A Conversation with Arne Sorenson, CEO & President, Marriott

That's good. I love that. Yeah. I've been working on it.

Yeah, yeah. One step at a time is the answer. And I think to some extent, this is a reflection of both the geographic differences and generational differences. Let's start by recognizing that there is nothing like going to school and getting educated in the areas that you think will be useful to you in whatever career you want to pursue. And so for those of you who are at Georgetown Business School, I think it's a spectacular place to be. And if you decided to get into business, it is perfectly appropriate and sensible, and you'd be crazy probably to do anything else but to go to a great business school. So good on you for that. I grew up in the Midwest. My father, both grandfathers were Lutheran preachers. All three of them went to the same college that I went to. We had started our family life in Japan and didn't get back to the States till I was in elementary school. And for whatever set of reasons, I really didn't think about going to schools outside of the sort of cocoon that defined our family heritage. I didn't apply to any school on the East Coast, for example. I applied to three schools in the Midwest, and they were all kind of cousin schools, in a way. And I went there, of course, to learn and grow up, which is, I think, why many of us go to college or university. Went to law school really because I didn't like the jobs that were available at the end of college. I didn't want to go be a management trainee at a big company that was a sort of personality-less thing, but wanted to keep learning. And so law school seemed like a decent place to go and have some flexibility for a career. I do think that the lesson in this is whether you've gone to Luther College or Georgetown for business school, you have to keep learning. Again, if you've gotten a finance degree because you want to be in finance, but you don't keep learning, you're not going to succeed. Because what you learn is not going to stay current for very long.

The idea I had when I went to law school was a law degree could set me up to do two or three or four different things over the course of my career. Practicing law was just one of those. And to the extent I thought about it at the time I left, I worried a little bit that I liked practicing law too much and I might end up just staying. The law firm is a great law firm. Career was a good career. That's great cases. Actually, Bill Marriott called, not during the middle of the Marriott litigation, but during the middle of the Haas family litigation, and said, 'Why don't you come out to Marriott?' And I think it was the third month of a jury trial in DC Superior Court. Probably your audience here is too young to remember who the Haas family was, but they were suing each other for years. And it was the best and worst, I suppose, of courtroom dramas. The best in the sense that we were there every day and the news cameras were outside the courthouse. The worst in that we were accomplishing nothing other than helping a family destroy itself. No kidding. Wow.

Well, I said to Bill Marriott when he called, 'If you want me to be a lawyer, you can call me down to Latham and Watkins and I'll do whatever you want me to do. I'm not interested in coming out to Marriott to be an in-house lawyer.' I did do the M&A or business development for two years. He bought a couple of companies. And after two years, he asked me to be the chief financial officer, which, you know, just a sign of how arguably irresponsible it was for him to offer me that job, that when he offered it to me on a Saturday morning at his house, the idea had never crossed my mind. For the obvious reasons that I didn't go to business school, I wasn't a CPA, you know, I wasn't classically trained in any of that. He said, 'Once you step in and do that.' And I did that for over a decade. In the end, of course, learned a little bit about finance context.

With Anbang or Airbnb.

So I can't believe it's been five years already. That's all good. The, you know, the onboarding piece of Starwood was interesting to me. Maybe back up for a step for those who aren't familiar with it, but Starwood was one of our principal competitors in the industry. And in early '15, I guess, they fired their CEO and they commenced a strategic review process. In other words, they put themselves up for sale. And, you know, people will occasionally, often ask, 'Why'd you buy Starwood?' And one of the answers, which is a little bit tongue in cheek, but only a little bit, is they were available for sale. And how often do you really get a meaningful competitor that has deliberately put themselves up for sale? Almost never. And so you've got to look really hard and say, what are the opportunities that I can achieve if we have this business as part of our platform. We can come back to that if it's of any interest. And so we ultimately jumped in, made an offer to buy it. It was an ideal time because the other potential strategic buyers, other competitors in the industry, for one reason or another, were not situated to be a very good buyer. One company was too small, and the other was still private and was about to list and therefore didn't have kind of currency that they needed. And so we were kind of the lone buyer and we stepped in. We thought we got a very good deal. A Chinese insurance company, Anbang, jumped in and made a proposal at the last minute, which was higher than ours. And of course, when the bid came in, I thought for sure that we had lost the deal. And I'm not sure this has changed that much in the last five years, but imagine bidding against, in effect, China, Inc. They can spend whatever amount of money they want. And to get a global platform in the lodging space, including a strong distribution in the United States and other parts of the world, we could see the attractiveness of that. So the first debate was, do we make another offer and try and get it back, or do we, you know, take our breakup fee and go off in a different direction. And I sort of pulled the team and, you know, pleaded for their unvarnished advice. And we've fallen in love with our own deal, right? You should pursue. And we ultimately decided, let's make a proposal that we would feel good about closing, but let's not chase beyond. And actually, for a mix of reasons and very much to our surprise, we ended up succeeding.

I think the board had the same question that I posed to our team, which is, have we fallen in love with the deal? Are we really pursuing a deal on terms that make economic sense for us as well as, of course, strategic sense? By the time it ultimately got to making that proposal and they saw that proposal, they were unanimous in support of it.

It took a year and a half of solid work by, you know, hundreds of people. And the principal pieces of that were a technology platform that had to be capable of merging these two things, a set of rules that had to win over the loyalty of the SPG, the prior Starwood loyalists, and then of course branding and naming of the new combined program.

Oh, absolutely. Yeah, absolutely. And we started trying to appeal to them before we closed the transaction. When the transaction is pending, you and I won't remember exactly the details of what we did, but we basically came out and said, on the day we close the transaction, we will recognize your elite status if you have it on one side, and we will allow you to transfer points between the two programs. Do that on the day of closing. Initially, all the folks told me it was impossible to get done. But it was a way of essentially saying there is immediate good news for you, whether you're a Marriott Rewards member or an SPG member, and there's more good news coming down the pike.

So that's a really good question, and I think it can be asked that way, or it could be asked the way we asked it internally. So when we were renaming the combined loyalty program, previously Marriott Rewards, SPG, which historically was Starwood Preferred Guest, but that really known as SPG, the Starwood name did not exist on any single hotel brand. Not nearly as old as the old name is Marriott, obviously. But we had some folks who loved the sort of independence and newness of the loyalty program and said, why shouldn't we jettison the Marriott name? And my answer, and obviously ultimately prevailed, was Marriott name is extraordinarily well known, right? And why would you give up the familiarity of that name for something which is a new word for word, right? It feels like Bon Voyage, so it probably works pretty well. I mean, we thought about that, but yeah, and I think the answer to the question is the same. The Marriott name is extraordinarily well known. It's filled with mostly good attributes from a customer perspective. It's not something we need to run from. And as a consequence, I suspect something will hang on.

Well, that's a couple of good questions. And the first question is, are we fearful of OTAs as bigger threats than our lodging competitors? And I think the short answer to that is yes. The somewhat longer answer is not just the Expedia's and Booking's of the world, but the Google's of the world, the tech platforms. They know an extraordinary amount about all of us. In Google's context, they know every place we search online. In Amazon's context, they know everything we buy. They know our preferences. They can often know them better than we know them ourselves. And their business model fundamentally is to get in the middle between the supplier and the customer and extract a tax, right? A percentage of sales. It might be an ad click, it might be a commission structure. There are lots of different structures, but they're trying to extract the tax. And obviously, we don't want to pay that tax more than necessary, and we only want to pay it when it's bringing incremental business. And so the principal reason we went after Starwood was to say we need a bigger ecosystem so that our loyalty members can live within our ecosystem and not feel like they've got to go to Expedia or to Google and find a place that they want to travel.

That's right. And that's where the OTAs and Marriott are most aligned, right? Because if they can deliver us the occasional leisure customer who doesn't really have loyalty, because it's not in their interest to be in the program, right? And as a consequence, they're going to be less inclined to come to us directly. That's fine. But when they start to say, 'Alright, we're going to pivot our model and get everybody,' right, including you, that's where it gets expensive for us. And so we've done things in the last few years to basically say, it's always been the case, you can't get loyalty points directly with us, you've got Marriott, you're not getting any. But not only are we going to make sure you can't get the room rate lower someplace else, but we're actually going to give it to you lower and lower, right?

By and large, all of them have, yeah.

So Airbnb, I think is going to price, at least that's what the news is, if this is true, and will immediately have another public company in our industry broadly defined, maybe with a value bigger than ours. Will be very close, and it wouldn't surprise me if it had a bigger value. And I think the fact that they're public is not terribly revolutionary. It'll be nice to have more information about them and about their profitability. Interesting to us. We of course have combed through their offering documents. Their system-wide sales are less than half of ours. So by system-wide sales, that is the gross amount paid by all of the guests that stayed at Airbnb facilities compared to the gross amount paid by all of our hotel guests. We're at about close to 90 billion, I think, in 2019. We think they were at 37 billion or something like that. And so what we'll end up doing a lot of that will be torturing ourselves and sort of comparisons. I think the more interesting thing is that they have opened up a new space, which is how do you get, particularly the whole home rental, right, which has existed for a long, long time, but how do you get it done in a digital world that allows a loyalty overlay, that allows ease of booking. And they have taken some steps on that. But we've gotten into it too, you know, moves into this area. So it will come after this.

Yeah. Yeah, it is.

No. No. And I can't imagine listing hotels on the Hilton, either.

I mean, I think the COVID impact is still obviously very new and it'll be interesting to see how that evolves when the virus turns to recede. Clearly, you look at residential real estate and you see residential real estate in non-urban markets moving much more healthfully and faster. And that's for obvious reasons. You're looking at where people vacation this summer. Not cities, by and large, but coastal destinations, mountain destinations, resort destinations, and all of that is reasonably obvious why. You can drive to those places. You don't need to go into virus hotspots. You're not dependent on mass transit, etc. Extended beyond the fact that, why would you go to New York? The shows are all closed. The restaurants are closed, etc. And of course, then you compound this with the fact that nobody's going to work, and by nobody's going to the office. And you know how Washington is, you go down to Washington on a weekday afternoon and it's dead, and the hotels are quiet, but the small businesses are closed and the offices are closed. What happens a year from now? I think we'll actually shift substantially back towards where we were before. Not all the way. I think remote work will be a more regular part of office workers' lives than it was before. Maybe that's a couple of days a week, but I think most companies will still value, most institutions will still value people coming in, building culture, collaborating, and doing all sorts of other things. I think, you know, we could poll this group, I suppose, I don't know how to do it technologically, but I think cities are still going to be very attractive places for people to live and start their careers, probably build their careers, and we'll end up with the cities getting certainly more vibrant than they are today. Yeah, take them a while to get back to where they were before.

Oh, not necessarily. I mean, I think the, and obviously a lot of this is about the virus, which I'm not an expert on, but the bad news, of course, is the virus numbers today are awful. And as a consequence, the next number of months are likely to be pretty lousy from a business perspective, whether it's our business or lots of other businesses. But the good news is the vaccine, and by mid-year next year, it seems really probable that folks who want a vaccine will have been able to get a vaccine. And so I think in 2021 we will see a step change back up, not to 2019 levels. I think to get back to 2019 levels is probably a good two or three years out.

Yeah, well, you know, we've got Residence Inn and Element, which was one of the Starwood brands, TownePlace Suites, all classically extended stay hotel brands. Residence Inn brand by itself has been probably the single most profitable real estate investment in the hotel industry globally for decades. Decades. And part of that is because with an extended stay, your operating costs are lighter. Part of that is you tend to run higher occupancy. And you end up with a customer group which is a little less dependent on whatever is happening with GDP at the moment, right? There are folks who are on longer-term assignments, they're in sort of less than permanent moves on a personal basis. A number of different factors that are going into that. I think the pandemic has reminded us of the strength of those kinds of brands. They are drive-to, they include folks that are just travelers, but are kind of in an in-between place. Starwood Capital, of course, owns a whole bunch of our properties in this space, not in some of our competitors, but so I think that is not surprising to me at all. That's different, though, from Airbnb and whole home. I think that whole home context can play a role for a true extended stay, but it's also about comfort in a pandemic that is about controlling 100% of where you're staying, right? You know that nobody else is going to be in that house.

Well, you know, not every company's the same. We have about 750,000 people that wear a badge every day around the globe, or did before the pandemic hit. And in an environment in which there's less trust in institutions, doing government, I think more and more people look to their places of work, to their employers, for what, for advocacy, for interpretation of the world that they live in. And so there is a demand from our community that we speak out on the things which are germane to us. Right. So I think that excludes things. For example, I've spoken on many things, never on choice issues. Why? Not because I don't have a personal point of view, but who cares what my point of view is on that? It doesn't have anything to do with the hotel business. Yeah. Who we accept as guests to our hotels, but inclusiveness is very much integrated with our business travel policy. You know, there are lots of places where for our community of associates and for our guests, it is germane to our business. It would be as risky for us not to speak out. It's just...

I think, well, yeah, I mean, take the George Floyd killing earlier this year. I immediately blogged about it, in part because it's sort of one of the things I do, and I was thinking about it and I was troubled by it and wanted to share my point of view. But I think we would have gotten beat up fairly badly if we had not spoken out about that. Yeah. It said, what are you telling us that this is okay?

Yeah, I think that's right. I mean, and this is more from a business perspective, but you got a business audience here. Bill Marriott, I've not been CEO for eight years. So he was CEO, as you mentioned, for 40 until 2012. Never did quarterly earnings calls. Not only did he not speak out on social issues, things that affect the business. And he did one, and that was after 9/11, when I was CFO and I invited him to come in and said, 'I think in the environment of uncertainty that we've got, it would be useful to hear your voice of, you know, we'll get through this, etc.' Yeah. And that's just the way times change. I mean, his job would have been principally internal and then marketing into hotel guests. It would not have been about the financial community, would not have been about policy issues, would have been about any of those.

No, I don't think so. No.

Well, succession conversation has got to be a regular conversation. In fact, the first board meeting I came to after becoming CEO, I said, 'We got to talk about succession.' And there were, you know, a good percentage of the board that looked at me like, 'What are you talking about? You're brand new in that position.' And the proverbial bus, going to be hit by the bus is the example, you know, you don't know whether I'll be hit by a bus. You also don't know whether I'm going to fail. Right. You're standing behind an icon in the industry, and you've got to be ready to replace. And so I want to make sure that that is something we talk about every quarter, and it means that it is reverberating back into what we do in the management ranks, which is to identify ready-now candidates, identify candidates we think might be ready in five years or 10 years, and make sure that we are being deliberate about building their breadth, making them as broad as they possibly can be, and having a set of choices.

It's probably less formal than an institution the size of Bain. They're meaningfully bigger than we are. But with respect to each person on that succession list, we are saying, 'Okay, where do they need to be broad? How does that compare to the importance of what they're doing today? When do we move them? Are there ways to modify the job that they have today to add some things or take some things away?' If you've got to be very specific.

Anything being with family. I mean, we've got four kids and they are my rock, and being with them is it.

Oh, I sure hope so.

And right now, Killer Angels.

Is a novel set in the Civil War at the Battle of Gettysburg. And even though it's a novel, it's one of the best at its historical importance.

Probably Martin Luther King, Jr. I think the, you know, I think at times about Nelson Mandela, or about Gandhi, or about Jesus. There are a few folks who individually have had enormous impact. I think MLK obviously has had that impact. But I also think he would be a great conversationalist and be very interesting, particularly from today's vantage point.

Yeah, a little bit of both. I think you'd like him at his peak, which is obviously what he was with us, but it would be sort of nice to get his reflections on the world today.

That's like asking my favorite kid, you know.

Well, this is maybe just partly due to something that you all probably study, but I think from a business perspective, Peloton is fascinating. To launch a brand at a dramatically higher price point for a product that is already well established and knock the lights out. Yeah, you got to give them credit for it.

Yeah, it varies. High floor, I suppose. Depends on the destination.

Well, I'll probably ruin my reputation with this, but put it in context. I only play maybe two or three rounds of golf a year. But often there with your neighbor, David London. I do enjoy a cigar on the golf course.

Japanese food is my comfort food without a doubt. Yeah.

That's a big list. Partly this is because I was young and fast, but I spent the summer of 1979 in Beirut, Lebanon, which was in the middle of a war. And I was 20 years old, 20, I guess. And we went down to the American University of Beirut, which is right on the Mediterranean, beautiful spot, and I ran there barefoot. And was running so fast and felt so good, and it was stunningly beautiful, but also in a very interesting, provocative place in time, which is a conflict zone and a war that in some respects is never ending.

Well, I think, go back to law practice maybe for a minute. I read every weekly and monthly law publication. I shouldn't say every one, but there were two or three or four that were sort of industry rags, if you will, and they would be about the meaningful cases decided, or what was happening in the law firms, or what was happening in various aspects of the profession. And I read them cover to cover. And there wasn't really any assignment to, but, and I'm not sure how deliberate I was about it, but the point is, you've got to suck up every bit of information you possibly can about the industry or the company or the discipline that you're working in. And taking those inputs and bringing that curiosity to the work that you're doing. And later on in my career, I found different ways to sort of structurally integrate that curiosity. But keep your ears open and just suck in every bit of information.

Well, Sam, as you're right to talk about the pandemic accelerating trends, one of the trends we've seen over the last 20 years is a shift of more and more of our total business towards leisure and away from business travel or away from the meetings business. Now, it's been modest, it's a shift of three or four or five points, something like that. At the moment, we've seen that dramatically accelerate. It'll shift back a bit, but I suspect leisure will continue to grow faster than other segments of business. And that will mean something for the way we market to folks, that will mean something for the way we structure the loyalty program, it'll mean something for the services. I think the second thing I would point out, it's kind of a small thing in some respects, but digital key. The ability to open your guest room door with your phone has existed for some period of time, but has really not been used by the bulk of our customers, really a very small percentage. And compare that, contrast that with the airline space, where certainly for domestic travel, almost none of us would print out a boarding pass. And we all know that we've got a problem if we end up at the check-in counter in an airport, that's the last of the world. And so I think the safety ramifications will drive more people to use this kind of technology that will last longer and be adopted much more dramatically.

Well, you've got to make sure it happens enough so people can see that it's safe. It's safe to give you their unvarnished opinion. And to some extent, that could go so far as to say it's not safe to hold back your honest opinion. When I, I probably shouldn't actually talk about which job, but I stepped into one job and compared the crew to a group of abused children because the boss before me had basically not permitted this kind of dialogue. And it took a full year to convince that team that it was safe and expected to be able to say, 'Okay, this is what I really think, this is what's not going well, or this is what I think we should do differently in the future than what we've done in the past.' But over the course of a year with very deliberate work, 'What do you think? Tell me what you think.' And particularly when those thoughts are different than your own, your response to them will tell them everything whether their thoughts should be shared or should be held. And I think in a big company, particularly, you have got to find a way to encourage people to give you what they think.

Yeah, I mean, I think Google obviously gets an enormous amount of money for advertising travel-related links or ads. You know, Expedia, Booking, their largest expense item is to Google, multi-billions of dollars a year for advertising. We spend dramatically less than that because we've got a brand that actually is known. Facebook is in the process and doing extraordinarily well in monetizing their traffic as well by providing ads and providing targeted ads, you know, using the information they have about their customers to target to them. And again, they are doing things in the travel space, they'll keep trying. Amazon, I think will be interested. Amazon so far has not tried to be a seller of hotel rooms, but I don't know why we would be surprised if they did. They again, they're selling us everything else, and I wouldn't be surprised if they went at it at some point in time. I'll make a commercial here for a second, and maybe this is relevant to a business group too. But, you know, as you know, David, the loyalty program, the way it works, every time a loyalty member stays at a hotel on a paid stay, that hotel gives a percentage of the gross revenues at that stay to the loyalty program to pay for the cost of redemption of those points for a free stay at some point in the future. And the value of those revenues as well as what's being contributed for credit cards and others is something like six to 7% of the total stay. And so if you say, 'Alright, I'm Google now, can I put six to 7% back into value that goes directly to the customer?' That's an enormously expensive decision. And while we will always be tiny in comparison to Google, I think we do have some tools like this one in the loyalty space that can cause us to be able to still succeed well with customers saying, 'You know what, you ought to be our customer or not.'

So all great questions, and there's a lot of work that has been underway for many years in some of these spaces. Human trafficking is probably the most recent. I think we have trained about 500,000 or 600,000 of our people to spot human trafficking. We have stories that have come up through the system where we have been instrumental in rescuing some folks who have been grabbed against their will, and we'll keep doing everything we can. And by the way, the sharing the training protocols and the like that we've developed, we have shared with the rest of the industry and view this has not been something that is a competitive advantage but something that's important for the industry to do. On diversity and inclusion, I think the most important thing there is creating an inclusive environment, which is both about how you run a firm, how you empower people, but also about the way opportunities are distributed, whether or not I see myself in the leadership of a company or I see myself in sort of the opportunity that the company presents to me. Of our top 800, let's say 800 executives at the company, 42% are women, for example. We're not quite 50/50, but we're going to be 50/50. And from a gender perspective, I think we can say we see this in our board, we see this in my direct report team, and we've got great examples of women succeeding. And a great example of racial diversity succeeding as well. But we've got to make sure that we keep moving on that. Sustainability, I think, is itself worth a much longer conversation. But essentially what we want to do there is everything we can that makes economic sense. And so that doesn't mean we shouldn't do some things to experiment and see whether or not we can make economic sense out of it, but sustainable energy, reduced waste, you know, we made a big deal last year out of the fact that we were going to go from single-use plastic toiletry bottles to the reused bottles that are dispensers, if you will, in the shower. In COVID-19, that becomes a little bit harder to actually roll out because what the customer wants is nothing that they're touching that's been touched by somebody else. But again, all the things that we can do in our supply chain or in our operations or in building management that reduces our environmental impact, we're trying to do.

So I, you know, I think in many respects the answers to this we'll only learn together over the course of the next couple of years. I don't particularly pretend to have any particular insight to it. Listening to our folks, listening to other business leaders, I think there is a range of views. I think many folks are very frustrated now by their continued digital lives. While these tools are excellent for some things, they're not great for building cultures. They're not great for collaboration and strategic conversations. They're not great for building careers, if particularly if you're early in your career. And they also, I think, they're also not great for mental health, to tell you the truth. I think we have lost the dividing line, whatever dividing line we had before, between work and personal life. And now when you're doing the same thing from home every day, those lines have further blurred. So I think the world we live in today will change back significantly towards what it was before. I think most bosses want their teams to come back to the office. They want the jobs to exist in a physical place. I think at the same time, most employees want a bit more flexibility than they had. I want to be able to work a day or two a week out of the office and not be looked at with cross-eyes as if I'm trying to steal in a vacation day, but that I can actually be productive in that way. And that's sort of where I guess I expect we'll settle out, that we will mostly have jobs that include offices and are in a physical place, but that there will be a higher remote mix within those jobs. From a travel perspective, I think it means that we can dial in a few days of work from an incremental week away. So if I'm working three days in the office, two days remotely, I can go down to Florida in the winter. I can work two days from Florida and take an extra three days vacation when maybe pre-pandemic I would have had to take a week. And that may arguably have picked us, but only time will tell.

You bet. Great to see you, Jeff. David and Sam, thank you very much. All of you at Georgetown, you're in a great place. Jeff, thanks for making Georgetown such an important part of the community and a part of the business community as well. So good to be with you all. Have a happy holiday.