A piece in today’s Washington Post on hotels caught my eye this morning. The story describes part of Hilton’s latest business:
Hilton and some of its dominant rivals, including Bethesda-based Marriott International and Starwood, benefit from a business model in which they manage hotels for someone else at a negotiated price. That model, known as asset light, tends to produce high profit margins because others own the real estate.
In other words, hotel chains (which one would think are tangible heavy) have become intangible companies.
This trend has actually been going on for some years. As the Economist noted almost 5 years ago:
Marriott, a big American hotel group, started to sell its property in the late 1970s and today owns only six of the 3,400 hotels that bear its brands. InterContinental, a British-based firm that is another big believer in being asset-light, owns only 15 hotels, manages 628 and has its brands woven into the towels of a further 3,800 franchised operations.
We have seen an exceptional level of transactions in the last five years, together with many changes in hotel ownership and the evolution of new management structures in the hospitality industry. There are two primary reasons that have triggered a frenzy selling: firstly, the real estate cycle; it taught hotel companies the lesson of an “asset light” strategy; and secondly, the split between hotel ownership and hotel operations. Companies are increasingly adopting a strategy of selling owned properties and concentrating on the core business of managing hotels, as they continue to recover from real estate cycles.
It is clear from these stories that the strategy of “going intangible” has going on for some time. Intangible assets have always been important in the hotel industry. Brands, quality of services and management systems that promote staff productivity are all important. Reservation systems and pricing strategies that maximize revenues and occupancy rates are also key to profitability.
In many ways, this trend matches the evolution in many other industries. Manufacturing companies has discovered valued-added in intangible-based services – leading to a fusion of manufacturing and services. So services industries have also found a way to leverage their intangibles. With the rise of shared-economy competitors such as Airbnb (the ultimate asset light hotel chain), the growth in the intangibles strategy is likely to continue.