Marriott Corporation: Case Introduction
Marriott is renowned for its elegant and comfortable hotels and resorts. The company caters to a targeted customer base, ranging from the frequent corporate business traveler to the family enjoying their occasional weekend get-away. Marriott has continued its rise in the lodging, contract services, and restaurant industries. The company continuously strives to meet the needs and wants of its customers while strategically maneuvering the rigors of today’s competitive and ever-evolving market of glamorous destinations and convenient services. In order to remain relevant in a highly-competitive environment, Marriott must strike that successful balance of minimizing costs, and gaining and effectively using financial leverage to grow its business, while also aligning its goals and value-driven strategies to maximize share holder wealth, and achieve its short- and long-term objectives through delivering the value and services that the marketplace requires. The following discussion presents an in-depth analysis of Marriott’s financial position (through 1987) according to the Harvard Business Review Case, Marriott Corporation: The Cost of Capital (9-298-101). The case takes a detailed look at Marriott’s financial strategy and performance in efforts to determine the appropriate capital structure for the company. The analysis will further provide methodology for calculating Marriott Corporation’s weighted average cost of capital (WACC), as well as an assessment of Marriott’s investments that continuously aide the corporation in achieving a competitive advantage over their top industry competitors. Marriott Corporation: Company Background
In 1927, newly weds J. Willard Marriott and his wife, Alice Sheets, opened a nine-stool A&W Root Beer stand called the “The Hot Shoppe” in Washington, D.C. The small venture would later flourish under a management contract for food-services with the United States Treasury, and over the next 60 years, become one of America’s leading lodging and food service companies. The Marriott’s had its first initial public offering of stocks (IPO) selling in 1953 with stocks—priced at $10.25 per share—selling out in two hours. The Marriott’s opened their first hotel, Twin Bridges Motor Hotel, in 1957 in Arlington, Virginia. By 1967, the corporate name was changed from Hot Shoppes, Inc., to the Marriott Corporation. Marriott further expanded its operations in the airline food service. They also opened the Fairfield Farm Kitchens food production facility; acquired its first resort property, the Camelback Inn, located in Venezuela; and purchased the Bob’s Big Boy chain of restaurants. In 1977, Marriot celebrated its 50th year in business and $1 billion in total sales. All three of Marriott’s major lines of business—lodging, contract services, and restaurants—were providing lucrative returns for the corporation. By the late 1980’s, Marriott opened its 500th hotel, further expanding globally and into lower-moderated lodging segments; expanded its restaurants to include the Roy Rogers chain; and enjoyed profits of $223 million on sales of more than $6.5 billion with total assets clearing $5.3 billion (through 1987). Lodging ranged from full-service Marriott hotels and resorts that were their most luxurious product offering, to more conservatively-priced rooms at its Fairfield Inn locations. Lodging accounted for 60.6% of the business’s identifiable assets. As depicted in Figure 1: Marriott: Business Lines Percent of Sales and Figure 2: Marriott: Business Lines Percent of Profits below, Marriott Corporation’s lodging segment generated the bulk of the business’s 1987 sales at 41% and was the most profitable at 51% compared to the other segments (HBR, 9-298-101).
Marriott’s contract services included food services to healthcare and educational corporate and government institutions. It also provided airline catering through its Marriott In-Flite Services and Host...
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