CEO OF THE YEAR 1988
“Bill is one of the best chief executives I’ve met in my business career,” says Ryder System’s Tony Burns, who [...]
July 1 1988 by JP Donlon
“Bill is one of the best chief executives I’ve met in my business career,” says Ryder System’s Tony Burns, who earns top marks as a CEO himself. “He’s built a tradition of quality and high integrity,” says Anheuser Busch’s August Busch. “Bill may be mild mannered, but he’s thoughtful and pays great attention to details.” “He’s a tireless executive,” observes Giant Food CEO Israel Cohen. “He spends 75 percent of his time on the business, 25 percent on his family and 25 percent on his church and community, which adds up to 125 percent, so I don’t know how he does it.” Such is the stature of J. Willard “Bill” Marriott Jr. among his peers. It’s difficult to get those CEOs who know him or who are acquainted with Marriott Corporation to comment critically. Even his competitors greatly admire him. “He’s an appropriate choice for Chief Executive of the Year,” says Holiday Corp.’s Michael D. Rose. “While they seem to have a penchant for following our lead in segmenting their hotel business, their execution has been very aggressive.” Hilton’s Barron Hilton: “Bill Marriott runs a very professional and competitive organization. His considerable success speaks for itself.” “I’ve been to a lot of his hotels and he’s not flawless,” sniffs Pillsbury’s William Spoor, “but if you look at the record of earnings and growth, he’s put it all together and that’s what counts.”
Essentially an open, informal man, Bill Marriott, 56, is self-effacing for an American chief executive. He travels over 200,000 miles a year to visit Marriott hotels and restaurants worldwide, periodically shaking hands with waiters and chambermaids.
Peter Drucker once observed that the reason many U.S. corporations lost their way during the 1970s and early €˜80s was due to professional managers who never had the gestalt of the business they were running. This is not the case with Bill Marriott. “I’ve been hanging around restaurants all my life,” he says.
After serving in a number of capacities in his father’s Hot Shoppes restaurant chain (which began as a nine-stool, five cent root beer stand in 1927) throughout his high school and college years, he joined the company full time in 1956. By then, he and his brother Richard, who is equally involved in the family business, had absorbed what management consultants are fond of calling €˜company culture’. Young Marriott didn’t know this at the time. What he did know were the values of his hard working, devout Mormon parents, who neither drank nor smoked and who donated 10 percent of their income to the church. Marriott’s wife, Donna, once said, “We belong to a church that believes in work. This is what Bill’s dad grew up with – the principle of hard work.”
Marriott – then and now – is essentially a family business. With over $6.5 billion in annual sales, and 4,000 units with operations and franchises in 24 countries developing $1 billion of real estate each year, the company is run somewhat like a chemical or oil refining operation. Services are treated like a process system. Every procedure, from folding linens, making up rooms – there are 66 prescribed steps – to food preparation is strictly controlled. Menus are tested and do not vary. Woe to the chef who introduces unapproved recipes.
Growing up in the restaurant business helps. “I can tell by walking through a dining room whether people (like the) food on their plates or are waiting to have their water glasses filled,” says Marriott. “I check to see whether the food is being prepared properly and whether it’s being picked up from the kitchen as fast as it should.”
It’s a principle that’s worked. Company sales and earnings have doubled over the past four years. Net income has increased at a compound rate of 20 percent since 1968. Return on equity has remained above 20 percent since 1980. It’s occupancy rate of 77 percent is higher than the industry average.
Turbulence in the airline industry, which has hurt in-flight catering and outdated franchise agreements, resulted in the underperformance in some restaurant chains, and has led to a minor reorganization of the company into two operating units. The lodging group, of which John H. Dasburg, 44, is president, includes 377 hotels with a total of 100,000 rooms. The service group, of which Francis “Butch” Cash, 46, is president, includes contract services, restaurants and the company’s recently launched lifecare retirement communities. Despite airline industry problems, Marriott continues to lead in this market; Greyhound is number 2. Although resorts and hotels are the most visible signs of its presence, only a fourth of these are owned by Marriott. In fact, the success of its aggressive hotel expansion is due to its creative use of financial techniques where the properties are sold to partnerships and insurance companies, while retaining management contracts. This arrangement provides an investment or (previously) a tax shelter to the limited partner and to Marriott, a source of cash with which the company can develop other hotels. Marriott is very much a deal-oriented company.
Realizing the hotel business was rapidly becoming overbuilt, Marriott began to look for other segments of the business to venture into. Like Procter and Gamble, it uses extensive market research in its strategic planning. While its time consuming approach tends to signal intentions to competitors, Marriott’s execution tends to be superior. In 1987, the acquisitions of Residence Inn, designed for the extended-stay customer, broadened its mid-price offering. Further down-market is Fairfield Inn, which debuted two units last year in Atlanta. Future growth is also pinned on lifecare communities, which incorporate retirement living with limited nursing care.
Not all efforts to diversify have worked. Marriott burned its tongue with gourmet foods, went nowhere with cruise ships and fizzled with theme parks, for reasons he explains in the interview that follows. Some also worry about its increasing leverage. “Essentially, it’s a well managed company,” says Noel Sloan, an analyst with London-based Kleinwort Grieveson, “but the balance sheet is not that pretty.” Bill Marriott maintains that debt levels may be high, but prudent.
While having presided over impressive growth since he became chief executive in 1972, the boyish-looking Marriott nonetheless worries about maintaining the “extended family” character. However romantic, family enterprises tend to be fragile creatures, as the experiences of the Binghams of the Louisville Courier, the Revsons of Revlon and the Johnson brothers or Johnson & Johnson testify. What may overcome the tribulations that tear other family-dominated firms apart is the shared ethos – inherited from J. Willard Marriott Sr., summed up in the often repeated dictum: “Are we doing a good job for the customer?” With the company serving some five million customers a day, one sees the logic of the precept. In addition to generous profit sharing, the company offers job security and a training program that turns largely unskilled people into skilled workers. As CEO of Marriott Corp.’s chief rival Hyatt hotels (and one of the Chief Executive of the Year judges), Pat Foley is a knowledgeable critic of the company. “Bill has built an incredible degree of loyalty and purpose among his people,” observes Foley. “It’s getting to the point where we no longer bother trying to hire his general managers away because they won’t leave!” Mathias J. DeVito, CEO of The Rouse Company agrees: “Bill has provided extraordinary leadership while expanding its operations without reducing its quality.” Affable, if laconic, Marriott proved to be modest about his achievements during his conversation with CE.
Although Marriott’s 10 years of solid earnings growth is noteworthy, you were nominated and ultimately chosen, in part because of your team building efforts. What do you do that makes your transference of skills, your team building, so different?
We’ve developed a climate of listening. The more I listen, the more effective I am; and the more my people will contribute to solving company problems. They know that I need their help, and that their ideas will be used. We are relatively open to all levels, but especially in the senior ranks of the company. I want to get everybody’s input about operations and find out what’s going on. To do this you must develop trust.
How do you listen in ways other chief executives may not?
Well, I try not to talk very much. Having attended gatherings where other CEOs are called upon to give reports, I’ve noticed that many speak in the first person. It can be interesting to hear them say, “I did this,” “I did that.” We tend to trip over our own egos a lot, because, I suppose, most of us fight so hard to get to the top.
How did you acquire or develop this listening ability?
I’ve always been reasonably sensitive. When somebody tells me that I’m not doing something right, I really want to hear why. Up until 10 years ago, I read every single letter that came into the office. Now we get 7,000 letters a year, and I answer 10.
Any person at any level within Marriott who feels he’s not being treated fairly after seeing his supervisor and supervisor’s boss can supposedly go directly to you. Does that really work?
I don’t get very many of them, but I’ve had some. Somebody will come up to me and say, “You know, I didn’t get a raise last month,” and I’ll review it. One woman approached me and said she was a cocktail waitress at the Marriott Marquis in New York. She complained that the shoes they were required to wear were too high. She said, “We can’t walk in these shoes eight hours and not have our backs and legs in pain.” I told the people there, “Get them some lower pumps, guys.” If they’re not comfortable, and if their backs ache, they’re going to growl at our customers. If my people feel that I’m being fair with them, they attempt to do their best. If there’s a rotten apple in the barrel, I hear about it. I have enough contacts around to know what’s going on. If a general manager of a hotel or a vice-president of a company is very tough on his people, I hear about it.
But you are only one person and Marriott employs some 210,000. You can’t be everywhere. Is there a formal system by which this works?
There is no formal system. It’s values, it’s beliefs. It’s how you talk. It’s how you feel and how you conduct yourself. A lot of people in this business and other businesses have not spent time with “the little people”. I’ll go through a company cafeteria and shake everyone’s hand.
You are unusual in the lodging business in terms of the breadth of markets and the price range that you cover. How can you be certain the brand image isn’t blurred in customer perception?
We conduct a lot of formal research and extensive focus group studies on Courtyard and Residence customers. People stay at the Residence for totally different reasons than at Courtyard. This particular strategic direction is more a result of necessity than invention. When we realized that we just couldn’t add any more rooms to our traditional lodging capacity – we have seven or eight hotels each in Atlanta, Chicago and in Southern California – we ran out of markets. In asking ourselves, “What can we do to grow?” we had to look at other markets, specifically those at moderate prices. Our research showed that people wanted to pay $55 – $60 a night, but wanted a good, clean room. When the old properties servicing this market were built in the 1960s and early 1970s, many were made inexpensively. Most are noisy, drafty and aren’t very clean. Many had been built with financial constraints. It owners couldn’t afford to maintain the rooms and public areas, maybe they would put up a new rug in the lobby and get through the year.
Many were franchised. Some were run by doctors, lawyers, Indian chiefs – the whole works. In many cases there was no franchise control. Where our competition in this market had put money into restaurants and public rooms, we put it all into guest rooms.
Do you plan to change your strategy of syndicating hotel properties and securing management contracts to service them?
No, because it’s working very well for us. We just sold out a Residence in syndication a couple of weeks ago. It sold in a few hours though Merrill Lynch! There is a market for real estate because people get a reasonable return on their investment in our hotel syndications. Many feel it’s an appreciating asset.
Doesn’t this limit your upper-profit potential? Shouldn’t you know the true profit potential in lodging by this time?
It limits us on the upper-end, but it also limits us on the downside. We’re really in the business of manufacturing hotels for sale. One result of our efforts to get good management contracts is the shedding of non-performing assets on the books. Public companies can’t afford to own real estate. It’s just not recognized as anything but a big dent on EPS, even if you have great cash flow. The market still does not value it despite your ROE.
Speaking of ROE, Marriott’s 1987 annual report, unlike the previous nine, didn’t reaffirm your goal of maintaining at least 20 percent annual returns. Can one infer that you no longer believe this is attainable?
It may be mathematically difficult. We’ve been at 20 percent or better for about 10 years. After a while, you become too big. It’s also harder to do without inflation. Inflation back in 1979 was up around 10 percent. Now it’s 4 percent, it’s a different ballgame.
Yet Wal-Mart has phenomenal growth each year and it’s larger than Marriott.
Sure, but they’re not going to double their sales at this point. It’s got to stop. A reasonable target for us lies in the high teens – probably 18 percent.
If one discounts asset sales and tax benefits, actual earnings would only be 10 percent instead of the usual 20 percent. Is the quality of Marriott’s earnings declining?
No, the sale of assets is not a big percentage of earnings. It is a factor though, because when you manufacture hotels for sale, you should get two parts of the profit: one part should be what you receive as a syndicator, a developer or whatever, and the other part comes from the ongoing management contract. When you sell, you get a little bit from development which we pull in as part of our earnings. We’ll own a hotel because we think there’s going to be some great asset appreciation. We did that with the Santa Barbara Biltmore for which we paid $5.5 million – we put another $10 million into it. We had approximately $20 million invested by the time we sold it for $58 million – taking a $38 million capital gain on that one property. That hotel had 220 units, and if Izzy Sharp, (CEO) of the Four Seasons, wants to pay us $280,000 in earnings, he’s welcome to buy the Santa Barbara Biltmore.
What about the benefits of the lower tax rate which puts a short-lived glow on earnings?
Our operating earnings are not going to be as high this year as they were in the last 10 years. But, remember, our tax rate is pretty high – around 46-48 percent. In fact, we got hurt in 1987 and the last quarter of €˜86 when Congress took away the investment tax credit at the end of the year. We ran without ITC all the way through 1987, and we got hit big in ’86, when the ruling compelled us to go back and reinstate earnings. We can cost-cut our way to the bottom line, but that’s not the way to get there or stay there.
Considering the premium you paid, what value do you bring to food service catering through Marriott’s acquisition of Saga?
When we first approached them, Saga Corp.’s stock was selling for $124 a share; we ended up paying $130. When we got it, we sold about half the company – all the restaurants – and knocked our acquisition price in half. We got what we wanted – which was its school, college, hospital and healthcare business. We merged that with ours, as well as the small businesses we bought just prior to becoming the biggest payer in the industry. It gave us market coverage on both coasts, in fact, throughout all of the U.S.
You couldn’t have done that on your own?
It just takes too long to get there. Saga was doing a very good job and, in my opinion, it was the Cadillac of the food service management business.
If they were the Cadillac, why did the Smithsonian trade it for another model?
I can say exactly why they withdrew. We had a lease with them, where we paid rent and made a good profit. They wanted to contract it out and pay someone $200,000 to run the place and get more money.
Owing to the high premiums normally charged people who are dubious about the prospects of lifecare, what will Marriott offer that’s different?
It’s a market and price-point problem. It’s limited only if you build expensive lifecare for a very narrow market. We’re building one for retired army officers and considering another for retired air-force officers. We’ll probably build one in a major area such as Washington D.C. We’ve got a lot of loyal shareholders and others in the Washington area who know our company and would like to buy in. Long-term lifecare can cost less. It could be marketed either as a rental, a privately owned unit, such as a condominium or it could be tied in with what we call assisted living. This is for single people, who are not well enough to live alone and not sick enough to go to a nursing home.
How much will you be investing before it makes money?
That depends whether or not we go with a rental or an endowment arrangement. If we go with endowment, the investment will not be great. If we go with rental, we will figure out a way to syndicate it. We will keep the initial investment low. Lifecare resulted from six or seven years of strategic planning where we looked into a variety of different markets, such as housekeeping, healthcare and intensive care units in hospitals. We even looked at psychiatric hospitals and drug abuse centers. Demographics pointed us towards extended living.
What are you doing to improve your in-flight catering, which is your problem business?
International expansion. We’re getting ready to move into Seoul, South Korea and we are working with the airport authorities in Osaka, Japan. Until the turmoil in domestic airlines settles down, we’re going to have problems.
Where else is Marriott becoming more international?
Our move into Mexico is our answer to the guy who makes shoes in Taiwan with leather that’s been produced in the U.S., and then has the shoes shipped back. In Mexico, the average wage is a dollar a day, versus five a day in the U.S. You can get a great room in Acapulco in the peak season for less that $100. That same room in Hawaii will cost you $300. We intend to service the foreign traveler that goes to Mexico.
What did you learn from your unsuccessful acquisitions, such as gourmet food, theme parks and others that didn’t work out?
Our experience with theme parks taught us to stick with our knitting. To be in the business of theme parks, you‘ve got to come up with an attraction every year. It’s like being in the movie business. Every year you’ve got to make X amount of movies. To come up with new rides every year will cost us about $1.5 million. The third year it cost us four, five, even six million dollars. The money went back into that park every year. We were able to maintain attendance; not drive it, just own it. Furthermore, we couldn’t build attendance because we were in Chicago, a northern climate, which only had three months of good weather a year.
Disney’s building a $2.5 billion theme park in Paris; it’ll probably end up costing $3 billion or more. You have to ask yourself, “Will that work in that kind of climate?” They’ve never done that before. They enjoy sunshine everywhere, except in Japan.
With the benefit of hindsight, is there one decision that you would most like to take back?
We had an opportunity to buy what later turned out to be the Hyatt Regency in Atlanta. We were about a $100 million company at the time, and had just opened a 500-room hotel in downtime Atlanta costing us $12 million. The hotel that became Hyatt Regency was available for $16 million. Our people went down there to look at it, and were convinced it wouldn’t work; the atrium was too high, the elevators were exposed and the restaurants and kitchens were in the “wrong” places.
Did you ever tell (Hyatt CEO) Pat Foley this?
Oh yes. I even told John Portman, the architect who built it, and who later designed our Marquis hotels in Atlanta and New York. We should have bought it. My dad was afraid of the hotel business. His attitude was formed by what he saw during the 1930s when hotels failed in great numbers. He saw owning hotels as a high-debt, high-risk business, and hadn’t figured on selling them off while retaining management contracts. While he wasn’t opposed, he wasn’t enthusiastic either.
Speaking of debt, Marriott’s debt to equity has gone from 1.9 to 1, to 3.4 to 1. Why?
Although it may seem like a paradox, the fundamental reason that our debt-to-equity ratio has increased recently is because Marriott is so profitable. Let me explain.
First of all, our high profitability gives us ample and reliable cash flows, which, in turn, gives us the capacity to service higher levels of debt. We use a lot of debt in our capital structure because, up to a certain point, it is cheaper than equity. Second, high profitability translates into a stock price well above the book value. This is good news, but consider what happens to our balance sheet when we repurchase our stock, as we have been doing since he stock market crashed in October. When we repurchase a share for, say $30, our equity account drops by $30. That share was on our books for $6.82. You can see that any significant share repurchases quickly, drive our equity account below what it might otherwise have been. Because of these fundamentals, our debt / equity does not overly concern us. We look to our cash flows, not our balance sheet, as the source of our capacity to carry debt. Since those cash flows are solid, we are very comfortable with our debt position.
People describe you as being highly moral, a man of high values. How difficult is it serving both God and Mammon?
I’m active in the Mormon Church as president of our stake, which is like a diocese. Our stake has 3,500 members. I spend between 15 and 20 hours a week on church affairs. It may seem to be a conflict to others, but not to me. This business, my family and the church are my entire life. I love all three. It’s a good thing my family works in the business, that way I get to see them. Seriously, I find time to attend my son’s lacrosse games as well as attending to my church and CEO duties. It’s my life.