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Intercontinental Hotels Group (IHG)Stock (Hospitality Industry, Hotel Industry, Resorts & Casinos Industry)
 IHG and the broader hotel and hospitality industry are facing some economic headwinds in 2008, as a combination of high oil prices and a downturn in their largest market, the United States, are causing people to travel less for the first time since 1980.[5] While IHG gets 69% of its operating profit from the United States, its large global presence provides a partial buffer. IHG's Holiday Inn is the most recognized brand in China, and IHG is the largest global company in that market.[6] [edit] OverviewIntercontinental Hotels Group can be traced back to 1777, but for most of its life was part of Bass, a conglomerate of beer, hotels, restaurants and soft drinks. The last of those non-core divisions, Britvic, a British soft drinks company was only divested via an Initial Public Offering (IPO) in December 2005. As a result of these divestments, its net income has fluctuated in the last few years, most significantly in 2006.The largest part of IHG's business today is the 3,419 hotels it franchises. It also manages 546 hotels and owns 18 hotels.[7] While all three parts come under the umbrella of the IHG brands, they require different levels of capital and produce commensurately different levels of revenue:
IHG also has the world's largest hotel loyalty program, Priority Club Rewards, with over 37 million members. It is notable for its "Any Hotel, Anywhere" program, which permits members to redeem their points for stays in non-IHG hotels as well.[11] [edit] BrandsIntercontinental Hotels Group has seven brands covering all major price segments.They are Intercontinental Hotels and Resorts is the flagship of the Group, and is designed to cater to international business travelers in the upper upscale segment of the hotel industry. There are 153 hotels in major cities in in 60 countries under this brand.[12] Crowne Plaza is an upscale brand that has 308 hotels in major urban centers, gateway cities and resort destinations around the world that caters to predominantly business travelers but has facilities that target leisure travelers as well.[13] Holiday Inn is the powerhouse of the group, with 1,369 hotels globally and one of the world's most recognized hotel brands. It is a midscale brand that targets a mix of domestic business and leisure travelers.[14] Holiday Inn Express, known as Express by Holiday Inn in the rest of the world, is a predominantly US brand, with 1,619 hotels in the US, Canada and Mexico, and 1,819 globally. It is similar to the Holiday Inn brand in amenities and pricing, but offers slightly fewer amenities and services.[15] Hotel Indigo is an upscale boutique hotel brand with 14 hotels found only in the United States. It offers the personality and high design common to boutique hotels within a multi-hotel brand, an unusual combination in the boutique segment. It was created in 2004, and is being expanded into Europe in 2008.[16] Staybridge Suites is an upscale brand of all-suite extended-stay hotels. There are 130 Staybridge Suites in the Americas as of the end of the first quarter, and 10 in the pipeline in Europe, the Middle East and Africa.[17] Candlewood Suites is a midscale chain of extended-stay hotels that consist of suites and studios. It has 142 locations across North America.[18] [edit] Business FinancialsIntercontinental Hotels Group has divested many assets since 2003, and continues to divest them, with three hotels on the market in 2008. The conglomerate of which it was a part started breaking up in 2003, IHG spun off its soft drinks business in an IPO in December 2005, and since the 2003 separation, IHG has sold 181 hotels for $6.02 billion.[19] As a result of these divestments, revenue shows a clear downward trend, as does net income. The divestments have made IHG less capital-intensive and increased its net income margins, resulting in a much less pronounced downward trend in net income. As a result of the large cash inflows associated with the divestments, IHG has returned over $7 billion to shareholders through special dividends and share buybacks since March 2004.[20] The net income margin has fluctuated over the last few years, notably in 2006, as a result of gains associated with the sale of assets. IHG has a presence in over 100 countries that are grouped into the Americas, EMEA, or Europe, Middle East, and Africa, and Asia. It also generates around 6% of revenue from its proprietary reservations system.[22] [edit] Key MetricsOne of the key metrics for a hotel is the Average Daily Rate (ADR), also known as the Average Room Rate. It is the hotel's room revenue divided by the number of room nights sold. As prices differ quite substantially across geographic regions, IHG breaks out its ADR across the Americas, EMEA, and the Asia Pacific Region.
[edit] Trends and Forces[edit] Large exposure to the United States market would hurt hotels in the event of a downturn.While the hotel and hospitality market is quite fragmented, it is still geographically quite concentrated. The top 20 countries have over 80% of the world's 18 million rooms. The United States alone accounts for 25% of those rooms.[31] Over half of IHG's revenues come from the Americas, largely the United States, and 70% of its rooms are in the United States. Moreover, 69% of IHG's operating profit comes from the Americas.[32] As a result, IHG is vulnerable to a United States recession. However, it has long-term management and franchise contracts for most of its hotels that make it less vulnerable than its competition. [edit] The branded hotel industry is growing strongly, especially in emerging markets like China.The United States, in addition to having 25% of the world's hotel rooms, is also one of the few markets where many of the hotels are branded and are part of larger chains. In the United States, 67% of all hotel rooms are branded, compared to 28% in the Asia Pacific region and 35% in Europe, the Middle East, and Africa.[33] In these parts of the world, especially China, the hotel market is shifting strongly towards branded hotels. Moreover, the tourism industry in China is growing rapidly, and China is expected to become the world's number one inbound travel destination within the next ten to fifteen years.[34] Intercontinental has a large pipeline of hotels under development in these regions and is already the largest international hotel management company in China, giving it a substantial headstart at expanding into this market. Its position in China, with the most hotels of any chain and possession of the best-recognized brand in Holiday Inn[35], will help it greatly. China is still largely a domestic market, with 1.39 billion trips in 2006[36], in comparison to 124 million inbound in 2006.[37] [edit] Decreased availability of financing is slowing hotel construction and expansion.Hotels are extremely capital-intensive to own and lease, and many hotel developers rely on financing to build hotels. As a result of the credit crunch, financing for such large-scale projects has become hard to find. As a result, despite the growth of the travel market, hotels could have difficulty expanding into new markets such as China. Intercontinental is somewhat buffered by having the largest pipeline in the industry at 1,720 hotels, and it only includes in its pipeline projects that already have commitments for financing. Nevertheless, these projects could still fall through or be substantially delayed, slowing IHG's growth in key markets. Moreover, its Staybridge and Candlewood Suites brands are new, and a slowdown in the development of new hotels would hurt their efforts to gain traction. [edit] High Oil Prices make travel more expensive, hurting hotels.High oil prices make road and air travel more expensive, forcing people to cut back on travel and vacations. This year is expected to result in the first decrease in road travel since 1980 as the high oil prices are exacerbated by the weakening economy.[38] While IHG's earnings were at the high end of analyst expectations for the first quarter, IHG's performance in the second quarter is key, given that it includes summer vacation season. However, IHG's higher-end brands cater largely to business travelers, who are less sensitive to rising airfares, and its continued expansion in the United States and in fast-growing markets like China also make it less reliant on US vacation travel. Moreover, according to IHG's president for the Americas, they were not seeing any weakness as of late May, with prices and demand remaining stable. He noted that while occupancy declined, the United States did add 2% in capacity in 2007.[39] However, some of IHG's hotels are nevertheless offering incentives such as gas cards, especially the Holiday Inns, whose roadside locations and midscale prices make them most vulnerable to fuel prices. Holiday Inns are mostly franchises, and the incentives do not appear to be a brand-wide policy, however. Even some Intercontinental Hotels, such as the Intercontinental Tampa, are offering gas rebates.[40] Furthermore, some of IHG's competitors seem to be worried, notably Bill Marriott, Jr., of Marriott International (MAR). On July 24, he called for Congress and the White House to stay in Washington, D.C. through the summer and develop a bipartisan solution to high fuel prices.[41] [edit] CompetitionThe hotel industry is highly fragmented and competitive, with even large chains like Intercontinental Hotels Group commanding single-digit market share at best. IHG's largest competitors are Marriott International (MAR), Starwood Hotels & Resorts Worldwide (HOT), Wyndham Worldwide (WYN), the recently privatized Four Seasons Hotels and Hilton Hotels (HLT), and the private French company Accor S.A. The branded and overall market are 7 million and 18 million rooms respectively. IHG controls 8% of branded rooms worldwide, and 3% of all hotel rooms.[42] IHG is distinct from its competitors in that the dominant part of its business is management and franchising. While many of its competitors are moving towards owning fewer hotels, IHG has a substantial lead over them. For instance, Marriott International (MAR) earns 25% of its revenue from managing and franchising hotels, in comparison to IHG's 63.5%.[43]
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