Hilton Looks Beyond Omicron to Double Down on China Growth Plans

A zero-tolerance approach to new coronavirus cases tanked Chinese hotel performance off-and-on since last summer. That doesn’t mean much to Hilton’s development team.

Hilton accounted for the largest share of China’s hotel development pipeline at the end of last year, according to Lodging Econometrics. Investor analysts have wondered in recent weeks if the country’s tough approach to combatting the spread of the virus would make developers think twice about pursuing new deals there. Hilton leaders Wednesday were in overdrive touting the long-term benefit of continuing to beef up the company’s Chinese portfolio. 

“Most of the development trends have been following the trend of the virus — meaning, as the world’s been opening up in those regions, you see a pretty direct correlation to signing activity and approval activity in those regions, led by the U.S.,” Kevin Jacobs, Hilton’s chief financial officer, said on an investor call Wednesday. “China has been kind of the exception to that rule, meaning even with lockdowns and people not moving around, you would think not being able to travel across the country would slow the pace of activity. But that just hasn’t been the case.”

It might seem like a strange time to pursue an array of new hotel deals in China. Hilton’s revenue per available room, the industry’s key performance metric, was down 24 percent there compared to 2019 levels. It was down 11 percent in the U.S. and exceeded pre-pandemic levels by 7 percent in the Middle East. China continues to lag both the U.S. and Europe in hotel performance, according to recent data from STR.

But approvals for new hotels in China were up 45 percent last year, and openings were up 30 percent, Jacobs added. The company has development partnerships with Jin Jiang International subsidiary Plateno Group for a Hampton expansion across the country as well as one with Country Garden to develop more than 1,000 Home2 Suites. Hilton also does its own direct franchising in China for Hilton Garden Inn projects. 

The flurry of development activity matches broader industry development trends that take a longer view of China: It is significantly underdeveloped compared to the U.S. when it comes to branded hotels. The more than 700,000 hotel rooms under construction there at the end of 2021 was an all-time high for China.

“It’s coming back and will ultimately return to a more normalized environment, not just China but the whole world outside the U.S. has significant growth potential,” Hilton CEO Christopher Nassetta said. 

But as to when that might be continues to stump the travel sector. The country’s “Covid-zero” strategy meant even a global sporting event like the Winter Olympics in Beijing is largely shut off from the rest of the world beyond those directly associated with or participating in the games. Many analysts wonder how feasible the closed-off strategy can be — and how much longer it can go for — while so many other parts of the world begin to open up. 

“My own view — and that’s all it is. It’s not because of insider knowledge — is that as the rest of the world opens and as you get to an endemic stage of Covid, I think there’ll be a lot of pressure economically, culturally, and otherwise for China to open up, much like rest of the rest of world,” Nassetta said. 

Beefing Up Business Travel

Hilton leaders circled back on their small- and medium-sized business travel strategy mentioned on the third quarter investor call last year. The company typically garnered 80 percent of its business travel demand from these smaller companies while special corporate contracts, larger companies that negotiate a set rate, made up the remaining 20 percent. 

Nassetta previously indicated a goal to make it a 90-10 split. It’s no wonder why: Companies like Wyndham and Choice Hotels may not see the kind of financial upside seen by Hilton or Marriott in good times, but they also snapped back to pre-pandemic performance levels a lot quicker because they focused on more resilient streams of business travel. Nassetta tried to indicate Hilton was more in that line of business, too, with its outsized focus on small- and medium-sized businesses.

“It’s not that we don’t want them or don’t love them, it’s just that ultimately we were never that heavily dependent on them,” he said of larger corporate contracts. 

The reordering of demand generators appears to be working: Hilton reported a $148 million fourth quarter profit and $407 million profit for all of 2021, up from the $225 million fourth quarter loss in 2020 and $720M loss for that entire year.

But this is more than just chasing a more resilient line of business travel. It’s about being able to secure higher rates. Because larger companies negotiate a set rate for the year, they typically paid less than smaller companies, which are usually paying 15 percent on average more on room nights, Nassetta said. 

“Corporate business is going to come back. You don’t have to believe it’s all going to come back, but the idea is, one plus one can equal three,” Nassetta said. “[That means] pivoting even harder to have a larger demand base to put in the top of the funnel of [smaller companies], along with corporates coming back gradually, is just going to give us an opportunity to price demand in a way that I think will be superior to what we could price it before.”