Scott mcculloch is editor of Families in Business.
JW Marriott Jr presides over a hotel empire whose operations span 66 countries. It is an achievement that has played out over some 40 years. The question now, as Scott McCulloch discovers, is whether his son John W Marriott III will soon fill his shoes
Logic would dictate that when you interview the CEO of a hospitality and hotels giant, you do it somewhere off in the hushed confines of a snazzy drawing room or, preferably, a plush cocktail bar. Not so with JW Marriott Jr, the septuagenarian patriarch who divides his time between family, church activities and running Marriott International, the world's largest hotels group. As chairman and CEO he presides over a $10bn lodging behemoth, and with more than half a million hotel rooms in 66 countries Marriott International's operations are global. That, quite simply, makes JW the daddy of the hospitality industry.
He is a busy man who spends 150 nights a year in the lodgings that bear his name. JW likens these visits to one big fact-finding tour of duty. "I learn a lot and what I look for when I visit our hotels is whether our 'spirit to serve' is functioning, whether our people are really stepping up to take good care of the customer, what physical condition the hotel is in and how it's doing in the marketplace," he says. "I visit the managers and the sales people from time to time and ask where they are in the marketplace, how they are being accepted by their customers, and how the competitors are doing."
Once all the intelligence is gathered, JW says he gets a sense of the "positioning of a hotel" and, if need be, some details to hand over to his generals at HQ in Washington DC should any corporate tinkering be necessary. He is a 'hands-on' leader and every inch the product of his fiercely entrepreneurial mother and father.
The company founded by his parents, and subsequently taken to new heights by JW himself, is still very much a family affair. "We come from a family that has always worked hard and all of my children started working in the business when they were 15 or 16 years old." His three sons have always worked in the business, some as general managers, others in sales or food and beverages. "They have been down in the trenches; they have got their hands dirty; they've worked hard and learned the business."
It seems apt, but many business leaders have increasingly insisted their successors be groomed externally – a career stint for, say, five years – then gently brought back into the family business fold for further training. It's a fashion that never caught Mr Marriott's eye. "I think the key for a family growing up in the business is to get into the business at the lowest level they can and learn. I did. When I was in college I worked for four years in our restaurant in Salt Lake City and I just learned the food and beverages side of the business as best I could."
He has worked in the industry for more than 50 years, but it was 1956, the year before the family's hotel business was launched, that marked the first of three major turning points. The hotel was a small part of his parents' fast-growing food services company, which began life in 1927 as a humble root beer stand. J Willard 'Bill' and Alice Marriottlater added hot food and named their business the Hot Shoppe. In 1929 the couple incorporated and began building a regional chain. Hot Shoppes opened its first hotel, the Twin Bridges Marriott Motor Hotel, in Arlington, Virginia, in 1957.
Yet seeing Twin Bridges rise from its blueprints meant seed money. The problem was Bill Marriott Sr was risk-averse and deeply reluctant to borrow cash. He saw little alternative but to take the company public. "He said 'we cannot build a hotel business without going into debt, so I'm going to sell some of my stock and diversify.'"
Looking back, it was a canny move. Today the Marriott family still owns about 20% of the company, which has grown into an economic powerhouse that employs 133,000 people. When JW became president in 1964 (CEO in 1972 and chairman in 1985), he focused on expanding the hotel business. With the rise of airline travel, Marriott built several airport hotels during the 1970s. By 1977 sales had topped $1bn.
The company has gradually transformed from catering and restaurants to become a pure hotel group. Despite having built some food-strong brands, JW says his strategy eventually boiled down to a sobering exercise that involved sizing up the group's formidable competitors, one of which was McDonalds. "We did not move as aggressively in the restaurant operations side as we did in hotels, and it's probably my fault because I recognised back in the 1970s and the early 1980s that we were in the fast food business," he says. "We had a chain of Roy Rogers restaurants and I realised back then that we could not compete with McDonald's. They had a national advertising programme; we were in four or five cities and we could not compete on a national or a worldwide scale but we could compete on a worldwide scale with our hotels – against Hilton, Hyatt and Sheraton, and other brands."
So Marriott waded deeper into its chosen market. By 1982 it became the US's biggest operator of airport food, beverage, and merchandise facilities with its acquisition of Host International. A year later it introduced moderately priced Courtyard hotels. Acquisitions in the 1980s included a time-share business, food service companies and competitor Howard Johnson. The group sold the hotels but kept the restaurants and highway units. By 1987 the company had entered three new market segments: Marriott Suites (full-service suites), Residence Inn (moderately priced suites for extended stay travellers) and Fairfield Inn (moderate economy hotels). It also began developing 'senior living' facilities aimed at the elderly.
Lodgings were in. Food and beverages were, ostensibly, out. All was going to plan, says JW. "It wasn't a survival decision, it was a decision to focus our energies on what we thought we could do best, which was to develop hotel brands and develop hotels operating expertise giving us some brand dominance."
The current Marriott International was formed in 1998 when it spun off from its previously held food services and facilities management business. Flush with cash from this spinoff, Marriott continues to add new hotel properties and time-share resorts. At the same time it has shed non-core businesses, such as its senior living and food distribution services in 2003, to focus on its hotel business.
It could not have got there without spending heavily and taking on debt. Yet family businesses, it is often claimed, have little taste for debt. Marriott may be the exception to the rule, although the company ended 2004 with $555m of debt net of cash, the lowest level since its spin-off in 1998. Drawing on his rivals' numbers, JW puts the figure into context. "We have about $1.3bn of debt and our competitors – Hilton and Starwood – have between $4bn and $5bn of debt. That is three to four times the debt that we have."
Limiting and paying down debt seems perfectly sensible. What's more clever is the group's overarching business model, which calls for Marriott to own, outright, few of its hotels. Instead, nearly all of its properties are franchised or are operated under long-term management agreements with other property owners. JW says the thinking behind this strategy emerged from a desire for global reach. "We knew the importance of distribution," he says. "We wanted to be a global hotel company. We wanted to have excellent hotels around the world and throughout the US but we did not have a balance sheet that would allow us to do that." Indeed, Marriott's franchisees retain some $50bn of real estate. "We certainly can't put that on our balance sheet so we had to use other people's balance sheets and other people's investments to effect our growth strategy."
The original Marriott Corporation split its operations into two companies in 1993: Host Marriott to own hotels, and Marriott International, primarily to manage them. Part of this strategy was to help boost cash flow and better focus on its 'manage versus own' model. "By 1990 and 1991 we had accumulated about $3bn of hotel-owned assets on our balance sheet and there was no market out there to buy these assets, and again, we were trying to stick to our model which was to manage rather than own," says JW. "So we split the company into two companies – one that would own the real estate and one that would manage the real estate."
Today, the company has 2,600 hotels under its corporate umbrella. "We own about six and so we operate and franchise the rest – about 50% of our rooms are operated and about 50% are franchised." The franchise model, where Marriott licenses its name and lets other people run its hotels, is not unique, but compared with its nearest competitors, Beverly Hills-based Hilton and Starwood in White Plains, New York, Marriott runs the purest model in terms of ownership.
Pure is one watchword for Marriott International. Profitable is another. The company saw its 2004 third-quarter profit soar by 45% as room rates grew faster than occupancy for the first time in three years, a sign that the lodging recovery was in full swing.
Marriott reported fourth-quarter profit up 12% largely on higher room rates and analysts urged investors to buy shares while they were weak. Deutsche Bank analyst Marc Falcone suggested buying Marriott shares because the company's operating outlook is "solid". "We think that this is a long term recovery," predicts JW. We don't think this is a spike; there are more people travelling today and they're willing to spend more. Corporations are willing to spend more than last year and we are seeing a very strong resurgence in the market."
It is an astute observation. US hotels posted a 12% rise in room revenue for the week ended 29 January while hotel room rates rose 5% to an average $90.11. Meanwhile, Marriott's expansion plans, a juggernaut of 300 new hotel openings, trundles on. "We'll do about 150 hotels in 2004 and another 150 in 2005 and about 25% of the rooms will be outside of the US," says JW.
Marriott has captured about 8% of the US market, but only 1% of the rest of world, which is why the company has assembled development teams in Hong Kong, Frankfurt and London. "It's across the world, we're not concentrating in any one place," says company spokeswoman June Farrell. Despite this, JW believes huge scope remains for growth inside the US. "We're developing half a dozen brand new hotels in the US as we speak, and we're doing them ourselves," he explains. "In addition we're really seeing a lot of conversions; other [hotel operators] change their flags to Marriott because they can get a higher return on their investment in their hotels with the Marriott flag." Indeed, last year Marriott began negotiating higher rates for large corporate buyers for 2005, and rising profit margins would return to the average pre-downturn levels in about three years, CFO Arne Sorenson predicted last October. Over that three-year period Marriott would generate some $2.5bn to $3bn in operating cash flow and, unless it finds major opportunities to buy hotels, will return the bulk to investors, mainly through stock buybacks.
So what of the future? At age 73, it is likely JW will pass the mantle at some point. Although there are plenty of worthy candidates to take over when he decides to step down, JW's eldest son, John W Marriott III, could possibly find himself in his father's shoes.
The Marriott name is the brand and the brand is Marriott. Should it always be this way? "No," says JW. "Who ever succeeds me as CEO – it would be nice if it were a Marriott – that person has to have a very strong management ability and very strong leadership ability, and we want the best man for the job. If it happens to be a Marriott, then great. If it doesn't happen to be a Marriott we'll work with them and make it happen because we need the very best talent that we can possibly find to run this company."