Hotel Group Faith in Asset Light Model Opens Gap for Upstarts

I began covering the hotel industry full-time earlier this year. One of the things I’ve been most struck by is how hotel investors have a near-religious belief in the “asset light” model.

• The asset-light model means that hotel groups rarely own or long-term lease hotel real estate.
• Groups instead mostly run properties through management or franchised contracts.
• They leave the ownership of buildings and land to families or investment firms.
• Marriott was the first to do move in this direction in the mid-1990s.
• Today, asset-light is widely taken to be the only acceptable model for the so-called “parent brand” hotel groups.
• IHG claims to be the most asset-light. Marriott isn’t far behind.

Yet in any business sector, when everyone is going one way, that potentially opens up an opportunity for other players to grow by making different decisions on their core competencies and positioning.

Perhaps the sharpest mind on these issues has been Inès Blal, an academic.

• Blal has published with colleagues several widely cited academic papers on strategic management in the hotel industry.
• Blal is currently the executive dean and managing director of EHL — ranked number one among hospitality management business schools worldwide in the past few years.
• One of her papers, published right before the pandemic and co-authored by Giuliano Bianchi, is “The asset light model: A blind spot in hospitality research.”
• It grew out of Blal’s dissertation work on hotel group expansion strategies.
• The paper “raises the question of the lack of critical appraisal of the asset-light model.”

Does asset-light make sense for all these large public companies?

• The answer that all the students hate is, “It depends” — as I can imagine Blal saying.
• From a strategic perspective, it’s a big no-no for all the players in a category to take a one-size-fits-all approach.
• To be clear, asset-light isn’t bad. It works for certain companies.
• What I understand Blal to be saying instead is that a proper analysis should drive decision-making, not blind faith.

The following is my loose, journalistic interpretation of the paper.

• Blal and her colleagues are academics who have to write in a nuanced way for an audience mostly of fellow academics.
• As a reporter, I aim instead to spark a broader conversation among industry leaders.
• My gloss on Blal’s work is that there’s an opportunity for value creation that’s under-appreciated. I oversimplify to make some broader points.

Asset-light works in some cases.

• In asset-light, you shift from being an owner and hotel manager to being a distributor and the seller of a manual on how to manage 100-plus rooms.
• So if you have the strongest brands in the market, if you can put heads in beds (such as by running a loyalty program to drive direct bookings), and you can drive industry-leading earnings to the owner, you probably should go asset-light.
• Splitting ownership and management also allows each entity, the owner and the manager, to become specialists — potentially unlocking efficiencies.

The asset-light model also creates some potential weaknesses.

• If you don’t own the asset, you can’t make 100 percent sure it is properly maintained and following brand standards. You’re left with using carrots and sticks to get owner cooperation. A few bad actors can tarnish a brand’s reputation.
• You may be tempted into brand bloat, with a brand for every price point, as a way of simulating choice. An alternative would be to create just a few brands by using premises about customer needs other than price.
• It’s also not clear if the recent moves to asset-light really generated significant gains.
• Blal’s and Bianchi’s exploratory story didn’t find the switch to asset-light by six U.S. hotel corporations to have unleashed a stunning improvement on two measures of profitability: earnings before interest, taxes, depreciation, and amortization and return-on-equity (essentially net income divided by shareholder equity) across a 16-year stretch.
• While equity investors favored asset-light companies, the underlying performance of asset-light may not be clearly superior. Within a group’s portfolio, asset light might work well for some brands but not others.
• This study isn’t the last word on the topic. More research is needed. Yet it’s disappointing that so little research on this topic has been done so far.

Companies that take alternative approaches may enjoy some long-term advantages.

• Blal didn’t single out examples, but I will.
• CitizenM and Scandic are among the companies taking alternative paths.
• CitizenM has claimed that a benefit of owning everything from the construction process to operations is that it can roll out new technologies across its network seamlessly rather than needing buy-in from multiple stakeholders.
• Having the best tech game often requires iterating based on customer feedback faster than rivals.
• So a wholly-owned ecosystem may be nimbler. Having the agility to pivot quickly could help the brands pick up incremental revenue faster than larger, lumbering, asset-light players.
• Companies that are vertically controlled might innovate in some ways faster and thus create value, whether it’s by, say, adopting pre-fabrication as a cheaper construction method with a lower carbon impact or by, say, developing a mobile app for employees to use for more efficient workflows.

Ultimately Blal and her colleague ask: “How can just one divestment model be beneficial to the performance of all companies?” It’s a good question.

I always read tips and feedback. Contact me at [email protected] or via my LinkedIn profile.