IHG's hotel rates are higher than in 2019 even though occupancy hasn't recovered. We hear a lot about pent-up demand as a factor, but technology matters more in the long run. Plus, IHG's claim to market-share leadership in China bodes well.
For InterContinental Hotels Group (IHG), soaring hotel rates owing to a post-pandemic surge in pent-up demand for travel have been a boon after the pandemic bludgeoned the travel sector. But IHG Hotels & Resorts said its pricing power would last beyond the present moment thanks partly to its investments in digital technology. The company also anticipated future growth as China, the world’s second-largest economy, reopens.
“Pricing power is here to stay,” said CEO Keith Barr in an interview on Tuesday after the company released its earnings.
In the second half of the year, the Windsor, UK-based hotel operator — which has 18 brands, such as Holiday Inn and Six Senses — saw its rates recover to pre-crisis levels. In the fourth quarter, average daily rates worldwide were 13 percent above pre-pandemic levels. The amount IHG could charge per available room went up each quarter throughout the year.
In the fourth quarter, IHG saw pricing strength even though occupancy remained five percentage points behind 2019 levels worldwide. In the Americas, rates were 11.7 percent ahead of 2019 levels, and occupancy was just 1.5 percentage points below 2019.
“While there are economic uncertainties, we expect continued strong leisure demand in many markets, alongside the further return of business and group travel and the ongoing reopening of China,” said CEO Keith Barr.
The company said that its corporate rate negotiations for 2023 so far looked set to drive further increases in average daily rate as demand from groups, meetings, and events rebounds.
When the pandemic struck, IHG slashed costs. During the recovery, it has shifted proportionally some of its expenditure, investing more in its digital capabilities, with a strategic goal of “creating a digital advantage.”
“We’ve spent well over $300 million in the recent years investing in our technology platforms,” Barr said in an interview. “Part of that is the guest reservation system, the new mobile app, the all-new IHG.com, brand.com websites for five brands so far. We’ve also invested in moving into the cloud for data analytic capabilities. We’ve just built a new demand forecasting model for revenue management. We’ve improved the tech for our loyalty program. All of these pieces come together.”
Last year IHG revamped its app to let guests book rooms and check in faster and also choose and redeem many rewards through its loyalty program. Since its launch, the percentage of people who start the booking process and complete a purchase is up two percentage points versus 2019. Revenue driven by its mobile app in North America and Europe is 30 percent higher than the pre-crisis level.
Looking ahead, IHG sees significant potential in its test with a new pricing and booking process called attribute-based booking. The long-promised goal is to sell rooms by displaying their attributes, such as whether they have extra floor space or a great view. The process helps upsell guests.
IHG said it has continued to test the cross-selling of non-room extras and the up-selling of rooms by presenting upsells of room types and room views. It plans to expand this testing across more brands this year. Its revamped app now lets guests filter their searches by room attributes.
Barr said that 77 percent of the company’s revenue comes through its enterprise platform (its website, app, and call centers), with 23 percent coming through indirect channels such as online travel agencies. So technological improvements in its process can lead to profits flowing to the bottom line.
Encouraging more guests to use chat-based customer interaction instead of making phone calls or in-person requests is another goal for the hotel operator. It said it achieved 20 percent of customer contacts going through digital channels by the end of 2022, compared to just 4 percent at the start. Growth in artificial intelligence capabilities for end-to-end self-service rose from 12 percent to 17 percent as AI comes for travel planning.
In the fourth quarter, IHG’s group revenue per available room, a key industry metric, paced 4 percent ahead of 2019.
For 2022, revenue rose 33 percent year-over-year to $1.84 billion, while operating profit rose 55 percent to $828 million. Net debt fell slightly to $1.85 billion.
Holiday Inn brands delivered around a third of the company’s hotel signings and half of its openings last year.
IHG’s Market Share in China
IHG’s pipeline for hotel development is below its historical average but saw improvement at the end of 2022.
“We signed 467 hotels in 2022 and opened 269,” Barr said, noting that net system growth rose 4.3 percent in the year, excluding the company’s exit from Russia. “The further 1,800 hotels in our pipeline represent future growth of over 30 percent of today’s system size.”
“Fourth-quarter hotel signings in the Americas were materially higher, positive for its net unit growth outlook,” said analysts at Jeffries in a report on Tuesday.
In 2023, eyes will turn to China’s economic reopening to boost demand at IHG’s 639 open hotels in Greater China, as well as future growth in the world’s second-largest economy.
“We basically had the greatest market share in 2022,” Barr said, speaking of the foreign players in Greater China. “If you look at full-service hotels, we were number one as well.”
IHG has 454 hotels representing about 94,000 rooms under development in Greater China.
“Hilton has a third-party partnership to grow Hampton Inn and another third-party relationship for Home2Suites,” Barr said.
Unlike other CEOs of the largest Western hotel groups, Barr spent several years working in China, and he’s continued to steer his company to lean into the market opportunity there.
“It’s a powerhouse business,” Barr said.
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Photo credit: Hotel Indigo Exeter around December 2022 opened its doors to guests after a multi-million-pound major restoration project. Source: IHG. IHG Hotels & Resorts