The E-word in an asset-light context
By Inès Blal, Executive Dean at Ecole hôtelière de Lausanne and Noelia Rodriguez , Joint Ventures Manager at Meliá Hotels
With the deployment of the asset-light strategy across the industry, the E-word, Equity, has almost become taboo. A lodging corporation pursuing an asset-light strategy that merely mentions E… with an owner could nearly be regarded as an outlaw. While we understand how and why we got here, we, nevertheless, question this rather rigid approach. Is pouring equity into a deal always a bad thing in an asset-light context?
1. Equity to support a competitive advantage
As the asset-light strategy increasingly becomes common practice among major corporations, the capability of managing relationships and partnerships is the key to competitive advantage. In particular, establishing a solid network of strategic partners with the capacity to invest in new projects becomes a source of competitive advantage for any lodging corporation embracing the asset-light direction.
One of the key characteristics of outsourcing (which is basically what asset-light is all about) is that it creates specialized entities. These new and specialized business models (i.e. brand operators, institutional owners, and operators) need partnerships to compete. During the first wave of the execution of the asset-light strategy, in the early 1990s, the key, then, for lodging corporations was to find owners for the hotels they had been operating for decades. But the environment in which hotel chains are currently operating is markedly different from the past one. It is more complex, uncertain, short on financing, and includes a set of very specialized players. Now, success lies in the management of the relationship with the other specialized industry players. For lodging corporations, this entails developing a network of owners, real-estate developers, operators, and lenders. The end-game is, now, a matter of integrating partnerships and creating new forms of collaborations that involve risk sharing, and resources alliances.
And here is where equity stakes can help. They support mixed-capital structures to underpin this collaboration and enhance integration between partners.
While the strength of the brand and its alignment with the property are prerequisite to securing a successful deal with an owner, the capacity to contribute equity can be attractive for both partners and… the deal itself. In addition, the corporation becomes a valuable partner within the international business system as a result of its ability, and commitment, to deliver higher value to partners. In short, contributing equity into a joint partnership can help differentiate a corporation from its competition.
2. Equity to reinforce the asset-light business model…
Owners not only contribute with the real estate or equity, they also bring know-how to the table. Their role is not just limited to the real-estate expertise. They have cooperation expertise as they collaborate with hotel operators across different locations. Moreover, when they have capacity to invest in and develop new projects either in the same market or in new markets, owners become instrumental to the future success of the asset-light strategy. Therefore, the partnerships can spawn collaborative open processes with which to manage the new business and to build up a set of short- and long-term additional resources. The management of strategic partnerships entails and generates a unique set of strategic capabilities which are very different from their internal processes.
As a result, new knowledge and new organizational capabilities emerge to support the asset-light business model. Contributing equity into can support this new knowledge. And this unique skill set becomes an unparalleled source of differentiation. It is also a selling point that can be used to attract other partners to a subsequent hotel deal. This is especially important when the partners have the capacity to invest in future projects. In this case, equity involvement does not contradict the asset-light strategy; it supports its business model. Obviously, there are many ways to generate this unique set of collaborative capabilities but, isn't equity one of them, especially, when hotel-management pre-requisites are met in the property?
3. Equity stakes to manage the transition to the asset-light business model
The dominant thinking in the industry is that equity involvement can compromise the financial structure of an asset-light corporation. But a mixed-capital structure, such as a JV, can pave the way for the fundraising needed to renovate the facility and develop other projects - without compromising the company's financial structure. For companies transitioning to the asset-light business model, JVs can be an attractive vehicle for trimming the corporation's balance sheet. The shift form ownership to JV means that the new venture will take on the financing and capital expenditure burden of the project, which are, thus, partially eliminated from the financials of the corporation. As a result, the hotel firm can participate in the new venture's profit distribution, and receive direct revenue from management fees. In short, it will transition into an asset-light corporation by increasing the value of its real estate portfolio and its brand value.
Moreover, for those companies managing the transition, the asset-light context is an opportunity to evaluate its real estate portfolio. As pressure and opportunities arose to divest their assets, lodging companies had to distinguish those strategic properties in their balance sheet. In certain instances, where the property is a brand flagship in a strategic tourist destination and in a strong real estate market, equity investment becomes attractive. The corporation stands to benefit from the increase in the market value of the asset while supporting the growth of its brand and developing its management abilities. For lodging corporations, they can take advantage of real-estate cycles by divesting non-strategic properties and using the proceeds to renovate strategic assets to reflect their brand standards and growth strategies.
In conclusion, we believe that this rather dogmatic approach to equity in the asset-light context could be re-assessed. Indeed, investing equity could be a way to support strategies in an asset-light context.