ACCOR Group's Expansion Strategy - Research Paper Example

Research Methodology Research Methodology This research indents to find out whether there were any major changes pertaining the company following the implementation of the strategies in the year 2006. It compares the company's financial statements two years before and after the strategic implementation to check if the group's turnover, profit and asset were indicating some significant changes due to the installed strategies. While carrying out the research regarding ACCOR group of companies, importance of selecting the appropriate paradigm is emphasized. This includes the opinions on how to carry out the research as well as the necessary approach of data collection and analysis. The methods used to collect the appropriate data included a quantitative data collection approach: getting the relevant data from the company's management information systems where it has provided its financial reports before the implementation of the strategies and after this period. The collected data is then analyzed using tables and charts in order to draw conclusion on whether the strategies made any changes to the company. There is also analysis of the strategies used by two other major rivals of ACCOR group of companies which are used to corroborate the hypothesis to be deductive. Roy 1995 ACCOR group's financial statements before implementation of the strategies: 2004/2005 Amount in EUROS millions 2004 Reported change Revenue 7,123 + 4.3% EBITDAR 1,859 +5.3% EBITDAR margin 26.1% +0.8% Before tax profit 592 +13.2% The growth rates for the company in revenues for year 2004 were as per the following: Revenues + 4.6% Expansion + 3.0% Impacts of the currency (decline of dollar against Euro) - 2.0% Disposals - 1.2% Growth Rate + 4.3% The financial statement after strategic implementation: 2007 (Amount in EUR millions) 2007 % change (Reported) Revenue 8,121 + 6.8 EBITDAR 2,321 11.4 EBITDAR margin 28.6% 1.2 Operating profit Before tax 907 24.8 The growth rates for the company in revenues for year 2007 were as per the following: Revenues + 6.5% Expansion + 4.3% Impacts of the currency (decline of dollar against Euro) - 2.7% Disposals - 1.3% Growth rate + 6.8% Analysis Amnt In m 9000 - 8000 - 7000 - 6000 - - 5000 - 4000 - 3000 - 2000 - 1000 - Revenue EBITDAR Profit (before tax) Graph of the two financial statements; Revenue, EBITDAR, profit (before tax) Year 2004 Year 2007 11 - 10 - 9.0 - 8.0 - 7.0 - 6.0 - - % 5.0 - 4.0 - 3.0 - 2.0 - 1.0 - Revenue EBITDAR Profit (before tax) Graph of the two financial statements; Revenue (reported change), EBITDAR (reported change), profit before tax (reported change) Year 2004 Year 2007 i. Before implementation of the new strategies As per the above table, the company's profit before taxation amounted to 592 million which was13.2% for that year. In the same year, the company's consolidated revenues shot up by 4.3% which were the same as moving from 295 million to 7,123 million. Not including the effects of transitions in scope of exchange rates and consolidation, the revenues went up by 4.6% for the same year as well as 5.1% in the fourth section of the year. This indicated the company's demand in the group's activities. In the year 2005, ACCOR ventured into a colony capital investment of 1 billion as well as offered fresh resources to drive the desired growth for the company. The benefits for the second quarter were from favorable basis of comparison. There was lackluster summer in the hotel sector in both the US and France while the fourth quarter indicated an optimum in upscale as well as in midscale hotels followed by the leveraging US economy to great recovery. ACCOR's like-for-like quarter growth in the same year ended up with 4.6% growth. The company's consolidated earnings before, interests, tax, depreciation, amortization and rental cost (EBITDAR) went up by 5.3% equivalent to 90 million, to a value of 1,859 million. Its growth was as follows: (In millions) Revenues (like-for-like): 107 Expansion: 44 Currency impact: (46) Disposals: (15) The EBITDAR margin for upscale and midscale hotels went up by 0.5 points like-for-like shot up to 24.4%. Economic recovery depended on the market: there was an increase of 35% of EBITDAR for country markets and improvement of margins by an average of 3.3 points. There was weak growth of 65% in country market as margins went down by 1.1 points. EBITDAR, for the US economy sector had a margin contracted by 1.2 points to 36% following adverse impact of USD 13 million that was in non-recurring expenses associated with industrial accident risks experienced in US's California. Non counting on these expenses the margin would have gone to 37.1% which would be the same for the year 2003. EBITDAR margin for the service business went up to 41.1% right from 40.1% witnessed in the previous year. The same sector experienced a margin improvement of 4.9 points as well as 0.5 points. Before tax the profit went up by 13.2% same as EURO 592 million, indicating growth improvement after a decline of two years. The net income, group share went down to 11.5% because of the non-recurring EURO 58 million losses on the compass shares. The company's cash flows for the year 2004 were as follows. Operations fund went up by 7% to 906 million. Capital costs for both maintenance and renovations were reading an increase of 15% to 326 million in that year. This represented 4.5% of revenues, while the free cash flow was 580 million. Including share holders interest of 3,833 million and debt of 2,092 million at the end of the year 2004, the gearing ratio for the same year was 55% compared with the previous year's 67%. EBITDAR cover interest remained stagnant at 5.6 times. Capital returns went up by 10% compared to the previous years. After tax ROCE was at 8.3% with an average cost of capital amounting to 6.4% and the capital employed of 11.5 billion. The economic value added (EVA) made by the company was totaling to 219 million compared to the previous year's 208 million. Revenues from services offered by ACCOR were up by 10.6% for 2005. ii. After implementation of the new strategies Operating profit before tax was up by 25% Operating profit before tax and non-recurring items were up by 25% to 907. Net profit, for the company's share went up by 76% to 883 million Fresh returns to shareholders were 750 million. Consolidated revenue experienced a growth of 6.8% by the end of 2007 whiles the like-for like were at increase of 6.5% indicating a strong development in the company's two basic operations viz: hotel and service. The revenues received from the service revenue went up by 11.9% like for-like while 16.5% were on a reported basis for the company's medium-term organic growth goal for the operations of a range of 8% to 16%. The continued upturn in the hotel cycle in most parts of Europe boosted the company's hotel business in terms of average rates as well as occupancy cycles. This encouraged an increase of like-for-like revenue of 6.4%. Hotel sector also saw an increase by 5.8% globally at constant consolidation cope and exchange rates while 7.8% were on the reported basis. After the strategies adapted by the ACCOR group of companies in 2006, major financial ratios saw a significant improvement, indicating the firms robust position financially. Gearing was at 6% by the end of 2007 as compared to the previous year's 11.3%. Funds' ratio received from operations prior to non-recurring items went up by 4.0 points within the year to 26.2%. Capital returns got to a record 13.6% compared to previous year's 11.9%. The consolidated EBITAR reached 2,321 million, which was 11.4% raise as compared the 2006's figure. This margin got up to 28.6% for the year ending 2007 which was a record for the company getting 0.7 points like-for-like as well as 1.2 points on the reported basis. There were EBITDAR margin of 42.6% for the hotels operations. This was an improvement of 0.8 points as compared to the 2006 margin. This increase indicated a favorable cycle of the hotel business in Europe that was an improvement in operating performance. Operating profit before tax in addition to non-recurring items resulted to 907 million. Reflected a raise of 21.6% for like-for-like which was some how higher than the targeted 870 million. The company also experienced a strong increase in net profit, group share going up to 76.2% to 886 million. His amount was part of the 319 million received through capital gains on disposal of real estate in UK, German and the Netherlands. ACCORS STRATEGIES Using the SWOT analysis and the SFAS matrix, the TOWS Matrix associated with ACCOR group, the strategic analysis of the company's significant internal and external factors as well as the opportunities and threats which have effects on the performance of the firm and strategies it ought to adapt in try to reposition as a leader in the hospitality industry are indicated. External factors Opportunities Internal Factors Strengths Weaknesses Strategies for Strength Opportunities Strategies for Weakness Opportunities Invest in joint ventures and mergers to create new market opportunities Rebrand for growth and expansion in the new and coming markets Acquisitions for growth Growth through multi-Segmentation Profits Increase via new markets penetration Products modification and Innovations for more profits Products diversification Customer satisfaction via Modification of products. Threats Strategies for Strength Threats Reposition Brand through Control Venture in new innovative concepts for new products Establish asset management system Strategies for Weakness Threat Avoid commoditization through differentiation New market's Diversification Utilize customer loyalty and trust According to the SWOT analysis above, the group should focus on joint ventures, mergers and acquisitions, development of innovative products, segment and multi-branding, rebranding the company, penetrating to fresh markets and developing them as well as integrating the management to control its assets in order to keep its position as a global leader in hospitality industry. Strategic Analysis The company's profile has significantly transformed since adoption of the strategies in 2006. This is more reflected by comparing the current situation with what the last cycle effects would have to the present status. Service sector contributions went up by double by the end of the year 2007. This was attributed to the acquisitions strategy adapted which also saw the contribution by service operations to operating profit grow b from 21% to 38%. The hotels were greatly restructured on new business model basis. The divestment of Red Roof Inn (341 hotels with 36,683 rooms in total), the group's exposure in America was 85 in operating profit in comparison to 25% experienced in 2004. This sector had experienced low response to business cycles. There were bigger contributions from the European hotels that were less cyclical and provided more substantial position for more expansion. This strategy helped in promoting intensives that are a less-capital owning models. The adoption of the new strategies have had significant impact to the ACCOR group, with the years 2007 and 2008 being good years for the firms business growth. The company has become the leading European market leader and a major group in the hotel industry globally. It has been able to rent excellent services to its clients all over the world in its two major businesses: hotel an service industry. The hotel sector has been under spontaneous growth with, Sitehotel, Pullman, Mercure, Novotel, Ibis, Etap hotel, Sofitel, Formula 1 as well as Motel 6 Brands and Lenotre being the company's major hotels globally. The service sector has seen more than 30 million people in over 40 countries getting the company's benefits through its excellent services which comprises of marketing services, human resource services as well as expense management. Acquisitions and New real estate management This was undertaken by the company in order to improve its flexibility with an aim of meeting two major objectives i. To lower the intensity of capital in upscale hotels ii. To variablize the expenses of holdings in the midscale section. The company intents to dispose the hotel assets in the upscale sector (Sofitel) while maintaining the contract of management with a minority stake. This is meant to reduce the volatility of the earnings in the sector that is more responsive to business cycles. It aims to achieve the objective of managing 755 of all Sofitel units as compared to 62% in 2004. The company intents to also transform all fixed assets into variable leases relating to some percentage of the earnings with no assured minimum. This is meant to variablize some of the hotel's fixed expenses. 128 France based hotels with a value of 1 billion would be signed with a consortium of investors, Fonciere des Murs, which is a member of credit Agricole Group. 15% of the Novotel a Mercure hotels would be rendered under changing contracts of leases compared to 2004's 1%. This strategy would also look for some extra financial resources worth 400 million for duration of one and a half years, with 140 million received from the deal signed with Fonciere des Murs. This would assist ACCOR concentrate on its basic businesses while giving support to its quickly growing strategies. Other Contributions made by the Adapted strategies i. Services department It experienced massive growth in 2007 and 2008 via its acquisitions of 8 facilities which were significant to its growth and future expansion (ACCOR, 2007) ii. Hotels brandy strategy Newly launched Pullman brand in the upscale sector is expected to grow via franchise contracts and management services. The firm still extends its non-standardization segment provisions by creating all season's brand of ten hotels. iii. The asset-right program Through its strategy to adapt owning structure, the property assets divestments created 486 million Strategies adopted by other competing firms i. The Erawan Group It intents to relocate to Thailand from China and India due to failing market in those countries. It will use equity capital to offer funding for the relocation. Main resoan of relocating to Thailand is that its management feels that the country has big untapped hospitality market. This might take some time to regain growth considering the unknown risks in the new market (ACCOR, 2009). ii. Hilton Hotels aims at not expanding to new regions but to introduce a fresh generation of wealth which indicates its ambition to expand and refresh. This would take place without financial investment. It intents to grow through developing strength of its relationship with its partners through franchise and agreement on management. This strategy would enable it to grow fast with less risk. Its partners include India EIH and Oberoi Hotels that will manage its nine hotels in the country. His strategy might not be easy to see growth since the country's competitors are in better strategic position Limitations of the research method i. Lack of transparency. The company might decide to with hold some significant information in fear of getting exposed to its competitor. This might make the provided information being inaccurate thus producing the wrong information about the company. ii. Numerical errors/ inaccurate data Some of the numerical data provided usually contains some inaccuracies or varying data. This might make the research produce erroneous information. iii. Change of data/ data manipulation The provided data could have been changed by other people illegally in order to benefit them. This implies that some people with bad attitude can decide to change the information provided by the company since it might be crucial to their business operations. This changed data leads the researcher getting the wrong information regarding the company being investigated. iv. Lack of concrete conclusions. As the researcher, one can not make concrete conclusions and recommendations since most of the provided information contains this. The researcher is therefore forced to conclude as per company's information and recommendations provided but not mainly from his own views. Conclusion The company is likely to experience a big pace in its growth with the adoption of the more substantial financial resources which would also assist it in enjoying bigger financial flexibility. After one year of implementation of the company's strategies, it has seen its capex budget grow by 39% to amount of 1.7 billion from 1.2 billion targeting two major objectives: Improve the company's forefront positions in the hotel industry in Europe markets as well as achieve more market shares in much more potential areas such as India, China, Russia, Latin America and the Middle East. It hopes these new markets would offer fresh growth in the medium term. It expects the base of the hotel to increase by 20% up to 550, 000 rooms before the year 2008.The company should utilize its resources in the service sector by capitalizing on Ticket restaurants globally in order to be in the front line in corporate human resources management services. It also expects to double its Capital expenditure to 3000 million by end of 2007. References ACCOR, 2009. Annual general meeting on May 13th 2009. [Online] available at: http://www.accor.com/en/finance.html [Accessed 13 May 2009] ACCOR, 2007.ACCOR 'the spirit of smiles' [online] available at: http://www.accor.com/en/sustainable-development.html [accessed 13 may 2009] Roy Dodge, 1995. Group Financial Statements. Amazon: Cengage Learning Read More