Marriott's strategic shift from real estate to brand commodification and its impact on the hotel industry.

The Rise of Hotel Chains

The shift to franchising and its implications for hotel ownership and customer experience.

Franchising and Ownership

An overview of the business model and financial dynamics of hotel chains.

Economics of Hotel Chains

The use of data to optimize room rates and revenue for hotel properties.

Data-Driven Revenue Management

The role of loyalty programs and customer incentives in driving hotel brand preference.

Brand Loyalty and Customer Incentives

A comparison of franchised and independent hotels, focusing on market performance and customer expectations.

Franchising vs. Independent Hotels

The operational differences between luxury hotels and other hotel tiers, and the role of hotel brand management.

Luxury Hotel Operations

The increasing volume of branded properties and the impact on consumer choices and hotel industry consolidation.

Expansion and Consumer Impact

# The Economics of Hotel Chains

## Marriott's Expansion Strategy

Marriott's growth over the past 20 years has been nothing short of impressive. With 8,700 hotels in 139 countries and territories, they have more than tripled in size. This expansion can be attributed to their strategic decision to move away from the real estate business and instead focus on commodifying their name.

### Franchising Model

- Marriott and other major hotel brands have shifted to a franchising model, where independent owner-operators own and operate the hotels under the Marriott brand.
- This model allows the brands to scale up much faster and removes the financial risks associated with real estate ownership.
- The brands provide data and support to help the owners maximize revenue and optimize room rates.

## Impact on Customers

- Hotel loyalty programs with points incentives have become a major draw for customers, increasing the customer base for flagged hotels.
- The franchise model may not always be beneficial, especially for owners in high-demand markets where independence might be a better option.
- The highest-performing hotels in Manhattan, for example, are independent hotels.

### Range of Brands

- Marriott's range of brands gives them the ability to appeal to customers for every experience and location they desire.
- Luxury hotels are still mainly operated by the hotel brand itself, as they require more complex logistics and amenities.

## Future of Branded Hotels

- The number of branded hotels is set to increase, with more properties in construction.
- Customers now have more choices and more places to both earn and redeem points.

For a deeper dive into the specific economics of Hyatt and a full interview with the CFO of Marriott, click the link [here](https://www.wsj.com).

Thank you for watching and stay tuned for more insights into the hotel industry.

"Unlocking the Growth Potential of Hotel Chains: A Closer Look at Marriott's Expansion Strategy"

To incentivize guests to shop within the programs

- Marriott, Hilton, and Hyatt have all shifted to a franchise model, where independent owners operate their hotels under the brand name
- This allows the brands to expand rapidly without the financial risk of owning and operating the properties
- Hotel brands provide data and support to help owners maximize profits and manage pricing
- Loyalty programs and points incentivize guests to book within these branded hotels
- The franchise model is not always beneficial, especially in high-demand markets, and luxury hotels are often still operated by the brand itself
- The shift to franchising has led to a consolidation of big hotel flag families and an increase in the number of branded hotels offered to consumers.

When guests stay at a hotel chain like Marriott, Hilton or Hyatt, these companies don’t typically own the property. They may not even run it. So what is happening in the hotel industry and what benefits are smaller companies receiving from these “flags” in the industry?

WSJ explains why hotel companies like Marriott and Hilton actually own less than 1% of their properties and why hotel owners like MCR Hotels choose to fly a flag or go independent. 

Chapters:
0:00 The hotel industry
1:30 Franchise model
2:47 Pricing hotel rooms
4:28 Loyalty programs
5:25 Independent hotels and branding

The Economics Of
How do the world's most successful companies generate revenue? In this explainer series, we'll dive into the surprising stories behind how businesses work--exploring everything from Costco's "treasure-hunt" model to the economics behind Amazon's AWS.

Hyatt is smaller than its hotel chain competitors. So how did it get to be the most expensive? Watch the Economics of Hyatt: https://on.wsj.com/3PLS0T6

How did Marriott become the largest hotel chain, with over 30 brands? Marriott’s CFO explains why this is just the beginning for the hospitality giant: https://on.wsj.com/4aFZFds

#Travel #Hotels #WSJ

There's something going on in the hotel industry.

These might seem like 3 different hotels, but they're actually all Marriott.

Over the past 20 years, Marriott has more than tripled in size.

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.

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.

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.

These are the names you're familiar with.

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.

If you go back to the 50s, everything was owned, operated and flagged by the same person.

MCR is the third largest hotel owner operator behind these 2 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.

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.

Moving to franchising removed a lot of the financial risks associated with real estate.

1 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.

Now, Marriott and Hilton each own less than 1 percent of their properties,

But in shifting to this strategy, major hotel brands now have to focus on a new customer.

The owner is the 1 that puts the brand onto the hotel, and that's what drives franchise fees to the brands.

Those fees can amount to anywhere from 5 to 15 percent of what the property brings in.

So the brands have to prove that having the name is worth it.

Because in addition to data on how lobbies 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.

In dynamic cities, the price of a room could change multiple times in 1 day.

We get questions all the time and they say, I was going to book for $199 and now the rate just went up to $249.

Every 1 of our full service hotels has a revenue manager and they take account of what's going on in that particular marketplace.

And these systems also calculate rates that optimize for the hotel's bottom line.

We don't want to 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.

This helps make up for less profitable days.

It is the worst night of the week because business travel does not really occur on Sundays and neither does leisure travel.

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.

But Analysts say an even bigger draw are hotel loyalty programs.

Marriott and Hilton each have over 180 million members.

And thanks to points, guests are incentivized to shop within these programs.

The points have essentially become currency.

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 because 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.

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.

So usually the highest performing hotels are smaller.

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.

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 want to 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 addition hotel.

What having this range of brands gives us the ability to appeal to our customer for every experience and location that they want.

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.

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.

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 3 or 4 big hotel flag families now.

And Looking at the properties in construction, the number of branded hotels is only set to increase.

If you liked this, we have a deeper dive into the specific economics of Hyatt, and we have a full interview with the CFO of Marriott.

Click the link here or in the description to watch on WSJ.com.


Speaker 0: There's something going on in the hotel industry. Just look at this 1 block in Chicago. These might seem like 3 different hotels, but they're actually all Marriott. Over the past 20 years, Marriott has more than tripled in size. 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.

Speaker 1: 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.

Speaker 0: And you can see the same happening for competitors like Hilton and now Hyatt, because they're also following a similar playbook.

Speaker 2: 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.

Speaker 0: 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.

Speaker 3: 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.

Speaker 0: 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.

Speaker 3: If you go back to the 50s, everything was owned, operated and flagged by the same person.

Speaker 0: MCR is the third largest hotel owner operator behind these 2 real estate investment trusts.

Speaker 3: 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.

Speaker 0: That means hotel brands mainly have money to gain with every new hotel.

Speaker 4: Because they were not on the hook for the asset cost, they were able to scale up their brands much faster.

Speaker 0: Moving to franchising removed a lot of the financial risks associated with real estate.

Speaker 1: 1 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. Now, Marriott and Hilton each own less than 1 percent of their properties,

Speaker 0: while Hyatt owns about 2 percent. But in shifting to this strategy, major hotel brands now have to focus on a new customer.

Speaker 4: The owner is the 1 that puts the brand onto the hotel, and that's what drives franchise fees to the brands.

Speaker 0: Those fees can amount to anywhere from 5 to 15 percent of what the property brings in. So the brands have to prove that having the name is worth it. Hotel brands say,

Speaker 2: It more than pays for itself.

Speaker 0: Because in addition to data on how lobbies should look and what amenities to have, They also provide data to help the owner get the most money for each room each night.

Speaker 1: 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.

Speaker 0: In dynamic cities, the price of a room could change multiple times in 1 day.

Speaker 3: We get questions all the time and they say, I was going to book for $199 and now the rate just went up to $249. Then you should have booked at the $199. The prices are fleeting.

Speaker 2: Every 1 of our full service hotels has a revenue manager and they take account of what's going on in that particular marketplace.

Speaker 0: And these systems also calculate rates that optimize for the hotel's bottom line.

Speaker 3: We don't want to 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.

Speaker 0: This helps make up for less profitable days.

Speaker 3: 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.

Speaker 0: Flying a flag can also help owners target wider pools of hotel customers with better fees for booking platforms like Expedia and Booking.com.

Speaker 3: So if you buy a hotel room via Expedia for a Marriott hotel, we pay a lower Expedia fee, we the owner.

Speaker 0: But Analysts say an even bigger draw are 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.

Speaker 3: The points have essentially become currency.

Speaker 0: Which can help increase the customer base for flagged hotels in smaller markets.

Speaker 3: If you're in a secondary or tertiary market, you generally fly a flag because that brings people to your building because 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.

Speaker 0: 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.

Speaker 3: The highest-performing hotels in Manhattan are independent hotels. You have a greater elasticity of demand. So usually the highest performing hotels are smaller.

Speaker 0: But brands do operate some properties, mainly in this tier, whereas franchising mostly happens in these.

Speaker 2: 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.

Speaker 0: 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.

Speaker 2: With respect to most other full-service and luxury properties and resorts, we would prefer to manage, because we want to control all aspects of the delivery of the guest experience.

Speaker 1: Specifically at the luxury end, we do overwhelmingly manage those hotels, and We wouldn't, for example, be talking about franchising an addition 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.

Speaker 0: 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.

Speaker 2: We bought the hotel. We completely renovated it. We will eventually sell that hotel.

Speaker 0: 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.

Speaker 3: 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 3 or 4 big hotel flag families now.

Speaker 0: And Looking at the properties in construction, the number of branded hotels is only set to increase. Thanks for watching. If you liked this, we have a deeper dive into the specific economics of Hyatt, and we have a full interview with the CFO of Marriott. Click the link here or in the description to watch on WSJ.com.

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