With supply chains constrained and inflation driving up the cost of new builds, the big hotel companies are turning to conversions to help fuel unit growth.
IHG has been more aggressive than most in recent years thanks to the introduction of new conversion-specific brands like Voco and Vignette Collection.
Conversions now account for around 25% of all IHG signings, up from around 17%.
“Against the backdrop of a fragmented global hotel supply, we've talked before about the increased importance of conversions. As hotel owners look to benefit from our scale, revenue-generating systems, marketing and loyalty programs to drive performance, efficiencies and returns,” CEO Keih Barr said on a call with analysts after the publication of the firm’s first-half results.
“With Voco and Vignette Collection, we have added two brands that play primarily in the conversion space. Expanding our brand portfolio has also enabled us to sign more portfolio deals with owners with assets across multiple segments.”
Because it now has conversion brands across multiple segments, IHG is increasingly looking at portfolio deals with owners where it brings in multiple properties onto its platform.
During the first half of the year, it added three portfolio deals in the EMEAA region that added 10 hotels across six brands. In this region, nearly 50% of openings and signings are from conversion brands.
“We always had a good conversion offer with Holiday Inn and Holiday Inn Express because they were the best in those categories. So if you had a good hotel and you were bringing it in from independent or one of the weaker brands you wanted those brands. But now having more conversion brands, so more opportunities, it does allow more owners to bring in their product. And I think we will see that continue into the future,” Paul Edgecliffe-Johnson, chief financial officer and group head of strategy, said on the same earnings call.
Inflation impact
Unsurprisingly, IHG execs got a lot of questions from analysts about inflation and its impact on the business, but like so many of its rivals the company is downplaying the situation.
Barr believes that the hotel industry “actually performs quite well in inflationary environment” and he pointed to high consumer demand and investment in an updated loyalty programme.
Average daily rate for the period was up 4% versus 2019 but occupancy was still around 10 percentage points down. This effectively means that although IHG might be welcoming fewer guests, it is able to charge more.
“So we fundamentally believe we have pricing power in this industry that can continue moving forward because truthfully, ADR growth hasn't kept pace with inflation. And so we know that we have that ability to do it,” Barr said.
Earlier this year CBRE published a paper which looked at the impact of inflation on hotels. The findings weren’t necessarily all good news for the industry.
The study said:
- During periods of low or medium inflation, most hotels see neither benefit nor harm from inflation. The returns follow the real economy.
- There is weak evidence that suggests that economy hotels may be less able to price to inflation, but much stronger evidence that luxury hotels are able to benefit from higher rates of inflation. Therefore, luxury hotels emerge as the most likely candidate as a hedge for inflation.
First-half highlights
- Total revenue increased by 52% to $1.8 billion.
- Operating profit doubled to $388 million.
- Opened 14.9k rooms (96 hotels) in H1; global estate now at 883k rooms (6,028 hotels).
- Signed 30.7k rooms (210 hotels) in H1; global pipeline now at 278k rooms (1,858 hotels).
- Luxury and lifestyle portfolio now 445 hotels, 12% of system size; a further 287 hotels represent 19% of group pipeline.
- $500 million of surplus capital to be returned via new share buyback programme.