Marriott Starwood Merger and Disruptions in the Hospitality Industry
The Marriott and Starwood merger is taking place amongst a trend of consolidation in the travel and hospitality industry driven by “New Market” and “Low End” Disruptors in the market, who operate under different business models in terms of Profit Formula, Processes and Resource Allocation.
This time last year, Starwood Hotels (HOT) put up the “For Sale” signs. Starwood is one of the top 10 hotel chains globally with 1,300+ hotels in 100 countries under its operations and brand management. It is a market leader in the upmarket and luxury segments of the hospitality industry, operating 11 hotel brands including St Regis and Westin at its top end, Sheraton and Four Points in the middle, and W & aloft hotels in the more trendy and boutique category. Recently it has experienced a decline in Revenue, Operating Income and Net Income.
After almost a year of mergers & acquisition offers and counter-offers from the most interested suitors — Marriott International (MAR) of US and Anbang Insurance Group of China, shareholders of both Marriott and Starwood voted in favour of their proposed merger on April 8th 2016.
Marriott is one of the top 5 hotel chains in globally with over 4000 hotels under management across 19 brands, from the Ritz Calton and JW Marriott at the luxury end to Courtyard and Fairfield Inn at the lower end.
The Marriott and Starwood merger is taking place amongst a trend of consolidation in the travel and hospitality industry driven by “New Market” and “Low End” Disruptors in the market, who operate under different business models in terms of Profit Formula, Processes and Resource Allocation. These Disruptors include independent vacation rental properties and their online global distribution platforms (New Market Disruptors e.g. AirBnB, Tripadvisor), and budget hotel chains that operate nationally or regionally (Low End Disruptors e.g. Premier Inn in UK, ETAP/ Ibis / Formula 1 in France, Motel one in Germany and Austria).
A. What are the key factors driving the sale of Starwood and consolidation in the hospitality industry?
Let’s look into the situation through 3 lenses of the Disruptive Strategy theory:
- Low end and New Market Disruptions improving their products’ functionality and reliability driving incumbents in the hospitality industry like Starwood to improve performance beyond what most customers can use and will pay for, creating a Performance Surplus with the mainstream market.
- The travel industry becoming more mature globally and products have become more modular and less integrated — from budget airlines to road travel to accommodations, and travellers have become more independent and content to self-serve on their business and personal trips.
- Profit-formula of modular business models such as AirBnB and the independent accommodation rentals listed on them have far lower fixed costs than global hotel chains like Starwood and can make money with much lower gross margins.
Faced with improving performance of regional budget hotel chains and boutique hotels (“low cost disruptors”) providing a good-enough standard of comfortable and convenient hotel stay to guests at low price that satisfy the needs of travellers in the mainstream market without the hotel facilities and F&B services that full service upmarket hotels like Starwood provide, Starwood engaged in Sustaining Innovations to improve its performance in attributes most valued by the industry’s most demanding customers. These include loyalty programs (Starwood Preferred Guests), “lifestyle concepts” to differentiate its brands in terms of hotel designs, décor and services (Starwood Corporate Strategy), and continuing to grow through expanding the number of hotels it manages globally (by hundreds each year). In the process of engaging in these Sustaining Innovations to attract the higher end frequent traveller and group travel globally, Starwood has improved its products and services beyond the needs of the mainstream traveller, who are increasingly opting for the cheaper boutique hotel or branded budget hotel that are good enough for a short stay — forgoing the hotel facilities and Food & Beverage services that are not very often used.
New Market Disruptors in the form of independent vacation rental properties massively increased supply and choice of accommodations for personal and business trips as online distribution of these fragmented rooms became mainstream and performance improved through online public review and rating systems on AirBnB, Tripadvisor, etc. These New Market Disruptors operate in a more “Modular” approach to hotel operators by only managing the Sales and Marketing of the fragmented pool of accommodations listed on its online platform, while the “hospitality” operations or the guests is managed by the property owners. This means they have completely different “Profit Formula and Processes” with far lower overheads and can make money at lower gross margin resulting in cheaper products to consumers. These New Market Disruptors have attracted frequent and higher end travellers who might otherwise have stayed at a 4 star Starwood resort room or suite to stay at an independent villa for their family holiday, or an apartment for the longer business trip.
This is the first of a 2-part article written by Joyce KWONG for Harvard Business School’s HBX certificate course in Disruptive Strategy with Professor Clayton Christensen. The second part of the article is published on her blog on Disruptive Business Consulting.
Joyce Kwong is a Professional Business Consultant specialising in:
1. Strategy and Business Development,
2. Transformation & Change,
3. Performance & Talent Management
4. International Expansion
She runs a “30minutes Business Clinic” as part of her Coaching and Mentorship program for Entrepreneurs and SME owners.
Joyce graduated from the University of Oxford and has a MBA from INSEAD.
She is a Member of Institute of Directors (MIoD) and Royal Institute of International Affairs (Chatham House) in Britain. She is also a Freeman at Worshipful Company of Marketors in the City of London.
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 Starwood’s full year 2015 Unaudited Consolidated Statements of Income
 Market Realists
 Disruptive Strategy by Harvard Business School Professor Clayton Christensen