clock menu more-arrow no yes mobile

Filed under:

The Marriott/Starwood merger is another case of the rich getting richer

Justin Sullivan/Getty Images

The hotel giant Marriott is buying the smaller hotel group Starwood (whose brands include Sheraton, Westin, W, St. Regis, and Le Méridien) to form what will be the largest hotel group on the planet. The main aim of the merger is to obtain scale that's large enough to drive a hard bargain with Expedia and other giant players in the online hotel brokerage game, but another factor that makes Starwood an attractive pickup is the fierce loyalty its Starwood Preferred Guest loyalty program inspires in the company's most devoted customers.

At the same time, this very fierce loyalty has many SPG devotees panicked that the new, less classy management from Marriott will somehow mess things up. "I’m livid," Hugo Espinoza told Josh Barro of the New York Times. "I dread to think what the merger will do to my platinum-for-life status."

But Fusion's Felix Salmon and Stratechery's Ben Thompson both have reassuring takes, arguing that there are real complementarities between the Marriott and Starwood portfolios and that it would be hugely against Marriott's interests to ruin this beloved aspect of its new acquisition. The truth, however, is more complicated. Even if the program itself remains high-quality, the merger's impact on many existing Starwood customers can still be strongly negative. At the same time, some SPG members — including Espinoza himself — will likely benefit from the deal. Like the concurrent trend toward consolidation in the airline industry, hotel consolidation will ultimately drive a form of reward-points inequality where the rich get richer and the middle class lose out.

Hotel rewards are about excess capacity

The fundamental logic of a hotel rewards program goes like this: A room in a nice hotel is expensive, so if someone gets one for free she is receiving something of value. At the same time, the cost difference to a hotel of leaving a given room empty versus filling it with a guest is negligible, and if that guest buys a meal or two or some drinks at the bar it may even be profitable to let her stay in the otherwise empty room for free.

A loyalty program takes advantage of the fact that the empty room is worthless to the hotel but valuable to a potential occupant to generate some arbitrage. By giving away the empty room — whether in the form of a free stay or a free upgrade — to a frequent customer, you generate value out of nothing and encourage a set of frequent travelers to deliberately seek out your hotel. Tie-ups with credit card companies (in Starwood's case, American Express) generate a further opportunity to monetize these empty rooms.

The issue this creates for loyalists is that you are inextricably in competition with your fellow loyalty program members. Except in the depths of a severe recession, there is only so much excess capacity to go around. To get the best goodies, it's not good enough for you to be loyal — you have to be more loyal than other potential points redeemers.

Starwood and Marriott are complementary

All the major hotel groups operate brands at different points on the fanciness spectrum, and Starwood and Marriott are no exception. But broadly speaking, their portfolios are weighted differently. Marriott is much larger, with 4,300 hotels to Starwood's 1,270, and a larger share of Marriott's hotels are utilitarian spots (think the Courtyard, Residence Inn, and Fairfield Inn brands), while Starwood's portfolio is more weighted toward fancy hotels.

Marriott is basically a convenience option. If you have to travel frequently for work, often to miscellaneous locations, Marriott will serve your needs more effectively simply because it is much more likely that Marriott has a hotel near where you want to go.

Starwood is more of a choice for travel enthusiasts. Its rewards program is more generous and features better customer service, and its portfolio contains lots of places where it would be fun to cash in rewards stays. And if your necessary travel is overwhelmingly tilted toward major cities, then their smaller footprint won't bother you. It's a smaller chain, but it's not small per se.

A tie-up will create a company that is just bigger and able to do more. It'll be more ubiquitous than Marriott ever was by adding the Aloft, Four Points, and Sheraton brands to its already large stable of properties and offer more fancy destination getaways than Starwood ever could by aligning the Ritz Carlton and JW Marriott brands with Starwood's existing high-end portfolio.

Starwood's middle class is going to get squeezed

But here's where the limited amount of excess capacity comes into play. Even if the merger goes off perfectly smoothly and lives up to its full business potential, it's not possible for everyone to win in the rewards game. The merged company will have more hotels, and therefore more excess capacity to go around. But it will also have more loyalty program members looking to soak up that excess capacity.

And since Starwood's portfolio is disproportionately tilted toward destination properties while Marriott's client base is disproportionately tilted toward utilitarian frequent travelers, you'll see more Marriott loyalists cashing in at Starwood properties than Starwood loyalists wanting to cash in at Marriott properties. For the very top-end Starwood elites, that's no problem. They'll still be at the front of the line for goodies, and they'll have an expanded portfolio of hotels to take advantage of. But for the middle class in the Starwood program, it's going to be a huge problem — they'll be pushed down in the pecking order and find it harder and harder to gain access to the hotels they want to stay in.

This is essentially what we've seen happen in repeated rounds of airline loyalty program revaluations (most recently American Airlines) in the wake of industry consolidation. Building a larger network means more convenience for fliers with the highest tiers of frequent flier status, but it's also meant there's less excess capacity to share with lower-tier elites. Airline after airline has responded to this by devaluing the lesser tiers of its loyalty programs in order to focus on the newly enlarged bloc of superloyalists. It's just another way in which broad economic trends toward bigger and bigger scale support winner-take-all markets and create unequal distribution of gains.

Sign up for the newsletter Today, Explained

Understand the world with a daily explainer plus the most compelling stories of the day.