Seat 2B By Joe Brancatelli
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What to Know (and Fear) About the Big Merger
November 19, 2015 -- Marriott International gobbled up Starwood Hotels this week and created a global behemoth with more than 1.1 million guestrooms and 5,500 hotels spread out over 30 brands in 100 countries. What do those mind-boggling a numbers mean to business travelers? "Marriott is Amazon.com now," a hotel-industry insider explains. The purpose of the $12 billion cash-and-stock deal is to help Marriott (Nasdaq: MAR) be all things to all lodgers and to convince travelers that they never have to book anywhere but Marriott.com. "Size," he says, "is everything." But does size really matter to us? Most of us aren't likely to need 26 properties in Hawaii or a room in Lagos, Nigeria, where Marriott's Protea chain has three hotels. Can you distinguish between Aloft and Element, two Starwood (NYSE: HOT) brands, and Marriott's AC Hotels? Do you need Moxy, a new Marriott chain? Do we want Marriott to have three "soft" brands of independent hotels? And won't losing Starwood Preferred Guest, which will eventually be folded into the much larger Marriott Rewards, be bad for our perks? Short answer: Who says you matter in this global game chess where Marriott is battling InterContinental (4,700 hotels), Hilton (4,500 outposts), Accor (3,800 properties), and economy specialists such as Wyndham and Choice? Long answer: You might not matter individually, but our collective booking patterns and attitudes are at the heart of everything the hotel industry is doing to remake itself.
The big get biggerMany business travelers were rooting for Hyatt Hotels, with about 600 locations, to buy the 1,300-unit Starwood operation. That would have thrust two smaller players, both of which offer outstanding frequency programs, into the lodging big leagues. After initially demurring, however, Marriott last weekend stealthily swept in and snatched Starwood out from under Hyatt. Why does Marriott, with 4,300 properties, want to get bigger? Because everyone else is. Hilton, for example, boasts that it opened 91 hotels in the third quarter and has another 1,500 properties in the development pipeline. And why do they all want to get bigger? Because heft really does matter in the modern lodging industry. Corporate hotel buyers like big chains. It allows our bosses to negotiate worldwide deals with chains that can offer us accommodations almost anywhere we need to be. Small-business customers and independent business travelers also like size because dealing with one gigantic chain offers us the simplicity of one-stop shopping and helps build our frequent-stay balances faster. Size has another benefit. The larger a lodging chain becomes, the more leverage it has with online travel agents (OTAs) such as Priceline.com, Hotels.com and its parent, Expedia.com. Hoteliers detest OTAs, their growing market share and their high fees (20 percent or more of the nightly rate). The larger a lodging chain gets, the thinking goes, the better chance it has to negotiate lower rates from the OTAs.
The branding balanceEven with the emphasis on growth, however, what benefit are the total of 30 brands that Marriott and Starwood bring to the combined company? Even in this day of hyper-segmented lodgings, there can't possibly be 30 different concepts that interest or serve us. Branding is about much more than consumer choice, however. In this era when the mega-chains don't own or even manage the vast majority of buildings that fly their brand flags, brands are the air that the chains breath. More brands — even overlapping concepts in the same general price and service categories — work because they give the chains an opportunity to flood the zone in a region without violating the geographic restrictions built into their contracts with hotel owners. Such contractual end-arounds explain why Marriott already has three separate brand names in the luxury category (Ritz-Carlton, Bulgari and JW Marriott), five in what it calls the lifestyle segment, a raft of traditional full-service hotels (Marriott, Renaissance, Delta, Gaylord), and a slew of "select service" options. Add the Starwood brands and it's a Tower of Branding Babel. But 30 brands permits the combined company to inject a multitude of hotels into each region without running legally afoul of their franchisees.
The Sheraton quagmireA 30-brand portfolio is unwieldy even for the combined Marriott-Starwood, however. One example: the Renaissance (Marriott) and Le Meridien (Starwood) chains share so many style and demographic points that they might be ripe for consolidation. Does Marriott needs to build out Starwood's new mid-market Tribute Portfolio collection of independents when Autograph, Marriott's competing soft brand, is much larger and growing much faster. But the biggest question surrounds Sheraton, Starwood's aged middle-of-the-road brand. Sheraton represents around 40 percent of the Starwood portfolio and its reputation is in tatters. While it has some outstanding properties overseas, many of its domestic locations are decrepit. Even Marriott's bosses admitted the problem in an analyst's conference call this week. Expect some existing Sheratons to be purged or converted to Delta Hotels, a Canadian chain that Marriott purchased earlier this year and specifically envisions as a landing spot for properties that don't meet the standards of higher-priced brands. Yet when all the purging and converting is completed, Marriott will still have to figure out what Sheraton is and what it should offer guests.
Oh, yeah, about your points...But let's be honest: Understanding the rationale of the Marriott-Starwood deal is just business. The personal stuff is how the combination will affect our points in Starwood Preferred Guest (SPG) and Marriott Rewards. First of all, since the deal isn't due to close until the middle of next year, assume nothing much will happen in 2016. But logic dictates that SPG, will 21 million accounts, will be folded into Marriott Rewards, which claims 54 million members. That'll be good for average Starwood customers and bad for elite SPG players. SPG offers elite customers a portfolio of guaranteed perks — late check-out, suite upgrades and free breakfast systemwide — that Marriott Rewards does not. It's hard to see Marriott suddenly offering those benefits in the future. After all, if Marriott didn't feel the need to compete against Starwood, why would it offer the perks now that Starwood has been merged off the field? And all SPG players have the benefit of the most flexible currency in the frequency-plan market. SPG points transfer at beneficial rates to a broad range of airline frequent flyer programs. That perk isn't likely to survive, either. But it's not all bleak. For all its elite perks and value as a transfer partner, SPG brutally overcharges members for most award nights. You have to spend much more with Starwood to win award nights than you must spend with Marriott. In fact, a recent study says Marriott Rewards' "payback" is 54 percent higher than SPG. Marriott will also stress the program's new global mass. Marriott Rewards, they'll rightly claim, offer the most places to earn points and the most hotels where you can claim awards. In other words, Marriott Rewards, like Marriott itself, will stress that it's big. And big is what the hotel business is all about these days.
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