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

0:00- [Narrator] There's something going on

0:02in the hotel industry.

0:03Just look at this one block in Chicago.

0:06These might seem like three different hotels,

0:09but they're actually all Marriott.

0:11Over the past 20 years,

0:13Marriott has more than tripled in size.

0:15And we can trace this boom back to a decision Marriott made

0:18decades ago, to move away from the real estate business

0:22and instead, commodify its name.

0:25- Well, of course, as you might imagine,

0:26we think we're the best.

0:27We are the largest, 8,700 hotels in 139 countries

0:32and territories, really showing expertise

0:36around the world for what we think hospitality means.

0:39- [Narrator] And you can see the same happening

0:41for competitors like Hilton, and now Hyatt,

0:44because they're also following a similar playbook.

0:47- It's commonplace to actually invest behind real estate

0:50in order to build a brand, and then over time,

0:53sell down real estate.

0:54We wanted to do it in a very deliberate way.

0:57- [Narrator] With this business model,

0:58the brands don't have to run most of the hotels

1:00that fly their flags, nor do they have to pay for them.

1:04In most cases, that responsibility

1:06falls on people like this guy.

1:08- So independent owner-operators like us

1:11generally own the hotels and employ the team members.

1:15Most people think that they are Marriott employees.

1:18They're generally MCR employees.

1:20- [Narrator] So why did this shift happen,

1:22and how does it affect the customers?

1:25This is the economics of hotel chains.

1:30The business today looks like this.

1:32These are the names you're familiar with,

1:34Marriott, Hilton, Hyatt.

1:36And these are the players who actually front the money

1:39to buy the real estate, hire the employees,

1:41and run the day-to-day operations.

1:43Owners pay to use these big hotel names,

1:46referred to as flags in the industry,

1:48and it's a departure from the tried and true strategy

1:51of decades before.

1:52- [Tyler] If you go back to the 50s, everything was owned,

1:54operated, and flagged by the same person.

1:57- [Narrator] MCR is the third largest hotel owner-operator

2:00behind these two real estate investment trusts.

2:03- We get all the revenue,

2:04and then we get whatever profits are left over.

2:07And we pay Marriott or Hilton a franchise fee

2:11to be part of their system.

2:13- [Narrator] That means hotel brands

2:14mainly have money to gain with every new hotel.

2:17- Because they were not on the hook for the asset cost,

2:20they were able to scale up their brands much faster.

2:23- [Narrator] Moving to franchising removed a lot

2:25of the financial risks associated with real estate.

2:28- One of the things we realized as those hotels

2:30got more and more popular is that by building them all

2:34on balance sheet and with dealing with economic cycles,

2:37we were constrained.

2:39Our growth was constrained.

2:40- [Narrator] Now, Marriott and Hilton each own less than 1%

2:43of their properties, while Hyatt owns about 2%.

2:46But in shifting to this strategy, major hotel brands

2:49now have to focus on a new customer.

2:53- The owner is the one that puts the brand onto their hotel,

2:56and that's what drives franchise fees to the brands.

2:59- [Narrator] Those fees can amount to anywhere

3:02from 5 to 15% of what the property brings in.

3:05So the brands have to prove

3:06that having the name is worth it.

3:09Hotel brands say.

3:10- It more than pays for itself.

3:12- [Narrator] Because in addition to data on how lobby

3:15should look and what amenities to have,

3:17they also provide data to help the owner get the most money

3:20for each room each night.

3:22- At the end of the day, you are saying,

3:24"What will the market bear?"

3:26When there's a Taylor Swift concert coming into a market,

3:28we see the rates literally out to 40 miles away go crazy.

3:33- [Narrator] In dynamic cities, the price of a room

3:35could change multiple times in one day.

3:38- We get questions all the time and they say,

3:40"I was gonna book for $199,

3:42and now the rate just went up to $249."

3:45You know, then you should have booked at the 199.

3:47The prices are fleeting.

3:49- Every one of our full-service hotels

3:50has a revenue manager, and they take account

3:53of what's going on in that particular marketplace.

3:56- [Narrator] And these systems also calculate rates

3:58that optimize for the hotel's bottom line.

4:01- [Tyler] We don't wanna sell out our hotels

4:02just on a Tuesday

4:04because then that leaves us exposed on Wednesday.

4:07So we may sell you that room

4:08at an extraordinarily high price because what we really want

4:11is for you to book Monday to Wednesday

4:13or Tuesday to Thursday.

4:15- [Narrator] This helps make up for less profitable days.

4:18- We're giving the rooms away on Sundays.

4:20It is the worst night of the week

4:22because business travel does not really occur on Sundays

4:25and neither does leisure travel.

4:28- [Narrator] Flying a flag can also help owners

4:30target wider pools of hotel customers,

4:32with better fees for booking platforms

4:34like Expedia and Booking.com.

4:36- So if you buy a hotel room via Expedia

4:40for a Marriott hotel, we pay a lower Expedia fee.

4:43We, the owner.

4:44- [Narrator] But analysts say an even bigger draw,

4:47"Our hotel loyalty programs."

4:50Marriott and Hilton each have over 180 million members.

4:53Hyatt has more than 40 million.

4:55And thanks to points, guests are incentivized

4:58to shop within these programs.

5:00- The points have essentially become currency.

5:04- [Narrator] Which can help increase the customer base

5:06for flagged hotels in smaller markets.

5:09- If you're in a secondary or tertiary market,

5:11you generally fly a flag because that brings people

5:15to your building 'cause they want the points.

5:17The idea is you earn the points in Corpus Christi

5:21or in Yuma, Arizona,

5:23and then you redeem them in Miami and New York.

5:26- [Narrator] Today, two-thirds of all hotels in the US

5:28are branded, but the franchise model

5:31isn't always beneficial.

5:33For owners in high-demand markets,

5:35like those with more leisure travel,

5:37independence might be a better option.

5:40- The highest performing hotels in Manhattan

5:42are independent hotels.

5:43You have a greater elasticity of demand.

5:46So usually, the highest performing hotels are smaller.

5:49- [Narrator] But brands do operate some properties

5:51mainly in this tier, whereas franchising

5:54mostly happens in these.

5:57- Those operations have dramatically fewer touch points

6:01and offerings by virtue of the fact that they're designed

6:04for a person who wants a great room to stay in,

6:08a quick option for breakfast,

6:10but they don't need other things.

6:12They don't need a ballroom.

6:13They don't need a specialty restaurant.

6:14They don't need a spa.

6:18- [Narrator] In the luxury tier,

6:19those amenities are expected,

6:20creating more complex logistics.

6:23That's why most luxury hotels are still operated

6:26by the hotel brand itself.

6:28- With respect to most other full service

6:31and luxury properties and resorts, we would prefer to manage

6:33because we wanna control all aspects of the delivery

6:36of the guest experience.

6:38- Specifically at the luxury end,

6:41we do overwhelmingly manage those hotels,

6:44and we wouldn't, for example,

6:46be talking about franchising an EDITION Hotel.

6:50What having this range of brands gives us the ability

6:54to appeal to our customer for every experience

6:58and location that they want,

7:00and that is really important for Bonvoy.

7:03- [Narrator] In some rare cases,

7:04hotel brands will still strategically purchase a property.

7:07Marriott bought this W Hotel in New York

7:10to use it as an incubator for new ideas and designs,

7:13and Hyatt purchased Hotel Irvine.

7:15- We bought the hotel.

7:16We completely renovated it.

7:18We will eventually sell that hotel.

7:20- [Narrator] But by and large, more hotels are outsourcing

7:22the owning and operating of their properties,

7:25increasing the volume of branded properties

7:27offered to consumers today.

7:29- The customer now has more choices.

7:30They have more places to both earn and redeem.

7:33But what you have seen in the past 25 years

7:37is a consolidation.

7:39There are really three or four big hotel flag families now.

7:44- [Narrator] And looking at the properties in construction,

7:47the number of branded hotels is only set to increase.