAR gains in the U.S., to which he replied that annual gross domestic product reports are better for assessing demand than corporate budgets are. He described GDP numbers as “anemic,” and said there is currently more strength in the leisure segment, which tends to be more price sensitive than corporate travel. Sorenson also said that with thousands of franchisees pricing their hotels on a daily basis and a “radical” transparency in pricing across the industry it is more difficult to move rates this cycle compared to previous cycles.

“It’s not focused on home sharing or disruptors, it’s more about the ubiquity of information,” Sorenson said. “Each passing year it becomes simpler to know the rates of every hotel within our own system. We have the transparency of Marriott.com, on top of other systems, and I think that’s the world we live in. It does not mean that we won’t be able to drive rate in the future, but it won’t be quite the environment we had in years past where there was more flexibility to do that.”

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