Marriott Has Handed Alibaba the Job of Finding New Guests. Whatever Happened to Going It Alone?

In the end, it all comes down to finding new customers more efficiently.

As the world's largest hotel group, whatever Marriott does sets an example. And this move may cool other hotel groups' enthusiasm for going onto the internet to fight for customers themselves.

On the evening of August 7, at the W hotel on Shanghai's Bund that had opened only a month earlier, Marriott International and Alibaba announced a strategic partnership and a joint venture. The venture will be based in Hangzhou, and both sides will station teams there to run all of Marriott's Chinese-language online platforms: Marriott's Chinese official website, its Chinese mobile app, Marriott's official flagship store on Fliggy. It will be headed by Cai Yongyuan, a vice president of Fliggy.

Which is to say that, judging by what the venture will actually do, the work falls mainly to Fliggy, Alibaba's travel platform. Fliggy used to be Alitrip; last October it was overhauled and split in two, into Alibaba Business Travel, a B2B service for corporate travelers, and Fliggy, a B2C service aimed at young people. At bottom, Fliggy is an online travel agency (OTA). And China's largest OTA is, as you know, Trip.com Group.

So this is really Marriott partnering with one more third-party platform. The only difference is that it is called a joint venture — which may, of course, make it the closest third-party partner Marriott has.

Since the start of last year, star-rated hotels, Marriott among them, have been declaring war on third-party platforms one after another in the fight for young consumers, pushing their own direct-booking channels. Hilton launched the biggest marketing campaign in its 97 years, "Stop Clicking Around." Marriott's slogan was just as blunt: "It pays to book direct." In January, Marriott also released an all-new app, and Hilton and InterContinental have both been happy to talk up their app download numbers.

The hotel industry has never been so keen on selling direct. But to Dan Wasiolek, an analyst at the ratings firm Morningstar, the smarter move is still to work with third-party platforms. "This joint venture doesn't surprise us," Wasiolek told QDaily. "Marriott's biggest advantage is brand value, not channel capability. The smarter thing is to widen that moat — the brand — and attract more third parties. That is also its biggest challenge."

Judged on its financials alone, Marriott is in fact doing well. Its latest quarterly report put total revenue at $5.795 billion, up 48.5% from a year earlier, and net profit at $414 million, up 67.6%. RevPAR (revenue per available room — how much money one room actually brings in per day, one of the key measures the industry uses to judge how a brand is doing) and occupancy rose 2.2% and 1.6% respectively. The jump in revenue came from completing the Starwood acquisition, though even before that, revenue grew 17.9% in fiscal 2016.

But Marriott, Hilton, InterContinental and the rest all know where their problem lies: they appeal less and less to younger consumers. The assortment of digital "innovations" of recent years — rooftop picnics, robots, digital door locks — have all been attempts to close that distance.

Seen that way, the place Alibaba and Marriott chose to announce their partnership was symbolic too. W Hotels, aimed at a younger crowd and known for modern design, have won a large following around the world, and were the asset Marriott cared most about in buying Starwood. The W on the Bund is also a new calling card Marriott is showing young Chinese consumers.

What Alibaba and Marriott Want From Each Other

"We are the world's largest consumer platform, and Marriott is the world's largest hotel management group. It is only natural for the two of us to come together," Alibaba CEO Daniel Zhang said again and again at the press conference. Scale, then, is the premise of the deal.

Buying Starwood expanded Marriott overnight to 122 countries, 60 hotel brands, more than 6,000 hotels and 1.2 million rooms. Before that, no hotel group had ever passed a million rooms.

Marriott CEO Arne Sorenson, speaking to QDaily at the press conference, went further: without the Starwood deal, there might have been no joint venture at all. "We have three to four times as many hotels as the number two in the market, so about a year ago Alibaba started some informal conversations with us. Alibaba asked us, 'What do you think? Can we do something together?'" What Marriott wanted was obvious: Alibaba's enormous traffic. Alibaba says it has 500 million active users — "that's more than the population of the United States," Sorenson said.

A week earlier, Alibaba had merged the Tmall and Taobao membership programs into "88 Members." Under it, the Taoqi Score — a rating derived from what a member has spent on Taobao, Tmall, Fliggy and Taopiaopiao over the past 12 months — became the only thing that sets a member's tier, with three levels: 300, 1,000 and 2,500. Super members scoring above 1,000, whom Alibaba regards as the "backbone of consumption upgrading," can apply directly for Marriott gold or silver status.

That hands Marriott a sizable batch of users at a stroke, and a relatively high-spending group at that. Alibaba, for its part, is anxious to get more revenue out of those users, and the "prestige" attached to Marriott's five-star hotels is plainly part of what Alibaba is after. After buying Starwood, Marriott owns 30 hotel brands, most of them mid- to high-end; of the 20 brands it has already brought to China, most are high-end luxury hotels.

"The Marriott-Alibaba joint venture is more proof of the value of scale," Michael Bellisario, an analyst at the American wealth-management firm Robert W. Baird, told QDaily. Marriott is not, in fact, the first hotel company to team up with an e-commerce giant. In January, Hilton announced a deal with Amazon under which Hilton Honors members can spend their loyalty points shopping on Amazon, making Hilton the first hotel group to swap points with Amazon. Hilton was really copying what banks such as American Express, Chase and Citibank had already done with Amazon.

Why Marriott Thinks Alibaba Is Worth More Than Trip.com Group for Reaching Young Consumers

On sheer scale and bargaining power in online travel, Trip.com Group is close to a monopoly in China, especially after buying Qunar and eLong one after the other. According to the 2015-2022 China Chain Hotel Market Assessment Report, Trip.com Group and the two OTAs it controls, Qunar and eLong, together hold more than 70% of the online hotel market.

By user base and habit, Trip.com Group looks like the stronger third-party platform. Star-rated hotels do depend heavily on it, and they have long been one of its main sources of profit. Yet even though it brings in more bookings, hotels have complained for years about third-party booking platforms' pricing and commissions.

Floris van Dijkum, an analyst at Boenning & Scattergood, an investment bank based in Philadelphia, told QDaily that OTAs do bring hotels new guests, but that they often take a cut as high as 30%. "OTA fees are really high. A hotel executive told me OTAs make more money out of the hotel business than the hotels themselves do."

By one count, the American OTA industry swallowed about $16 billion in commissions in 2015. There are no comparable figures for China, but Trip.com Group's revenue offers a glimpse: in 2016, accommodation-booking revenue came to 7.3 billion yuan ($1.1 billion), up 58% from the year before and 37% of total revenue.

Marriott and Trip.com Group already traded blows once, in February last year. When Marriott ran a loyalty campaign guaranteeing the "lowest price on its own website," it promised that if a guest found a lower price elsewhere, Marriott would go a further 25% below that price. Trip.com Group hit back by pushing Marriott down its search rankings.

Marriott and Alibaba have not disclosed who owns how much of the joint venture, or how the money will be divided. But writing a new rule has always been easier than tearing down an old order. Marriott Executive Vice President Stephanie Linnartz called the venture a "direct sales platform" built together with Alibaba, saying that "booking a Marriott hotel on Fliggy is the same as booking on Marriott's own website."

And don't forget what Marriott needs most: more young customers. Trip.com Group, meanwhile, has spent the past few years busy making itself younger. Taobao's and Tmall's core users are already young — by Alibaba's own survey, more than 60% of mobile Taobao users are under 30. As a bet on future growth, Alibaba is the platform that fits Marriott's target audience better.

The deal with Alibaba is also being sold as something larger than a sales channel. In the two companies' words, they will "build around Marriott's hotels, pull together the travel offerings nearby, and design personalized travel packages." All of that is about strengthening the brand experience — and it is where Marriott is trying to set itself apart from its rivals.

Why Is Selling Direct So Hard for Hotels? In the End It Comes Down to the Efficiency of Finding New Customers

Back when the internet was less developed, OTAs meant a more efficient distribution channel: they could reach more users and bring hotels more bookings.

But now, even OTAs, which have a relatively easier time finding new users, are watching their marketing costs climb year after year. Dan Wasiolek told QDaily that marketing spending as a share of total revenue has risen every year for OTAs and price-aggregating search sites, and has done so for years. Partly that is because demand keeps growing; partly it is because consumers have too many choices. "What's unusual about the hotel industry is that it is still an extremely fragmented one, so standing out among so many hotel brands naturally costs more."

In the more mature American market, OTAs such as Priceline and Expedia are together so dominant that selling direct is even harder for hotel groups there. Van Dijkum also described a practice in which American OTAs use advertising that does not square with the facts. "Expedia will say in its ads that room rates on its platform are 30% below the hotel's own price, for instance, but people at the hotel have told me that price was the most expensive rate the hotel charged in the past 45 days, not its real price that day."

In a comparison we ran of star-rated hotels earlier, the lowest price under every set of conditions did indeed turn up on a third-party platform rather than on the hotel's own channel — though that leaves out the points and discounts that come with membership. In theory a hotel's own price can be the best deal at the same level of service; but hotels cannot stop a third party from chasing a lower price by cutting the service, leaving out breakfast, say.

Selling direct has still won hotels a few points. Hilton CEO Christopher Nassetta said that, compared with 2015, Hilton's online direct bookings and mobile bookings rose by 200 basis points (2%) in 2016, and that in the fourth quarter of last year nearly 30% of bookings were made online. Hilton's Honors program added 9 million members in 2016, bringing the total to 60 million.

But the truth is that hotel groups' direct-sales strategies have made few waves, and the effect of selling direct is hard to measure in the first place. As Sorenson put it: "Honestly, it is going to get harder and harder to measure the impact of member-only discounts. In the second and third quarters of 2016, member-only discounts moved RevPAR by about 30 basis points (0.3%). But the further back you push the timeline, the closer you get to when we launched the push for more direct bookings, the more current baseline data you have, and the more you can actually calculate," he said. "The further back you go, the harder it is to tell which channel a booking really came from. Right now most hotels offer a member-only discount rate, and our main competitors are no exception, so assessing the impact isn't easy."

If it weren't for Airbnb, the hotel industry might have had more time to feel its way, or might not have given up on the effort so quickly. Airbnb, on a roll at the moment, is valued at $30 billion — above Hilton's $19 billion and closing on Marriott's $35 billion.

It has already thrown the industry into confusion. The American Hotel and Lodging Association (Marriott and Hilton are both members) has announced that this year it will go after Airbnb at the federal, state and local level in the United States, to win back the guests Airbnb has taken. "We want to break the myth that Airbnb is supporting ordinary people and helping them earn a bit of extra money. Home sharing is not what you think it is," said Mr. Flanagan, who runs the association. What he means is that plenty of people run their listings like hotels, hoping to make money from them.

Whether they sell direct or work with third parties, what hotel groups are after in the end is the same: to find new customers more efficiently, which means more users at the lowest possible cost. Li Qingping, president of the hotel consultancy UHC Hezong, told QDaily that hotels are in fact already a fairly mature market, and that their cost of winning a new customer is lower than in many young industries. But internet platforms have far more potential and possibility than hotel groups do. Besides, the joint venture Marriott and Alibaba have set up is not exclusive.

Fliggy says it brought high-end hotels 6 million new members last year. Li Shaohua, an Alibaba vice president and president of Fliggy, expects that "this year Fliggy will help high-end hotels sign up 10 million new members."

Given Marriott's size, Van Dijkum believes it will bargain harder with OTAs in China — a travel market still less mature than America's — and that working with Alibaba will make traffic faster and easier to get.

What matters more to Marriott, of course, is its loyalty program, the thing it lives on. So the joint venture also hopes to offer, beyond the hotel itself, a complete travel experience and a customized service that starts at the moment of booking. That can be read as a move against Airbnb, which launched a similar destination-experience product, Trips, last year.

If things go as Marriott and Alibaba plan, more consumer data will flow toward Marriott in the future — and with a fuller picture of what consumers do, Marriott will be able to react to the market faster.

And Then There's China's Booming Market

Arne Sorenson, president and CEO of Marriott International, wrote in a statement on LinkedIn that "by 2031, the global middle class will grow by 3 billion people, and China will account for most of that growth, yet today only 10% of China's population holds a passport."

At most destinations outside China, the number of Chinese tourists is growing 25% a year. "We see this trend in every market around the world. Even in some markets that started small, growth has been fast. I think it will go on for many years to come," Sorenson said.

And data from eMarketer has China accounting for a quarter of the world's online travel spending by 2021; this year, online spending has already reached $87 billion, 20% more than in 2016.

These are the numbers cited in nearly every discussion of the Chinese travel market's potential. The industry consensus is that tourism in China is entering a golden age. International hotel groups including Marriott, InterContinental and Wyndham are all speeding up their expansion in China.

Marriott is the most aggressive of them. China is its largest single market in the world, and it now sometimes opens a hotel here every week. According to STR, a firm that tracks the hotel industry, Marriott International has more rooms in China than any other American hotel company, apart from Wyndham Worldwide Corp, which owns brands such as Super 8 and Ramada.

Marriott has 300 hotels operating in China and another 300 in preparation, which will come to 170,000 rooms between them. China accounts for 8% of Marriott's hotels worldwide, and the hotels going up in China are 17% of everything the company has planned globally.

"Marriott has such a grand plan in China — 170,000 rooms times 365 days is 62.05 million nights that have to be sold. If you can't sell them, you lose money. You have to find a way to stimulate demand, to get more people into those rooms," Van Dijkum worked out on the spot in a phone interview.

Alibaba's designs on the Chinese travel market are plain from its investments of the past few years: Baicheng, Qyer, Zailushang and Youyou Mobile are all startups working on niches of outbound travel. Fliggy itself was overhauled last October, from its logo to its positioning; it is new, but with Alibaba's resources behind it, its growth should not be underestimated.

Marriott is quite optimistic about the new venture, probably because a first round of cooperation with Alibaba last year gave it a taste of success. At Monday's quarterly call, Sorenson said the membership tie-up launched with Alibaba's Fliggy platform last year brought Marriott 6,000 new members in six weeks.

For now, though, the first thing Sorenson has to worry about is the systems. Marriott has its own reservation system, commerce system, property management system and more, while Alibaba runs its own separate systems. How to connect the two seamlessly, and do it without compromising security, is what worries him most right now.

Cover image from 4ever, Vogue, Assets Adobe