Skift Take

IHG has led the way on shedding real estate to focus on hotel management, and it's paying off in booming markets like China.

Call Richard Solomons and the InterContinental Hotels Group predictable and you won’t hear much argument. But reliable, the hotels chief executive points out, does not mean dull.

Solomons has been on the board of IHG for almost 14 years, spending the past two and a half years in the head role. He has become the Steady Eddy of the FTSE 100.

IHG was formerly part of Six Continents, the hospitality giant that emerged from the Bass brewing empire, and was floated as an independent company in April 2003. Since then, its story has changed very little, if at all.

The group behind the InterContinental, Holiday Inn and Crowne Plaza brands has been consistently selling off hotels as part of a long-standing “asset light strategy”.

Put simply, it prefers to leave property ownership to the real estate giants and to get on with the business of running hotels, striking long-term contracts with the owners.

The proceeds are then invested in its brands – of which there are now nine – and regularly returned to shareholders through bumper dividends and buybacks.

Barely a year goes by without IHG unveiling another significant return to shareholders. Last August it rewarded its investors with a $350m (£212m) special dividend and it’s hardly surprising that analysts are already talking about another return in the order of $300m in their 2014 forecasts.

IHG has so far returned $9.4bn to shareholders since it was de-merged from Mitchells & Butlers, the pubs and restaurants business spun out of Six Continents.

Predictable? Solomons, who joined Bass back in 1992 and has remained with the company through its various incarnations, holds his hands up.

“That’s a good thing isn’t it?” he says sitting in the club lounge of the InterContinental Park Lane, which was sold to a Qatari investment group for £301.5m last March.

He stresses it’s a tough job steering such a steady course. “You’ll hear that more from the analysts than from the investors,” he says of his reputation as Mr Reliable. “It’s hard work. The balance sheet returns to shareholders is all part of it, but ultimately we are a hotel business and what we spend our time on is looking after customers and speaking to owners.

“I know that sounds a bit trite, but it’s what we do. We are not going to do something just to cause a surprise. From an investment perspective, I think we have got the highest quality income stream in the industry because of that.”

IHG may not have departed from its strategy, but that doesn’t mean it hasn’t ventured into new territory.

It’s not Solomons’ style to boast. Immaculate in a grey suit and green tie, he only reluctantly gives up any personal information, such as the reason for his winter tan – a festive holiday in Dubai with his family.

In the past two years IHG has unveiled two new brands, including the much anticipated Hualuxe chain aimed at the increasingly wealthy Chinese consumer – the first of which will open in the Far East this year but may eventually cross the seas to serve Chinese tourists on visits to key cities such as London.

Then there’s Even, the fitness and health hotel to which IHG has committed $150m and which is aimed at Americans who are often on the road but want to stay in shape while abroad.

Next week, IHG hopes to make a big impression on global business and political leaders at the World Economic Forum in Davos, where it has just opened its latest InterContinental.

Solomons will be going to the forum for the first time, to launch the hotelier’s latest global trends report.

Davos won’t be the only political hob-nobbing that Solomons, a former investment banker, has been doing of late.

He was one of the business leaders to accompany the Prime Minister last month during his trade visit to China, where IHG is rapidly building an empire.

Holiday Inn was the first international brand to venture into China back in 1983 and IHG is now the biggest global hotelier in the country with around 200 hotels – China is its biggest market behind the US – and a further 118 in the pipeline.

Three-quarters of those are already under construction and Solomons believes more business is likely to emerge from the trade visit.

In Britain, trade visits can often be dismissed as little more than public relations exercises, but Solomons insists the Prime Minister’s presence was vital in a country where business is all about who you know.

“I’m not sure the way it was reported back in the UK necessarily got across the benefits of it,” he says. “In a market like China, seeing British business supported by the Prime Minister and other senior ministers actually means a lot.

“Having the opportunity to introduce the Prime Minister and, again, other ministers, to some of our big owners was very important. We got a lot out of it and I was out in Asia anyway. It was a couple of days well spent.”

By 2025, IHG estimates there will be as many hotel rooms in China as there are in the US, but recently the picture hasn’t looked quite so rosy. Global consumer groups have been hit by a crackdown on government entertainment under the new Chinese premier, Li Keqiang.

What companies initially thought would be a 12-18 month blip during the change in the Communist leadership has turned out to be a long-term drive to clamp down on excessive spending by bureaucrats.

Perks such as restaurant meals, banquets and expensive gifts are all now subject to scrutiny.

For IHG it has meant that growth in revenue per available room (RevPAR) – a key metric in the hospitality industry – has been muted in China compared with other parts of the world.

In the first nine months of last year, the last available figures, RevPAR in Greater China grew 0.4pc, compared with 6pc in the rest of Asia, the Middle East and Africa, and 4.4pc in the US. Even Europe performed marginally better, with RevPAR up 0.6pc during the period.

Solomons isn’t easily ruffled and he’s not about to lose his cool. “RevPAR is a lousy stat,” he says with a laugh. He argues that because IHG is still opening hotels in China, it is increasing overall revenue in the country.

“We are out-performing the market hugely,” he stresses.

“We were up 0.7pc [on a RevPAR basis in the third quarter] and the market was down 5-6pc so we significantly out-performed.

“You have to make long-term calls. It’s not our capital going into building these assets but our owners are in there and they are making long-term decisions.

“You don’t generally own a hotel for a year, it might take several years to develop it and you could well keep it for a lifetime. And our contracts are generally 20 years and some are much longer.

“The [Chinese] government has tried to crack down on some excesses, which one can understand. The scale and power that we have there now, the size of the business, is why we outperform the market.”

One subject that does provoke a response involves fast-growing internet companies such as Airbnb, the website that allows people all over the world to rent out their flats or spare rooms to visitors.

Airbnb is only six years old but has received $326m of funding from backers, including the Hollywood actor Ashton Kutcher, according to the technology database CrunchBase.

Solomons believes there is a “slight naivety” about online companies, which may not be very old but are now big global businesses. While traditional companies such as IHG are subject to a raft of safety regulations, online firms, which essentially offer a similar service, compete on a different playing field, he says.

He insists it’s right and proper that those regulations exist for hoteliers such as IHG. But he adds: “When it comes to regulation, I don’t want to see an unlevel playing field. I think it’s something government have to keep an eye on.

“We get a lot of questions about Airbnb, for example, which is an interesting concept.

“But what about fire and life safety, what about food safety, what about security issues, what about cleanliness – all those things that we are required to keep to a standard? What about paying tax?

“I think it’s important that consumers really understand that just because it’s online it shouldn’t be treated differently. If you are paying somebody for a service and that service is sold as a major operation, it’s becoming a big business then why would different standards apply? It doesn’t make any sense to me.”

Still, with 679,000 rooms and more than 4,600 hotels worldwide, Solomons can’t be too worried about new players infringing on his turf. “Right now globally we have about 5pc of the world’s [hotel] rooms but 13pc of the global pipeline, so we are significantly punching above our weight,” he says.

And with that Mr Reliable gets back to the business of running hotels.

IHG: In numbers

1777: The first Bass brewery is opened in Burton-on-Trent

1988: Bass brewing empire moves into the global hotel industry, buying Holiday Inns International

2003: Six Continents, re-named from Bass three years earlier, is broken up and InterContinental Hotels Group is listed in the UK and US

679,000: Number of hotel rooms worldwide by November 2013

$556m: Pre-tax profit in 2012 on revenue of $1.8bn

$9.4bn: Amount returned to shareholders since the 2003 de-merger

Richard Solomons CV

Born: 1961

Home: Radlett, Hertfordshire

Education: University College School, Hampstead, and Manchester University

1992 Joins Bass

2003: As finance director of Six Continents oversaw separation of IHG

2011: chief executive of IHG 

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Tags: intercontinental hotel group

Photo credit: Richard Solomons speaking at World Travel and Tourism Council on April 10, 2013. World Travel and Tourism Council / Flickr