Octav Alexandru Buzoianu

URN: 6067570

Group 2 ; Topic 6

POSITION PAPER

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 “Asset light strategies are the only way ahead for
international hospitality companies.”

Introduction

Throughout the last two centuries, the Hospitality industry has been subjected to
numerous changes and developments, from what it should really offer its guests and how
lodging should be done, to different strategies of management and ownership. If in the
past, hospitality was seen as a mix of tourism and real-estate businesses, apparently the
future tries to separate and point out the necessity and obvious advantages of making a
clear distinction between the two. Hospitality should provide the means, management and
the know-how of performing the specific services and the actual venues should belong to
second party companies.

The last few years have seen a growing trend for operators to seek to dispose of
their real estate assets of their hotels while keeping the hotels within the operator’s stable
of brands. Hoteliers have been moving towards their ‘asset-light’ strategies of becoming
hotel management companies rather than owners of real estate (Page T., 2007). In support
of this idea, hospitality companies have started focusing more on franchising and / or
management contracts as they recognize the multiple benefits they bring.

Therefore, this paper will evaluate the benefits of applying the ‘asset-light’
strategies in the future, with a brief analysis of using management contracts and
franchising, and support them with relevant current examples from the hospitality
industry.

Franchising
To begin with, “asset-light” strategies aim at reducing the costs of a company and
maximizing their profits, as well as allowing them to focus more on their core services,
and not on the real-estate related ones. As mentioned above, the two strategies are
franchising, which implies selling a franchise to a venue owner, and management
contracts, which consist of manage back and contracting systems.

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1.1 A Brief Insight

Franchising is not a new and modern strategy to be applied. As a matter of fact,

the first franchise was done in 1907, when the Ritz Development Company franchised the
Ritz – Carlton name in New York. By the 1950’s, this business format had become
established in over 140 countries, varying in stages of development depending upon
economic, cultural and legislative environment (Fulop C., Forward J, 1997). Nowadays,
franchising is seen as a great opportunity to enlarge the market share and it is used by
numerous companies, especially in the hospitality industry. Some of the big corporations
or companies specialized in franchising include: Wyndham Worldwide, Choice Hotels,
Hilton, Marriott, Accor, Starwood…

The franchise system has been developed mainly from the need of retail
internalization to involve also the sourcing of products and the transfer of expertise
(Dawson, 1993). Further dimensions to international activity include financial
investment, cross-border shopping and managerial movements (Barry Q., 1998).

1.2 What is Franchising

Franchising is a business strategy very similar to licensing, often confused with

the latter. The major distinguishing feature of franchising is that the licensor (i.e. the
franchisor) does not only grant permission under a franchise agreement for the licensee
(i.e. the franchisee) to sell the franchisor's branded products or services and use its
business system, but also provides a proven method of operating, support and advice on
the setting up of the franchisee's business as well as continuing support thereafter for
which there is payment by some type of ongoing fee (Fulop C., Forward J, 1997).

1.3 Why Use Franchising?

The choice of marketing a product outside the country or place where it is

regularly sold is influenced by internal and external factors which will be revealed further
in the paper.

The main two motives of using the franchise method and applying it abroad are:
reactive and proactive internationalization.
Reactive internationalisation occurs when saturation and marginal opportunities in
the home market are the key influences on a company’s decision to expand
internationally (Barry Q., 1998). This means that the product or service cannot be sold in
more retail points than the ones already exist. Any decision to expand such a market
would only result in increased costs and not much difference in the gained revenue. This
is when the company decides to sell the product or service outside its normal
environment. Note that, companies can only do such a thing when they are financially
ready to open new locations and support their opening costs.

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 A good example for the reactive internationalization is the North American
company, Starbucks. In the US, the company already has an extraordinary network of
retail locations, some no more than 5 blocks away from each other. The success but also
the sheer number of inbound locations convinced them to start franchising their brand all
over the world, now a successful coffee chain world wide.

On the other hand, the proactive internationalisation stems from the firm’s
willingness to exploit international opportunities before the domestic market reaches
saturation (Barry Q., 1998). For this we can simply take the example of Hilton Hotels by
taking the decision to expand outside the US.

Another reason for using franchising is the opportunity to rapidly develop on new
markets. This strategy gives the franchiser a great deal of choice as regarding locations
and number of retail outlets. In the hospitality industry, a national market can be easily
covered, if having the necessary resources. The following table presents the necessary
steps a company should take in order to expand on other markets.

Cheng M.S. J. et al (2007)

If successful and well structured management is used, the franchising technique

can be beneficial for a firm, as shown in the table above. The graphs point out a positive
growth in the size of the market and this growth can only result from a positive
economical one. There are key factors that influence the initial decision of franchising,

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and most certainly economical development is one of them. There are four main types of
franchise option open to companies entering new markets:
– master or area franchising (franchisor grants the right to sub-franchise)
– joint venture (franchisor seeks some kind of partnership)
– direct investment (a first investment in company owned retail locations)
– direct franchising (franchisor directly establishes and runs individual
franchisees)
(Barry Q., 1998).

There is no best way to franchise, but choosing the right type for the right
business really makes the difference between success and failure on the international
market.

1.4 Franchising in the asset-light context

By definition, franchising belongs to the “asset light” strategies. The franchiser

supplies the brand, the product / service, the equipment and the method of business while
the franchisee will supply the venue and its costs, plus the ones of operating under
franchise. Most of the times, the franchiser states that it has no interest in the actual
development of the real-estate asset, albeit the accent is put that the franchisee and the
venue must meet the imposed standards.

For example, Choice Hotels is one of the biggest franchisers in the hospitality
industry, with more than 6.600 hotels around the world. They offer a range of upscale
(Cambria suites) and mid-market (Comfort inn, Sleep Inn, etc) franchising possibilities.
In their brochure, dedicated to the new franchisees, they clearly state that “We do not
own or manage hotels*. This means we are dedicated entirely to optimising hotel
performance for our franchisees…for you.” In the footnote, the * is also revealed:
“Although Choice Hotels currently owns three hotels as a result of a transaction with a
previous affiliate, we do not intend to develop, own or operate any other hotels”
(www.choicehotelsfranchise.com, 2009).

This example evidently shows the future trends for hospitality companies such as
Choice Hotels specialised in franchising. I stand in favour of using franchising for
international development for both franchisors and franchisees.

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Managing Contracts

The second choice to go for, when opting for an “asset-light” strategy, is a

Management Contract. Compared to franchising, managing contracts offer more freedom
concerning the two parties involved and can also be combined with outsourcing. The
following will present this strategy and prove it is suitable for the future of hospitality
companies.

2.1 What is a Management Contract?

A management contract is a written agreement between the owner of a hotel and a

hotel management company, which is appointed to operate and manage the hotel on
behalf of, and for the account of, the owner in return for the payment of a management
fee (Eyster, 1988). Using a management contract represents the easiest way to divide the
ownership and the management of a hotel.

2.2 How Do Management Contracts Work?

First of all, management contracts can be of divided into two categories:

management – back contracts, and regular managing contracts.

Manage – back contracts are very common nowadays as hotel companies opted
for sale and manage-back arrangements in which they release the capital invested in
properties but engage purchasers into management contracts. For example, in the
European hospitality industry, Societé du Louvre sold 888 hotels to Starwood Capital for
about €1.7 billion and Menzies Hotels raised €174 million from the sale of 14 properties
(Travel Industry Monitor, 2006). The revenue gathered is usually used to pay back any
long term loans or debts and the remaining capital is then reinvested towards developing
better services / product. This truly defines the asset-light strategy, as hotel chains
renounce owning the venues under which they operate and sell them for profit. What they
keep differs form contract to contract, but mostly the staff and some of the equipment
remains. In any case, the operator company can use its new revenue to install up-to-date
equipment in the hotel. Although not under their possession anymore, they rely on the
well functioning and attractiveness of it to make profit.

Regular management contracts are similar to franchising or licensing but the

owner of the venue does not have to pay for a licence. The only difference is that a
management agreement, with that associated income stream, is an asset, whereas a lease,
with its obligation to pay rent, is a liability (Page T. 2007). The owner just hires a
company of hospitality professionals to manage the hotel in the best possible way.
Companies that offer such type of contracts are Marriott, Accor, and Extended Stay
Hotels.

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2.3 Outcomes of Management Contracts

One of the main advantages of a sale and manage-back for an operator selling
hotels is the reduced risk. The management agreement reduces their exposure to the
fluctuations in profitability of the underlying business. Under a lease structure, the
operator has all the operational business risk and the obligation to pay the rent (Page T.,
2007).
Another advantage is that the fact that such a maneuver should not affect any day-
to-day management, image or customers. Keeping them altogether is the biggest asset.
For example, the Scottish company Macdonald, in 2006, has put on the market 20 of its
UK based properties, for the price of £200m. After doing so, the finance director Gordon
Fraser stressed that “there will be no implications for customers and staff once the deal
has been concluded” (Caterer & Hotelkeeper, 2006)

Conclusion

If in the past, hospitality and real-estate were not differentiated in terms of hotels
owning numerous fixed assets, the future seems no other than to split the two apart in two
distinct businesses. Albeit, this does not change the fact that the two should work together
for a mutual benefit. What is hospitality without a hotel?

Through techniques such as franchising or managing contracts, operators will be

able to easily expand to different markets without having the same high costs as they
normally had until now, this being actually the main reason of using “asset-light”
strategies. Letting go of the asset and transforming it into equity again gives the operators
grater advantages, and this in turn benefits the industry.

The number of management contracts will continue to increase. Chain operators

will expand their contract management with large full service properties, while
independent operators will expand by managing smaller, market segmented properties.
The number of contracts between owners and operators will also increase in the several
years as the number of distressed properties increases (Eyster J. 2009).

Last but not least, my personal opinion is in favour of these strategies and their
modern approach, leaving more room for improvements and for other parties as well.
Considering the high number of renowned operators (Hilton, Marriott, Accor,
Intercontinental Group) that have opted for this techniques as well as the seminar I have
attended at WTM London in 2009, based on emerging markets and the possibilities of
entering those markets, I do consider that “Asset-Light” Strategies are the way ahead for
the hospitality industry.

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Analytical Bibliographies

1. Page T. (2007) “‘Asset-Light’— Managing or leasing?”, Journal

of Retail & Leisure Property; Apr2007, Vol. 6 Issue 2, p97-99, 3p

This journal article refers to Managing contracts and the operators’ decision to
sell their biggest asset – the hotel itself.

The beginning of the paper reveals the real factors that push operators to sell their
assets, such as: high costs, possible debt, and opportunity to release the capital from
balance sheets. The following ideas compare and illustrate the advantages of having a
Managing contract, and not a lease system. The author also reveals the possibility of a
lease back after the sale was done, and still having the capital from the initial trade, but
also the disadvantages of doing so.

The general target of this paper is an experienced audience, generally people from
the hospitality industry as well as researchers in the field.

The article is highly relevant to my topic as it one of the few papers that offer
good information on the subject of “asset-light” strategies.

The biggest strength of this paper is its ability to shortly and clearly point out the
negative and positive aspects of managing contracts and lease back strategies, with sound
and actual examples. No major weaknesses can be found besides the short size.

2. Barry Q. (1992) “Towards a framework for the study of

franchising as an operating mode for international retail
companies” International Review of Retail, Distribution &
Consumer Research; Oct98, Vol. 8 Issue 4, p445-467, 23p [online]
Available at: www.ebscohost.com, Accessed: 11 November 2009

This paper presents an in depth view of international franchising and the entry
mode on the franchising market.

The article provides a very good framework for franchising. Starting with the
introduction, the author provides a short history of franchising but also points out the lack
of a good research or study on the retail internationalization. Shortly after, the key
motives of international expansion are highlighted which are divided into two factors –

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an over saturated market and second the sheer will of the company. Also explains the
four types of franchising master or area franchising, joint venture, direct investment and
direct franchising and the way to operate a franchise.

The audience of this paper are people form the industry who wish to have a grater
insight into franchising but also could be considered a good research document in the
academic system.

Topic of the article is highly relevant as it describes in depth the franchising

strategy.

The topic has a high degree of professionalism, as well as having an extremely

well and backed up content regarding the field of franchising. I consider this article
flawless, especially from my student perspective.

3. Eyster J. (2009) “Recent Trends in the Negotiation of Hotel

Management Contracts: Terms and Termination” Cornell
Hospitality Quarterly; May2009, Vol. 50 Issue 2, p259-269, 11p,
[Online] Available at: www.ebscohost.com, Accessed at: 11
November 2009

This paper presents the ways in which hotel managing contracts can be reviewed
and rethought depending on the situation while thoroughly explaining the new tendency.

This publication raises the subject of changing and / or renewing the contracts
signed for managing hotels or lease – backs. The legal aspects are mentioned and also
some examples of application. The paper also presents some case scenarios regarding the
different ways to approach the renewal of the contract or its censure. The perspective of
owners, not only operators is also taken into consideration.

The audience targeted by the author belong to both sides of the industry –
professional and academic. The language used is more professional rather than academic
as it uses a great deal of law and business influences.

The relevance of this paper to my topic is obvious and relates to the future aspects
of the asset-light strategies, and the possibility to amend a managing contract when one
of the two parties, or both, decide to reconsider, for longer or shorter periods.

The strength feature of this paper is that it presents the different scenarios in
which a company may find itself in and also a possible solution is proposed.

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 4. Fulop C., Forward J., (1997) “Insights into Franchising: A Review
of Empirical and Theoretical Perspectives” The Service Industries
Journal, Vol.17, No.4 (October 1997), pp.603-625 [online]
Available at: www.ebscohost.com, Accessed: 11 November 2009

The purpose of this paper is to provide the reader with a good insight into the
franchising business and explain how this scheme actually works.

From the beginning, the author builds up the knowledge of the reader by briefing
him with some historical figures and facts about franchising as this helps understand
better the whole phenomenon. The reason of franchising is explained briefly as the whole
process is developed on more exact facts and categories. The author presents as well
franchising from socio – cultural and economic aspects and the implication of other
parties.

I do consider that this paper reaches out more for the academic audience as it is
packed with references and cross references to different other authors.

The paper is relevant to my topic by providing some insight information about

franchising.

The strengths of the paper can be considered the huge amount of information that
is well presented and referenced so that the reader can actually understand and as well,
the multitude of cross references and references that provide different and similar
perspectives, for and against franchising and its components. The weakness is the heavy
language used.

5. Panvisavas, V. and Taylor, J.S. (2008). Restraining opportunism

in hotel management contracts, Tourism and Hospitality Research,
8(4), 324-336

The main purpose of this article is to introduce the reader with the advantages and
disadvantages of management contracts in the hospitality industry.

The paper, examines the different roles a hospitality management contract plays
in the industry. Throughout the paper, the HMC’s outcomes are compared to the
behavioural control of the operators but also owners, as well as presenting control

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methods in order to manage any given situation. The paper stresses the importance of the
relationship between the two parties involved in the HMC as the success of both depend
on one another.

The audience targeted by the author is mainly represented by scholars and

researchers as it provides more information on the theoretical part rather than practical
one.

The article provides valuable information regarding the topic of “light assets”
strategies as the main focus is put on hotel managing contracts.

In this article, the main strength is at the same time it main weakness. The author
focuses solely on the control aspects of different kinds, rather than elaborating more on
other features as well. This may be somewhat disappointing but truly useful for someone
looking particularly for this.

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References

1 Barry Q. (1992) “Towards a framework for the study of franchising as an operating

mode for international retail companies” International Review of Retail, Distribution &
Consumer Research; Oct98, Vol. 8 Issue 4, p445-467, 23p [online] Available at:
www.ebscohost.com, Accessed: 11 November 2009

2 Caterer & Hotelkeeper (2006) 2/16/2006, Vol. 196 Issue 4412, p8-8, 1/4p [online]
Available at: www.ebscohost.com, Accessed: 11 November 2009

3 Choice Hotels, (2009) Available at: www.choicehotelsfranchise.com, Accessed: 11

November 2009

4 Dawson, J. (1993) ‘The internationalization of retailing’, Working Paper Series: 93/2,

[online] Available at: www.ebscohost.com, Accessed: 11 November 2009

5 Eyster , J . ( 1988 ) ‘ The Negotiation and Administration of Hotel and Restaurant

Management Contracts’, 3rd edn, Cornell University School of Hotel Administration,
Ithaca, NY . [online] Available at: www.ebscohost.com, Accessed: 11 November 2009

6 Eyster J. (2009) “Recent Trends in the Negotiation of Hotel Management Contracts:

Terms and Termination” Cornell Hospitality Quarterly; May2009, Vol. 50 Issue 2, p259-
269, 11p, [Online] Available at: www.ebscohost.com, Accessed at: 11 November 2009

7 Fulop C., Forward J., (1997) “Insights into Franchising: A Review of Empirical and
Theoretical Perspectives” The Service Industries Journal, Vol.17, No.4 (October 1997),
pp.603-625 [online] Available at: www.ebscohost.com, Accessed: 11 November 2009

8 Ming-Sung Cheng, Julian et al.(2007) “Toward a Stage Model of the International

Franchise System Development: The Experience of Firms from Taiwan” Journal of
Marketing Channels; 2007, Vol. 14 Issue 4, p65-83, 19p, 1 chart, 1 graph [online]
Available at: www.ebscohost.com, Accessed: 11 November 2009

9 Page T. (2007) “‘Asset-Light’— Managing or leasing?”, Journal of Retail & Leisure

Property; Apr2007, Vol. 6 Issue 2, p97-99, 3p

10 Panvisavas, V. and Taylor, J.S. (2008). Restraining opportunism in hotel management

contracts, Tourism and Hospitality Research, 8(4), 324-336

11 Travel Industry Monitor (2006) Jan 2006, p12-12, 1/2p [online] Available at:
www.ebscohost.com, Accessed at: 11 November 2009

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