Marriott Affords Schrager a Larger Stage

By teaming with the hotel chain, the entrepreneur gets a chance at larger market.
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Flying in the face of conventional wisdom -- a career strong suit -- hotel entrepreneur and historic bad boy Ian Schrager is teaming up with hotel giant and family-values archetype Bill Marriott Jr. to develop what the pair hopes will be the next generation of boutique hotels.

If the new, still-unnamed brand is a triumph, it will prove that Schrager and Marriott, aged 60 and 75, respectively, are far younger in spirit than their years suggest -- or that the 30-somethings they want to reach are a fusty, musty bunch. Or both.

The deal, concluded earlier this week after nine months of gestation, was announced Thursday on the leafy rooftop terrace of Schrager's Gramercy Park Hotel in Manhattan. Essentially,

Marriott International

(MAR) - Get Report

is using Schrager's name, talent and experience to jump full force into the boutique hotel business, a segment it has been unable to penetrate to date.

The boutique hotel market is desirable for its high-margin food, beverage and entertainment businesses. Several years ago Marriott tried unsuccessfully to buy the San Francisco-based Kimpton boutique chain before the death of its founder, Bill Kimpton.

Schrager will provide the creative juice behind a new line of hotels that Marriott will operate and that will be developed and owned by third-party investors. The target: 100 new hotels on an aggressive time line, including 10 by the end of the decade, with five locations to be announced by year-end.

Marriott International Chairman Bill Marriott said that the company has been wanting to get into the boutique business for many years but has been unable to find the right partner. The septuagenarian said that after reading about Schrager's Gramercy Park property last year, he "rushed" to see it from his summer home in New Hampshire and toured it with Schrager. He was particularly impressed, he said, by Schrager's introduction of "colors" and "chandeliers" -- in other words, by the hotelier's move beyond his trademark ultra-cool, black-and-white interiors to a warmer-paletted, softer look.

Marriott stands to gain tremendously from a footprint in a new lodging category and to do so with a relatively small investment. Although CFO Arne Sorenson said the company will keep open the possibility of co-investing with some of its developers -- it has a worldwide network of 100 builders -- it is more likely to be happy with its management fees.

And by bringing Schrager on board, Marriott could gain a step on two of its major competitors --

Hilton

(HLT) - Get Report

and

Intercontinental

(IHG) - Get Report

-- which do not have boutique hotel lines at present. Of course,

Starwood

(HOT)

has become the reigning king of boutique with its W Hotels, launched as a kind of knockoff of Schrager properties. "Marriott has always been completist," says Tom McConnell, a hotel broker with Cushman & Wakefield. "This will fill the last hole in their business lines."

For Schrager, the stakes are higher, and so are the potential rewards. "This is his stake at credibility in the big league," says one veteran hotel industry analyst who asked not to be named. Indeed, Schrager himself concedes that his impact on the hotel world and the hoteling habits of a generation has been far greater than his actual footprint in terms of ownership; this deal will give him the chance to put his stamp on a vast array of properties.

Industry experts agree that the key to success will be in the details -- and that is also where there is the greatest potential for conflict between the two industry icons. "A lot of Ian's magic, and what others haven't got, is control of the style and energy in each of his spaces, from the restaurant to the architecture to the hotel room," says a former insider. "He's on top of every single step of the process from the lighting of the bar to how the pillowcases smell when they come out of the laundry. Marriott can't do that."

But will the hotel giant allow Schrager to do that? Bill Marriott exerts his own intense brand control, and whether he will be able to avoid second-guessing his new partner is what will make or break the partnership.

In that regard, the relationship between Bill Marriott and Ian Schrager will be pivotal. But a market observer sees some wiggle room. "Ian doesn't take a back seat to anyone," he says."I don't know what's going to happen when he walks into a hotel that's a day away from opening and sees that the employees aren't as attractive as he'd like."On the other hand," he notes, "He wants to leave his mark on the entire world. So he might be willing to concede some points."

It's not just Schrager who is seeking a reinvention, says the industry analyst. "Marriott once was the category killer in every one of its brands. Along came W, along came Hilton Garden Inn, and Marriott is no longer the segment leader. Now, here's a chance to build a new brand. But everything has to be better. This is Marriott's chance to lead again."

"In the old days of the boutique business," says McConnell, "the watchword was, 'we don't want to be Marriott,' That's certainly morphed."

At the time of publication, Peter Slatin had no positions in stocks mentioned.

Slatin publishes the independent real estate newsletter theslatinreport.com. He has written extensively about real estate and architecture for publications ranging from Barron's to The New York Times, and is on the editorial board of Real Estate Portfolio, published by the National Association of Real Estate Investment Trusts. He was the founder and editor of Grid, an award-winning real estate business magazine.