When Marriott International announced their $13.3 billion bid to acquire Starwood Hotels and Resorts back in late 2015, I was stunned. For a company as mature as Marriott’s to seriously consider spending billions of dollars to acquire a hotel chain with failing brands like the Sheraton, especially at a time when industry disrupters like Airbnb were stealing serious market share, was ludicrous to me. However, as a hospitality professional and as someone with at least some business sense, I knew there had to be more thought behind such a large acquisition. And when you dig into weeds as thick as what’s surrounding this story, you come up with a pretty nice looking flower in the end.
It’s no secret that there are both obvious benefits and challenges to such a merger. Besides being the new largest hotel chain in the world, both in terms of the number of properties (5,700) and rooms (1.1 million), Marriott has said there are obvious supply chain and marketing benefits that come with increasing economies of scale after the merger. Marriott claims that by the second full year after the merger, there will be nearly $200 million in annual cost savings through operational efficiencies in its supply chain and what may be more formally named a “combined and optimized distribution network”. What Marriott also gains is access to additional markets and guests to serve. Starwood already had a well-established presence in extremely profitable markets in South East Asia and Africa. Through the acquisition, Marriott not only takes over the profit streams of these hotels but also has the rights to construct further hotels in these markets where they previously had no ability or authority to do so. As for the guests, the benefits are slightly murkier but can definitely be realized in the coming years. Starwood Preferred Guest (SPG) members aren’t necessarily happy about becoming Marriott Rewards (MR) points members, but through the linking of accounts (whereby 1 SPG point equals 3 MR points) guests of both systems will have access to an unprecedented amount of destinations around the world.
The challenges, however few and far between they might seem, do pose a threat to the long term viability of such an enormous deal. The usual nuisances of online travel agencies (OTA’s) and aspects of the sharing economy, like Airbnb, are only going to grow and eat away at the traditional lodging industry’s profitability. Although Airbnb only holds about 1% of the lodging market share, a study out of Boston University found that an 10% increase in local Airbnb locations led to a 0.35% decrease in hotel revenue. For hotels that already skate by on razor thin profit margins, this is not good news. OTA’s also take a bite out of hotel profits, often times undercutting what a hotel is charging on its own website to steal business or disregarding negotiated rates to charge what it can to maximize the number of rooms sold. As someone who worked for Marriott International and who had to report to senior sales staff about these illicit activities, I know what a burden they can be on hotels who want to increase the amount of guests who book direct. And with only a few OTA’s making up the industry these days (Expedia alone controls 75% of the domestic market for third-party online bookings), there are more opportunities for these companies to exploit their economies of scale and undercut hotel room prices. What’s more, Marriott now has 30 brands to control, and brand cannibalism is a real possibility as competing brands or ones that just haven’t been successful (I’m looking at you Sheraton) don’t get the attention they need to succeed on their own.
However, there is some light at the end of the tunnel (or in reference to my earlier analogy, some more petals behind those thorns). Marriott is not blind to the threat of OTA’s or Airbnb and has strategies to combat both. For one, Marriott has been aggressively attacking the idea of booking through a third-party site by launching its “book direct” promotions and campaigns with the idea that the lowest price and the most benefits in terms of rewards points can be attained by booking directly with Marriott’s website. For Airbnb and other companies of the “sharing economy”, Marriott is unveiling more technology and features, including key card access and concierge communication through the Marriott app, at its current hotels to accommodate millennials and other guests looking for an “upgraded” experience. Marriott has also planned to launch around 150 Moxy brand hotels within the decade, a hotel created “especially for the millennial traveler”. Each hotel will have a contemporary design, approachable service, and a sensible price, and will specifically be targeted to Airbnb customers who want an authentic but cool and exciting experience. For what it’s worth, I think the combined Marriott-Starwood merger has real potential and barring any new revelations, there is much for both the combined company and current guests to gain from this deal.