The mystery owners of the Marriott- branded hotel are dealing with a conglomerate with exacting standards and an ability to deliver guests but also one not inclined to renegotiate management contracts with cash-strapped proprietors.
The Maryland-based company will be operating the hotel when it takes effective control of the 197-room Kingston building from Atlantic Hotel Inc in a few months. That first step can only happen when Marriott has deemed that the infrastructure is up to its standards. That has already meant delays including a major reconfiguration of the kitchen.
As Forbes outlines in a 2004 article called “Soft Pillows Sharp Elbows” when Marriott manages a hotel that normally means “the help is on the Marriott payroll. As the operator it takes roughly 65% of revenue to cover payroll, utilities, insurance, supplies and health insurance, leaving 29% to the building owner for supplying the capital (and paying the property tax) plus any profit.”
Seems like a steep price but the article notes that owners still line up at Marriott’s door with some 700,000 rooms operated or franchised worldwide, as it “is fiendishly good at running a full-service hotel…Another key to the company’s success is an attention to detail reminiscent of Ray Kroc’s McDonald’s. It has a 66-item checklist for how to make up a room. Marriott last year began rolling out a system called At Your Service that records a guest’s every little desire. If you want a foam pillow or are irked by street noise, the computer remembers for your next stay at that hotel–and soon, anywhere in the chain.”
Not owning their hotels means Marriott need not worry about empty rooms. However such arrangements leave little incentive for Marriott to control costs when occupancy is low . That has been a source of contention for many owners who still have the mortgage to pay.
In the case of AHI that will be a big nut to crack as with a mortgage of US$29M at a rate of around 12% over 20 years it would mean a monthly payment of roughly US$350,000 per month. A typical 200-room Marriott run Hotel with a 70% occupancy rate would bring in total revenue of around US$20M per year depending on extras, according to this article by hotel consultant Steve Rushmore. Not much breathing room if occupancy rates start slipping.
Meanwhile the Forbes article points to several disgruntled owners: “The real flashpoint with owners is the passing-through of costs in operator contracts…The unhappy hotel owners contend that Marriott doesn’t pass along rebates it wins by dint of its huge purchase orders from Marriott-controlled suppliers, particularly one called Avendra (50% owned by Marriott) that furnishes them with everything from towels to green beans. The owners complain also of being overbilled by Marriott for things like marketing and restaurant-concept research.”
That said the company’s reservations system and customer loyalty programme do bring in the guests: “Put a Marriott flag over the entrance to a roomy full-service hotel and on average your sales will be 13% higher than had you chosen a comparable brand.”
If it all breaks down, getting out of 20 to 25-year management contract is not easy. Take the case of Waikiki M Edition vs Marriott International. The rosy revenue projections did not come true and the owner locked out Marriott at 3 am one Sunday morning . However, Marriott went to court and eventually settled for an undisclosed amount for loss of management fees.