“The asset light approach has been exhausted”
Saar Sharon is the newly appointed CEO of Leonardo Hotels in the UK, where his brief is to lead the company’s expansion through asset acquisition, joint ventures and leasing across the UK. As an alumnus of the Ecole hôtelière de Lausanne, we thought it fitting to ask one of Saar’s old professors to interview him on behalf of The Hotel Yearbook. Demian Hodari, the school’s expert on hotel ownership and management structures, rose to the occasion. Their conversation touched on the advantages of being small and emerging trends in ownership structure.
Demian Hodari: Saar, you are now in charge of a relatively small, regional hotel company. How do you think firms like yours can best compete with the larger, more established multi-national hotel companies in the years ahead?
Saar Sharon: I actually think small and medium size companies have never had a better opportunity to compete with the large internationals than they do in this day and age, and that will be the case in the coming years as well.
Small companies need to be particularly adept at paying attention to market trends and competitors’ strategic decisions in order to best understand their own potential competitive advantages. Smaller companies are likely more nimble and have a better chance to react to important changes affecting their business. For example, the main influences I see today are the Internet, consumers’ increasing concern for value, a focus on operations, and product design. These all have a major impact on the value and power of brands, and we are trying to proactively compete on these in a few key ways.DH: How so?
SS: Leonardo Hotels took a strategic decision to develop its own brand and distribution and revenue management systems. If you own your distribution system, manage your website well, sell rooms to corporates, and collaborate well with online distributors, you will get the income. The major brands pay the OTAs as well and with Google and Amazon entering, this trend will increase in importance. We are also very confident that our new alliance with Lufthansa will prove very beneficial in terms of managing our distribution and generating sales.
We acknowledge that brand recognition is important, but operations are even more so. What really matters to the customers at the end of the day is the service they get. As a smaller player, we are able to build a strong relationship with our customers and provide them with more customized, personal attention, and that translates into better service. Profit conversion comes from providing a welcoming service at the right time at the right price. The large internationals generate much of their income from things like franchise fees and brand royalties – but smaller players who don’t have that luxury need to stay even more focused on the customer, on margins, and on finding the niches that bigger companies don’t or can’t compete in.
Our small size is also an advantage, not disadvantage, in that we can be more flexible. The bigger brands are realizing that in their quest to sign deals they have sacrificed brand integrity, and they are increasingly returning to rigid development lines in order to rectify this. They sell standardized hotel room design and size and a standardized franchise or management agreement. Small or medium-sized operators can work around the building constraints and the developers’ constraints more efficiently. This also means that we can fight for great locations that might not suit the bigger players.
DH: Technology is clearly a key issue for all hotel companies. Any thoughts on how this plays out for smaller companies?
SS: This is something we are giving a lot of thought. In theory, large companies have better resources to understand trends, technology and supply chains. But because they control so many rooms in so many countries with so many owners, they cannot adapt to market trends very quickly. Small companies can (in theory) adapt much faster, but they often lack knowledge and funding to invest in technologies.
DH: Let’s look at the social, human resources side of the business. How do you see the advantage or disadvantage of small companies in this arena?
SS: Here I think large operators have an inherent advantage. Staffing in hotels is an issue because hiring and retaining staff in a low-paid environment, with limited prospects for career development, will always be a challenge. Internationals have the appeal and ability to offer more positions in more countries and the ability to grow further. I think smaller companies need to find new strategies to invest in talent and be able to offer career options to their junior and management level members. At Leonardo, we operate a lean structure and empower our staff from an early stage to make decisions. We don’t believe in expensive, heavy overheads, so we invest in training through our “Leonardo Academy”. This is where we train, coach and develop employees from junior level all the way to executive level. I am sure international hotel companies train more employees than we do, but those who choose to work for us will get excellent training and good future prospects, so they are not disadvantaged by working for a smaller team. In Germany, for example, we have grown our GMs in-house by about 15% just in the last eight years.
DH: Where do you think the “asset light” movement will go in the coming years? How will that impact firms such as Leonardo?
SS: In reality, I think the asset light movement has been exhausted. Most international hotel brands no longer own hotels or have little stock left. Their focus was once on separating ownership from management. That has shifted to separating management from branding or franchising. What they need is more franchisees with significant size and knowledge to operate hotels with international brands on them.
The other trends I see are an increase in overall franchise costs and investors backing companies that either own a brand or manage hotels subject to franchises from brands. That is how international brands will grow. At the other end of the spectrum, there are companies like ours that like to make more money from each hotel and are willing to take more risk. We were never a part of an asset light strategy, as we like to be exposed to both the real estate and the operations.DH: Some of the buzzwords in the industry are about new structures, such as “manchising”. Do you think we will see these more in the coming years, and why? How can firms take advantage of these structures?
SS: I believe we will see more regional and eventually international third-party management companies that act as a “white label” and manage independent and branded hotels from multiple companies. I think this will reflect a growing separation between companies that franchise and companies that focus on management. They require two very different sets of abilities, and hotel owners are starting to realize more than ever that they can’t necessarily get the best of both from one company.
DH: Let’s talk about leases. Its largely a forbidden word in the USA, but here in Europe it still has its proponents. What are your thoughts about the future of leases?
SS: Leases are widely used in Germany, France and the UK. I think that as the population continues to grow – and as pension funds’ investment continues to grow along with it – we will also see a growing trend in leasing hotels. Institutional money needs the certainty of income from a lease and cannot be exposed to employees. I therefore see a trend in growing tenant companies like Leonardo across Europe. We are now moving into the UK, and my understanding is that Premier Inn – which is one of the European leaders in leasing hotels – is now moving into Germany.
Regardless of leases, there will be growth through white label management companies, and I think this is an opportunity to consolidate into a larger, more efficient regional structure. Interstate and BDL Redfine in the Netherlands and UK are examples of such companies. It is also an opportunity to take a leasing model across Europe.
DH: You have worked with numerous types of owners during your career. Can you explain how you think ownership of hotels will change over the coming years? Not only who will own hotels, but how different owners will involve themselves (or not) at the property level? Do you see more involvement by owners, or less?
SS: This is an important trend. The first issue is that there are many regional differences in owner types and preferences. For example, if you segment owners based on their willingness to get involved with the property, then I see a growing trend of owners not wanting anything to do with hotel exposure who would therefore go for a lease, or at least get some income guarantees or reduce exposure to employees. If there is a management contract, they would use asset managers.
On the other hand, I see a continuation and even a reinforcement of private equity investment in hotel management companies that own and operate hotels. Take Starwood Capital, for example, or Goldman Sachs or Patron Capital. These companies will be very involved at the property level, and they often back up management teams that own and operate hotels.
There will always be trophy owners for trophy assets. However, I think more owners will seek to reduce exposure to the operations through a lease. So we will see less of the traditional structure of an owner owning, and a management company managing, with a brand distributing, and an owner’s representative (i.e. an asset manager) in the mix acting as an intermediary.
DH: Thanks, Saar, for sharing your views on these fascinating changes.
About Saar Sharon
Prior to managing Leonardo Hotels in the UK, Saar was responsible for driving the management of PPHE Hotel Group (Park Plaza Hotel Europe) real estate, including capital expenditure, acquisition strategies and asset utilization optimization. Specifically, Saar focused on identifying asset strategies across all branded hotels within a hotel portfolio with over 5,500 bedrooms. Recently, Saar led the acquisition of Hercules House in Waterloo, London to be developed into a 490-bedroom upscale hotel with an investment in excess of £100 million.
Prior to PPHE, Saar held senior investment positions at Jones Lang LaSalle Hotels and advised on disposals and acquisitions to a value in excess of €4 billion across western and eastern Europe to clients like Starwood Capital, Goldman Sachs, Blackstone, Invesco, Deka and many others.
Saar holds an LLB from the University of Sussex (Hons), an LLM from the Hebrew University and an MBA in International Hospitality Management from the Ecole hôtelière de Lausanne.
Demian Hodari, Ph.D.
Professor of Strategic Management
EHL
