Why Hyatt is changing its business model?

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H: Hyatt Hotels logo
H
Hyatt Hotels

Hyatt’s (NYSE: H) overall revenues have  declined by nearly 2.1% in the past four quarters. This is in stark contrast with its third party owned hotels business, which has seen its revenues jump by 7% in the same period. This can be attributed to Hyatt’s asset recycling strategy, in which the company is selling its less profitable owned and leased hotels to enter new management or franchise agreements with the purchasers, and re-investing the proceeds from sales into new hotels in key locations where profitability is high. Hyatt’s Asset light model is aimed at reducing risk by significantly reducing capital expenditure and having the flexibility to efficiently manage hotel assets under its brand name. This model is being followed by all the big hotel chains, including Hilton, Marriott and Starwood Hotels. Hyatt appears to be a little bit behind the curve, but is certainly catching up.

Franchise and Managed hotels are less capital intensive and less risky 

Hyatt charges 5% for the franchised select service hotels which is 0.5% above industry average and 6% for the franchised full service hotels which is also 0.4% above the industry average. Thus, Hyatt’s cash profits have fluctuated in the last 5 years, but the volatility in cash flows from Hyatt owned or leased hotels has been meaningfully higher than that for third-party owned or leased hotels. Additionally, Hyatt’s expertise lies in managing brand, services and hotels rather than financing new establishments. Thus, Hyatt’s asset light model could be a win-win situation for both Hyatt and the investors.

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Asset light model for will improve margins 

Even though Hyatt’s total assets, revenues and operating income declined in 2015, there was significant improvement in its operating margin due to increase in the number of franchised and managed hotels, and sale of its less profitable owned hotels.

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The number of  owned and leased properties of Hyatt has declined from 96 in 2010 to 40 in June 2016. Hyatt sold 5 of its owned hotels in the U.S. in 2015 and is expanding its presence in more profitable regions such as China. Asia Pacific contributed just 4% to Hyatt’s management and franchise fees in 2015, which indicates that there is a lot of untapped potential, especially in China where the overall hotel industry revenues stood at $44 billion in 2015. In the second quarter of 2016, China accounted for 40% of Hyatt’s worldwide hotel additions.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of Hyatt

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