Marriott vs. Hilton: A Fee Fight for Hotel Dominance

Early Check-In

Editor’s Note: Skift Senior Hospitality Editor Sean O’Neill brings readers exclusive reporting and insights into hotel deals and development, and how those trends are making an impact across the travel industry.

Marriott and Hilton appear to be neck-and-neck in the race to expand their footprints and loyalty programs. But if you look at the more important metric of fees earned for services they provided hotel owners, you’ll see Marriott far ahead.

Hotel groups charge owners fees for managing or franchising hotels. This fee revenue is critical. Hilton’s fee revenue drove about 95% of its adjusted EBITDA in the first quarter.

Fee revenue also has the virtue of being subject to auditing — unlike metrics like net room growth and loyalty program membership, which don’t have agreed-upon industry standards.

Marriott vs. Hilton, over fees

Skift compared the fees Marriott and Hilton earned in the past 26 quarters, from the start of 2018 through the first months of this year. Here are a few takeaways:

• Hilton has grown its franchise and licensing fees at 5.57% yearly, while Marriott’s pace was 4.28%.

• But Marriott is far ahead in total fees. Marriott generated $1.24 billion in gross fee revenue last year, while Hilton generated only $773 million.

• Hilton’s fees are growing faster, but Marriott’s fee volume lead is so large that — if current trends stayed the same — it would take Hilton 40 years to catch up.

The hotel fees worth watching

The hotel giants charge hotel owners base fees, which are static, and incentive fees that are generated by meeting performance targets. Higher average daily rates and improved occupancy can boost both types.

Hilton, for instance, generated 80% of its total fees in the first quarter from base and incentive fees for franchising hotels. Hilton’s cut typically reached about 5% of a franchisee’s room rate, but details varied by contract.

Marriott and Hilton aim to optimize their fee structures to max out profitability while maintaining competitive pricing for hotel owners. This strategy involves a careful balance between base fees, incentive fees, and additional revenue streams from their loyalty programs.

Yet this strategy will become more difficult as the companies expand their offerings downscale, where fees tend to be lower.

The companies aim to grab share with middle-class travelers in midscale, extended-stay, and premium economy segments that they’ve previously avoided. Last year, Marriott absorbed City Express, announced an extended stay brand in the “affordable midscale” category called StudioRes, and debuted a midscale brand in Europe called Four Points Express by Sheraton. This year Hilton debuted LivSmart Studios and bought Graduate Hotels.

“I always marvel at everyone focusing on net-rooms growth instead of net fee growth,” said Hyatt CEO Mark Hoplamazian while speaking in April at the Hotel Investment Conference South Asia (HICSA). “One of our hotels, a Grand Hyatt in a great location, is probably the equivalent of about 10 midscale hotels [in terms of fees].”

Better-known hotel metrics

Despite the usefulness of fees, you rarely hear about them. Hotel analysts obsess over hotel development pipelines instead.

“When I die, they’ll put the net-rooms growth number on my tombstone,” joked Marriott CEO Tony Capuano at a press event this year.

But the net-rooms growth race needs to be put into context. By room count, Marriott is a third larger than Hilton. Yes, Hilton has been growing its footprint at a somewhat faster pace. However, it would still take Hilton about 32 years to overtake Marriott in room count, assuming that Marriott’s and Hilton’s current respective growth rates remain stable.

Net-room growth announcements are unverifiable. We don’t know how many hotels that promised to join their portfolios actually will.

Loyalty program comparisons are also tricky. Hilton is on track to overtake Marriott in loyalty member counts within the next year, according to Skift estimates. However, the significance of that milestone is unclear because we don’t know how lax each company is in defining what it means to be “a loyalty member.” Never-used accounts aren’t meaningful, for instance, and we don’t know how many of each company’s accounts are active.

One caveat: Marriott and Hilton include the fees they charge banks for running co-branded credit cards in their gross fee totals but don’t detail the amounts. Over time, as their loyalty programs grow and they disclose more numbers, the relative power of each company’s loyalty program will become a metric that investors will track, too.

For now, though, it’s more important to watch which company can generate the most fees per room rather than the buzzier topic of which company has the larger development pipeline.

What do you think? Tell me. I’m at [email protected] and on LinkedIn.

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