Munificent Marriott to invest $140M in employees as upshot of tax reform

The 398-room hotel was acquired through a joint-venture with Middleton Partners, and marks Arbor Lodging’s fifth Marriott International-branded property.
The Marriott Schaumburg. Photo credit: Marriott International.

Arne Sorenson, president and CEO of Marriott International, called the company’s performance in the final quarter of 2017 as the “icing on the cake” of a terrific year. Now, the company is serving some of that proverbial cake back to its employees.

During Marriott’s Q4 2017 earnings call, Sorenson reported that Marriott’s adjusted net income for the quarter totaled $415 million, a 24-percent increase over the same period last year. The company’s total worldwide revenue per available room also increased 4.6 percent in the fourth quarter, and was up 3.9 percent in North America.

For the full year, Marriott's RevPAR increased 2.1 percent, and the company added more than 76,000 new rooms to its system throughout 2017, including 11,000 rooms converted from competitor brands. The company’s worldwide development pipeline weighs in at 2,700 hotels and more than 460,000 rooms, including an estimated 34,000 approved rooms not yet subject to signed contracts.

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Sorenson said during the call that an already strong quarter for the company was amplified by Marriott’s sale of Avendra to Aramark for $1.35 billion, resulting in a $659-million gain for Marriott. On top of this, a change in tax provisions delivered an additional $259-million gain that helped boost Marriott’s performance beyond its initial projections. Last year Marriott returned $3.5 billion to shareholders in 2017, and Sorenson said this year a portion of the company’s new gains will reinvested into its employees.

“The takeaway is that our effective tax rate is dropping 8 percent to 22 percent… and hopefully as a result, we will see a stronger economic climate in the United States,” Sorenson said. “As we considered how we might leverage this good news, we considered our long-term cultural maxim that in the hospitality business strong guest loyalty and economic results are derived from high associate satisfaction and engagement. Attracting and keeping the best talent is critical to us, so we plan on investing roughly $140 million for 2018 in our most important asset—our people.”

As part of the investment, Marriott will be increasing its associate contribution match for retirement savings by up to $1,000 for associates in the U.S., and will invest in other associate programs throughout the year. Marriott will fund $70 million of the cost for this initiative, and will tap into Avendra’s proceeds to cover the remainder.

Seeing Dollar Signs

Sorenson said he has been struck by the optimism he has seen amid CEOs of U.S. corporations going into 2018, particularly when it comes to tax reform, and he hopes that this will prompt more business travel spending in the coming months.

“Sadly, these [statements] don’t immediately translate to someone’s team going out there and spending more on hotels, but if that optimism translates into better corporate profits and better investing, then it bodes well for corporate demand in our industry,” Sorenson said.

With Marriott currently housing 30 brands under its umbrella it would be unreasonable to expect Sorenson to address all of them in the time allotted.  He did say that he was pleased with the synergies Marriott has gained through its acquisition of Starwood Hotels & Resorts, and hinted that future synergies will be realized through 2018 and 2019, particularly on the loyalty and credit card side of the business.

Photo credit: Marriott International

In considering the status of the Sheraton brand, Sorenson said the process of updating Sheraton was well underway, and the deliberate pace of the overhaul is very much on purpose.

“We can’t publish [new] standards and give [owners] a week to comply, that’s not fair to the relationship we have with those owners,” Sorenson said. “At the same time, the early [hotels] to fix are the worst ones… and we know there are a number of hotels out there that won’t meet our standards. So we have accelerated our efforts there to hopefully renovate, or [drop them] from the system.”

Questions about OTAs and direct bookings were inevitable, and Sorenson said direct bookings constitute roughly 70 percent of Marriott’s total bookings. Meanwhile, OTAs actually gained a percentage point of Marriott’s total bookings in 2017, reaching 12 percent, but Sorenson doesn’t see that number increasing in any meaningful way.

One of the most effective methods for growing direct bookings is through guest loyalty programs, and it’s no secret that with nearly 110-million members, Marriott’s loyalty program is a heavyweight. In fact, in 2017 loyalty member stays accounted for more than half of Marriott’s occupied rooms. Last year, the company also implemented new credit card agreements, contributing to brand management and franchise fees totaling $695 during Q4 2017.

“The Starwood portfolio had more of a reliance on third parties… and as our loyalty program gets stronger and the clarity of the benefits to loyalty members becomes clearer we’ll feel better about our ability to drive direct bookings throughout the cycle,” Sorenson said. “We’ve seen great shifts to direct channels in the past few years, even with anemic demand growth, and our tools are only going to get stronger.”

Ignoring the Negative

In its forward-looking statements, Sorenson said Marriott is adopting a new accounting standard, which he anticipates will result in a negative impact of $50 million for the first quarter of 2018. Beyond that, the company expects system wide RevPAR in North America will be flat, or increase up to 2 percent due to a poorly-placed Easter holiday and a lack of travel when compared to last year’s Presidential Inauguration and the Women’s March in Washington D.C.

As the call neared its end, Sorenson was asked to discuss Marriott’s snafu in China at the outset of 2018, and how it may impact the company's first quarter results. Marriott drew China’s ire after listing Tibet, Taiwan, Hong Kong and Macau as separate countries in an online survey, when China claims each of these territories as its own. The error drew an apology from Sorenson after China unceremoniously shut down the company’s website and mobile app in the country for a week.

Sorenson said that Marriott doesn’t expect to see a measurable financial impact from the shutdown, but admitted the year is still young. The lesson learned? Third parties can sometimes be difficult to trust.

“It’s a classic story, we relied on a third party to deliver an online customer survey to us,” Sorenson said. “We should have caught it, even though it was by a third party, and we didn’t catch it. We are moving as quickly as we can to look at all the stuff we have exposed to customers online… to ensure we aren’t making similar mistakes in the future.”

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