IHG doubles down on China

The InterContinental Shanghai Pudong Hotel. Photo credit: IHG

After a little over a year as leader of IHG, CEO Keith Barr has been eager to show that his plan to accelerate the company’s growth is paying off. During an earnings call for Q2, Barr declared the company came out swinging in the first half of this year, recording its highest earnings in a decade, and notching its strongest performance in China.

IHG was nothing if not busy last quarter. The company launched a new upscale conversion brand, Voco, in June, and so far four hotels have been added to the brand in the UK, with an additional three planned for the near future. The company already has signed 20 deals to develop Voco-branded hotels, and Barr said IHG is aiming to open 200 Vocos over a 10-year period.

IHG’s Avid brand also recorded 130 deal signings to date, including 82 in first-half 2018. Barr characterized this progress as “far ahead” of IHG’s initial expectations, earmarking Avid as IHG’s next brand to scale for the future. The company also is undergoing a refresh of Holiday Inn Express and Kimpton, introducing updated Holiday Inn Express guestroom designs in the U.S., Canada, Europe and Greater China.

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Photo credit: IHG

On the topic of China, IHG has a number of reasons to be happy about its performance in the country. The company’s revenue per available room increased more than 9 percent in China, and combined with net rooms growth of 12 percent IHG was able to realize underlying fee revenue growth of nearly 13 percent for the first half of the year. The company opened 7,000 rooms and signed a further 17,000 rooms into its Chinese pipeline during this period, and Paul Edgecliffe-Johnson, IHG's CFO, said the company sees “great long-term potential” in the region.

According to Edgecliffe-Johnson, Greater China is host to more than 100 cities with populations of more than 1 million. Since IHG has roughly 90 percent of its pipeline and 75 percent of its open hotels in Tier-2 to Tier-4 locations in the region, the company is positioning itself to reap the rewards as China’s middle class continues to come into its own.

“Demand is now significantly outpacing supply [in Greater China], allowing all brands to drive strong RevPAR growth,” Edgecliffe-Johnson said during the earnings call. “[We] now have over 400 properties in our system and pipeline across the region. We are focused on building relationships directly with owners rather than pursuing a master franchise agreement, meaning that we keep 100 percent of the fees generated from these properties.”

Photo credit: IHG

Looking at the company’s overall results for Q2, IHG posted RevPAR gains of 3.7 percent, net rooms growth of 4.1 percent—the highest level of rooms growth for the company in eight years—and growth in total underlying fee revenue of 5.3 percent. This success led to an increase in underlying operating profit of 8 percent, and an increase in reported revenue of 7 percent to $900 million. As a result, IHG is implementing a number of initiatives that Barr said will be used to swell its room growth in the coming months. These changes included the combination of the company’s Europe, Asia, Middle East and Africa regions, leading to a 46-percent increase in signings year-over year.

“These initiatives represent a meaningful change in the way that we lead and run our business,” Barr said during the call. "We’ve already made good progress against each strategic initiative. Our new organizational structure is being embedded and we are starting to drive some meaningful results."

IHG’s U.S. hotel performance also is still riding high, recording a 2.9-percent increase in RevPAR for Q2. Year-over-year rooms growth also was up 2.3 percent, while fee revenue rose 4.3 percent. IHG has 115,000 rooms in its U.S. development pipeline, and signed 20,000 last quarter.

Photo credit: IHG

A possible trade war remains on everyone’s mind as the industry moves through the second half of the year, and with so many hotels under development—and new brands—IHG may have some reservations about rising construction costs in the months to come. Barr, however, remains optimistic.

“[Edgecliffe-Johnson] and I were intimately involved in the development of [Avid], and one of the critical things we focus on was the cost per key to develop Avid, and also making sure that it was procurement ready,” Barr said. “That was inherent in our thinking of developing the Avid brand. And you saw the fact that one of our owners is able to break ground very, very quickly. So, we don't see any risk today from an Avid perspective in terms of these signings transitioning to openings, candidly, because the return on these investments, even with increased costs, is still so significant.”