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By: Kavya Krishnan
In the World of hospitality, the asset-light approach has lifted hotels. This strategic model draws attention to reducing capital expenditures by outsourcing operations and ownership. By prioritizing management and franchising, these chains demonstrate agility and financial efficiency in maneuvering through the intricacies of the industry.
Conventionally, hotels are operated by owning, managing and/or franchising and they absorb the capital costs and operational risks. According to some columnists (Naidu,2023), “In an asset-light model, instead of owning properties, hotel companies adopt the franchise route thereby reducing capital investment. Between FY15 and FY23, the average operating margin before depreciation and amortization (EBITDA margin) of the sample hotel companies improved to 34.6% from 17.6%. The share of rooms based on management contract (asset-light model) during the period increased to 40% from around 15%.” The aforementioned strategy permits hotels to take advantage of their brand, proficiency in operations, and market influence, without being hindered by the exorbitant expenses and risks linked to owning properties. In the domain of management contracts, hotel chains oversee the daily workings of a property belonging to a third party. They earn management fees based on the revenue earned by the property. This allows the chain to expand itself without heavy capital investments. On the other, franchising encourages hotel chains to broaden their brand and operational framework by collaborating with those who both own and run the properties. This approach gives operational authority and revenue opportunities without the ownership responsibilities. Everything comes with its pros and cons. One of the distinctive advantages of using this approach is that it helps in freeing up capital. Since no money has to go to the vast costs Committed for the acquisition of properties, hotel chains can shift their monetary resources towards growth, technology, and development of relationships with customers. This approach also allows for quick professional achievements which is because it enables the growth of the activities of hotel chains exponentially. There are limited financial constraints and chains have opportunities in developing markets and highly potent areas increasing their global presence and market share.
There are considerable financial ramifications involved in property ownership, such as the risk of change in property value and external factors. This model reduces risk exposure of these kinds by removing property ownership and relevant capital from the organization. The transfer of some property ownership and certain operational functions enables the hotel firms to focus on their business core of brand management, customer satisfaction, and customer productivity. This model provides more flexibility to the hotel chain’s management in adjusting to changing business conditions. Assets in a light strategy has exhibited a number of benefits, it is not free of problems either. As globalization of the chains has advanced, it has become necessary for the hotel chains to work with the property owners and the franchisees to protect the brand and execute the operations as required. Third-party ownership and operations also give room for quality challenges. In addition, the process includes strengthening links with property owners and franchisees and obtaining beneficial contracts.
According to some professors (Seo,2021), “Many major hotel brand companies that are adopting the ALBM have increasingly divested their real estate properties and concentrated on managing and franchising hotels. For example, at year-end 2020, Marriott International controlled approximately 1,423,044 rooms worldwide ‒ and nearly 99 percent of them, or 1,407,144 rooms, were operating under management contracts and/or franchise agreements. Another major global hotel group, Hilton, operated 1,019,287 rooms in 2020, of which 999,887 rooms ‒ 98 percent of the entire portfolio ‒ were managed or franchised. This dramatic shift in asset ownership reflects a recent global trend for the hotel landscape.”
In conclusion, the asset-light strategy has the operational approach of hotel chains, presenting a route to expansion, financial optimization, and strategic adaptability. By placing more importance on management and franchising than on owning real estate, these chains are creating new standards in the hospitality industry. As far as the prognosis of the development of the industry is concerned, the asset-light strategy will be a triggering factor in the success of hotel chains and will modify and flourish even under increasing competition.
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