Marriott gets a wake-up call

Marriott gets a wake-up call

Shaken by the plunge in travel, the hotel giant presses ahead with a makeover: freshening its look, trying new brands, and preparing a successor to the patriarch.

By Marc Gunther, contributor
Last Updated: June 25, 2009: 10:10 AM ET

(Fortune Magazine) -- Next time you order breakfast at a Marriott, you may notice something new about the bacon. Instead of being served in identical six-inch strips, it now comes in an assortment of sizes. That's because senior executives of Marriott, after sampling four or five varieties of bacon in a blind taste test, found that an irregular cut, which costs less, tastes just as good as the rectangular slices traditionally served in the company's hotels.

Although J.W. "Bill" Marriott Jr., the company's longtime chairman and chief executive, had his doubts, he approved the new specifications when he learned that they would save about $2 million a year. "Times are changing," says the 77-year-old CEO.

Consistency has long been the watchword for Marriott International (MAR, Fortune 500), the lodging giant (sales: $12.9 billion). In its 82-year history, the company has had just two CEOs, both named Marriott: Bill Marriott Jr. and his father, J. Willard Marriott, who with his wife, Alice, opened a nine-stool A&W root beer stand in Washington, D.C., in 1927. Not until 1957 did Bill Jr. persuade his father, who hated debt, to open the company's first hotel.

Over time Marriott hotels became the favorite of Middle American business travelers who knew what to expect there -- a clean room, traditional furnishings, a smile at the reception desk. "Marriott is the most reliable of brands," says Bjorn Hanson, an industry analyst who now teaches at New York University's Tisch Center for Hospitality, Tourism, and Sports Management. "There's a saying in the industry that Marriott puts heads in beds."

Now, though, because of several factors -- the severe economic downturn, the increasing sophistication of road warriors, and the fact that none of Bill Marriott's four children is positioned to take over the business -- change is coming to this conservative family-run company. The company is aggressively cutting costs while trying to protect its worker-friendly culture. It is modernizing the look and feel of its hotels and launching a new brand, called Edition, with Ian Schrager, godfather of the boutique hotel. And this spring Arne Sorenson, a lawyer, the company's CFO, and a relative newcomer to Marriott, was named president and chief operating officer, putting him in line to succeed Bill Marriott as CEO.

For the time being, it is up to Bill Marriott to steer the company through an industry slump that is even worse than the one that followed the 9/11 terrorist attacks. "This is the mother of all recessions in my lifetime," he says. People are traveling less, even as the supply of hotel rooms is increasing, a double whammy that has driven down occupancy rates and prices. For the first three months of 2009, Marriott's revenue per available room, an industry metric known as revPAR that is the rough equivalent of same-store sales in retailing, dropped by about 17%.

Literally adding insult to injury, Washington politicians heaped scorn on luxury travel and corporate meetings after executives of bailed-out AIG (AIG, Fortune 500) were caught last fall gallivanting at a St. Regis resort in Dana Point, Calif. Almost immediately hundreds of meetings and conferences were canceled to forestall criticism, notably a pricey Wells Fargo (WFC, Fortune 500) employee-recognition trip to Las Vegas. At a Ritz-Carlton operated by Marriott in Half Moon Bay, Calif., more than 30 groups called off plans for retreats, seminars, and incentive meetings. Defending his industry, Marriott wrote an op-ed piece in the Washington Post calling for an end to the "toxic rhetoric."

Based in suburban Bethesda, Md., Marriott operates and franchises over 3,200 hotels under more than a dozen brands, including Ritz-Carlton, Renaissance, Courtyard, and Fairfield Inn, with properties in 66 countries and territories from Armenia to Vietnam. The casual observer may be surprised to learn that the company owns only six hotels; it began selling off the real estate in the 1980s, shifting to its current business model, which requires less capital and minimizes real estate risks. Marriott operates about half of the rooms in its system, including most of the upper-end hotels, and franchises the rest. Franchise fees are the least volatile source of cash flow in the hotel business, acting as a buffer in difficult times. Even so, the recession has hit Marriott's financial results like a rock band visiting a hotel room. In the first quarter of 2009, revenues were $2.5 billion, a 15% year-over-year decline, and net income was $87 million, a 28% drop.

To fill more rooms, Marriott is offering free nights and discounted rates. You can stay at a brand-new JW Marriott in Medan, Indonesia, for just $85 a night, or book a room at a Marriott beach resort and casino in Cura�ao for $120. Cutting expenses is another option, but it's complicated by Marriott's oft-stated desire to treat its people right. Since its early days, when J.W. Marriott put a doctor on the payroll to tend to his waitresses and kitchen help, the company has provided employees with good benefits, lots of training, and opportunities to advance. "If the employees are well taken care of, they'll take care of the customer and the customer will come back," Marriott says. "That's basically the core value of the company." Most Marriott managers got started as hourly workers in the hotels, and all but a handful of its senior executives have been promoted from within. Pay for hotel managers depends not just on the profitability and guest satisfaction scores of their hotels but also on how they are rated by their staff. Nevertheless, Marriott laid off about 1,000 people last year, from a total payroll of about 146,000. Some other workers had their hours reduced, and executives will forgo bonuses.

Guests may notice changes too, and not just the bacon. At some hotels, Marriott replaced Häagen-Dazs ice cream with the less expensive Edy's brand. (The company says Edy's, which isn't as dense, is also easier to scoop at banquets.) Breakfast buffets offer fewer varieties of fruit. Even Ritz-Carlton is trimming expenses, curbing opening hours for spas and restaurants. No cost-cutting move got more attention than Marriott's decision to eliminate automatic delivery of newspapers to guest rooms. The company estimates that it will deliver 50,000 fewer papers every day, or 18 million a year, an unwelcome development in the reeling newspaper industry. "In this economic climate, it isn't responsible to keep giving guests something they don't want," Marriott says. "You'd see guests come out of the room and step on the newspaper, and they weren't even picking it up."

Meanwhile, Marriott has been making over its brands, which needed sprucing up. A couple of years ago Robin Uler, the company's chief creative officer, took Bill Marriott Jr. to dinner at Prime One Twelve, a high-end steak house in Miami's South Beach. Noisy and crowded, with wood floors, contemporary d�cor, and a menu to match, the place was hopping despite its high prices. Then they returned to the Marriott restaurant across the street, which was dead. "So do you still want carpets and booths far away from one another with no noise?" she asked him.

Lobbies in many Marriotts are morphing into "great rooms" with free Wi-Fi, where modular furniture can be arranged for meetings, socializing, or casual dining. "An empty lobby is not an inviting place to be," Sorenson says. "The great room is about bringing back life." If hotel guests spend a few extra dollars on a latte or a glass of wine instead of sitting in their rooms, all the better. Ideo, a cutting-edge consulting firm, helped Marriott redesign public spaces as well as guest rooms for Courtyards and TownePlace Suites.

Marriott is also getting outside advice as it prepares to enter the hotly contested category of boutique hotels, where Starwood's W, the hip Monaco chain, and several independents have grabbed market share at lofty room rates. Edition, Marriott's new brand, expects to open five hotels next year, with boutique guru Schrager and Bill Marriott Jr., both famously detail-oriented, collaborating on design. "I'd like to see a little bit of color in the rooms," Marriott says, not quite buying the monochromatic convention of so many boutique brands. "So people, when they wake up in the morning, don't just look at a gray or brown."

Replacing Bill Marriott as CEO won't be easy. "If there's one executive in the hotel industry who is revered, it is Bill Marriott," says NYU's Hanson. Marriott visits about 200 hotels a year, inspecting kitchens and signing autographs for rank-and-file workers. He checks out rivals too. "I sneak into competitors' kitchens more than you'd know," he says.

By contrast, Sorenson, who is 50, has never worked in the hotels, although he has had responsibility for Marriott's European operations since 2003. "He's young, he's bright, he understands the finance side of the business very well, and he accepts the role of the family," Bill Marriott says. The family owns about 25% of the company's shares (worth a little more than $2 billion at today's prices), and Bill Jr.'s oldest son, John W. Marriott III, an investor in hotels, is vice chairman.

Sorenson refers to his boss as "Mr. Marriott" and says having the family meaningfully involved in the company is an advantage because it "allows our customers and associates to connect with something that's personal." A Midwesterner who was born in Japan -- his parents were Lutheran ministers -- Sorenson is a good fit for the folksy Marriott culture, which has been shaped by the Marriott family's Mormon faith. "There's not much elitism here of any sort," he says. An advocate for Marriott's sustainability efforts, including a pioneering effort to help preserve the Amazon rain forest in Brazil, Sorenson drives a Prius to work.

Bill Marriott prefers his collection of Ferraris and Maseratis. Fit, trim, and diminutive, he walks on his treadmill four nights a week and took up Pilates training when his daughter told him he seemed to be getting even shorter. He calls retirement a "disease" and says, "I like to go home at night, but I still love to go to work in the morning." Even in these tough times? "It's all I've ever done," he says, not sounding like a man with plans to speed off into the sunset.