🗞 The Hotel Empire, Powered by Points

Happy Sunday! 👋 

This week we’re taking a look under the hood at the largest hotel company in the world, Marriott.

Let’s dive in!

The Hotel Empire, Powered by Points

The 1980s were boom times for Marriott.

In 1981, they opened their 100th hotel, and by 1989, they had opened their 500th. It was a decade marked by staggering growth.

Marriott systematically added new concepts targeted at specific customer types. The Courtyard by Marriott was introduced for business travelers in 1983, while the Fairfield Inn (1987) was geared more towards value-conscious guests. Shares were soaring, and by the end of the decade, Marriott had become a diversified, international hospitality giant generating billions in revenue.

Then came 1990.

With the commercial real estate market in serious distress, Marriott was on the cusp of bankruptcy. So, CFO Stephen Bollenbach devised a plan called “Project Chariot” that would divide Marriott into two separate public companies.

The existing company would become Host Marriott. Host Marriott would receive virtually all of the physical assets such as real estate holdings, undeveloped land, and project partnerships. Importantly, they would also retain the vast majority of Marriott’s long-term debt.

The newly created company, Marriott International, would retain the service operations and intangible assets. This included the existing management contracts, franchise agreements, trademarks, etc. This business was a cash-generating machine and was left virtually debt-free.

Here’s how those two companies have performed since the separation in October of 1993:

Marriott Today

Let’s say you wanted to open a hotel in your city. What would that process actually look like?

First things first, you’d have to hire an independent consulting firm to conduct a feasibility study on the specific market you’re looking to build in. Based on the results of that report, you would then submit a formal application to a company like Marriott asking to use one of their brands for your location. That application fee typically ranges anywhere from $50,000 to upwards of $85,000.

Once you’ve received your conditional approval for the Marriott brand, you would then use that letter of approval to help raise capital. Importantly, most lenders will not provide funding for a hotel unless you have that franchise approval in hand. Having that brand flag gives lenders a greater sense of security since Marriott’s loyalty program has proven to create higher occupancy rates.

Once you’ve pooled together enough money from lenders and investors, your architects and general contractors would work together with Marriott to get your building up and running. Marriott has very specific architectural and brand guidelines covering every minuscule detail of a property from room size to electrical layout.

Once your property is ready to go, you’d hire a management company (or manage it yourself), connect to Marriott’s central reservation system, and start booking stays.

Today, Marriott International is home to more than 10,000 properties and 1.8 million rooms.

79% of those properties are franchised or licensed, 20% are managed by Marriott, and just 1% are owned outright.

That’s right. The largest hotel company in the world owns just 50 hotels.

How does Marriott actually make money from these properties?

1. Franchise Fees: In a standard franchise agreement (like the one described above), the hotel owner pays Marriott roughly 4–7% of room revenue in exchange for leveraging Marriott’s brands, their booking engine, their operational systems, and access to their loyalty traffic.
   This revenue is extremely high margin for Marriott. All the costs required to develop things like brand guidelines or reservation technology are fixed, meaning that it costs very little to add a new franchisee.

2. Management Fees: In locations where Marriott is actually the property manager (that includes staffing, accounting, payroll, etc.) they collect an additional 2%-3% of room revenue as well as profit sharing based on certain hurdles.

3. Credit Card Points: Marriott is partnered with banks all over the world to offer co-branded cards. Any time someone swipes that card, the issuing bank (Chase or American Express in the U.S.) buys Bonvoy points from Marriott to award to the cardholder. Marriott sells these points at a wholesale rate above the expected cost of future guest redemptions, and collects the spread as revenue. Over the last 12 months, Marriott has generated around $1B just from this segment alone.

A MOAT Powered by Points

In 1983, Marriott first launched the Honored Guest Awards program. This loyalty program (now named Marriott Bonvoy) has gone on to become even more integral to the company’s success than management probably ever imagined.

Today, Marriott Bonvoy is home to more than 295 million global members, making it the largest hotel loyalty program in the world. This massive loyalty network has become central to Marriott’s competitive advantages.

For customers, the Bonvoy program is a major travel experience improvement. The Bonvoy app allows them to manage the entire booking process end-to-end. From reserving a room to check-in and even acting as a digital room key, the entire process of staying at a hotel is made easier. 

Additionally with each stay, Bonvoy members collect more points. With each incremental point, the inclination for booking your next stay with Marriott grows. This is evident in the booking numbers as more than 2/3rds of Marriott’s global room nights are booked by Bonvoy members. And since most members book directly through the Bonvoy app, Marriott is often able to avoid the 20% take-rate of aggregation platforms like Booking.com and Expedia.

From the franchisees/hotel owners perspective, this massive loyalty network creates built-in demand which leads to much higher occupancy rates.

This also enables Marriott to grow its overall properties quicker as banks are more receptive to applications knowing the Bonvoy program creates higher baseline occupancy rates.

That’s all for this week. 

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