Seeing the Asset Light

“Being in more than one business at a time can be a distraction.”

 

Conrad Hilton once said “you can make a lot of money from a hotel as long as you don’t build one”. Well, Accor, the French hotel group, seem to believe the same thing, in fact, they are going further and giving up owning them altogether.

Accor, now Europe’s largest budget hotel group by number of rooms, has just sold its Motel 6 budget hotel chain.  Motel 6 hadn’t been doing too well and these days Accor doesn’t like to tie up its cash in assets either. This move will speed up its “asset-light” strategy of disposing of property and operating hotels as a franchisee or on a management contract. They seem to see themselves in the hotel management business these days.

Having grown from the business that Paul Dubrule and Gérard Pélisson started in 1967 this French group now manages over 4400 hotels on five continents and many familiar brands such as Ibis. Currently, two thirds of its hotels operate under this asset-light approach and it aims to raise this to 80% by 2015. All this will mean that returns on equity will rise and cash will be available to return to shareholders.  In February Accor doubled its dividend as annual earnings jumped by a third.

As such a well established and successful hotel business Accor may find it easier to divest its property assets, than a business operating on a smaller scale, but the move is an interesting one. Accor’s share price has reflected these changes and it has been outperforming its London-listed rival Intercontinental. Investors seem to like asset lightness. Well why wouldn’t they? I think it greatly simplifies the business, reduces risk and clearly improves returns.

Many businesses can be split into component businesses and by operating them together they are often compromising performance in one or more of the components. In the hotel case, a pure property investor may make different timing, redevelopment and sale decisions than someone with the added considerations of using this property asset to run a hotel. Management have a conflict of interest and they aren’t normally very good with those. Focus though is a very good thing, as is releasing cash from a mature business as, it is often said, shareholders are better able to judge what to do with their money than managers are.

If you own a business it doesn’t hurt to consider if you need to be doing all the things you currently do yourself. I find that many people I work with are not only not focused enough but they have more than one business. They are often better served by choosing one of them, rather than doing both, a bit like Accor in fact.

Mark

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