IHG sees ‘delay, not a stop’ in China

IHG Atwell Suites
IHG's Atwell Suites

InterContinental Hotels Group CEO Keith Barr said that the group would see a “delay, not a stop” with growth in China as a result of the coronavirus.

The company said that it had see a $5m fee impact for February, but expected to see a strong bounce back.

Barr told analysts: “Greater China is an important part of out future, wth the regions representing 30% of pipeline, however today it is a small part of our business, representing 15% of open rooms and around 10% of operating profits. There will be some impact.

“One per cent in group revpar is $13m in Ebit. This is an evolving situation and it’s hard for us to predict where it will go. We have around 160 hotels closed and we’re seeing significant reductions in occupancy in February. Based on the current level of disruption, we’re seeing a $5m fee impact for the month of February. We’re seeing some impact in Asia Pacific, shifting conferences and events. The real question is what is this going to look like in terms of a decline and recovery, Sars was a sharp drop and a sharp recovery.

“The key thing to remember is that the Chinese government’s ability to stimulate demand is unlike any other, it could cause a significant uptick when this normalises.

“The business is still moving ahead, there could be disruption in terms of FF&E. This is a delay, not a stop. There could be a slide, but the long-term strength of the business is strong in China, we’re very bullish on China. There could be a dip but it will recover as it has done previously.”

For the full year the group reported a 0.3% drop in global revpar, with the Americas down 0.1%, US down 0.2%, EMEAA up 0.3% and Greater China down 4.5%. Performance was impacted by macro and geopolitical factors, increased supply growth ahead of demand in some markets, and ongoing unrest in Hong Kong. Fourth-quarter global revpar was down 1.8%.

In the US, the company said that fourth quarter had seen a fall in demand weakness in certain sectors of the economy, such as automative. The CFO said: “Holiday Inn and Holiday Inn Express are competing in a segment with 3% supply growth, which is outweighing demand growth. This will be absorbed in time.”

The group reported operating profit up 4% to $865m.

IHG saw net system size growth of 5.6% (5.0% excluding Sands partnership in Macau), the strongest in over a decade, with 65,000 room additions.

Commenting on the potential for further M&A, CFO Paul Edgecliffe-Johnson said that IHG had “managed to take down some of the best brand opportunities out there and our focus is growing those organically”.

Signings at the group were down 1% on the year, to 98,000 rooms, taking the pipeline to 283,000 rooms. The CFO said: “We saw a supercharged Avid performance in 2018. If you formalise for those signings were actually up 7%.”

The group said that loyalty room revenue contribution was flat year-on-year. Barr said: “A better representation of the full value of our loyalty programme to deliver revenue to our hotels from both qualified and redeemed stays is loyalty room night contribution, which was around 46% for 2019.”

When asked whether faith in branded hotels was slipping, Barr: “When we talk about brands we’re talking about the branded relationship. The industry is shifting to the branded players for a variety of reasons. The biggest players can create great value, they are going to get the more preferable financing agreements. There’s the owner piece and from the customer perspective it’s about the totality of the scale of the brand. Underpinned by a great brand experience. Underpinned by loyalty and our technology platform. Then you layer in credit cards and timeshares, we’re much deeper ingrained into the lives of our customers against other industries.”


Insight: IHG is the coronavirus bellwether. It is also the company which, historically, has always been the most reluctant to put a number on a matter and now, it clearly felt, was not the time to start. So while Hilton, Wyndham and Expedia have been quick to chuck the numbers around, all we’re getting from Barr is a fee number for February.

IHG is the most exposed of all the global operators to China - in the first half of last year it saw 8% of operating profits came from the region (it's closer to 2% at Hilton) and as of Q3 last year 30% of its pipeline. But while 8% is something this hack would happily find down the back of the sofa, its loss would not brutalise the business.

China remains a long-term play and key to offsetting the squeeze in the US. The CEO worked there for four years, it has relationships on the ground which means it don't have to bother with master franchises agreements. It has a brand, Hualuxe, tailored to the Chinese market. When outbound travel does start again, the Chinese will use familiar brands and that will be IHG.

Away from China, the group remains unwilling  - and largely tied by those holding the purse strings - from indulging in lavish M&A and will be looking instead at its brand stable to maintain owner interest. Weakness in China won’t make it any more of a bid target than it already is. Which is to say that its future remains far from certain.