Hi, everyone. I'm Thomas Allen, Morgan Stanley's U.S. gaming, lodging, and leisure analyst. I'm very happy to be with Tony Capuano, the CEO of Marriott. Tony is actually at the Times Square EDITION across the street from Morgan Stanley's offices, and we just realized that now. This could've been almost in person, but it's not.
I could probably step out on the terrace and yell out the window, and you can give him my responses. Well, thanks for having me.
Exactly. Thanks, Tony. Two things. I just have to do two housekeeping things first. First, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Second, if you have any questions for this webcast, please just submit them over the webcast, and we'll get to them. With that, we'll start. Tony, thank you very much. Now that you've been in the CEO seat for around nine months, can you talk about your top priorities for the company as you look out over the next few years? Thank you.
Of course. Well, as you might expect, given that we are still in the midst of recovery from the pandemic, our teams around the world are keenly focused on driving demand and capturing more than our fair share of that demand as we watch the recovery develop around the world. I think we're looking beyond the recovery as well. Beyond the recovery, I would give you four or five principal priorities. I think number one, it's all about remaining focused on our key constituents. Those constituents obviously are our associates, our guests, our owner and franchisee community, and ultimately, our shareholders. We continue to be very focused on growing our industry-leading portfolio, both through new development as well as conversions. I think you should reasonably expect us to continue to enhance the Marriott Bonvoy loyalty program and grow both Bonvoy membership and engagement.
maybe most importantly, you'll see us continue to innovate and bring new ideas to that umbrella Bonvoy branding and to our operations that we think will drive engagement with those members.
COVID's obviously had a significant impact on your business. Can you talk about how it's impacted your business, how you're recovering, and if you think there are any changes in consumer behavior coming out of COVID?
Sure. maybe I'll give you some quantitative responses to the first part of the question and then pivot to some of the trends we've seen emerge that we think may very well endure beyond the end of the pandemic. As you heard in our third quarter earnings call, RevPAR was down about 25% relative to 2019 levels on a global basis. We continued to see good momentum in October. October RevPAR was down just 24% versus 2019, and that was about a 300 basis point improvement from where we were in September. In October, we also saw global occupancy rise to about 61%, and that's the highest level we've seen globally since the start of the pandemic. I just came back from a week in the Middle East.
I was in Dubai, Doha, and Riyadh, as you might expect, that was led by the United Arab Emirates and the impact of Expo 2020. we look ahead to the end of the year-- Now, I'll give you a reminder that I know you know, Thomas. Q4, we usually see a seasonal drop in global occupancy. Back in 2019, we saw global occupancy drop about 500 basis points from October to November, and then about another 800 basis points from November to December.
Even while we're keeping a close eye on this new variant, we do currently still expect to see sequential quarter-over-quarter improvement in global RevPAR versus 2019 in the fourth quarter. We had really strong October results. That recovery momentum continued into November. In fact, I just got some statistics this morning. If you look at Thanksgiving week here in the U.S., RevPAR was up almost 13% versus 2019, and that recovery was disproportionately driven by ADR. That, I think, fuels our optimism about the business performance we expect going into the Christmas and New Year's holidays. On the second part of your question, I think we expect to continue to see this notion of a blending of trip purposes.
It used to be quite easy to walk into one of our hotels and determine almost by sight whether a guest was a business traveler or a group meeting attendee or a leisure traveler. I think that will become more difficult, but we think that's terrific news for our business. We also are starting to see some data that would suggest a bit of a lengthening of stay. I experienced both of those trends myself two months ago. I went to Europe for the IHIF Berlin investment conference. I've probably gone to that conference for 30 years. Historically, I would take a Sunday night flight over, spend two days in Berlin, and come back. Instead, I took a 12-day trip, and during the course of that trip, I was in five cities.
At various times during those 12 days, I was a business transient traveler, I was a group meeting attendee, and I even snuck in a bit of leisure travel. I think both of those trends will likely continue even when the pandemic's behind us.
Talking about that, Well, I guess we're in December. Earlier in November, the U.S. reopened borders to international travelers. Historically, I think about 95% of your U.S. business has been domestic customers. Have you seen a change? Did you see a change in international visitors after that happened? Do you think it's sustainable?
Well, your memory is spot on. Back in 2019, only about 4% of our U.S. business was international. We would see a higher percentage in some of the big gateway cities across the country. Here in N.Y. would be a good example. If you look back at 2019, international demand in N.Y. City was about 11% of total demand. We have seen very steady and encouraging improvement in international bookings since the announcement in mid-September, again, particularly in those gateway markets. In fact, if you look at recent weekly bookings from international guests, they're about 60% higher than what we saw in the weekly bookings pre-announcement of the border openings.
Time will tell how Omicron impacts that, encouraging all the same.
No question.
Just, you touched on how things, the momentum is continued in November, and you highlight the really strong Thanksgiving. Has it been broad-based? Have you seen the special corporate and group bookings continue to pick up, or has it been more kind of leisure-dominated still?
We have. Particularly here in the U.S. and Canada, we've seen a nice steady improvement in both group and special corporate bookings. If you look at weekly special corporate bookings, they're currently down around 35% versus where we were same period in 2019. That's a nice pace of improvement, even compared to just what we saw a month ago when we were down around 40%. On the group side, new group bookings have also improved pretty steadily. If you look at recent new weekly bookings for all future dates, they're only down between 10% and 12% versus the same period back in 2019.
Wow. Great recovery. Talking about another side of your business, just around unit growth. Pre-COVID, you were growing hotel rooms a bit over 5% a year. You're now at about 3.5%. Do you expect to get back to those pre-COVID levels?
Yeah. We're very confident, Thomas, that we'll get back to those mid-single digit growth rates. I think given the attractiveness of our brands, the uptick we've seen in development activity, the really encouraging trends we've seen around conversions through the first three quarters this year, our industry-leading pipeline, the fact that we've got more than 200,000 rooms under construction, I think all of that continues to drive our confidence. Precisely when we get there is a little difficult to predict, as you might expect. Even the events of the last four or five days remind us of the unpredictability of the virus and the pandemic. That coupled with some of the supply chain challenges we've had likely make it difficult to get there in 2022. Although, again, I am encouraged by the pace of conversion activity we've seen through the first three quarters.
What other kind of key geographic regions is driving the NUG growth?
It's interesting. When I think about growth, in my prior role, my thoughts were consumed with net unit growth. Round numbers, we've got a 17% or 18% market share in the U.S. and Canada. We've got between 3% and 4% market share outside of the U.S. and Canada. Over the long haul, we think there is a really significant runway for growth internationally. I talked about our pipeline, which is just a shade under 500,000 rooms. More than 60% of that pipeline is international. If I had to guess, I would suggest to you that that percentage mix will continue to rise towards a higher proportion of international growth, but not to the exclusion of domestic growth. We continue to see strong demand for our brands here in the U.S. and in Canada.
You have about 30 brands today. How do you think about that portfolio, and do you see opportunities for organic and inorganic opportunities there?
It's interesting. Maybe appropriately, the Starwood transaction tends to consume discussion about M&A. As you'll recall, prior to the Starwood acquisition, we were rolling along at a pretty good clip in terms of smaller regional acquisitions, some of which filled a geographic gap in our distribution, some of which may be a demographic, something like Moxy, and sometimes a product offering, like the Elegant deal as we entered into the all-inclusive space. I would expect the vast majority of our growth going forward would be organic. As we've done for as long as I've been with the company, we'll evaluate acquisition opportunities on their merits.
Thankfully, we're in a position where we don't need to do M&A simply to achieve scale. If it achieves some of the metrics we've evaluated in the past in terms of helping us gain a foothold in a market where we've been challenged to grow organically, and/or if it's a platform that we think has regional or global growth implications, then we'll certainly take a look.
Just one last one on your net unit growth and your brand portfolio. How much are construction delays and supply chain issues impacting your businesses?
We've certainly seen some issues, certainly here in the U.S., all of us watch these same troubling images of freight backed up at various ports around the country. It has slowed down some of our construction, either starts or completions a bit. I think the really encouraging news, Leeny and I talked about this in the third quarter earnings call. We're at a three-year low in terms of the percentage of the pipeline that's falling out. We continue to have a high degree of confidence that the hotels that are in the pipeline are going to open. They may just slip a quarter or two, as a result of some of these supply chain interruptions.
What do you think is driving that very low percentage drop-outs you're seeing?
Well, a few things. I think number one, when you look at our universe of owners and franchisees, they tend to be long-term investors focused on long-term holds with these assets. They don't necessarily get too cute in terms of trying to time the market or time cycles. I think in this particular circumstance, they think about putting a shovel in the ground today with a hotel not opening for 18 or 24 months, they've got some measured optimism about that hotel opening in the teeth of a pretty strong recovery environment. They also wonder whether some of the hotels that they might compete with will have not done renovations through the pandemic period. So they envision a bit of a double win, opening into a strong recovery environment and being the newest product in their given market.
It's funny, I had dinner with a friend last night who is going to go do a project with a hotel company, who was asking me about profit improvement plans. Can you just talk about, Marriott's been famous for being very structured around what you have your franchisees and your partners do. How have you gotten through the process of helping them through COVID, while also making sure that they maintain their quality?
Yeah. I think one of the things that's really been encouraging to me, given our business model, we don't always agree with our partners on every aspect of the business. We just had about 200 of our owners and franchisees together with us in Orlando, and we reviewed the fact that through our advisory councils, we had nearly 100 meetings with them over the last year. In some ways, we've all come to the same side of the table to try and figure out how we can help each other weather the storm. We have worked together to identify operational efficiencies. We've worked together to identify strategies, to try and fill vacant positions. We've tried to identify operating efficiencies that we think can endure beyond the end of the pandemic. When possible, we've helped our partners navigate some of the government support programs that have been available.
Subject to lender approval, we've tried to give our owners flexibility on things like FF&E reserves. You combine that with some of the really terrific work that our teams have done at the above property level. As you know, in 2020, we completed a very extensive organizational realignment, to reduce our corporate G&A. We were able to lower that by ±15%. We expect G&A this year to be about $800 million, which would be about 15% lower than where we were in 2019. We do think a lot of those savings can be sustained over the long term.
Can you just talk about what those are? I think that people are surprised when they hear a company like Marriott can cut its headcount by 15% and sustain it. Can you just talk about what you're doing differently?
It's really about prioritization, Thomas. I think we have focused more of our teams on demand recovery. We've tried to find more efficient ways to do the same type of work. In some areas, maybe we've modified the scope of work we do. You look at a function like global design, maybe we do some of that work through technology, and on a hybrid basis, combined with in-person visits. It's really looking at every part of the enterprise and trying to identify areas for enhanced efficiency.
Labor shortages and wage inflation is obviously a big discussion point in the market in general. Can you talk about two ways? One, how it impacts your core corporate business, the Marriott employees, but the core corporate employees. How you help your owners with their headcount and their employees. Thank you
It's interesting. We got a question during the third quarter earnings call, the question was, "I heard from an owner that wage increases or wage rates are up 20+%." That's definitely not what we're seeing. I'm sure somewhere around the world there's a market where that's the case. We have seen some wage pressure, and as you might expect, where we see that problem most acutely is in those markets where demand has recovered most quickly. Arizona, Florida, California, those types of markets. The other side of that coin, obviously, is those are the markets where we're seeing the most rapid growth in average daily rate as well. That's a bit of an offset.
We've worked, as I said earlier, closely with our owners and franchisees to try and come up with ways to streamline hotel operations, look at every part of the operation, and identify those efficiencies. We are increasingly confident that the efficiencies we've identified should help offset the vast majority of the wage and benefit inflation that we're seeing. Maybe the last part of your question, we are doing everything we can to support our owners and particularly our franchisees in terms of job fairs and doing a better job getting the narrative out there about what an extraordinary company Marriott is to build long-term careers, sharing statistics that we've talked about with pride for years, that more than half our general managers started in the hourly ranks. We are, in some markets, having to do some one-time incentives.
We're really trying to help spread the narrative about the opportunities that the company offers.
How much of this do you think is transitory? Using the term transitory, how much inflation do you think there is, and how much of it is transitory, is, I guess, the question.
Yeah, it's a great question. I think the bigger challenge for us, depending on which consultant you endorse, upwards of potentially one in five jobs in the travel and tourism sector have left that sector permanently. I think that the challenge for companies in the sector is really to do a better job explaining why this is a sector that prospective employees should be drawn to, identifying the long-term opportunities that exist, and getting folks that are not simply shopping for the current highest hourly wage rate, but instead are more keenly focused on identifying long-term career development opportunities. I think that's maybe the most powerful tool we have to try and mitigate some of the wage pressure that we're seeing.
Asking the question in a more positive light, can you just talk about the pricing power that you've had to date and how sustainable it is and why do you think it is?
Yeah. It's been a pleasant highlight of the recovery, is the recovery of the pricing power. If you look back at other challenges, whether it was post 9/11, whether it was post-Great Recession, in those instances, it took us upwards of four or five years to get back to pricing power. As we talked about in the third quarter earnings call, in many markets, we're already back to 19 ADR levels. Why? I think a few things. I think you look at savings rates in many countries around the world, certainly in the U.S. You look at, I don't particularly love this term, but you hear lots of folks talking about revenge travel. I just think people have been reminded as they've been quarantined, how much they miss the ability to visit friends and family, explore new cities, try new foods, experience new cultures.
I think that's why you've seen particularly the leisure segment come back so strong and endure even beyond the end of the traditional summer season.
Have revenue managers changed their mentalities at all to think to themselves, "Let's not focus as much on occupancy, and let's focus much more on rate?" We're hearing that a bit from the casino companies. I'm not sure if maybe the hotel industry has broadly changed that or not.
Well, I think the hotel industry has really made remarkable progress over the last number of years on the science and the sophistication of managing yield. I'd be more worried if I heard somebody saying, "Let's just go for rate." We are trying to strike the right balance between occupancy and pricing in a way to maximize room revenue, and I think you'll continue to see us take that approach.
Talking about doing things differently, last week, you announced a new partnership with Amadeus. Can you just talk a little bit about what you're getting out of that relationship?
Of course. As we've talked about in the past, we are making some significant investments in our core technology platforms. I think the agreement with Amadeus is one component of that. We are rebuilding and supplementing our core technology infrastructure to support our growth ambitions over the next several decades. I think that Amadeus relationship will be a natural part of that evolution.
One thing that's been a bright spot in your recovery has been around credit card fees. They were up 11% in the third quarter versus 3Q 2019.
Can you just discuss how you're driving such strong growth there?
Yeah, the credit card fees have been really resilient and a real bright spot for us. Before I talk about some of the statistics, one thing I would mention, Thomas, one of the really interesting challenges that our credit card platforms helped us address, we've got 160-ish million members of Bonvoy, and particularly in the early days of the pandemic, they weren't traveling much, if at all. I think our credit card platforms were one of the tools we were able to use to stay so engaged with our customers and work with our credit card partners on grocery purchase bonuses and those sorts of things, so that we stayed connected and sticky with our customers through those early days.
Obviously, growth in credit card branding fees is really a function of two variables, cardholder spend and new cardholder acquisitions. We continue to see good, steady growth in both of those areas. Even in the midst of the pandemic, we talked a little bit about this on the earnings call, we launched new branded credit card programs in really important international markets like Mexico and South Korea, and both of those new card products are off to great starts as well. I think we feel even more and more optimistic about the strength of those programs and the power of our partners.
It reminded me that you have the JV with Alibaba in China. Can you just talk a little bit about how that's been coming along and just the China market in general and what you've been seeing in the China market?
Sure. The Alibaba partnership has been a terrific opportunity for us. As I think you're aware, it allowed us to create, in effect, a Marriott storefront on the Alibaba site, which gave Alibaba members access to the entirety of our 7,800 hotel portfolio. I think it did a terrific job of helping the Chinese consumer really understand the breadth of the portfolio, the positioning of the 30 brands within the portfolio. As you may have seen, we just made an announcement with Rakuten in Japan, which I think will give us similar exposure to the portfolio. China has been interesting. China is obviously our second-biggest market. We've got about 400 open hotels and another 400 hotels behind those in the pipeline. In the second quarter, Leeny and I, with great pride, proclaimed that China was back, that demand across all three segments was at or above 2019.
You fast-forward a quarter, again, because of the unpredictability of the pandemic, at one point you saw more than 100 cities in mainland China shut down, at least for short periods of time, which impacted that performance in the way you might expect. The good news, though, I think, for our model is that, and for the China market, you saw those markets lock down, get containment of the virus, and then reopen relatively quickly, and we have real-time visibility into those demand trends. You saw terrific demand in the second quarter, a moderation in that demand in the cities where there were lockdowns, and as soon as those lockdowns were lifted, almost an immediate re-acceleration of demand in those markets.
Interesting. One of the things that we have noticed that's been kind of a structural change in your business has been small and medium sized enterprises have kind of come back a lot faster than large enterprises. Why do you think that is? Do you think that that's a lasting change, or do you think that that's just a temporary kind of phenomenon?
If you look at our data pre-COVID, use 2019 as an example, small and medium sized customers represented about 60% of our business transient. Year to date this year through the first three quarters, that is up to about 75%. I think it's relatively easy to understand. Although it's been fun for me the last two days, seeing New York feel so alive, as I talk to our customers, you've still got spotty return to the office in many major urban markets around the country. We've always anticipated that a significant return to the office would act as a catalyst for large company business transient demand. In the interim, you've seen the small and medium sized companies represent a bigger percentage of that revenue.
Our expectation would be, as you see more and more major urban markets reopening, that it will likely settle back down in that 60-ish% range.
Big picture question, when do you think RevPAR will get back to 2019 levels?
Well, I would love to tell you. Maybe I can ask you 15 questions about the pandemic, and if you can give me the answers, I'll tell you. What I can tell you is we continue to be really encouraged about the pace of recovery. I think it's a bit of folly to predict with any precision precisely when it's back, and I felt that way a week ago. I think the events of the last four or five days underscore the idea that we've got to see how the pandemic continues to evolve before we're prepared to make those sorts of definitive projections.
Okay. Something that you can see a lot clearer is just the OTA mix within your business. It's picked up during the recovery. Obviously, leisure's been very strong, that shifted it. How do you think OTAs fit in in your distribution channels?
Well, the OTAs are important partners to us. They give us access to consumers that are a little more difficult to market to through our traditional channels. Interestingly, if you rewind to just before the pandemic, in 2019, we saw the OTA's share of room nights actually drop for the first time in several years. As you know, we had the ability to yield out that business on high demand nights. Thankfully, as leisure has led the recovery, we've seen an uptick in demand coming through the OTAs. Over time, we expect our direct share will continue to increase in the same sort of way we saw it between 2017 and 2019.
Airbnb, do you feel like it's having any different impact today on you than it did pre-COVID?
Well, certainly, maybe the way I would answer that, if you look at our Homes & Villas platform, just before the pandemic started, I think we had order of magnitude about 3,000 listings. As we sit here today, we're more than 35,000 listings. I do think, the combination of strong leisure demand, coupled with folks being really focused on cocooning a bit with friends and family, led to an uptick in demand for multi-bedroom homes and accommodations. It's driven the performance of Homes & Villas. It certainly helped Airbnb through that period. Interestingly, I think as demand recovers, you'll continue to see our customers want and expect all the services and amenities that they've grown to love in our hotel portfolio.
There was a recent settlement in Pennsylvania around disclosing resort fees. What exactly is going on there? Do you think that'll have any impact on your business?
I don't think so. We were very confident in the disclosures that we had built into our channels around resort fees. That settlement, which had no financial implications or admissions of wrongdoing or anything else, simply give us the opportunity to provide even more clarity and transparency to our guests on resort fees and the value proposition of those resort fees. We're very comfortable with where we landed with the Pennsylvania AG.
final question. We haven't talked a lot about groups. Just talk about what you're seeing on the convention front, how optimistic you are that it's going to rebound in the months and years ahead.
Yeah. Statistically, I mentioned a couple numbers earlier, and on the Q3 call, we talked about steady improvement both on overall bookings and some really encouraging data on the pricing power we'd seen, in ADR through the third quarter. A few months ago, we had about 300 U.S. association and corporate meeting planners together with us in Orlando. They were bullish on the protocols we had put in place to offer safe meetings. They were taking lots of photographs and videos to send back to their constituents. I think they left that meeting with lots of confidence about the ability of Marriott to pull off safe meetings.
Maybe most interesting to me, what we heard qualitatively over those few days, while we've done, I think, an admirable job of putting in place the technology platforms to enable hybrid meetings, almost to a person, those meeting planners said, "It's nice that you have that, but if we're going to have the meeting, our members really want to attend in person." You've convinced us you know how to hold these meetings safely, and we hear a disproportionate number of our either employees or members insisting on attending in person. That continues to fuel our optimism about continued recovery in the group segment as well.
Perfect, Tony. We got through a lot there in a very quick fire way.
I know. I felt like I was doing Jeopardy lightning round.
Exactly. Well, thank you very much. Audience, thank you very much for listening.
Thomas, thanks so much for having me. Let's do this in person next time.
Definitely.
All right. Thank you all.