What do you get when you mix Marriott International (NYSE:MAR) and Ikea?
Moxy Hotels, apparently.
This week, Marriott announced at the Berlin International Hotel Investment Forum that it is launching a three-star hotel brand in Europe in partnership with the chic-cheap Swedish furniture retailer. In its press release, Marriott described the new brand as:
“Designed to capture the rapidly emerging millennial traveler, the new brand combines contemporary stylish design, approachable service and, most importantly, an affordable price.”
Ikea has flirted with the idea of opening its own hotel brand in the past. Furnished with Ikea products, the hotels would act as an excellent marketing vehicle for the retailer. Although Ikea owns several hotels in Europe, as far as I know, only the WestCord Hotel Delft (across from the Ikea Concept Center) in the Netherlands is fully decorated in Ikea furniture. Wisely, Ikea has chosen to partner with established hospitality businesses.
On paper, it sounds like a match made in heaven. But is it? A brief history lesson might be in order when considering the pros and cons of such a collaboration.
Why It Might Not Work
It’s important that Marriott shareholders — and those interested in buying its stock based on the news — consider what has happened in the past when attempting to launch hotel brands. Namely, it’s not as rosy as the press release would lead you to believe.
Failures for Marriott are few when you consider it operates 3,800 hotels across 18 brands in 74 countries. Realistically, though, there’s going to be some clunkers.
According to the Upstart Business Journal, Marriott entered into a partnership in 2001 with Bulgari, the Italian watch and jewelry brand, to open seven high-end hotels. Each company threw in $70 million to the mix, but 12 years later, they’ve opened just three with a fourth expected in 2015.
MAR’s second miss is its 2007 partnership with Ian Schrager, co-founder of Studio 54 and Morgans Hotel Group (NASDAQ:MHGC) — Edition Hotels. Edition was meant to take the industry to a new level creating as many as 100 hotels with the help of Schrager, considered by many to be a boutique hotelier legend. However, right now, exactly one hotel exists in Istanbul with another four in various stages of development.
So, when Marriott and the other parties involved suggest as many as 150 franchised locations can be opened in the next 10 years, we’re allowed to be skeptical.
That also doesn’t mean it’s not a good idea — it’s just that this road isn’t necessarily paved with gold.
Why It Might Work
Two points stood out for me in Marriott’s press release:
- Most important is the fact that economy hotels in Europe (Marriott has very few hotels there in this price point) represent almost half the total room supply, yet only 20% are branded. Independents rule the roost. If executed successfully — and that’s a big if — Marriott could dramatically increase its market share in Europe.
- Also, hotel affordability in Europe is a much bigger issue than in North America. Anything that gives travelers a comfortable, affordable place to stay is a welcome addition to the hotel landscape over there. Budget hotels are experiencing the fastest rate of growth in Europe (thanks to the economy), and this will only feed into to that.
Last year, Marriott announced it was planning to increase the number of rooms it has in Europe from 40,000 to 80,000 by 2015. It’s going guns-blazing in Russia — which represents its fourth-biggest market in Europe (MAR lumps Russia in with Europe) — with 19 open and 11 on the drawing board. However, many of those hotels are its premium brands like The Ritz-Carlton. Moxy Hotels will open in countries like the U.K., Germany and Sweden, where Ikea already does big business.
Each hotel will range from 150 to 300 rooms, which means if Marriott hits its target of 150 hotels in 10 years, it will have added at least 22,500 rooms to its portfolio in Europe. About 5,000 of that could conceivably be introduced by the end of 2015, suggesting the higher-priced brands will still represent most of the near-term growth.
Since Marriott spun off its vacation ownership business in November 2011, its stock has improved 40% compared to 35% for the S&P 500. Its business is running very smoothly, and any real contribution by its newest brand in 2014 and beyond will only make an investment today that much more rewarding.
However, if you’re looking for a bump in the stock price simply because Ikea is the owner of some of the first hotels, I think that’s a bit of a stretch. It makes for nice news but has little bearing on the success or failure of the new brand. That’s up to Nordic Hospitality, which will actually be managing the hotels along with Marriott, which in turn will be providing a lot of the marketing and publicity.
Execution is what will make the difference. Not brand names.
As of this writing, Will Ashworth did not hold a position in any of thee aforementioned securities.