MARRIOTT IS SMOOTHING OUT THE LUMPS IN ITS BED
Few companies were as sorry to see the supercharged `80s come to an end as Marriott Corp. The giant hotelier used last decade's financial fads--leverage, limited partnerships, and tax-driven real estate deals--to become one of the nation's most profitable developers. It all worked so swimmingly: Marriott would develop a hotel site, sell the lodge for a nice profit to investor groups, and then collect lucrative fees to manage the property. Over the decade, the $8.3 billion lodging and food-service concern expanded its rooms sixfold, to 150,000.
These days, Marriott Chairman J. Willard Marriott Jr. still zips to the company's Bethesda (Md.) headquarters in his red Ferrari Testarossa. Other than that, though, you won't find much evidence of the boomtown mood that used to dominate Marriott. With the real estate market in a blue funk, the company is paying a steep price for last decade's joyride. Its balance sheet is now carrying roughly $1.5 billion worth of mortgages on hotels and other properties it hasn't yet been able to unload. What's more, a nationwide glut of rooms has led to cutthroat pricing in the industry, placing enormous pressure on Marriott hotels.
Small wonder, then, that short-sellers, always a pessimistic bunch, have been circling overhead since fall. The shorts have been betting huge sums that a prolonged recession could push cash-strapped Marriott over the edge. Another wild card: Is Bill Marriott, 59, up to the enormous task of managing the hotelier out of this jam? A driven executive who routinely logged 200,000 miles a year in travel to visit the far reaches of his empire, Marriott has suffered two mild heart attacks during the past 18 months.
Those looking through the glass darkly at Marriott had better pause. Bill Marriott may have lost a few steps, but he plans to personally lead his company through its transition. The devout Mormon now works out daily on a treadmill--and shows no indication of grooming a successor. Marriott says doctors recently gave him a clean bill of health: "I'm feeling better than I have in years."
'OUT OF THE WOODS.' Maybe so. Yet Marriott's years of 20% earnings growth are over. Still, the hotel giant has moved quickly to shore up its tattered balance sheet and bolster profits. Bill Marriott suspended virtually all new hotel construction last September--a move that will help relieve debt pressure. He has also pulled out the carving knife. The company hopes to slash overhead by more than 10%, and has already laid off or eliminated 1,300 jobs. And it's delaying merit pay increases for top management.
Cost-cutting, however, is only the beginning. Behind the scenes, Marriott has been busy remaking itself into a new and more conservative company. Rather than counting on hotel construction to generate growth, the company will try to persuade owners of hotels operating under rival monikers to switch over to Marriott. And the company is looking far afield for new growth into such diverse areas as golf-course management, child care, and building maintenance.
Even some critics have been surprised by Marriott's willingness to move so decisively. "They've really cleaned up their act," says Robert L. Renck Jr., an analyst with R. L. Renck & Co. In fact, Marriott has even won new support among bankers. Late last year, the company retired its commercial paper by tapping an existing $1.75 billion credit line from four banks. And on Feb. 1, the banks added $150 million for good measure. That has provided a much-needed financial cushion. "At this point, Marriott is out of the woods," says Caroline Levy of Shearson Lehman Brothers Inc.
Still, Marriott's slowness to react to warning signs--or perhaps just plain old hubris--a few years back made its brush with disaster closer than it had to be. Its profits depended too heavily on tax loopholes that made the purchase of newly built hotels attractive to investment partnerships. But such tax-motivated real estate deals were discouraged after the Tax Reform Act of 1986. Suddenly, Marriott had to guarantee returns of up to 10%--sometimes out of its own pocket--to keep investors coming.
PEPSI CHALLENGE. Then, after the real estate market collapsed in 1990, Marriott had a hard time attracting investors. Though the company has unloaded some hotels such as its Atlanta property, Marriott is now stuck with about 150 others--including a $300 million hotel in San Francisco's Yerba Buena district. Analysts figure it could take up to two years to unload all of these properties.
That's troubling because Marriott is now assuming considerable interest expense from the loans used to foot its building spree (chart). For now, Marriott insists that the cash flow generated from hotel and food-service businesses will see it through the lean years. Indeed, the company expects to churn out $600 million in cash flow this year, says William J. Shaw, the company's chief financial officer. That's nearly twice that needed to cover its interest tab.
Still, Marriott's recent run-in with Coca-Cola Co. underscores just how tight things are. In mid-March, the hotel colossus dropped Coca-Cola as its key soda vendor and switched to PepsiCo Inc. A senior Coke executive claims in an internal Coca-Cola memo that Marriott jumped to Pepsi after Coke rejected the hotelier's unusual demand for up to $100 million in loans at below-market terms. A source close to the Coke-Marriott negotiations says the company informed Coke it was making similar requests of other major suppliers. Marriott Executive Vice-President Francis W. Cash will only say that Pepsi offered "better economic considerations."
It's not hard to understand the sense of urgency at Marriott. The company needs to squeeze out cash wherever it can because hotel operating margins are under pressure. Although Marriott is gaining market share, the growing glut of rooms, apparent even before the gulf war and the recession clobbered travel, cut Marriott's occupancy rates a few points last year to the low 70% range. Intense competition has forced the company to discount rooms in its full-service Marriott hotels to as little as $49 per night on weekends and $39 at its midpriced Courtyard hotels.
The last thing Marriott wants to do is fight a price war. So instead it's boosting spending for advertising at a time of widespread cutbacks. Marriott has also consolidated the sales forces of its various hotel brands--which used to compete with each other. Before, if a corporate prospect chafed at the cost of booking its employees in Marriott's full-service hotels, a salesperson might simply slash the rate to win the contract. But now, Marriott's sales reps can steer that client toward a lower-priced line.
With its hotel business depressed, Marriott hopes to bolster nonhotel businesses, which already account for about half of the company's cash flow. The company, already a player in golf course management, recently inked a deal with Jack Nicklaus to manage up to 35 new Nicklaus-designed public courses. The company has begun to offer child care, janitorial services, and lobby convenience stores at these sites.
In food service, too, Marriott is looking for ways to make more with less. With construction costs soaring, the company has sold its well-known Roy Rogers fast-food stores to Hardee's and spun off its Big Boy diners to franchisees. Now, Marriott is going for lucrative captive markets, such as hospitals, office buildings, and turnpike service plazas. It's even willing to work as a franchisee of such former rivals as Burger King and Pizza Hut.
SENIOR COMMUNITIES. Even within its hotel operations, Marriott is being forced to rethink its strategy. Unlike many rivals that rely on franchisees to operate most of their hotels, CEO Bill Marriott has been reluctant to trust the family name to others. But he'll soon allow more franchising. The company has begun lobbying independent hoteliers, as well as franchisees of competitors, to convert their properties over to the Marriott name.
Marriott is pulling out all stops in one market--senior "life-care" communities, which combine deluxe retirement housing with medical and nursing facilities. The demand has been startling: A 413-unit tower in Arlington, Va., drew 2,205 refundable deposits of $1,000 each to reserve space. But the credit crunch has forced Marriott to hold off on new construction and scale back its plans for 150 centers to 50 over the next five years.
No doubt about it: These are leaner times. So lean, in fact, that Marriott is even trying to peddle an $8 million sheep-and-cattle ranch near Middleburg, Va., that once served as a family retreat. It's all quite a turnabout. During the 1980s, Bill Marriott took a family business that began as a nine-stool root-beer stand and refashioned it into a turbocharged high-flyer. And though the lodging colossus remains a mighty force, it's moving forward into the 1990s as something of a humbled giant.Dean Foust in Bethesda, Md.