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[#PAFh19] "The human component is not a quantifiable value today, but if neglected it can be fatal."

Interview with Olivier Chopin, General Manager, Les Hôtels de Bordeaux, President of the Association des investisseurs Franchisés Louvre Hotels. Kevin Machefert, Director of Sales, Marketing and IT, Machefert Group. Francis Martinon, VP Asset Management, AccorInvest France at the Paris Asset Forum >hospitality.

What is the reading grid for developing a property?

Olivier Chopin (OC): It is quite simple.

I would like to say that I am able to set up an independent hotel, but it is not in my DNA, it needs a premium location, and it can scare the banks. We have a franchisee's DNA so we're going to choose a franchise. Today, what has changed the most for me is that the franchisor/franchisee relationship has become less complex on both sides. Five years ago, a hotelier was historically linked to a group and there were no questions asked either way. Today, on both sides there are opportunity strategies. On the franchisor side, there may be a desire to favour a better opportunity in the same market. De facto on the franchisee side, this determination to move towards what is more attractive, has the most notoriety, best corresponds to the market, and offers more advantageous fees, has also developed.
Complexes have thus been removed and the relationship is healthy. So the reading grid is in relation to notoriety, innovation. Another notable fact is that today we see that voluntary chains increasingly invade the territory of incorporated chains. Independent brands that previously concerned secondary markets and hotel rebranding are now being introduced in new buildings. Beyond the know-how and notoriety I also look at the technical expertise in a construction that a franchisor will be able to bring me.

What is the maximum return on investment?

OC : Five years ago, we didn't do a hotel with fewer than 45 rooms, today that figure is maybe 60 and we are climbing quickly to 90 or 100 to find ratios similar in terms of profitability to those of a few years ago.

What major challenges have you faced in your hotel collection? Free up CAPEX, refresh products, integrate lifestyle?

Kevin Machefert (KM) : The metamorphosis began three years ago. The group is 28 years old, some properties that are part of the original collection were too dated. So there was a subject of profitability and EBITDA, and on the relative value level and on the absolute value level we had hotels that were no longer contributing enough. It was necessary to act in a Parisian environment where the competition has really diversified in recent years. Especially with the arrival of Airbnb and new lifestyle players. Let us remember that Mama Shelter was born in 2007, so these boutique properties positioned on the ground floor with a preponderance of F&B date back about ten years. Our challenge was therefore to reposition some of our hotels by trying to invest as little as possible in CAPEX because we wanted to keep our capital structure, not dilute ourselves too much, we want to remain a family group. We do not have the same vision as that of a fund that is shorter-term across 5 to 7 years. We have a vision of heritage. When a group has been founded with a lot of hard work, to get up and consolidate its positions while some encourage dilution to provide liquidity or invite you to make arbitrages on certain assets that are not strategic in Paris, it is necessary to bend over backwards. We have shown resilience. 

My goal for 3 or 4 years was to reposition ourselves via our ground floor. Before taking the position of Sales, Marketing and IT Manager, I was Director of Hotel Murano in Paris, now 1K. The goal was to think about how to bring value by investing much less in payroll items, which were considered essential to achieving quality. This was the approach of the 2000s, with constant investment in FF&E and CAPEX. We had a different approach, we had to be ingenious to reposition with as little budget as possible. At this property we redid the ground floor and opened the first Peruvian restaurant in Paris, we also opened speakeasies. At the time when they were not yet very developed and we were the third to do it in 2014. The aim is to maximize profitability per m². 

In a profession that has been very refocused on asset management and how to create value on assets, what has changed in your business after the recent changes? Have you changed your KPIs internally?

Francis Martinon (FM) : At AccorInvest we have two businesses, we are owner and operator. We have the payroll at home. Our job as owners is to leverage asset management, we have a lot of CAPEX. This year throughout France we had more than fifty hotels under construction. We are also working to restructure our assets, possibly our leases with certain lessors or even our holding patterns. We also activate sale and acquisition levers. AccorInvest is positioning itself for acquisitions to expand its fleet. Two new-build facilities opened Jo&Joe in Gentilly and an ibis Style in Puteaux in partnership with Europequipement.

We therefore have the management levers of both owner and operator since we own the business and therefore the results. On these levers, we work with our operator and it is together that we seek this active operational excellence asset by asset. Our asset managers work with Accor's operations managers on each of the assets to optimize the operating structure, the topline but not only. Our goal is to optimize profitability, the end result and not just to increase turnover without achieving the right operating margin.

A major constraint on performance is profitability with a personnel management logic. The human being is a creator of value in a service profession, how to arbitrate with respect to profitability??

We pay our manager for his advice on these matters, as well to manage our operations and staff. There is also a challenge for us, that of creating our house spirit. Employees have historically had the culture of belonging to the Accor group or their brands, and we are also building this AccorInvest culture. We ensure that our employees identify With the fact that the properties belong to us and understand what this means.

An example of the arbitration we have to do with our operator is in the field of training. Today, with our vision as an owner, the budgets for staff training and building maintenance are sanctuarized. We are investing in our teams and that is not what we are going to cut because it is very important in a service business. Once we decide to pass this and that training plan, we sanctuarize during that year. Maintaining buildings for us as owners means maintaining our heritage. This forces us to look for new reflexes and to be more intelligent than has been the case until now.

OC : The human component is a real work in progress because to me we go into the wall if we don't take hold of this aspect. We must change the paradigm because the new generations will not let us pass it on. We must value the human being, we are talking about sustainable development as a whole. It is no longer an artifice, it is something vital for our companies and we have a real responsibility in this regard. This responsibility is shared. National Education and the government have a shared responsibility to enhance the value of our professions and it is also our responsibility. I don't have a solution yet, but we have to change the paradigm. Recruit soft skills rather than know-how yes, but a person is no worse off for learning the basics, even if it means unlearning afterwards. Training and compensation must be rethought. The advantage of being in a large group is also to be able to say the social elevator still exists, and I very sincerely think so. It exists in our professions and there are very good careers to be pursued. We must start anew with our employees and customers. 

When we want to develop service signatures for F&B in particular, people are essential, how is this managed within the Machefert Group?

KM : It is undeniably a very complicated subject. We manage our own staff and are also a hotel operator. Within our group, we have two intertwined issues. First of all, we must manage the age pyramid and in particular the conflicts that this can lead to. When developing and requesting a new hotel business, it is also necessary to invest in training so that staff can pivot with the concept. It is very important in the hotel industry to have a payroll in line with the concepts we are trying to develop.
We will invest in our three-year plan, which begins in 2020, on training, with arbitration or repositioning topics for certain employees. For incoming employees, especially millennials, it is very complicated as the truth is many people are not trained. Even having made beautiful hotel schools, the employees in the field are clumsy, do not know exactly what is expected of them. With our means we will try to launch the Machefert Academy within the next 18 months. We are independent operators with one concept per hotel. On the other hand, we still have a group with a shared services centre, including a fairly strong HR department on which we want to capitalize to train the millennials. I have experienced it as an operator, people arrive with little training and you are very disappointed, but it is also our fault. If we don't know what to expect from them and we don't train them.

Five or six years ago, renovations to change concepts may not have been drastic enough to meet the new expectations of customers. Today, all brands have reworked their value proposition, their products, there are some things that are very differentiating. The gap is widening between innovations and concepts that may be at the end of the cycle. What is AccorInvest's reading grid for CAPEX arbitration?

There is a CAPEX arbitration committee, for each renovation we make a business case with the amount of the investment, the matching business plan and we look at how much it can provide in terms of profitability. All this until the entire plan works. The innovation lies in the fact that we have to discuss with our operator to keep it within the standards, and if the standards impose levels of investment that are incompatible with the return that the same operator can deliver to us in operation, we adjust the equation.

As an investor, what is the main value driver for you?

KM : Valorize the community. One of the most powerful business models in the hotel industry is Soho House, they do not value a community but members. As a family group we focus on this. We developed the "welcome to the family" catchphrase. Facebook and LinkedIn: their value is the community and their business models are now valued. We want to develop a sense of belonging.

FM : Optimisation of people, hotels and the entire set portfolio.

OC : In keeping with what has just been said. We must embark both customers and teams in a new adventure and tell them a story. It is a somewhat utopian or philosophical vision of valuation and it is not quantifiable. Where two years ago sustainable development and CSR were daunting, today they are essential. Whether it is in the search for a job for a young person or for a client. This valuation is not a quantifiable value today but can be fatal if it is neglected.

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