Sheraton Revamp Could Bring Substantial Revenue Boost: Latest Skift Research

Part of measuring the success of Marriott’s acquisition of Starwood hinges on the company’s ability to successfully turn around the Sheraton brand. As Marriott’s Julius Robinson, senior vice president and global brand leader, classic full service brands, indicated, “The success of Sheraton is vital. It is a top priority for the company.”

Our latest Skift Research report, A Deep Dive Into Marriott 2018: Assessing the Power of an Integrated Company, provides several analyses assessing the potential financial benefit of a successful Sheraton turnaround.

Neverthless, brand transformations do not happen overnight. While our analyses demonstrate considerable incremental revenue, seeing any benefit show up in Marriott’s income statement will likely take some time.

Last week we launched the latest report in our Skift Research service, A Deep Dive Into Marriott 2018: Assessing the Power of an Integrated Company.

Below is an excerpt from our Skift Research Report. Get the full report here to stay ahead of the trends.

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MARRIOTT’S STRATEGY FOR A SHERATON TRANSFORMATION

Starwood had been struggling with the Sheraton brand for a number of years as a result of the brand trying to be a little too much of everything to everyone. While it was trying to be a higher-end business hotel brand catering to corporate travelers, one could find varying levels of service and product, particularly in North America, with even some motor inns featuring the Sheraton name. However, internationally, Sheraton was more of a luxury product, only adding to the confusion.

Since the merger, Marriott’s basic strategy for turning Sheraton around involves major renovations at underperforming Sheraton properties and exits or conversions (to brands such as Delta, Four Points by Sheraton, or Courtyard) for a number of properties that are not up-to-snuff or that would require too much work.

Hotel owners appear to be getting on board with the idea of a sleek business travel hotel brand concept with co-working influences. According to the Sheraton Transformation announcement in June, 25 percent of Sheraton hotels globally have committed to renovations with some already under way, which based on 444 reported hotels (includes Sheraton Residences) in Q2 2018, is approximately 111 properties. Robinson of Marriott indicated “60 percent of Sheratons globally are committed to undergo renovation by 2020 … We have estimated half a billion dollars committed in investment for renovations by owners in the U.S. alone.”

History of Success with Large Potential Gain

Marriott has a history of successful turnaround stories, but the transformation most worth taking a look at is the Marriott Hotels brand repositioning. It is most comparable to Sheraton in terms of chain scale (Upper Upscale), segment (primarily business travel), as well as strategy for the transformation, which included new guest rooms and the M Club Lounge spaces for loyalty members and guests to work, relax, and refresh. Marriott even bought a Sheraton property in Phoenix, Arizona, to showcase its plans for the Sheraton brand and use it as a lab, in essence, to test new concepts, which is exactly what it did with the Charlotte Marriott City Center in 2016.

To estimate the potential gain as a result of the Sheraton turnaround, we performed three analyses looking at RevPAR Index, RevPAR, and Loyalty Contribution to Occupancy based on company filings for the Marriott Hotels brand as well as Franchise Disclosure Documents available publicly online. We include part of one of those analyses below, which takes a look at the incremental room revenue that hotel owners would receive should Marriott be able to improve Sheraton’s RevPAR Index.

All analyses are hypothetical, and changes in different variables would imply different results. Nevertheless, we hope the analyses demonstrate what the potential financial benefit could be for the Sheraton transformation.

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RevPAR Index Analysis

During the investor day presentation in March 2017, management indicated that one year after the implementation of the new guest room design, Marriott Hotel branded properties were seeing RevPAR index lifts of 6.3 percent. More recently, management noted in June 2018 that renovated Marriott Hotels have seen market share (as demonstrated by RevPAR Index) gains of 9 percent, on average.

RevPAR Index is calculated as the property’s RevPAR divided by the RevPAR of its competitive set and is used to estimate how much a property is getting of its “fair share” of available hotel revenue.

In the analysis, we assumed Sheraton properties receiving the transformation could see RevPAR Index gains in a similar range — we used a range of 5 percent to 10 percent. This implied, based on numerous assumptions, cumulative incremental room revenue of $75 million to $150 million for all properties being renovated. This incremental room revenue would be 0.8 percent to 1.6 percent of Sheraton’s current annual property revenue, which management indicated is around $9.2 billion.

Detail about all analyses are provided in the report.

While we recognize brand transformations do take time, CEO Arne Sorenson seemed positive, indicating on the Q2 2018 earnings call that the company is “making great progress on Sheraton … RevPAR [Revenue per Available Room] index for the brand is now above fair share, … we feel really good about the momentum.”

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