Less is more is the antithesis of the beliefs of modern empire-building executives. In the hotel industry, management tends to prefer building cookie-cutter hotels which have the largest possible footprints. Furthermore, they want the bragging rights that come with the ownership of hotel properties. Owner-operated hotels boast higher revenues than their franchised peers and this makes these companies appear larger, although they have lower profit margins.
Morgans Hotel Group (NASDAQ:MHGC), a boutique hotel management and brand company, signifies the change in times as even its larger and more established peers in the hotel industry have pursued boutique concepts and asset-light models.
Portfolio of niche and boutique brands
Morgans Hotel sets itself apart from its peers with unique lodging experiences for each of its differentiated brands. For example, Delano serves as Morgans Hotel's upscale luxury brand while the Hudson brand appeals to the younger and more price-sensitive traveler.
Critics might claim that this doesn't differ significantly from the multiple hotel tiers offered by traditional hospitality groups. In that case, Morgans Hotel's portfolio of original brands (Sanderson, St Martins Lane, Morgans, and Clift) serves as a perfect rebuttal by taking the concept of niche hotels and customization to a completely new level in which each hotel has individual branding. While Morgans Hotel has located its Mondrian-branded hotels in New York, Los Angeles, and the South Beach, it only has only one Sanderson hotel in London, a single Morgans hotel in New York, and one Clift hotel in San Francisco.
Morgans Hotel's focus on building a portfolio of niche hotel brands has granted the company pricing power. Its average daily rate, or ADR, which serves as the hospitality industry's pricing metric, has increased in every single year over the past few years from $200 in 2009 to $236 in 2013. This represents a decent compound annual growth rate, or CAGR, of about 4.2%.
InterContinental Hotels Group (NYSE:IHG) is an established hotel group that owns the flagship international luxury brand InterContinental Hotels & Resort and it has a market capitalization approximately 30 times that of Morgans Hotel. However, size hasn't been a stumbling block for InterContinental with respect to pursuing niche brands that appeal to new customer segments.
InterContinental understood that being everything to everyone doesn't work anymore. It launched the new niche hotel concepts EVEN Hotels and HUALUXE Hotels and Resorts in February 2012 and March 2012 respectively. EVEN Hotels comes as InterContinental's answer to the rising health and wellness trend. The differentiated offerings provided by EVEN hotels include fitness studios and healthier food choices. On the other hand, HUALUXE is the first luxury hotel created by Chinese for the Chinese. Instead of exporting the Western luxury hotel model to China, InterContinental got its local team in China to come up with an entirely new model which culminated in the creation of the HUALUXE brand.
A transition to an asset-light model for a hospitality company typically involves both asset monetization and an increase in fee income.
Morgans Hotel sold five of its hotels (partially or fully owned) in 2011 to reduce its capital intensity. It currently still owns five (including two partially owned) of the 11 hotels that it manages. Morgans Hotel previously mentioned in March last year that it was prepared to sell properties like Delano South Beach and Hudson New York if and when the opportunity arose. With respect to fee income, Morgans Hotel has been actively seeking new management contracts. It has a robust pipeline with hotel management agreements signed for seven hotels, with five of them expected to open in 2014 and the remaining two expected to open in 2015.
Hilton Worldwide Holdings (NYSE:HLT), the largest hotel group in the world, has similarly moved toward a capital-light model. While hotel management and franchise fees used to account for slightly more than a quarter of Hilton's top line, they currently contribute about 52% of Hilton's revenue. With the inclusion of Hilton's timeshare segment, recurring fee income now makes up about 63% of Hilton's revenue.
Asset ownership highlights a slight difference in strategies between Hilton and Morgans Hotel. While Morgans Hotel is more likely to sell its hotel properties at the right prices, Hilton prefers to retain ownership of some of its extremely valuable and almost irreplaceable trophy assets. These include iconic hotels such as the Hilton New York, the London Hilton on Park Lane, the Hilton Sydney, and the Waldorf Astoria New York, among others.
Foolish final thoughts
Hospitality groups' management teams have learnt painful lessons from various financial crises and outbreaks of diseases in the past and they understand that business isn't always rosy and travelers aren't loyal to any single hotel.
By applying the 'less is more' principle, successful hoteliers have focused on creating new boutique or niche hotel concepts, paring down asset ownership, and increasing the share of stable recurring income streams. Morgans Hotel offers one notable example of this, especially as it carries wide recognition as the pioneer of the boutique hotel concept.