Marriott International (NYSE: MAR ) recently announced five new hotels for its luxury Edition brand. Haven't heard of it? Don't worry -- the company has only opened two, and one already shut down. The Edition brand concept is a highly stylized luxury chain. But while everyone loves dreaming of staying at a fancy new hotel, most individuals don't book rooms at these locations.
Luxury is not so glamorous
The Edition brand falls under Marriott's luxury brands segment. In the third quarter, the company's high-end hotels only carried 2.2% of revenue to the bottom line. The luxury segment looks even weaker when compared to the Marriott's limited service hotels, which turned 16.5% of revenue into profit during the same time frame.
Other hotel companies have been focusing on the non-luxury full-service brands. Starwood Hotels (NYSE: HOT ) has opened over 50 Aloft hotels in the past three years. This brand focuses on Gen Y travelers and boasts "style at a steal." While the economy is still sluggish, having a product that satisfies price-conscious consumers' needs for quality at a discount may be the best road to higher profits.
Real estate investment
One possible upside to the Edition venture could be property value appreciation. Marriott expects to "recycle its property investments over time through the sale of the hotels while maintaining long-term management contracts." The company recently purchased the Clock Tower building in Manhattan for $165 million, which is where the New York Edition is planned to open sometime in 2015. Just four years ago, that building sold for $200 million. The London Edition will be in one of the city's most sought-after districts and the Miami location was purchased in a short sale.
With real estate prices in the gutter across the U.S., buying distressed properties seems to be the new trend for hotel companies. Pebblebrook Hotels (NYSE: PEB ) and Host Hotels (NYSE: HST ) have spent $1.6 billion and $1.7 billion, respectively, on higher-end properties throughout the U.S. recently, at what appear to be good prices. But if real estate continues to decline, newly acquired assets will need to be written down, hurting balance sheets throughout the industry.
Foolish take
In my opinion, Marriott's risk involved in the new venture outweighs the possible upside return. As we have all seen in the past few years, real estate doesn't always go up, and with margins on the company's luxury segment being so low, from an operational standpoint there is very little room for error.
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