Accor reports under new model

Accor's hotel revenue in the first-half of 2010 was up 7.5% (5.1% like-for-like) as the recovery gained momentum during the period.

These numbers were the first reported since Accor emerged at the end of June as a transformed company, shorn of its services business and focused on becoming Europe's leading hotel franchisor and one of the world's three leading hotel groups.

The strongest recovery is evident in midscale and upscale at 10.1% like for like as these segments have the most ground to make up after the recession. The more resilient economy segment outside of the US still showed significant growth at 7.6%.

The asset right strategy shaved 2.3% off sales growth in the second quarter with the opening of 1,600 rooms adding 1.6%. As the recovery gains hold and the expansion push steps up, this should more than compensate for the slippage produced by selling-off owned hotels and exiting fixed leases.

Accor, long under estimated by many of its rivals, is already the only global player without an American flavour and lays claim to being the number one hotel operator in the world. But its charted course has a number of challenges.

The transformation process began in 2004 and Accor has already moved from being 40% asset light in that year to 60% asset light by the end of 2009. Under the current project, labelled Ariane 2015, the target is to be 80% asset light.

The move is characterised by switching from a "traditional owner / operator" to being a "service provider and operator". Rather than Accor Hospitality the new look sees the logo accorhotels.com adopted with the tagline "Enjoy your stay".

The most recent move came in July when it sold Compagnie des Wagon-Lits' onboard rail catering operations. In somewhat typical Accor fashion, the deal saw the creation of a joint venture, 60% owned by Newrest and the remainder by Accor. There is an option for Accor to sell the entire business from 2013.

It is typical because Accor moves in gradual steps, following a seemingly inexorable industrial logic. It is a pattern repeated both for disposals and for acquisitions. On disposals, Accor has striven to ensure it has compatible partners rather than simply maximising short-term returns like its Anglo-Saxon rivals. For acquisitions it is a case of takeover by stealth with joint venture partners gradually pulled closer and closer to the mothership until they are fully under its control.

Also in July, Lucien Barrierre, the casino company 49% owned by Accor, filed a registration document for its public listing, likely to be held by the end of this year. This stake is estimated by Accor to be worth between Eu500m and Eu700m.

Back in May, Accor described, during an investor day, five strategic axes it was following: brands; operational excellence; asset right; steady growth; and "people first".

The brands start with Sofitel at the apex of the quality pyramid reaching down to hotelF1, Etap and Motel 6 at the base. This portfolio of brands was described as "federating hotels expertise and know how".

CEO Gilles Pelisson took the opportunity to emphasise that Sofitel was part of the portfolio, the only question mark around it was how it was to move to an asset light structure. At the top of the pyramid the only options were management moving down towards Novotel, Ibis and Etap, Accor is willing to take on variable leases and, in emerging markets, joint ventures and possibly ownership.

HA Perspective: There are big changes afoot at Accor and the size of the above article is a direct reflection of the scale of the company's ambition. The plans are long-term and short-term shareholder interests are arguably being ignored in favour of creating long-term value. In particular, it is difficult to see the benefits of retaining Motel 6 in the US given the historically dire performance and the strength of competition from stronger players in the budget and economy space such as Wyndham. Nor does devoting precious management time on Sofitel make a lot of sense in the near term. The logic of retaining a luxury brand within a portfolio which has its strength in the economy segment is less than compelling.

What is compelling, both in the near and longer term, is the potential returns from growth in the economy segment in Europe and emerging markets. Accor's willingness to use its balance sheet gives it a significant advantage over most rivals. It recognises that in some markets compromises have to be made: in Germany, for example, significant growth can only be achieved by accepting fixed leases.

And in emerging markets, direct investments, particularly in taking stakes in joint venture arrangements with local partners, is far more likely to succeed than pursuing just management or franchise deals.

The bigger gamble is in establishing a franchise network in Europe. Accor is right to identify that to date hotel franchising has been slow thanks to a range of factors such as a lack of established professional operators. It also acknowledges that network size is critical. How then will it succeed in franchising its All Seasons and Mercure brands without using its balance sheet?

Once franchising begins to take hold there is indeed likely to be a snowball effect. Perhaps the combination of focused efforts by a number of major hotel brands on establishing franchising and the need for independents to adopt brands to access capital will finally cause the snowball effect. But as Accor admits, this is difficult to project. Portfolio acquisitions might be the only solution.

A battle Accor deserves to win is persuading investors to understand the economic benefits of its variable leases. While these are likely to be capitalised back onto its balance sheet, it is hard to see why the company should be excessively penalised for this exposure. Retailers, for example, have been able to persuade investors of the merits of taking much more onerous fixed leases and creating seemingly ugly balance sheets as a result.

Accor benefits from sitting outside of the Anglo-Saxon sphere of influence in this regard. And being French gives it a distinctive offer to guests when compared to its main rivals, all of whom are either American owned or originated.

*A longer version of this article on Accor is available in the latest print issue of Hotel Analyst (Volume 6, Issue 2), now available on the website.