Why Marriott, Hilton and Hyatt Don’t Actually Own Most of Their Hotels | WSJ The Economics Of

Summary

The video script explores the transformation of the hotel industry, focusing on Marriott's strategic shift from real estate ownership to brand franchising, which has significantly increased its scale. Competitors like Hilton and Hyatt have followed suit, leveraging the franchise model to expand rapidly. This approach offloads operational and financial risks to independent owners while hotel brands focus on brand value and customer experience. The script also discusses the impact on customers, the importance of dynamic pricing, and the benefits of loyalty programs in driving the industry's growth.

Takeaways

• 🏨 Marriott has grown significantly over the past 20 years by moving away from real estate and focusing on branding.
• 🌍 Marriott, Hilton, and Hyatt are expanding globally, with Marriott operating 8,700 hotels across 139 countries and territories.
• 📈 The hotel industry has shifted towards a franchising model where independent owners operate most of the hotels under big brand names.
• 💼 Independent owner-operators are responsible for the real estate and staff, while hotel brands provide the brand name and support.
• 💰 Hotel brands benefit from franchise fees, which can range from 5% to 15% of a property's revenue, without bearing the cost of real estate.
• 📊 Brands provide data and insights to help owners maximize room revenue, adjusting prices dynamically based on market demand.
• 🏢 The growth of hotel brands has been accelerated by the reduction of financial risks associated with real estate ownership.
• 🛏️ Hotels use revenue management systems to optimize occupancy and pricing, sometimes leading to rapid price fluctuations.
• 🎟️ Loyalty programs are a significant draw for hotel brands, with millions of members incentivized to book through the brands.
• 🏙️ In high-demand markets, independent hotels may outperform branded ones due to greater demand elasticity and personalized service.
• 🏰 Luxury tier hotels are more likely to be operated by the brand itself to control the guest experience and offer a range of amenities.
• 🏗️ The number of branded hotels is expected to continue increasing, with a focus on strategic property purchases for innovation and design.

Q & A

What significant change did Marriott make decades ago that contributed to its growth?

Marriott decided to move away from the real estate business and commodify its name, which allowed it to scale up rapidly.

How many hotels does Marriott currently operate, and in how many countries and territories?

Marriott operates 8,700 hotels across 139 countries and territories, showcasing its global hospitality expertise.

Why are competitors like Hilton and Hyatt following Marriott's business model?

Hilton and Hyatt are following Marriott's model because it allows them to grow their brands faster without bearing the asset costs, by using a franchising approach.

What is the role of independent owner-operators in the hotel industry according to the script?

Independent owner-operators own the hotels, employ the team members, and are responsible for the day-to-day operations while paying franchise fees to use the big hotel names.

How has the shift to franchising affected the hotel brands' financial risks?

The shift to franchising has removed a lot of the financial risks associated with real estate, as the brands are not responsible for the asset costs or day-to-day operations.

What percentage of properties do Marriott and Hilton own according to the script?

Marriott and Hilton each own less than 1% of their properties, focusing more on brand management rather than property ownership.

What are the franchise fees that hotel owners pay to the brands, and what do they get in return?

Franchise fees can range from 5 to 15% of the property's revenue. In return, owners get the brand's name, data on amenities and operations, and access to the brand's loyalty programs.

How do hotel brands prove that having their name on a property is worth the franchise fees?

Hotel brands provide data and support to help owners maximize room revenue, ensuring that the benefits of the brand affiliation outweigh the franchise fees.

What is the significance of revenue managers in full-service hotels?

Revenue managers are responsible for optimizing room rates based on market conditions, ensuring the hotel's bottom line is maximized and managing occupancy across different days.

How do hotel loyalty programs benefit both the hotel owners and customers?

Loyalty programs incentivize guests to shop within the brand's ecosystem, increasing customer base and revenue. Owners benefit from lower fees on booking platforms and higher occupancy rates.

In what scenarios might an independent hotel be more beneficial than a branded one?

In high-demand markets with more leisure travel, independence might be a better option as it allows for greater demand elasticity and potentially higher profits without sharing revenue with a brand.

Why do luxury hotels tend to be operated by the hotel brand itself rather than being franchised?

Luxury hotels require a higher level of service and amenities, and brands prefer to manage these properties to control the guest experience and maintain the brand's luxury reputation.

What is the current trend in the US hotel industry regarding branding?

Two-thirds of all hotels in the US are branded, indicating a strong preference for affiliation with known hotel brands among property owners.

How does the script suggest the future of branded hotels is shaping up?

The number of branded hotels is set to increase, as seen in the properties currently under construction, offering consumers more choices and expanding the reach of hotel brands.

Outlines

00:00

🏨 The Evolution of Hotel Chains: Franchising and Brand Expansion

The video script discusses the transformation of the hotel industry, exemplified by Marriott's growth strategy. Marriott has expanded significantly by moving away from real estate and focusing on branding. This approach has been mimicked by competitors like Hilton and Hyatt. The script explains that hotel brands now act as franchisors, collecting franchise fees from independent owner-operators who run the hotels. This model reduces financial risk for the brands and allows for rapid scaling. The brands provide expertise and data to help owners maximize revenue, adjusting room rates dynamically based on market demand. The script also touches on the importance of loyalty programs in driving customer engagement and revenue.

05:00

📈 The Impact of Franchising on Hotel Ownership and Customer Choice

This paragraph delves into the implications of the franchising model on hotel ownership and customer options. It highlights how branded hotels have become more prevalent, with two-thirds of US hotels now carrying a brand name. The script contrasts the benefits of franchising in smaller markets, where brand recognition can attract customers, with the advantages of independence in high-demand markets where hotels can command higher rates. It also discusses the different tiers of hotel operations, noting that luxury hotels often remain under the direct management of the brand to control the guest experience. The paragraph concludes by observing the trend of increased consolidation in the industry, with a few major hotel flag families dominating the market, and predicts further growth in branded hotels based on ongoing construction projects.

Keywords

💡Hotel industry

The hotel industry refers to the business sector that deals with the operation of hotels, motels, resorts, and other lodging establishments. In the video, the hotel industry is undergoing changes due to the shift in business models, with companies like Marriott, Hilton, and Hyatt moving away from owning real estate to focusing on their brand names and franchising.

💡Marriott

Marriott is a leading global lodging company with a diverse portfolio of hotels. The video discusses how Marriott has grown significantly over the past 20 years by transitioning from a real estate business to a brand commodification strategy, resulting in a vast network of hotels under its franchise.

💡Franchising

Franchising is a business model where a company (the franchisor) licenses its business model, brand, and systems to another party (the franchisee). In the context of the video, hotel brands like Marriott have adopted franchising to expand rapidly without bearing the asset costs, allowing independent owners to operate hotels under their brand names.

💡Brand commodification

Brand commodification is the process of treating a brand name as a commodity that can be licensed out to others. The video explains that Marriott decided to commodify its name by moving away from the real estate business, which has contributed to its growth and the expansion of branded hotels.

💡Independent owner-operators

Independent owner-operators are individuals or entities that own and operate hotels independently, often under a franchise agreement with a larger hotel brand. The video mentions that these operators bear the responsibility of owning the real estate and employing staff, while the hotel brand provides the brand name and associated support.

💡Franchise fee

A franchise fee is the payment made by a franchisee to the franchisor for the right to use the brand name, business model, and other intellectual property. In the video, it is mentioned that hotel owners pay franchise fees to hotel brands, which can range from 5 to 15% of the property's revenue, as a way for the brands to monetize their brand name.

💡Revenue management

Revenue management is the process of optimizing revenue generation by managing the price, timing, and yield of a product or service. The video describes how hotels use revenue management to adjust room rates dynamically based on supply and demand, aiming to maximize profitability.

💡Hotel loyalty programs

Hotel loyalty programs are membership rewards systems offered by hotel chains to incentivize guests to choose their properties over competitors. The video highlights that major hotel brands have millions of members in their loyalty programs, which can drive customer retention and increase the customer base for franchised hotels.

💡Economic cycles

Economic cycles refer to the recurring periods of economic expansion and contraction that occur in the economy. The video explains that by moving away from owning real estate, hotel brands are less constrained by economic cycles, allowing for more flexible growth and expansion.

💡Flag

In the hotel industry, a 'flag' refers to the brand name or logo of a hotel chain that is displayed at a hotel property. The video discusses how hotel owners pay to 'fly' these flags, leveraging the brand recognition and reputation to attract customers and justify the franchise fees.

💡Consolidation

Consolidation in the context of the hotel industry refers to the process where the market becomes dominated by a few large players or brands. The video concludes by noting that over the past 25 years, there has been significant consolidation, resulting in a limited number of major hotel flag families controlling a large portion of the market.

Highlights

Marriott has tripled in size over the past 20 years by moving away from real estate and commodifying its name.

Marriott, Hilton, and Hyatt are following a similar business model, focusing on brand rather than real estate ownership.

Independent owner-operators own and manage most hotels under big hotel brand names.

Hotel brands charge franchise fees to owners, which can range from 5 to 15% of the property's revenue.

Brands provide data and expertise to help owners maximize room revenue.

Hotel brands scale up faster due to reduced financial risks associated with real estate.

Marriott and Hilton own less than 1% of their properties, while Hyatt owns about 2%.

Hotel brands must prove the value of their name to justify franchise fees.

Revenue managers optimize room rates based on market demand and other factors.

Hotel loyalty programs incentivize guests to shop within the brand's ecosystem.

Points earned in loyalty programs have become a form of currency for guests.

Flagging a hotel can help owners target a wider customer base and negotiate better fees with booking platforms.

High-demand markets may see independent hotels outperforming branded ones due to greater demand elasticity.

Luxury tier hotels are more likely to be operated by the hotel brand due to complex logistics and expected amenities.

Hotel brands strategically purchase properties for incubation of new ideas or specific business purposes.

The number of branded hotels is set to increase as seen in properties currently under construction.

Consolidation in the hotel industry has resulted in a few major hotel flag families dominating the market.

The franchise model has led to more choices for consumers in terms of earning and redeeming points.

Transcripts

- [Narrator] There's something going on

in the hotel industry.

Just look at this one block in Chicago.

These might seem like three different hotels,

but they're actually all Marriott.

Over the past 20 years,

Marriott has more than tripled in size.

And we can trace this boom back to a decision Marriott made

decades ago, to move away from the real estate business

and instead, commodify its name.

- Well, of course, as you might imagine,

we think we're the best.

We are the largest, 8,700 hotels in 139 countries

and territories, really showing expertise

around the world for what we think hospitality means.

- [Narrator] And you can see the same happening

for competitors like Hilton, and now Hyatt,

because they're also following a similar playbook.

- It's commonplace to actually invest behind real estate

in order to build a brand, and then over time,

sell down real estate.

We wanted to do it in a very deliberate way.

- [Narrator] With this business model,

the brands don't have to run most of the hotels

that fly their flags, nor do they have to pay for them.

In most cases, that responsibility

falls on people like this guy.

- So independent owner-operators like us

generally own the hotels and employ the team members.

Most people think that they are Marriott employees.

They're generally MCR employees.

- [Narrator] So why did this shift happen,

and how does it affect the customers?

This is the economics of hotel chains.

The business today looks like this.

These are the names you're familiar with,

Marriott, Hilton, Hyatt.

And these are the players who actually front the money

to buy the real estate, hire the employees,

and run the day-to-day operations.

Owners pay to use these big hotel names,

referred to as flags in the industry,

and it's a departure from the tried and true strategy

of decades before.

- [Tyler] If you go back to the 50s, everything was owned,

operated, and flagged by the same person.

- [Narrator] MCR is the third largest hotel owner-operator

behind these two real estate investment trusts.

- We get all the revenue,

and then we get whatever profits are left over.

And we pay Marriott or Hilton a franchise fee

to be part of their system.

- [Narrator] That means hotel brands

mainly have money to gain with every new hotel.

- Because they were not on the hook for the asset cost,

they were able to scale up their brands much faster.

- [Narrator] Moving to franchising removed a lot

of the financial risks associated with real estate.

- One of the things we realized as those hotels

got more and more popular is that by building them all

on balance sheet and with dealing with economic cycles,

we were constrained.

Our growth was constrained.

- [Narrator] Now, Marriott and Hilton each own less than 1%

of their properties, while Hyatt owns about 2%.

But in shifting to this strategy, major hotel brands

now have to focus on a new customer.

- The owner is the one that puts the brand onto their hotel,

and that's what drives franchise fees to the brands.

- [Narrator] Those fees can amount to anywhere

from 5 to 15% of what the property brings in.

So the brands have to prove

that having the name is worth it.

Hotel brands say.

- It more than pays for itself.

- [Narrator] Because in addition to data on how lobby

should look and what amenities to have,

they also provide data to help the owner get the most money

for each room each night.

- At the end of the day, you are saying,

"What will the market bear?"

When there's a Taylor Swift concert coming into a market,

we see the rates literally out to 40 miles away go crazy.

- [Narrator] In dynamic cities, the price of a room

could change multiple times in one day.

- We get questions all the time and they say,

"I was gonna book for $199,

and now the rate just went up to $249."

You know, then you should have booked at the 199.

The prices are fleeting.

- Every one of our full-service hotels

has a revenue manager, and they take account

of what's going on in that particular marketplace.

- [Narrator] And these systems also calculate rates

that optimize for the hotel's bottom line.

- [Tyler] We don't wanna sell out our hotels

just on a Tuesday

because then that leaves us exposed on Wednesday.

So we may sell you that room

at an extraordinarily high price because what we really want

is for you to book Monday to Wednesday

or Tuesday to Thursday.

- [Narrator] This helps make up for less profitable days.

- We're giving the rooms away on Sundays.

It is the worst night of the week

because business travel does not really occur on Sundays

and neither does leisure travel.

- [Narrator] Flying a flag can also help owners

target wider pools of hotel customers,

with better fees for booking platforms

like Expedia and Booking.com.

- So if you buy a hotel room via Expedia

for a Marriott hotel, we pay a lower Expedia fee.

We, the owner.

- [Narrator] But analysts say an even bigger draw,

"Our hotel loyalty programs."

Marriott and Hilton each have over 180 million members.

Hyatt has more than 40 million.

And thanks to points, guests are incentivized

to shop within these programs.

- The points have essentially become currency.

- [Narrator] Which can help increase the customer base

for flagged hotels in smaller markets.

- If you're in a secondary or tertiary market,

you generally fly a flag because that brings people

to your building 'cause they want the points.

The idea is you earn the points in Corpus Christi

or in Yuma, Arizona,

and then you redeem them in Miami and New York.

- [Narrator] Today, two-thirds of all hotels in the US

are branded, but the franchise model

isn't always beneficial.

For owners in high-demand markets,

like those with more leisure travel,

independence might be a better option.

- The highest performing hotels in Manhattan

are independent hotels.

You have a greater elasticity of demand.

So usually, the highest performing hotels are smaller.

- [Narrator] But brands do operate some properties

mainly in this tier, whereas franchising

mostly happens in these.

- Those operations have dramatically fewer touch points

and offerings by virtue of the fact that they're designed

for a person who wants a great room to stay in,

a quick option for breakfast,

but they don't need other things.

They don't need a ballroom.

They don't need a specialty restaurant.

They don't need a spa.

- [Narrator] In the luxury tier,

those amenities are expected,

creating more complex logistics.

That's why most luxury hotels are still operated

by the hotel brand itself.

- With respect to most other full service

and luxury properties and resorts, we would prefer to manage

because we wanna control all aspects of the delivery

of the guest experience.

- Specifically at the luxury end,

we do overwhelmingly manage those hotels,

and we wouldn't, for example,

be talking about franchising an EDITION Hotel.

What having this range of brands gives us the ability

to appeal to our customer for every experience

and location that they want,

and that is really important for Bonvoy.

- [Narrator] In some rare cases,

hotel brands will still strategically purchase a property.

Marriott bought this W Hotel in New York

to use it as an incubator for new ideas and designs,

and Hyatt purchased Hotel Irvine.

- We bought the hotel.

We completely renovated it.

We will eventually sell that hotel.

- [Narrator] But by and large, more hotels are outsourcing

the owning and operating of their properties,

increasing the volume of branded properties

offered to consumers today.

- The customer now has more choices.

They have more places to both earn and redeem.

But what you have seen in the past 25 years

is a consolidation.

There are really three or four big hotel flag families now.

- [Narrator] And looking at the properties in construction,

the number of branded hotels is only set to increase.