One of the biggest stories in 2016 was Marriott International’s acquisition of Starwood Hotels & Resorts Worldwide, so when Laura Paugh, Senior Vice President of Investor Relations at Marriott International, appeared at the Barclays Gaming and Lodging Conference in New York on 5-6 December, it was inevitable that most of the questions concerned the likely implications of the deal and the group’s prospects for 2017.

World’s Largest Hotel Company – Now Bigger in Asia

Adding Starwood’s properties to the Marriott portfolio creates an organization with almost 6,000 hotels providing 1.1 million rooms in 120 countries through 30 different brands. “We were at 4,000 and we’re now at 6000 – so there are more places for people to stay and that creates leveraging advantages. You also have greater economies of scale on the cost side, and as you improve the operating fundamentals you’ll also see accelerated unit growth. Marriott has been growing units at twice the rate that Starwood has, so there’s still tremendous opportunity for Starwood brands to expand faster.

Today we are more international than we were before. We had 80% of our rooms in North America but now we’re closer to 70%. Our presence in Asia has dramatically changed – we are much larger in Asia.”

Integrating Starwood

It is expected that there should be eventual cost savings of around $250 million by Q1 2018, as the costs of operating dual systems are gradually eliminated as the operational processes are merged during 2017. Other aspects of the two businesses must also be combined. For example, “Marriott offers a JPMorgan Chase credit card while Starwood has American Express, but we now have an agreement with both that permitted us to link our loyalty programs, and we’re already seeing improvements in card usage.

Looking at the different Starwood brands, there are likely to be opportunities and changes ahead. For opportunities, “Aloft, Element, and St. Regis would be the three that come to mind. Aloft and Element are vastly underrepresented and there’s a lot of excitement for them among franchisees.”

The changes may be necessary with Sheraton. “On the domestic hotels we need to redefine what the brand standards are for that brand. For many years, Starwood had brand standards they didn’t enforce. We really need to get the brand back to where it needs to be in terms of brand quality and service standards. We have a good relationship with owners so we’ll work with them and look at every hotel individually – how are they achieving the standards and where are the shortfalls.”

Fixing the issues may in some cases require further capital investment, and will leave owners with choices to make. “If the market room rates aren’t enough to justify the extra capital we can offer another brand, but there undoubtedly will be a few who leave the system. It won’t be a lot, but we’re working through this and it’s going to take time.”

AirBnB and the OTAs

AirBnB is a brand that tends to do well with younger travelers, leisure stays, and groups of leisure travelers, when everybody wants to be together. That’s not much of our business to be honest. It doesn’t resonate so well with corporate travelers. They don’t want to go and find the key and make their own coffee. They’re looking for reliability so we haven’t seen a big impact.

Where we do see an impact is when you get these compression times driven by big leisure events, such as the Boston Marathon. For big events we can’t push prices as much as we’d like, but it’s not making headway in the corporate environment.

Of course, one big issue for hotels competing with AirBnB is that of doubtful legal compliance and unfair competition. “It’s not just the tax, but also the regulatory environment – but the arguments we’re making to regulators are making headway. We just want our competitors to be on a level playing field. Of course we want to follow the regulatory standards anyway, but we want our competitors to do that.”

As far as the OTAs are concerned, the new contracts have yet to be negotiated, but improvements may be in store. Upon completing the acquisition of Starwood, Marriott learned that their own OTA contracts, negotiated on the strength of 4000 properties, were already better than those secured by Starwood on far fewer hotels.

Current Performance Trends

Occupancy rates are very high, but despite what you’ve heard about supply we don’t have enough hotels. We seem to continue to fill them up, which is encouraging. Where RevPAR goes doesn’t depend so much on where occupancy is, but on where GDP goes. If GDP continues to climb and we add new hotels, they will absorb incremental demand; if we don’t have new hotels then prices will rise. What concerns us all is where the economy will go, because that’s what determines RevPAR.”

Foreign exchange rates and a strengthening dollar were largely dismissed as an especially significant issue. “Four percent of US room nights are international travelers, slightly more in the gateway markets, but we don’t have a lot of exposure to international arrivals though we’d like more. Americans visiting our overseas properties make up 15-20% of guests, so a stronger dollar helps those hotels but tends to hurt the US less. But for currency transactions, remember we don’t repatriate RevPAR; we bring home fees.”

Heading into 2017

It has become more difficult for franchisees to secure loans as RevPAR weakens and lending rules are tightened. Interest rates are not the problem, but availability of capital is. This gives strong brands such as Marriott an advantage as a safer choice for the banks. Accordingly, while Marriott has a 15% market share in North America for rooms in operations, its share of rooms under construction soars to 35%. Marriott’s RevPAR expectations stand at 0-2% growth next year, so with labor costs rising at close to 4-5%, some margin erosion is inevitable. However, as Laura makes clear throughout, for all the minor adjustments which can be made to branding and financing there is one powerful factor which will ultimately determine just how much success the company is likely to enjoy heading into 2017.

The real challenge is that we’re a cyclical business so GDP matters. Demand is the problem, not supply. Supply has never led us into recession – supply just makes it worse when it happens. So the thing that concerns us all is the economy.”