• IHG pipeline suffers amid limited financing

 

InterContinental Hotels Group forecast "very modest" pipeline growth this year, moving to "modest" next year, as difficulties over development financing remained.

The company signed 130 hotels into its forward pipeline in the first half, representing 17% of the hotel industry's global pipeline. However, the company said that attrition had increased, driven by hotels leaving the Holiday Inn brand as sites were upgraded as part of its relaunch.

CEO Andy Cosslett told a conference call: "We don't know what's going to happen with owner confidence. Generally it's moving forward, but it'll take time and the financing environment in America is difficult, so we've got this hiatus. Expect modest system-size growth." Cosslett could not put a number to the growth, adding "modest is modest. This year will be very modest and next year will be modest".

Looking at supply in the wider hotel industry, Cosslett said: "The slowdown in supply in the US looks set to be mirrored – apart from in China –  reflecting the the confidence in the lending markets. The upside is that restricted supply will boost revpar.

"In Europe, Middle East and Africa our signings are ahead of last year. The key issue is America, where upscale projects are almost impossible to get financed. In China we've got 5,000 rooms in our pipeline – we've got 30% of our pipeline in that part of the world –  but America's the sticking point."

China remains the group's leading development market, with plans to add 30 hotels this year, Cosslett adding that IHG had a "28% share of the total number of rooms opening in the next few years. Our position is further strengthened by the fact that our mix of development is in the upscale market".

"The US is by far the biggest market, with 25% of the world's rooms. The market in China will be bigger in 20 years. The opportunity is immense and we are intending to capitalise on it."

Cosslett said that, in China, it would consider bolstering its estate with the acquisition of a brand. "We've got fewer brands than our competitors, which is something that we've been happy with, but at the lower end we might need a different brand in addition to Holiday Inn Express."

The group is also considering adding a brand at the luxury end, to prevent saturation in the country with its InterContinental brand. The CEO said that the group would update on its thoughts in November, but that any new brand could be an existing local chain, global chain or one that it created itself.

The comments came as the IHG reported its first half results, with operating profits increasing by 22% to $219m (£140m) on the return of corporate travel. Revenue for the period rose by 6% to $772m, with the group commenting that revenue growth in the second quarter  – up 9.3% – was its highest for two years.

First-half revpar was up by 3.9%, accelerating in the second quarter with a 7.4% increase, including a 29.4% rise in China. In July the rise was 8.1%. The group said that global occupancy trends had been positive for seven months and the recovery that began in Asia has spread to most of Europe and latterly the USA.

Ebitda was up 19% to $274m. The group reduced its debt by $100m to $1bn, largely as a result of $75m in cost savings, which it was set to make again this year.

Richard Solomons, CFO, said: "Up until recent months our revpar growth has been driven by occupancy alone, but as occupancy and business mix has improved, rates are now positive in each of our regions. However it is important to note that visibility across the whole industry has been limited, occupancy has been growing, but for us is still four to five percentage points lower than it was in 2007 and 2008."

In the UK, first-half revpar rose by 1.2%, although the second quarter saw an increase of 2% and July was up 2.6%, led by strong growth in London.

Due to its mid-scale bias, IHG underperformed the total US industry in the first half, although benefited from less volatility. However, it anticipated seeing the mid-scale strengthen as rate differentials were reset.

Solomons added: "After several years of outperforming in the UK, we've built up a meaningful premium in the mid-scale segment and we continue to outperform in London. However, as a result of a number of lower rate contracts we're locked into – which protected us in the recession – we have underperformed in the UK as a whole. This means that, while our hotels are doing well from an occupancy perspective –  70% in H1, 82% in London – it's at the expense of rate."

Cosslett added: "One of the issues we have in the UK is yield. On weekdays we are pretty close to full, so it's hard to attract the transient customer who typically pays more and we need to get the yielding at the mix sorted out."

The group has introduced a dynamic pricing model for its corporate clients, which offers a negotiated discount on contracted volumes against the prevailing market room rates. Cosslett said that approaching 30% of IHG's business was under the new model, with the remainder of negotiations "the usual sit down and conversation".

IHG remains committed to its asset-light strategy. Cosslett said: "We don't intend to move rashly, but it's important to constantly reaffirm our determination to make further progress on our asset strategy over the next year or two."

Solomons added: "We're keen to realise some assets, but the market isn't really conducive right now."

 

HA Perspective: The overwhelming majority of the world's global hotel brands have come out of the West, principally North America. The adoption of a budget or economy hotel brand out of China by IHG would be the clearest signal yet that this hegemony has ended.

This is only to be expected. Just as the global economy is re-weighting in favour of the East (which is arguably just the East reasserting its proper allocation after a couple of centuries of under representation), so too the hotel business must reflect global realities.

This should by no means be seen as a threat by Western companies. While their dominance will end and their relative size will shrink, in absolute terms the opportunity is for unprecedented growth for all.

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