Luxury brands turn to management contracts for growth

Aside from the sheer spectacle of it, Marriott International's acquisition of Starwood Hotels & Resorts Worldwide was a clear message that scale and distribution matter more than ever. It's those variables that are helping drive consolidation and asset-light growth as a healthy pipeline becomes ever-more critical.

Belmond and Elegant Hotels are the latest companies to diversify into management, as the luxury sector negotiates how to expand without sacrificing its service, attention to detail and the individuality that makes customers seek it out.

Belmond, the former Orient-Express Hotels, has, in its year under president & CEO Roeland Vos, turned to management contracts for growth, alongside a renewed vigor for balance-sheet led expansion. Vos said earlier this year that the group had not been successful in getting management contract growth because it has not had the adequate development resources, nor has it had the necessary focus or the balance-sheet support.

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Since then, he has made a number of new hires who are now looking at “the European market and the opportunistic things that come from outside of Europe” and has committed to providing key money and other incentives.

A priority for the company in pushing its managed expansion is driving awareness of the new brand, with the appointment of Starwood, L’Oreal and Cartier veteran Arnaud Champenois as SVP of marketing and brand.

Elegant Hotels announced its first management contract in October, for a hotel in Antigua, which is currently under construction and due to open in 2017.

The company said that management contracts of this kind represented “a compelling opportunity to expand beyond Barbados, given they require far less capital investment than full ownership, and is therefore considering a number of other similar targets.”

Fueling the Drive

Investors at least do not appear to believe that a move to management will mean value lost. A note from Liberum described the strategy as “a positive step in the strategic direction for Elegant. Not only does it lever its centralized functions and play to the expertise of the strong management team but opens a less capital intensive avenue for growth."

For CampbellGray Hotels, which last year saw an investment by the Audeh Group, growth through management contracts is a part of more orderly expansion driven by the new shareholder.

Daniel Johansson, development director of CampbellGray Hotels, said: “We have always been quite opportunistic, but to grow and create that value, we have to be more focused.”

For Johansson, the issue is not only about cash deployed, but competing for properties with the big global operators. Johansson added: “We also find that the likes of Hilton and IHG can provide money upfront in the form of key money or minority equity, which they can claw back in some way, which makes them more attractive to developers, even though management fees are horrendous—they will take a 3 percent base fee, a 10 percent incentive fee etc, but to get a project up and running sometimes the developers are left with no choice.

“If you have the operator investing, then we would be locking ourselves in so the owner loses some of the benefits of the management contract as they would then have to share the bottom line. If the operator believes in the project 100 percent, then they should be prepared to sign a lease and share in the risk.

“We are able to have discussions about pure management contracts, although, case-by-case we may invest if it looks interesting. If we can invest then it secures our position even more. For us to lose a flat is much worse than Hilton losing one of 3,000 flags.”

Johansson questioned the growth of the big operators, adding: “What always blows me away with the percentage of franchise agreements, which some operators have, is that guests are oblivious. But really it is not a Hilton or IHG hotel, the staff there are probably run by a third-party company or the owner.”

Luxury Lessons

The unique nature of the luxury boutique sectors has been an inhibiting factor in expansion, with the sector light on brands. With AccorHotels’ latest investment in 25hours Hotels, it is eager to avoid the cookie-cutter peril. A part of the EUR35-million investment by the French operator will be used “to invest in our creative lab, which will design concepts, but also the story of the hotel, what the hotel has to offer. Our hope is that, with the laboratory, we can bring these ideas to different countries and not be on the ground all the time,” said Christoph Hoffman, CEO of 25Hours.

The company is looking to add around three hotels per year. “We don’t want to make a big rollout, it would be very difficult to keep that individuality,” Hoffman said. 25hours Hotels currently operates seven individual hotels in Hamburg, Frankfurt, Berlin, Vienna and Zurich. A further five hotels will open in Zurich, Munich, Cologne, Düsseldorf and Paris in the next two years. The company has been looking to expand into other European countries for some time, and is now also targeting long haul destinations.

For Hoffmann, starting a hotel group was done “for the fun of it, without any real strategy to become a bigger player. We believe that if you want a special hotel you have to have a love for it and we want to create hotels with a lot of soul and a lot of individuality, we believe that ‘you know one, you know none.’”

The company looked to the luxury hotel sector for a partner when it wanted to grow globally—avoiding private equity, which, Hoffmann feared, would want to “milk the cow”—but was drawn to AccorHotels after meeting CEO Sébastien Bazin and realizing that “their philosophy was changing.”

“They are really big while we are really small, which helps us to keep our freedom. The deal is very similar to what they did with Mama Shelter, with a stake and options to buy more. We wanted to create a different hotel every time and we have an agreement with AccorHotels that this is our USP. It’s not easy to do that, it’s much easier to do a standarized project and roll it out around the world,” Hoffman said.

25hours Hotels has been allowed to remain a niche product while accessing AccorHotels’ extensive distribution platform. For those luxury products which remain independent, greater consolidation appears likely.

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