Center Stage: One on One with Arne Sorenson

Well, they're like 3,000 people here. I think a thousand of them work for Marriott. Pretty sure they better sound like it.

It's going great. It really is. We love throwing these stats out. And of course, one you didn't use, I guess maybe because we didn't use it in the call, is we're opening a room a little more frequently than once every 13 hours around the world. I'm impressed by that statistic. I'm also exhausted by that statistic, right? It shows you something about the pace of growth that's happening across the company and across the industry. So we're not unique in this space, obviously, but we are just thrilled to be here with GBTA. But we're also thrilled to be in an industry that is growing because of economic growth, because of a shift towards experiences, because of the growth of the global middle class. And we see that it presents opportunities all over the place. So the outlook is still lots of room for growth, lots of upside. We're not in any kind of plateau or peak. I don't think we're at a plateau or peak. We are in a complicated world today.

So a couple of thoughts on that. We closed in September of 2016, announced in November of 2015, and so we're getting near the second anniversary of closing. And automatically you're integrating. That's a lot of time, yeah. And so we better have accomplished a lot, right? And I think we have. From the beginning, of course, we linked the loyalty programs the day of close, which was a positive surprise for folks, and we were really pleased to get that done. Very deliberately, we said we want to settle the people team as quickly as we can, right? Because we don't want anxiety about the future to be gnawing away on confidence. Obviously it creates anxiety, uncertainty. We want really people to be focused. So the bulk of our team of people around the world was resolved by the first of 2017. And that was a good thing. Now we are right now firmly combining the loyalty programs, firmly combining the reservations platform so that all of our hotels are on every platform, and you don't any longer have to go to the Marriott platform or the Starwood platform. And that's all about technology and training of our folks. In some respects, it is as fast as it could be done and as fast as other companies in comparable spaces have done it. It still seems like a long time to me. I hate to take two years in order to get all that done. We get to the end of this year, I think the team of thousands of Marriott associates who are working around the world will deliver it, and we'll deliver it fabulously well. And then we can have that behind us, and we'll be looking towards the future.

Yeah, and fortunately we're not hearing those comments. From the moment the deal was announced in 2015, particularly from the SPG folks, we heard, "What are you gonna do to my points?" I hope you've all seen that the cover of Business Week this week is "Do Not Disturb My Points." It's a Marriott story. And we had a little bit of debate internally about this very one who first came out because it tries to create some tension, right? What is Marriott gonna do to the SPG points? But it resolves the tension very much in our favor and says Marriott has navigated through this. They didn't necessarily make every decision the way an SPG member would have wanted to, but when you look at the collection of benefits available from this program, people feel good about it. Let me digress for one minute. I was in New York last Tuesday afternoon after our earnings call and then heading to Boston for our board meeting which started Wednesday morning. The shuttle had been canceled the night before, so I was taking the 6 a.m. shuttle from LaGuardia to Logan. And I ran into an old friend who's working for Bloomberg. The Bloomberg team was going up to Boston for a meeting, but he introduced me to another senior member, and then suddenly to the points maven within Bloomberg. And he's following me onto the plane talking about various features of the loyalty program. I sit down in my seat, and there is a road warrior from one of the big consulting shops sitting next to me. And suddenly there's six people around me in the plane that are talking about SPG and Marriott Rewards, knowing they're coming together on August 18th next Saturday, and having a point of view about all of it. You can't buy that kind of interest.

And think about the relationships that are represented in this room. 7,000 people here. We know each other. We are doing business together. With the bulk, I would think, we relate to you on a portfolio basis, not necessarily on a brand basis. I think about the big customers we have here in this room, and we are talking about where their people should go, how we should care for them no matter what level they are in their companies or organizations, and no matter what the purpose of their trip is. And that's very much the same philosophy we take at a level for all of our customers. We want to make sure we are delivering choice within our platform for different trip purposes, different geographies, different price points, different sensibilities, luxury, lifestyle, etc. And generally, having that greater choice is a good thing. We go to market with our platform, we go to market with our loyalty program. Because right now, we are opening a new AC Hotel by Marriott in the US basically once a week. It's a brand that existed in Spain for maybe 15 years, well-known in Spain, not known in the United States. The hotels are opening up quickly, they're filling up quickly because of the relationship with Marriott as a whole. And so what we want to make sure we do is we've got to have that loyalty program be strong, we've got to have the platform be strong, we have to have the brands stand for something, each of them underneath that. So people know if I'm staying at an AC or a Marriott, they know what they're getting from it. But we don't need every one of those brands to be something you can pull off at the top of your brain with unaided recall. I have to look at a brand survey because even with the expertise you have, sadly you might not be able to list our 30 brands.

Yeah, we can work on that backstage. That's why I have no cards.

Well, sadly we don't have much pricing power. And you can see that in whether you look at what we reported last quarter, you can look at the last few years. We don't seem to be able to have much power to move rate, period. Why? As big as we are, roughly 15 percent of the US hotel business, something like that, we only price about half of those rooms because the other half is priced by our franchisees. There is total transparency every single day in pricing. And what we see is enormous competition around rate. Particularly, we actually think we win by driving occupancy, which we do by driving service, by having a stronger loyalty program, those sorts of things. And the premium performance we get is because of distributing higher occupancy. Yes, you can maybe drive some rate premiums, hopefully you've got product premiums that justify it and service premiums that justify it, but the pure rate premium potential is extraordinarily modest.

We have an easy one? No, it wasn't an easy one. That's something we had debated for a long time. And I presume everybody knows what we did, yes, with great knowledge in this group of experts. We talked about it a long time. And you know what we had seen beforehand was that the intermediary business had gone from, oh, I don't know, 10 percent of group business to 50 percent of group business in the last decade or so, which is obviously massive growth. We could look at the group intermediaries and see dramatically different kinds of platforms. Some were delivering amazing value to their customers and really helping them manage their meeting planning, do all sorts of things that was really delivering value, and some weren't delivering much value at all. And they were all charging the same thing: 10 percent. 10 percent in the context of a full-service hotel in many of our big cities across the United States is a very healthy percentage of the total profitability of that hotel. It's a very expensive business. And I think collectively, what we've got to figure out is how do you get to a place where the group intermediaries who are delivering enormous value are paid for it, right, which they have to be, done by their customers, and how do you get away from this notion that everybody gets 10 percent no matter whether they deliver value or they don't deliver value? I'm not suggesting for a second that people deliver zero value, but there's a big difference in that range. And so what we did is say, let's recognize the capital needs of these hotels, the pressure on profitability, but let's also say, all right, we're gonna bring the base down from 10 to 7. Let's see whether or not those group intermediaries working with our end customers can basically say, okay, how does this settle out over time? The exceptions that you refer to in Europe in your comment are really very temporary in nature, and they were driven by the contracts that were in place at the time. This is something that's going to apply within a certain number of months. It's gonna apply to everybody for all businesses. Certainly one of the issues for an industry at large is having consistency. If everybody is playing by the same rules, you have time to adjust to those rules. It makes a difference.

I mean, there's nothing immediate. We are in negotiations with Expedia as we speak, right? That's a different place obviously. And it'll be interesting to see how those negotiations come out. We don't have a sort of secret drawer of next steps that we're gonna take over the course of the next number of years. This is a place where I think we've got to have dialogue with our great partners and make sure we work through it together in a way that the economics are fair and that we are as aligned as we can be. We'll never be perfectly aligned, but we should be totally transparent with each other, and we should look for the places where we can be aligned together. And I think there are more of those than the opposite.

Yeah, that's interesting. We of course have watched this space for a number of years. And maybe four years ago, we were thinking about doing something with one of the folks in the home sharing space. And our hotel owners said, "Why on earth would you legitimize this upstart group?" And we thought, well, if you care that much about it, it was just a little test anyway, we won't bother with it. We now get to a place where I think it's fair to say this business exists, and we're unlikely to be able to wake up tomorrow and suddenly see that it's gone. So the business exists. It is competing broadly in the hospitality space. It skews overwhelmingly towards leisure travel, it skews overwhelmingly towards value travel, cheap travel. But obviously a number of those platforms want to move to business travel and they want to move upscale. They want to grow aggressively. And so we've been obviously competing with other hotel tech companies for a long time. We've got to make sure we compete through product and value and service. There is one place, and this is what prompted the London pilot, there's one place where we don't have a great response to them, and that is the whole home kind of aspirational thing. You know, the manor house in England or that four-bedroom house someplace that a big family can go to and stay together. We get some of that business in our hotels, but much of that business for generations has gone to an agency in some place, or a property manager of some sort. And so we thought in London, let's do a whole home pilot. We've used Tribute Homes, Tribute being one of the brands that came to us with Starwood, and let's connect it to the loyalty program. Let's see what our customers tell us about it. We have a partner there who delivers services, not just key delivery, but housekeeping, design services, they're standing by if anything goes wrong, so that in fact we can deliver the kind of experience that our guests will expect to have. They don't want to take a crapshoot and end up in a place which is dirty or which doesn't work or something else. And we're four or five months into it. It's all of 200 units in London. It's going well, and we've yet to see sort of where we go next steps on this. But I do think if we can find the right code to deliver a larger unit which looks very different from a hotel room, a whole home product, I think it's an interesting place to be.

Well, so one of the great benefits of my job is the legacy that Marriott has had. 91 years this year. And for most of those 91 years, the company has been talking about taking care of our people because our people take care of our guests, and the guests come back again and again. And taking care of our people is not a patronizing idea. Taking care of our people is about empowering them to win, and empowering them to feel pride in their work, and empowering them to have dignity in their lives. And we see it. I'm traveling all around the world all the time, and see it in hotels all the time. People with jobs that are not fancy, people who will never end up in a room like this, who have pride in their work as much as any of us have pride in their work. And so the first thing we've got to do for the future is we've got to make sure we retain that cultural legacy, because it is only through their pride in their work that we will succeed. I think you get beyond that, it is about the things we've started with already. It's about loyalty, it's about technology. How do we use the loyalty platform, the technology that runs it, to make sure we communicate with folks, that we know you, that we can customize your experience, that it's intuitive to do business with us? I think we've got to make sure we stay focused on lifestyle and luxury and localization, if you will. One of Marriott's great lessons when we started with our international business 40 years ago, 45 years ago, in the hotel business, is that we thought we needed a room for American travelers traveling abroad that wouldn't disappoint them and would make them feel like they were at home. Today it's the opposite. We don't want to disappoint them, but most of us when we go to Cairo want to know we're in Cairo. And we want a real local experience that we can Instagram about and we can go home and tell stories about it. And so that change, which is about design and food and beverage and all those sorts of things, even as we're moving in technology, we've got to move that forward.