Third-party operators set sights on high-end segments
 
Third-party operators set sights on high-end segments
23 MAY 2019 8:12 AM

Third-party management firms are growing and stretching their influence across the higher segments, including luxury assets, and in different geographies.

LONDON—In Europe, white-label or third-party hotel management is very much a United Kingdom phenomenon, but do not expect the trend to remain in British isolation, executives said on a panel at the Hotel Operations Conference.

Matt Luscombe, CEO of Cycas Hospitality, said third-party management has become more and more professionalized over the past 10 years and now is working even more closely with operators.

“We offer a logical separation, with focus where (owners) need it to be,” he said.

Helder Pereira, CEO of RBH Hospitality Management, said investors are driving this shift, “who want to see change and a model that does not have leakage.”

“One compliments the other as brands cannot grow without operational support,” he said.

Pereira said the reason the trend has not grown so much in mainland Europe is that investors there have not understood the concept—yet.

In the U.K., the growth of third-party management is moving into new segments, the executives said.

“We’re getting into luxury and lifestyle more, where it was once seen mostly in the midscale, a little in upscale,” said Nick Northam, EVP of Interstate Hotels & Resorts’ international division. “We are moving across all multiples, and it is a huge opportunity. It works with the brands as they do not have day-to-day management, and it is all we do. We do not own anything, so we have to be world-class.”

Luscombe said “brands are more relaxed operating in the luxury and lifestyle space,” adding that having a few luxury assets in a portfolio is “a fantastic way of bringing in talent.”

Pereira agreed third-party management deals “are going up the value chain,” predicting his company “will be involved in luxury hotels within the next five years.”

Investors and hoteliers are also becoming more interested in the unencumbered sector.

“We launched an in-house brand, but not a customer-facing one, and we actively go for unbranded hotels,” Northam said. “This is a real growth area, and we are putting a lot of weight behind this.”

He said Interstate also has a handful of asset-management contracts, and while it is not their focus, if such opportunities arise, Interstate often takes them.

Luscombe, who worked for InterContinental Hotels Group for almost a decade, said third-party management has another huge opportunity around improvements in culture and service.

“We can bring an edge. Third-party managers need to step up as the brands move away,” he said.

Richard Bursby, partner at legal firm Taylor Wessing and the panel’s moderator, said from what he has seen from the contracts on his desk, brands are retreating from day-to-day operations management.

“They probably would not admit to this, but this is what I am seeing,” he said.

Pereira said “the danger is to try to do too much.”

Third parties “are not commoditized, so we require a nucleus of capital so that when the churn comes and investors sell, we are in the financial position that we do not have to change our people base,” he said.

Brand relationships
Third-party management firms continue to work closely with the brands, the executives said.

“In Europe, we work with 30-plus brands,” Northam said. “They see us as a partner and work in tandem with us, although there have been a couple of occasions when the brand sees us as competition and even bid against us. The best relationship is one in which the brands listen to us.”

Northam said he does not look forward to the day when brands get out of management completely, fearing the extra time they had would just lead to “weird and wonderful brand standards.”

“So I think it is important (brands) still manage. We have to remain brand-agnostic, as to be otherwise is suicide,” he said.

Luscombe said earning trust is essential to the brand relationship.

“There are deals where the brand has told the investor a third-party would manage better. That is trust, but you have to earn it,” he said.

But things are changing, Pereira said.

“Brands have to show themselves to be relevant,” he said. “I think in a few years, we will not see any more 20-year contracts. Whether it will be five-year or 10-year ones, I do not know.”

“And we all see brands are proliferating,” Luscombe added.

Challenges
The three executives said their earnings reports mirror that of the branded hotel companies in that growth is still being seen, although it is not stratospheric.

They also face pressure in hiring and retaining labor.

“There is never a year when costs are not an issue, but now it does seem more acute. I am not sure if Brexit is an excuse,” Northam said.

“We outsource a lot of our housekeeping, and those firms are feeling great pressure as a lot of their staff are from mainland Europe,” he said, adding pressure also comes from the fact that third parties sell their ability to procure across a wide base for the benefit of owners.

The executives said other areas of interest to them are co-working spaces, conventions and meetings, and extended stay, with Cycas already involved in the latter.

“Extended stay is becoming mainstream, and Airbnb is part of that thinking. Everything is blurring again, such as the use of public space,” Luscombe said.

“And with all these new things you need a focus for operations,” Pereira said.

“A lot of convention centers in the U.K. are operated by councils, which might not be as efficient as they could be and cannot directly manage,” Northam said.

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