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
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
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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At the time this article was written, Fool contributor Matt Thalman owned shares of Starwood Hotels, but no other companies mentioned above. The Motley Fool owns shares of Pebblebrook Hotel. Motley Fool newsletter services have recommended buying shares of Pebblebrook Hotel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.