Going Asset Right

Going Asset Right
Oct 2016 , by , in Trends

Going Asset Right

Globally, many hotel companies have started to pursue an asset-light strategy.On one end, international and Indian hospitality chains are focusing more on their core business, moving away from asset ownership model, on the other end, the growing numbers of budget hotel aggregators are transforming the hospitality industry. Sapna Srivastava takes a look.

 

“Asset-light” is the industry jargon for franchising out hotels whose bricks-and-mortar belongs to another individual or an investment fund. Marriott, a big American hotel group, today owns only six of the 3,400 hotels that bear its brands. InterContinental, a British-based firm owns only 15 hotels, manages 628 and has 3,800 franchised operations. Closer home, Indian Hotels Company Ltd (IHCL) plans to include four new hotels in four new destinations with over 300 rooms by December 2016, through management contracts rather than through ownerships, which has been the traditional strategy for the company.

Potential & Challenges

As per experts,some of the reasons, this change in the management structure of the industry can be attributed to,are:

  • To lighten the asset heavy balance sheets and debt burden
  • To lowers their capital risk
  • To get them faster to the growing market
  • To split the hotel ownership and hotel management

Although, the brick-and- mortar investment is done by the franchisee, the hotel chain still has to ensure a consistent brand and customer experience or else it runs the risk of jeopardizing the brand reputation built over the years. An advantage of owning the bricks-and-mortar is that not only the company has absolute control over its operations and maintenance but, the property valuation itself appreciates considerably.

The attraction of franchising is understandable as hotel groups are shying away from tying up capital in the real estate, taxes and energy bills. But, merely investing in the front end while,the back end is not able to keep up effectively with front end growth will not help reap the benefits of an asset light strategy. As the hotel group provides its brand and its online reservation system to the franchisee, it needs to invest in integrating and consolidating their back-office functions, particularly sales and Customer Relationship Management (CRM). This is to provide standardized services across the world and manage the customer experience.

Many hotel chains are going one step ahead in their asset light strategy, by outsourcing their integrated sales and CRM function to Business Process Management (BPM) players, as per a WNS report. The tangible benefits, it states are:

  • Better customer interaction through BPM contact centres across the world.
  • Ability to scale up and down quickly, based on changing business conditions
  • Continuous cost savings and standardized output

The split between hotel ownership and hotel operation helps companies generate capital to finance international growth. As a safeguard to losing control of the asset, they enter into long-term leasebacks agreements.

Emergence of budget hotel aggregators

keys-prima-hotel-temple-tree-shirdi-roomKeys Prima Hotel Temple Tree Shirdi – Room

The Federation of Hotels & Restaurants Association of India estimates that there are just 103,000 “branded” hotel rooms in India, of which just 35 per cent are budget. Bangkok, alone has 125,000 rooms. It estimates that India needs another 180,000 rooms by 2020 if it is to meet its target for domestic and international tourists.

Noticing this gap and the presence of massive unorganised hotel market, companies such as Oravel Stays (OYO Rooms), Zostel Hospitality (Zostel and Zo Rooms), Wudstay, Zip Rooms, Fabhotels, VResorts and Treebo have partnered with standalone hotels and guesthouses intending to consolidate the disorganised hotel market.  With these new-age aggregators eating into the convention budget hotel business, the mid-market segment hotel chains too are tweaking their business strategies.

The number of budget leisure travellers and business travellers is steadily growing in India. They are familiar with the budget hospitality and also the online travel aggregators (OTAs). But they need the assurance of quality of hotels. This is where the emerging budget hotel aggregator firms are making their presence felt.

The budget hotels aggregators have developed a strong technology and app based platform toprovide am efficient marketing, distribution and quality assessment programmes. Experts feel, this is where the organized budget hotels lack as most of them are yet to create a strong technology platform. But, to develop a sustainable business model, the aggregators will also have to focus on establishing standardisation across their offerings and building durable relationships with the hotel owners rather than just expanding inventories.

While, some budget and mid-market segment hotel chains have been sensitive to these disruptors, others do not find them in the same league. They feel the quality standards cannot be offered unless there is a full control over the hotel management.  Some hotel owners also expressed that associating with the aggregator will dilute their brand image and the value it offers.Indeed, the hotel aggregators will bring in more supply from the unorganized to the organized market creating more competition in the budget and mid-scale segment. However, it may be too soon to say whether these companies will disrupt the branded budget market in India.

 

 

About Shubham Singh

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