For every hotel that quits one brand, there’s another ready to sign them up, and 2013 results from both Choice and IHG shine a light on how the transfer market is playing out.
IHG saw modest actual system size growth of 0.5% in 2013, as it ejected or lost almost as many hotel rooms as it opened. And among those picking up the hotels removed from IHG was Choice, which views conversions as a great source for new inventory.
The process is well established in the US market, with the last couple of years seeing a number of small portfolios quitting one brand and moving wholesale to a new brand flag from a rival hotel company. While these group deals have been less prevalent recently, the number of transfers remains strong; and the activity is becoming a more international one.
“If you strip out some multi-unit deals that we did in 2013 and 2012, the fourth quarter, our franchising contracts were up 28%, which is a very nice increase in our mind and its mostly being driven by conversions,” said Choice chief financial officer Dave White. The company’s domestic franchise portfolio grew 2% in 2013, while initial franchising and relicensing fees grew 32%.
While its established strong brands such as Comfort Inn are scooping up properties that other brands drop, Choice is also growing its Ascend Collection, a soft brand that accepts hotels in all shapes and sizes and particularly suits conversions and independent hotels looking for marketing support. Ascend, which chief executive Steve Joyce called “an integral part of our growth strategy to expand into the upscale segment” had a “breakout” year, growing from 72 to 123 properties, with a good percentage in international markets including Europe and Australia.
Choice sees an uptick in new construction in the US market helping it in two ways. First, that means it signs more new hotels. “We are seeing a development environment that is more promising than we have experienced in several years,” said Joyce. “In the fourth quarter we saw executing franchising agreements for new construction hotels increase by 13%. That is a great sign for Choice and for the industry.”
Second, more new builds for rivals means they are likely to throw out those properties that fit least well with brand standards. “Domestic conversion franchise sales increased 14% for the year. We executed 441 domestic conversion contracts compared to 387 during 2012. We were able to achieve this 14% increase in domestic conversion franchise agreements despite challenging prior year comparisons.” The last quarter of 2012, for example, included a wholesale conversion of 46 Jameson Inns.
Some of Choice’s new inventory came in the form of properties lost from the IHG portfolio. While IHG added 35,000 rooms during 2013, it lost 25,000 rooms. In America, 18,000 rooms were removed, leading to portfolio net growth of just 0.4%, something new finance director Paul Edgecliff-Johnson put down to “part of our continuous focus on quality”.
Elsewhere, in Europe, the opening of 3,500 new rooms balanced the loss of a similar number, while in the AMEA region, 4,000 rooms were added and 2,000 lost. It was only in Asia that there was substantial net growth, with 8,000 rooms added, against just by 1,000 removals.
Some of the losses were sweetened by damages settlements, for agreeing to exit contracts early. In Europe, 1,300 of the rooms that left the IHG system were under such deals, returning a damages sum in the process.
“Almost all of the removals are about improving the quality of the portfolio,” said chief executive Richard Solomons. “I think you can see from the signings, from the activity and from the quality focus that will continue to drive our system size, but it is very much about quality not just about size.”
Among hotels still to be lost will be a number of Crowne Plazas, a brand which IHG is making over in a similar way to the successful Holiday Inn refresh. Those too shabby to stay, or where owners don’t want to spend the required sums, will be out of the system : the results presentation promised further “brand detracting hotels” would be removed during 2014. “We’re on a journey to improve the quality and consistency of the brand primarily in the US and we’re really encouraged by the results so far,” said Solomons of a refresh that will be rolled out this year following a successful pilot. Much of Crowne Plaza’s growth is scheduled for openings in China.
Despite the modest growth of 2013, IHG continues to sign new hotels into its pipeline. In the US, it had its busiest year for signings since 2008, “something that sets us up well for the future,” said Edgecliff Johnson. In Europe, 50 additions to the pipeline included seven hotels in London and five in Russia.
In AMEA, IHG has a pipeline of 32,000 rooms of which more than half will open as Holiday Inn family hotels. In Greater China, a pipeline of 55,000 rooms includes more than half of the number already in construction: “We continue to have the industry’s leading system and pipeline in the region,” said Edgecliff Johnson. Overall, Solomons claimed IHG has 5% of the world’s hotel rooms, and 12% of the active pipeline.
Looking ahead, IHG’s growth will predominantly be in 10 markets, said Solomons, naming these as the US, Greater China, Middle East, Germany, UK, Canada, India, Russia/CIS, Mexico and Indonesia. “By 2020 these 10 markets alone will account for more than three quarters of industry growth which means that combined they will achieve some 4.6% compound annual growth in industry room’s revenue.”
HA Perspective [by Katherine Doggrell]: Phrases such as ‘bottom feeding’ would be too offensive to use in relation to companies such as Choice, which pick up both hotels the likes of IHG discard and hotels which have decided that they want to spend a little less on fees and focus on the distribution aspect of branding, rather than the multiple types of pillows aspect.
One of the learnings of the downturn for owners is that they don’t need the pressure of a foot-thick brand manual. Choice knows this and has spent the downturn doing distribution deals and even developing its own software division to service the needs of those who want to go brand-light.
For IHG, being seen to be ridding itself of underperforming hotels is part of its own brand promise. As the hotel transaction markets builds, driven by improved lending, this should play out well for both companies, with more new construction and more hotels reconsidering their brands and trading recovers.
Joyce pointed to a rise in investors buying independent hotels and looking to brand them. This has been a trend in recent years, with most of the global operators launching a brand-lite to capture them (Choice has the Ascend Collection). February saw Carlson Rezidor launch its own, with Quorvus Collection “a new generation of expertly curated luxury, five-star hotels”.
IHG is close to being alone in not having such a brand. As yet it doesn’t need to.