Global branded operators have shifted their growth strategy in recent years, with the ripple effect driving increased specialism across the sector. The decades of the hotel market being an owner and operator relationship are now seemingly diminishing, and the large players are leaning into branding above all else.

There is a global shift in strategy among operators, with an increasing emphasis on franchising and adding more brands, as the only KPI that truly matters to branded companies is Net Unit Growth. Feeding their pipelines and keeping the analysts convinced of their growth trajectory is key to their ongoing success.

With franchises now available even for a few, selected luxury brands, often driven by location, the market is opening up to third-party operators (TPO). This is to say white label operators who manage, franchise properties on behalf owners. Markets such as the US and Europe have adopted TPO, with the market now in its consolidation phase. However, we are now seeing the movement enter the more fragmented Asian market. Examples of such companies are Interstate and Aimbridge. In Australia we are seeing the rise of companies like Triology.

Franchise agreements allow hotel owners to access the reputation and distribution of the brands, while retaining full control over the operations. With owners drawing on one specialisation and optimising in this area, it is natural for them to specialise throughout the hotel stack. If there is a downside to the Franchise model, it is that there is currently no performance clause built into a Franchise agreement. If the Franchise is unable to deliver any form of premium to the owner, it can be difficult to exit.

There is also an overlay of the TPOs fee over and above the franchise fee, which means the total fees payable are very close to a traditional Hotel Management Agreement (HMA). However, there are significantly reduced corporate reimbursables than are seen in standard HMA, which is a primary source of savings.

A TPO is expected to be able to lower costs and provide greater flexibility than an operational agreement with a brand, where there will be strict guidance on operations, FF&E and investment, with little room for negotiation. While lower costs can be very appealing, owners must be cautious about taking them without considering the future or the potential impact on the hotel.

The appeal of the franchise model comes with additional pressure across operations. There is a heavier burden on the owner in terms of strategy and systems, with the days of handing over the keys and waiting for the money to come rolling in now behind us. Participation is now required to maximise the potential of the hotel and the role of the hotel within what may well be a wider portfolio.

As they have grown, TPOs do not always bring with them a single area of expertise. Like the traditional operators, their target is also growth and economies of scale, but while they can have a great depth of knowledge about hotels, it is rarely focused on one segment, holding instead a more broad-based experience. This can lead to operational inconsistency and brand dilution, which cannegatively impact the property's performance and potentially strain the relationship with the brand.

As with the brands themselves, growth is TPOs seek, as they need scale to be able to deliver their own profits. This scale, which has driven a spate of recent mergers, drives efficiencies at the companies themselves, but can put individual hotels at risk, becoming one site in a constellation of many. Where TPOs can be large-scale, hotel asset managers have an eye for the individual hotel and its needs.

The flexibility of the franchise over a traditional agreement is often the term of contract. In the budget end of the sector, these can be as low as 10 to 15 years, and while this is welcome after years of owners potentially being trapped in rigid agreements, shorter-term periods are not always ideal for assets which may be held for generations. Frequent rebranding can be confusing for guests and costly for owners, and short contracts mean that an asset manager may be needed to ensure the long-term vision for the asset.

Besides this, TPOs can face staffing and training troubles that major hotel brands might not face. Brands have vast talent pools and training programs, allowing them to deploy qualified staff to struggling properties if needed. A TPO will have a harder time attracting the talent and keeping the key roles filled and trained.

Another topic that is hardly ever discussed is the risk of deflagging. Without the major hotel brands’ oversight, there is a possibility of inconsistent service, lapses, and misalignment with the brand standards. These issues will not only affect the experience of the guests but will also deeply affect the relationship with the brand and, if persistent and not solved, the franchisor can exercise the right to pull the brand from the hotel. Such deflagging could be devastating for the owner as it will stripsaway the distribution, and also alarm investors and lenders.

A specialist asset manager brings with them not just operational experience, but decades of experience of the market, both in terms of geography and segmentation. Hotel asset managers bring with them a layer of reassurance - for both owner and brand - that the asset’s potential is being prioritised.

The success of a hotel is predicated on the solid relationships of those involved in its operations. Hotel asset managers, with their relationships across the sector, are adept at complex stakeholder management and ensuring that each party is looking to the good of the property as a whole.

With hotels moving into the mainstream as an asset class, every part of the hotel stack has its specialists, be they in operations, distribution, technology or F&B. Maximising all of these is the hotel asset manager, whose specialism is optimising the property itself.

By Alex Sogno, CEO, Global Asset Solutions.