Marriott Corporationfor the hurdle rates at Marriott Corporation and its three divisions utilizing CAPM and WACC. This case illustrates how to calculate beta based on comparable companies and to lever betas to adjust for capital structure; the appropriate risk-less rate and market risk premium; the choice of time period to estimate expected returns and the difference between the geometric and the arithmetic average as a measure of expected returns.
Marriott Corporation began in 1927, and over the next 60 years, the company grew into one of the leading lodging and food service companies in the US. In 1987, the Marriotts annual report stated, “We intend to remain a premier growth company. Our goal is to be the preferred employer and provider, and the most profitable company”. MarriSYNOPSIS
Marriott Corporation began in 1927, and over the next 60 years, the company grew into one of the leading lodging and food service companies in the US. In 1987, the Marriotts annual report stated, “We intend to remain a premier growth company. Our goal is to be the preferred employer and provider, and the most profitable company”. Marriotts profits were $223 million on sales of $6.5 billion.
In April 1988, vice president of project finance at the Marriott Corporation, Dan Cohrs, must prepare annual recommendations for the hurdle rates at each of the firms three divisions, including restaurant, lodging, and contract services, as well as Marriott Corporation as a whole. The companys restaurants, such as Roy Rogers and Hot Shoppes, provided 13 percent of 1987 sales and 16 percent of profits. Lodging operations included 361 hotels and more than 100,000 rooms, and generated 41 percent of 1987 sales and 51 percent of profits. Contract services provided food and services management to health-care and educational institutions and corporations, and accounted for 46 percent of 1987 sales and 33 percent
\1\ 46% of profits. Other services included health, food, and medical services, as well as administrative, technical, and managerial services. For these services the company relied on, as an operating base (which is limited to the various hotels and offices), to ensure the most competitive and efficient business process for every one of its hotels and other facilities. The companys organizations also offered financial services services. For hotels, Marriott Corporation’s “Hotel Capital Plan” made its primary business decision. The plan identified various economic, political, business, industry, and other factors that led to increases in hotel business. However, when the company met a target of “making it the most efficient and innovative business process for all” it decided to “move on.” In doing so, it met three general criteria: 1. It was designed to be the same as the earlier sales-driven approach that would have created some of the same benefits. 2. It was designed to have a more consistent business process in many of the sectors it provided to, including in health- care and education, as well as in the hospitality sector, which was largely dominated by hotel firms. 3. It was designed to be flexible to meet all of the company’s individual needs but would be cost-effective for hotels, and to create consistent profit margins to match those that would have gone to other firms. Because of these factors, Marriott was permitted to pursue a business plan using a different strategy over the next decade and several years. However, the transition to a revenue-driven approach that could afford hotels is often seen as more efficient than such an approach alone. The third criterion that satisfied the new criteria was the timing of the business plan. It is important to note that the new business plan did not necessarily include all of the things which the original plan would have provided. Marriott’s business plan was based on four important factors, which were: (i) The new business plan would eliminate or simplify a number of the major issues that had been identified during the 1990s, or (ii) The new business plan provided a framework for the business plan to adapt to market expectations; (iii) The business plan was presented in a more consistent form at a new level in line with the new business plan; 3. The business plan was not a new plan when it came to marketing its business for the past fifteen years; and (iv) The business plan could be used to meet particular customer needs and change business strategies in a way that would not be common by today’s business owners who see the business plan as simply catering to their specific needs. Marriott has been recognized for its business plan as “a plan that allows the customer to get to work. It’s designed to provide a unique, cost-effective product for a new home, yet it also recognizes that customers must be able to move from one place to another by the process they