Marriott built its own 'Airbnb' before coronavirus crashed business travel. Did it help?

Key Points

• Marriott International's Homes & Villas platform has grown, with 90% of stays on the Airbnb competitor coming from the Bonvoy rewards program members.
• This summer was the highest in gross revenue since the 2019 launch – bookings increased by 700%, revenue by more than 800%.
• As Airbnb preps an IPO many experts thought the coronavirus had made impossible, Marriott's success in alternative lodging can't make up for the traditional hotel industry challenges posed by the pandemic.

Marriott International began its push back against the success of Airbnb in Spring 2019 with Marriott Homes & Villas, a luxury property lodging service that offered customers a private residence alternative to hotel rooms. Bookings are up, by a lot, during Covid-19, as more travelers flock to individual properties. That's made the Airbnb rival a rare bright spot in business results for the hotel giant, which like its peers, has seen a massive falloff in traditional room bookings as business travel, travel to urban centers, and international vacation travel dwindled during the pandemic. 

From May to August, Marriott saw record performances in top booking days, up to 2x historical highs, according to data the company provided to CNBC. This summer has been highest in gross revenue since launch, with bookings up by 700% over last summer, and revenue increasing by more than 800%. Since the launch, the number of properties on the platform has grown 5x from about 2,000 to more than 10,000 in 250 markets. 

"We knew it was an offering that our customers wanted but we didn't have," Stephanie Linnartz, group president of Marriott's consumer operations, technology and emerging businesses, had said in an interview with CNBC shortly before the Covid outbreak.

The home sharing program started as a pilot in 2017 after Marriott learned that close to 30% of its members had stayed in home rentals in the past year. The pilot started with just a few homes in Europe.

Fighting Airbnb won't move the hotel needle

But for Wall Street analysts — and even for Marriott management — Homes & Villas is a small silver lining in relation to the massive decline in business for the traditional hotels concentrated in urban areas and overseas travel destinations. Pre-Covid, it could easily seem like Airbnb was the existential threat to the lodging sector. Now, getting the core accomodations back on track, and getting the traditional portfolio of properties aligned with a changed world, is the challenge that demands their full attention.

"It's tiny. It doesn't move the needle for these companies," said Patrick Scholes, managing director of lodging and experiential leisure equity research at Truist Securities. "They will have to make significant further investments to move the needle."

"It's an afterthought," said Dan Wasiolek, senior equity analyst at Morningstar covering the travel industry. "We're talking about 10,000 homes versus 7 million listings on Airbnb. And Booking Holdings has a similar amount. ... Even before the pandemic Marriott was just dipping its toes and doing it from an organic basis, using its boutique Tribute brand to facilitate high-end homes and experiences," he said.

Marriott management has not said anything to the contrary, telling Wall Street in the past that Homes & Villas remains insignificant as far as its earnings outlook, and so small in relation to the rest of the business that analysts should not "get too hung up on it," Scholes recalled of earnings call commentary. 

Marriott CEO Arne Sorenson told analysts on the company's recent August earnings calls that the Homes & Villas business has benefitted from three trends: leisure, drive-to and "whole home" preferences.

"If you can give me a vacation home on the beach or in New England or someplace I can drive to, then I know that I can control my environment, I can control my transportation and it suits my purpose because it's a leisure trip anyway. And so generally that has been a positive thing, although to state the obvious, it is a very small part of our business," the Marriott CEO said.

"They have bigger fish to fry right now than growing out Homes & Villas," the Truist analyst said. "Marriott and others had significant layoffs and the employees left are up to their eyeballs with existing work and not new projects. So they may have to hit the pause button on new ideas."

The company has had to furlough thousands of employees during the pandemic and also is in the midst of corporate layoffs.

After the March 2020 decline due to Covid-19 concerns, vacation rentals rebounded heading into the traditional peak summer travel season, and by mid-summer the vacation rental occupancy increased and approached 2019 levels. While vacation rental occupancy rebounded to 62%, hotels trailed with occupancy of 37.6%, according to lodging consultant Amadeus Hospitality data.

The bet on an "Airbnb-like' model may yet pay off for the hotel giant, but right now, Marriott management has its hands full just trying to figure out how to come out financially secure on the other side of Covid.

"Liquidity-wise, until there is visibility on moving past Covid, the focus needs to be on the balance sheet," Wasiolek said. "And visibility doesn't improve until there is herd immunity or a vaccine."

Hotels were healthy before the pandemic, but AirBnB's rapid growth from 2013 to 2017 did "cannibalize" some hotel industry growth, said Kevin Kopelman, senior analyst at Cowen, in an interview from before the coronavirus decimated hotels. As AirBnB's growth moderated, that cannibalization had slowed, but some cannibalization continued in the period leading up to Covid.

Homes & Villas was not the only newer offering Marriott pursued as the travel landscape shifted, some less well-positioned in the current moment.

Marriott invested in PlacePass, a Boston-based platform that lists tours and activities, in 2017. Marriott also said last August that it was getting into the all-inclusive resort space. In addition, the company unveiled the Ritz-Carlton Yacht Collection, which offers cruises on one of three 190-meter luxury yachts. Some newer efforts came as a result of the merger with Starwood, which had the Moments platform offering access to events like concerts and cooking classes.

Amid the pandemic, it's no surprise that the Moments platform is not a focus, and the cruises are not yet ready to start booking passengers.

There is a desire to travel ingrained in human nature and people will want to travel, and once they can from a safety and money perspective, they will return.
Dan Wasiolek
Morningstar analyst

Marriott also invested in start-ups and incubators in recent years. Two years ago, it partnered with Accenture and 1776 to incubate travel and hospitality start-ups in hopes of fast tracking innovation. Ideas ranged from loyalty programs to better booking processes to ways to maximize local activities during a hotel stay, though that program is now closed. 

Some investments in technology need to be made to survive in a tech-centric era, when conditions do return to normal. A recent study from Google Travel and McKinsey found that consumers looking for a hotel now peruse 45 digital touchpoints when researching a hotel, up from 39 touchpoints in 2017. That research takes place in 60 sessions over 36 days on average. The research also found that 70% of travelers don't have a brand in mind when starting a Google search for a hotel.

The travel industry needs to offer more of an experience, not just shopping for three nights in a hotel and the future will still be about personalization and technology, said John Hach, senior industry analyst with consulting firm Amadeus Hospitality. Companies are using browsing data and other information to deliver personalized recommendations and better understand both the context of the search and the consumer.

"Start-ups have a lot of momentum, speed and agility but also different challenges. We are finding ways for a bigger company and startup to work together to drive amazing customer experience…that's a key reason why we do what we do," Linnartz said in the interview earlier this year. 

Not all hotels want to be Airbnb

Some Marriott competitors turned away from making an effort to challenge Airbnb directly years ago. In 2016, Hyatt divested a stake it had taken in One Fine Stay, which was acquired by French lodging company Accor. 

Hilton CEO Chris Nassetta, who for years has dismissed any existential threat posed by Airbnb, said at the time of Marriott's Homes & Villas launch in 2019 that it remained uninterested in the idea. "We've spent a lot of time talking to our customers, and what our customers, at the moment, tell us is that they don't need [homesharing] from us," Nassetta said during the 2019 Hilton Q1 earnings call. "They have places they can get this, and in a sense, they don't want it from us. ... I'm a big believer in focus. We're going to keep doing what we're doing."

Hospitality industry consultant John Hach is less pessimistic than the Hilton CEO, and the equity analysts. 

"Within recent years and throughout dealing with Covid-19, hoteliers are providing vacation rental access on their brand websites. This emerging practice enables major hotel brands to actively compete with vacation rental sites and engage their large loyalty membership base with the option of selecting extended stay inventory," he said.

Of course, Covid has changed the equation, but Wasiolek said it does not mean that the strategic thinking from hotel management has changed. "It's a whole different type of offering," he said, and it includes a risk of the guest having a bad experience that is harder for a hotel brand to control.

Unlike AirBnB or VRBO, which is owned by Expedia, the properties in Marriott's Homes & Villas program are all professionally managed by housing management companies. Marriott CEO Sorenson stressed this as an advantage in the recent earnings discussion, telling analysts, "What people are drawn to in terms of home sharing particularly in a Covid-19 environment is, 'do you have a place where I can take everybody and where we can be on our own? ... I don't really want an apartment that somebody lives in regularly. I don't want the old style home sharing because I can't be certain about the cleanliness or comfort of that."

"There is a desire to travel ingrained in human nature and people will want to travel, and once they can from a safety and money perspective, they will return," Wasiolek said. For Marriott, or any major hotel brand, to make a big shift now, "would be shortsighted," he added.

Corporate travel becomes work-from-home travel

The new Homes & Villas business has 40% of properties in locations where Marriott does not have a presence, but also has its own Covid-related issues. Even as listings grow, it is Caribbean and international in portfolio mix, and the recent travel trend has been staying close to home. "Many people are concerned about hopping on airplanes," Scholes said, adding that in the short-term, the seasonality of the lodging sector now turns to being much more dependent on business travel.

And there are core issues that Marriott will need to first address. As corporate travel goes through what may be long-term structural changes, its weakness in "drive-to demand" properties — a winner as travelers stay closer to home and work-from-home potentially becomes a form of domestic work tourism — puts it at a competitive disadvantage versus some peers. A little over half of its portfolio fits that evolving dynamic, according to analysts, versus a Wyndham, for example, which is as high as 90% concentrated in drive-to properties.

"One thing that will permanently change is the propensity for working from home. I don't have to go from home to city or office. I can spend two months in Vermont and you won't find too many Marriotts there," said Scholes. 

In the near-term, and for potentially longer, hotel brands concentrated in urban areas are in a tough spot.

"Corporate travel recovered from past demand shocks, but maybe this time is different," Wasiolek said. "Video conferring has advanced enough. And that's something that will impact higher-end players more than the lower end. That's more of a structural question: how do you adjust now to get a higher leisure mix In urban hotels?"

I don't think hotels will have to make more investments in non-traditional properties, but they will think about evolving to cater to, technically not business travel, but business-related travel where workers want to work remotely.
Patrick Scholes
Truist analyst

Even within traditional lodging, there are winners on the current landscape that reflect this emerging trend, such as extended stay properties, which are significantly outperforming the market, but are less of a "primary brand" for Marriott.  

"Choice Hotels has a strong presence in extended stay. That's a market where even before the pandemic it was underserved. There was demand, and supply way below demand, and it is something doing well in the current environment," Wasiolek said.

Higher-ended hotels are having more trouble with occupancy levels. The revenue per room (revpar) measure through the end of August was down 44.5% for the lodging industry and, at the very high end, down 67.3%. "There's a big divergence," Wasiolek said.

For a company with as long a history as Marriott, wholesale changes to the portfolio of properties would require decades to complete, and even acquisitions might not be enough to merit the cost. "I don't think hotels will have to make more investments in non-traditional properties, but they will think about evolving to cater to, technically not business travel, but business-related travel where workers want to work remotely. They could buy extended stay hotel brands and move the needle a little, but I don't think it is in the cards for them. It's kind of like, you made your bets," Scholes said.

Building new loyalty with guests

Marriott has to use advantages it already has, according to analyst, such as loyalty promotions.

"They have the largest loyalty program in the industry, 140 million-plus, and lots of data," Wasiolek said.

While that data has posed a headache for Marriott in recent years when it became the target of customer hacks, the Morningstar analyst says it will be an advantage in charting a course in the new travel landscape. "In a permanent hybrid work environment, people will take more weekend trips, work from a destination. They just need to shift how to use marketing dollars and loyalty data," he said.

According to Marriott, more than 90% of Homes & Villas bookings come from Marriott Bonvoy members. "This tells us our most loyal customers have a need for this type of travel experience and until launch had been staying at homes from competitor platforms," Marriott spokesman John Wolf said.

Bonvoy combines the Marriott Rewards Program, Starwood Preferred Guest Program and Ritz-Carlton Rewards Program after Marriott's acquisitions. 

Marriott and other major hotel groups such as Hyatt and Hilton were all stepping up their game with loyalty programs pre-Covid, making sure they have competitive benefits and recognizing their most loyal customers.

"The average person may stay just a few times a year, but frequency drives engagement, and engagement drives loyalty," said Linnartz.

The way these hotel chains go about building loyalty may need to change from a past focus on drawing heavy business travelers into their system, and turning them into loyal customers driving higher revenue per property, which is a critical metric for hotel investors when deciding whether to open a new hotel within one of the major hotel chains.

"What any business wants to do is to make sure they are catering to their best customers," Kopelman said. Having a successful loyalty program makes a hotel chain very attractive to potential owners and is one of the reasons why major hotel chains have been taking market share from independents in the last few years, he said.

"Bonvoy members, in a typical year, unlike this one, occupied 55% of rooms and spend more than non-members and stay more," Marriott spokesman Wolf said. "Anything that benefits them or gets more members into the member pool benefits us. They spend more and they cost less."

The future of vacation rentals

Over the summer, a rising tide lifted boats in the vacation rentals market, at least domestically. One of the first signs of that was when Airbnb said in the middle of May that U.S. domestic listings returned to positive growth, at a time when hotel bookings were cratering. But that statistic was domestic, and Airbnb revenue took a huge tumble in the second quarter and saw its private market valuation — which had surpassed that of the largest hotel brands — get reduced by roughly half, and it too had significant layoffs.

Booking Holdings gets roughly 20% of its revenue from alternative accommodations; for Expedia, it is about half of that at 11%. For TripAdvisor, it's "negligible," Wasiolek said.

Wasiolek said vacation rentals and low-priced hotels are the most insulated parts of the market right now, and there is going to be an incremental portion of workers taking longer weekends or a week "here and there," in a new destination, and that could benefit traditional hotels and alternative lodging companies.

While it will be tough for hotel companies to change their mix of leisure and corporate, workers stuck at home looking for weekend trips may help. "Camping is tougher when it's colder," Wasiolek said. So even as occupancy could go down due to the transition from vacation to business travel season, the new paradigm could help hoteliers a little with "people looking for something to do," the Morningstar analyst said.

About two-thirds of Marriott Homes & Villas summer bookings were for stays within 60 days, according to company data, and nearly 50% were for stays within less than 30 days, and it saw the majority of guests booking trips for one week or less and choosing homes with two to four bedrooms in drive-to destinations.

Homes & Villas reservations for this Fall and Winter are showing an expanded booking window, with 75%-plus of the stays through the end of the year being booked more than 30 days out (27% of those were booked 90+ days out). "We believe this shows growing confidence among travelers over the past month and continuing into future months," said Marriott's Wolf.

"If people were going to do trips to hotels they will still do hotels, and people who like Airbnb will do that, and people who tried an Airbnb for first time, that might help them more if they had a good experience. But it benefits leisure travel in general, and that's where Marriott has to get its mix away from corporate." 

"We do see that the larger hotel chains with vacation rental offerings have an opportunity. As major brands have access to extended stay inventory and can leverage the power of their loyalty programs it is reasonable to foresee long-term opportunities for traditional hotel companies to grow their share of this emerging lodging sector," industry consultant Hach said.

Analysts will believe it when they see it mattering on the balance sheet of a company that has generated upwards of $20 billion in annual revenue. "It's never gonna be a big presence in our view," said Morningstar's Wasiolek. "It's very hard to scale high-end alternative accommodations. Airbnb is trying too and there are just not that many in the world."

If, or when, Airbnb does go public, the investor response to the deal will reveal an important aspect of market sentiment leading into the post-Covid world. Valuation won't be a direct read on Airbnb versus hotels because it is likely to be valued as hybrid of an online travel agency and lodging company. But it will indicate something more fundamental: whether investors think the desire to travel is going to return to some new version of normal.