Skift Take
In a Skift interview, IHG CEO Elie Maalouf said he’s seen no pullbacks in travel demand outside of China. He touted the company’s geographic diversification and how the hotel group is doubling down on tech upgrades this year.
InterContinental Hotels Group (IHG) reported earnings Tuesday, and said it isn’t seeing signs of demand weakness outside of China.
“We’re watching the data that’s coming out on the U.S. economy, but we’re not seeing anything in our numbers right now,” said CEO Elie Maalouf. “In Q2, we saw an acceleration. Looking into July, we saw a broad continuation of that pattern. Even early into August, it seems to be the same.”
Marriott and Wyndham recently suggested consumers may be pulling back on travel demand in the second half, and they modestly lowered their full-year outlooks.
But IHG, the third-largest Western hotel group by room count, said the post-pandemic tourism wave was merely moderating and normalizing to pre-pandemic levels. The group’s outlook remains cautiously optimistic, thanks partly to performance gains from its technology investments.
A key measure of hotel demand is revenue per available room, and IHG reported a 3% rise in this figure worldwide in the first half of the year. Revenue per available room rose 2.5% in the U.K., 4.8% in the rest of Europe, and 9.2% in the Middle East.
Modest Impact of China’s Weakness
IHG saw revenue per available room fall by 2.6% in China. But the group didn’t see a dramatic impact from that on its overall performance.
That news contrasted with Marriott, which cited weakness in China as a factor for lowering its outlook for the year.
In an interview with Skift, IHG’s Maalouf cited three factors affecting the group’s China performance:
- Tough comparisons to a year ago when travel restrictions were lifted.
- Strong outbound China travel, benefiting IHG’s hotels elsewhere.
- IHG is geographically well-diversified.
“There’s been strong outbound China travel mostly to Asia Pacific, including Japan, Thailand, Vietnam, South Korea, and Singapore,” Maalouf said. “Our Asia Pacific business was up 15%.”
Given that IHG is the largest international hotel operator in the country, one might expect it would be more exposed than its rivals to any decline in domestic travel demand in China. After all, it derives more fees as a proportion of revenues than its rivals in China because it relies on direct franchising.
However, Maalouf argued that when the Chinese travel elsewhere, they often stay in IHG hotels. That’s partly why weakness in China hasn’t hurt the overall bottom line more.
“We’re not saying that it’s a one-for-one, like-for-like transfer, but we’re saying that is definitely part of the explanation,” Maalouf said.
“I would think the proportional drop [in fees] for somebody who’s master franchised or is in a joint venture is going to be the same or worse, not better, than IHG,” Maalouf said. “They’re going to make even less proportionately, assuming everything else is equal.”
“We may be impacted more from an absolute sense [by a domestic China slowdown] because we have a bigger business there,” Maalouf told Skift. “I’m quite happy with that. Having the biggest international business in China that’s growing faster than anybody else with 500-plus hotels in the pipeline at nearly 800 a year, I’m not going to make apologies for that. The long-term fundamentals are strong.”
Tech Upgrade
- IHG hired Amadeus to build a guest reservation system to replace its proprietary Holidex system. Last year, more than 6,000 hotels gained the ability to upsell rooms based on room size and views. The software is intended to improve cross-selling guests on extras such as food and beverage credits, lounge access, additional in-room welcome amenities, and parking.
- “Over 25% of guests are seeing an up-sell offer at some point in their booking journey and these are driving an average nightly room revenue increase of about $20 across the company’s more affordable brands and about $40 for its luxury and lifestyle brands,” IHG executives said.
- Added higher-margin revenue thanks to the tech usage has helped expand the company’s profit margins. In the first quarter, operating profit grew 12%, partly thanks to upselling and cross-selling.
- IHG is developing a new revenue management system it will own with the help of an unnamed partner. The tool will help owners set room rates with better information about supply and demand signals. This year it rolled out to 1,700 hotels, and the goal is to reach 4,000 by year end.
- Maalouf told Skift that IHG’s revenue management system uses “machine learning and artificial intelligence to track and interpret all the variables to make the right channel decision and pricing decision recommendations for hotels and automatically run those decisions for them to maximize yields and meet their return objectives.”
- IHG began work on a next-generation property management system this year, switching from a premise-based to a cloud-based one. The company is piloting solutions in the U.S. and Europe and has picked a system in China. Maalouf declined to mention vendor names.
- Maalouf said the new property management system would have a better user interface for hotel staff, be more cost-effective, and be more flexible. “It’s going to be much easier to update because you don’t have to go update 6,440 hotels one at a time, essentially,” Maalouf said.
- Much of the tech spending comes from funds pooled with owners and doesn’t appear on IHG’s profit-and-loss sheets, he said.
IHG’s First Half
- IHG opened 126 hotels. Its net rooms increased by 3.2% year over year to 955,000. The group said its full-year net system size expansion will be between 3 and 4%.
- IHG signed a record 57,100 new rooms, 67% more than in the same period last year. It has a global pipeline of about 330,000 rooms.
- The group reported a net profit of $333 million and adjusted EBITDA of $567 million.
- IHG boosted the number of members in its loyalty program by 10% year over year but quoted the same “over 130 million” member total from last February’s update. Executives said they expect significant growth in credit card partnerships as a revenue stream over time.
Growth in Europe
In April, IHG said 108 open hotels run by Novum Hospitality and 11 hotels under development were expected to join its system in individual licensing agreements between 2024 and 2028. The company gave an update on that arrangement.
Conversion of the open hotels has already begun, with the first six hotels joining IHG’s system. About 8,000 rooms are expected to convert to IHG brands this year. In the coming years, 56 hotels will convert to Garner and 11 to Candlewood Suites, representing European debuts for these two brands.
“On an underlying, fundamental basis our brands are getting stronger,” Maalouf told Skift. “Our enterprise system, whether it’s global sales, loyalty, commercial delivery, revenue management, property management, operations — all of that working together is driving good returns for owners who then say, ‘Well, I’d like more of these brands.’”
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