• Room growth matters at IHG

Room additions were almost as important as revpar growth in building gross revenues in InterContinental’s franchise business in the first half of this year.

The figures show just how important growing its pipeline is for the future of IHG as a company.

The first-half results presentation yesterday showed that 48% of gross revenue in franchising came from room additions with the rest made-up of revpar. A year earlier, room additions were just 23% of the increase in gross revenue.

With revpars globally beginning to grow more slowly, on average, it is only by adding more rooms that will ensure IHG maintains its rate of growth.

The good news in the presentation was that the company reckons it will exceed the top-end of its 50,000 to 60,000 net new rooms target for the end of 2008.

The goal was set 18 months ago and in that time the company has added a net 26,000 rooms. But the momentum is increasing and there is confidence that the upper threshold will be breached.

CEO Andy Cosslett said it was important “that the business remains focused” on the target. It is currently opening a hotel a day and signing two a day.

One slight hiccup has been a slight lengthening in the time it takes between signing and opening. Typically this is nine quarters – just over two years – but growth in China, where hotels are 400 rooms and towers, means completion times are being stretched a little. Outside of China, the average room size is 150 or so.

The overall number of open rooms under this brand in the Americas shrank 3% in the first half to stand at 181,292.

But this quality management exercise is helping to bring future owners into the fold, claimed Cosslett. The brand is now being managed in a “more assertive” fashion which gives confidence to potential franchisees.

Later this year, there will be a major announcement concerning the renewal of the brand, added Cosslett. “Addressing the Holiday Inn tail gives us a platform to take the brand forward,” he said.

Exits from the system would remain high – 6,281 Holiday Inn rooms left in the Americas in the first half – until at least 2009. Overall, 13,282 rooms exited and 20,713 were added. This meant the net room growth across all the brands in IHG’s system in the first half was 7,430 or 1.3%. The development pipeline at the half-year was 187,487 rooms across 1,414 hotels.

The company chose to highlight the growing momentum within the upscale InterContinental brand with 16 signings in the first half bringing the pipeline to 50.

Despite the success of building the management contract business, just 20% of revenues come from this source. And even then, the nature of IHG’s management contracts is significantly different to its main rivals. They are much less operationally geared with the bulk of the fees being flat base rather than incentives.

Ownership is still significant with a total of £858m of assets at net book value including four flagship InterContinentals (New York, London, Paris and Hong Kong) valued at £669m.

So far this year £75m worth of hotels and interests in hotels have been sold and a further £64m worth is currently on the market. The asset sales more than covered the £40m in capital expenditure that included £15m on refurbishing InterContinentals in London and Hong Kong and £25m investment spending on the forthcoming InterContinental in San Francisco (IHG has a 19.9% stake), inducements on 11 Holiday Inn conversions and one InterContinental renewal, and the land purchase for the first phase of an Indigo in San Diego. “We will use our capital to support the development of our brands,” said Cosslett.

Thanks to recent disposals, total operating profit fell from £127m to £116m, with franchising contributing £122m, managed £42m and owned and leased £17m. Continuing operating profit was up 5% or 17% at constant currency to account for the slide in the dollar. Global constant currency revpar was up 7.0%.

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