A colossal win-win?

The USD 12.2 bln Marriott and Starwood merger, which has recently been officially approved and is scheduled to close in mid-2016 (subject to regulatory approvals and the satisfaction of other closing conditions), will establish the world’s largest hotel group, incomparable in size and brand variety to any other hotelier on the market. The new conglomerate will have 1.1 mln rooms in more than 5,500 own and franchised hotels (1,270 Starwood properties and 4,300 Marriott sites) across over 100 countries.

Booking completed

According to the estimates, Marriott and Starwood’s combined hotel group’s revenue from guests for the twelve months ending September 30th, 2015 would amount to USD 2.7 bln. The new 30-brand colossus will give the now predominantly US-focused Marriott International not only an unprecedented and bigger geographical reach, but also a portfolio of brands from a range of hotel segments in which the hotelier had previously seen some room for improvement. Whilst the 19-brand Marriott International has mostly been focused on developing four-star and five-star upscale hotel chain formats for business and vacation travellers, such as The Ritz-Carlton, Autograph Collection, JW Marriott, Edition and Renaissance, its portfolio lacked affordable big city brands, such as its newly-launched Moxy chain, which is targeted at younger clientele. The Starwood portfolio will add a number of alternatively modelled hotel formats to the Marriott stable, such as the boutique Aloft and W Hotels brands, along with a few well-known four-star formats, such as Westin, Sheraton and the eco-friendly Element by Westin brand.

On the other side of the coin, Starwood, which put up for sale its app. 350,000-room portfolio in the spring in an attempt to “accelerate our growth, improve performance, and sharpen our focus on operational excellence,” will now have stronger weapon in combating the fast-growing competition of alternative hotel and hospitality operators, such as the increasingly popular Airbnb, and when it comes to setting the rules when cooperating with all the numerous OTAs (online travel agents). "Starwood’s shareholders will benefit from ownership in one of the world’s most respected companies, with vast growth potential further enhanced by cost synergies,” said Bruce Duncan, the chairman of the board of directors of Starwood Hotels & Resorts Worldwide. The transaction should reduce the operational costs related to reservations, procurement and shared services and thus boost their attractiveness for owners, franchisees and customers. “Our guests and customers will benefit from so many more options across 30 hotel brands, while our hotel owners and franchisees will derive value from our combined global platform and efficiencies,” argues Adam Aron, Starwood Hotels & Resorts Worldwide’s CEO on an interim basis. Under the terms of the agreement, at closing Starwood’s shareholders would own app. 37 pct of the combined company’s common stock after the completion of the merger.

Also, the two companies’ combined sales expertise and coverage could be used to generate more customer loyalty, thus increasing revenue and encouraging cooperation with hotel developers. “We expect that these enhanced efficiencies and revenue opportunities will lead to improved property-level profitability as well as greater owner and franchisee preference for the combined company’s brands,” the companies write in a joint statement. The transition costs, whose size have still to be estimated, are expected to be incurred over the next two years. Marriott’s board of directors will be extended from 11 to 14 members with the expected addition of three members of the Starwood board of directors. Arne Sorenson is to stay on as the president and CEO of Marriott International following the merger and Marriott’s headquarters will remain in Bethesda, Maryland.

Expansion implications

In the third quarter of 2015 alone, Marriott added a total of over 10,000 rooms worldwide, including around 3,800 rooms in markets outside the US as well as 2,000 rooms acquired from rival brands, while the company's worldwide development pipeline grew to more than 260,000 rooms. At the same time Starwood signed 44 hotel management and franchise contracts worldwide with a total of app. 8,600 rooms, while opening 27 hotels and resorts with app. 4,800 rooms. The question remains if and where the development plans will be continued after the merger, as the improved Marriott and Starwood presence might result in the reduction and even cancellation some of the companies’ development plans. Their hotel brands and plans will probably not complement each other well enough everywhere.

There are a number of markets, including the CEE countries, where the two companies’ presence is still relatively thin and thus their growth dynamics remain high. Earlier this year the hotelier opened its third Polish location, a Courtyard by Marriott-branded hotel in Gdynia. The hotel group operates two other hotels in the country: the Warsaw Marriott Hotel and Courtyard Warsaw Airport, and is planning to open a Moxy hotel in Katowice in 2019 and a Renaissance hotel in Warsaw. Starwood currently has six properties in Poland. This year Starwood opened its first Romanian property – the Sheraton Bucharest hotel – and it now plans to open another Sheraton hotel in the country in 2019. In the Czech Republic and Slovakia Starwood recently debuted with the launch of two hotels under the high-end The Luxury Collection brand. Before the merger announcement the company also had ambitious expansion plans for in Russia.



Consolidate or die

As some market researchers point out, the immense push towards consolidation might herald and at the same time speed up a wave of new mergers in the hotel sector. “This merger has opened up a huge gulf between the next largest players, Intercontinental Hotels Group and Hilton,” says Mark Wynne Smith, the global CEO of JLL’s hotels and hospitality group. According to him, the market should now see further merger activity as other hoteliers seek to match the Marriott and Starwood conglomerate’s scale. “Consolidation among the major brand companies has been talked about for a number of years – and boards are now biting the bullet on the need to merge to achieve further growth in a cost efficient manner. At the moment there are several corporate hotel transactions at various stages,” Mark Wynne Smith explains.

The drive to improve cost effectiveness is being driven by a number of factors, including those of purely macro-economic nature. And yet it is hard to deny that technological advances and the growing popularity of non-traditional booking and lodging platforms – even amongst business travellers – are increasingly impacting the hotel sector. According to a report by the Hotel Association of New York City, over the course of the last year Airbnb's operations have had a negative impact of USD 2.1 bln on the accommodation industry and the broader economy of New York City alone. “The global presence of this merged company will allow it to develop guest-centric technologies that other companies might struggle to fund,” remarks Mark Wynne Smith. Given that both Marriott and Starwood are already paving the way in digitising the guest experience and their back-office operations, their tech-savviness might now intensify, setting a new – and for many unattainable – benchmark for the other hotel players. It will also be easier for the two hoteliers to create is a gigantic loyalty members pool. After the consolidation, the 54 mln member Marriott Rewards loyalty programme and the 21 mln member Starwood Preferred Guest scheme are planned to be merged, becoming “even stronger”.

Mergers of two market leaders of this scale are rare and this aspect itself adds an additional difficulty in predicting their future outcomes. With all their natural advantages, goliaths are also typically less flexible and thus more sensitive to unforeseen calamities. With any luck, the giants of the hotel and hospitality sector have feet made out of something more durable than clay.