• IHG may have a less cosy future

Andy Cosslett, the still fresh CEO of InterContinental, was up on stage yesterday declaring that the hotel business is not as tough as his previous berth with confectioner and soft drinks maker Cadbury Schweppes.

But Cosslett’s company, along with the others in the hotel industry, is set to face a much tougher time as it attempts to deliver on growth promises.

The third quarter results put out yesterday by InterContinental certainly show that the business is moving in the right direction. The pipeline of signed deals is now at just under 144,000 rooms.

The bulk of these, 100,000, are in the Americas. Less than 16,000 are in EMEA and just over 28,000 in Asia Pacific.

With so much riding on the US, InterContinental has much to lose if that market starts to tighten. And there are signs that it already is.

The revpar increase in the third quarter in the US was 7.5% with Holiday Inn core brand the weakest at 5.9%. This contrasts with 11.6% growth in EMEA and 10.5% growth in Asia Pacific (both figures across all brands).

Speaking at Deloitte’s 18th Annual European Hotel Investment Conference, Cosslett said the hotel industry is not as aggressive as bigger sectors such as retail or fast moving consumer good manufacturing.

He added that the quality of management training in the hospitality industry lags such rivals.

Cosslett contrasted his experience while at Cadbury Schweppes while selling to the big retailers like Tesco or Wal Mart to that within the hotel industry: he views the latter as more “cosy”.

As the competition for franchisees and management contracts stiffens – as it surely must if the growth promises of the industry are even half delivered – such cosiness may prove a thing of the past.

In particular, the big brand owners and operators have so far been in the ascendant when negotiating contracts. While it is easy to write your own contracts when selling assets – to ask the market to price in unfavourable terms, as another panel at the conference put it – it is an entirely different situation when bidding on an equal footing.

The past few years have been a period of accelerating revpar growth, asset scarcity and capital abundance. Operators have been the big sellers and real estate investors have been competing heavily to buy a piece of the action.

With decelerating revpar growth – which is already happening –the pressure on operators to deliver on expectations builds. Owners will become increasingly tough in their contract negotiations as they themselves feel the heat.

The story for the big brand owners and operators is still compelling, as the real pain is likely to be felt by the smaller chains and independent owner-operators. This will open up increasing opportunities for those brands strong enough to take advantage.

An InterContinental or Marriott will always be able to extract a higher fee for their strong systems than can weaker rivals. But the hotel industry has exhibited imperfect competition and the market for weak and distressed operations has been slow to clear.

The longer the weak players linger in the market, the harder it is for the stronger brands to grow and take advantage.

The deal flow in the recent past has been strong – and this year is set to break all records – but it has not resulted in much consolidation. Rather, private equity has mostly focused on taking out either public companies or other private equity.

Marriott International’s CFO Arne Sorenson, on the same panel as Cosslett, said that while his company would love to take part in mergers and acquisition activity, so far prices have prevented him joining in.

Higher interest rates make the leveraged positions of private equity look ever more difficult. And perhaps there will again be a window that will open for consolidation, as public equity is able to compete on a more even basis.

As the full force of the draught from this open window whistles around Cosslett’s head, he may soon find things much less cosy.

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