Asymmetric impacts of the asset-light and fee-oriented strategy: The business cycle matters!

The hotel industry in the United States has witnessed the rapid spread of the strategy of pursuing fee-based business (management/franchise) while going asset light. The two main consequences of this strategy are protection by shaving off fixed assets, and growth without a huge capital investment by expanding fee-based business. We examined how the impacts of this strategy vary with the business cycle. During a contraction period, the stable income stream of fee-based revenue and low operating leverage protect the firms from unexpected negative shocks. However, the efficient management of core intangible assets and the fee income structure resembling option payoffs act as driving forces to growth during an expansion period, increasing the firm's sensitivity to economic recovery. Consistent with the hypotheses, the management/franchising firms’ beta was lower during contraction periods but higher during expansion periods than non-management/franchising firms’ beta, and the beta movement between the two periods was significant in both groups. However, the proposed effects of the strategy appeared to apply only to the firms substantially engaged in fee-based business. Firms employing the strategy at a low or moderate level had stable beta over the cycle.