Why InterContinental Hotels Group wants to expand in China

Market Realist

Marcato Capital goes activist on InterContinental Hotels Group (Part 4 of 6)

(Continued from Part 3)

InterContinental and China

InterContinental Hotels Group (IHG), the UK-based hotels group, has seen an activist push from Mick McGuire’s Marcato Capital Management. The San Francisco-based hedge fund is pressuring the hotel company to explore strategic alternatives, including a sale to a U.S. based hotels group.

IHG said in its 2013 report that growth in demand for hotels is driven by economic growth and an increasing trend for domestic and global travel resulting in part from favorable demographics and globalization of travel. In November, 2013, IHG revealed its ten priority markets, which include a number of key emerging markets and more developed markets—U.S., Middle East, Germany, UK, Canada, China, India, Russia and the Commonwealth of Independent States, Mexico, and Indonesia.

The company cited Smith Travel Research data and said that “In the U.S., around 70% of the industry supply is branded. In fast developing markets, such as China and India, branded penetration is lower, at around 20–30%. However, this is expected to increase significantly over the coming decades as branded hotels gain traction due to the advantages of reliability, guest safety and security and consistency of standards that large global brands bring.” It further added that “in terms of economic trends, global GDP growth in the last ten years of circa 4% per annum has contributed to increasing disposable income and a greater number of middle-class households, particularly in emerging markets such as Greater China, with a greater propensity to travel.”

Chief Executive of IHG Richard Solomons said last year that “China is IHG’s second largest market after the United States and is likely to surpass the U.S. to become our largest by number of rooms by 2025. Having been in China for 30 years, IHG has a deep understanding of the market and of consumers’ needs, and we are confident in its future development prospects. We are committed to continuing to grow in China.” IHG said its strategy involves penetration in key cities such as Beijing and Guangzhou and targeting Tier 2, 3, and 4 cities.

HUALUXE brand to drive expansion in China

The company aims to grow in China and has ambitious goals for developing its HUALUXE branded hotels and resorts, both in China and internationally. The HUALUXE brand was launched in 2012 and was designed specifically for the needs and preferences of Chinese guests. With the first hotel under the brand set to open in late 2014 in China, IHG expects to expand the brand to 100 cities in China in the next 15–20 years. As outbound Chinese travel continues to grow and gain momentum, IHG said it also plans to introduce  HUALUXE Hotels and Resorts in key international destinations to meet specific needs of its Chinese customers when traveling abroad. In December last year, IHG said it has added nearly 7,000 rooms to the HUALUXE pipeline across China, including major destinations such as Beijing and Shanghai, as well as key emerging markets of Chengdu, Kunming, and Wuhan.

IHG quoted industry data and said that in 2012, China’s domestic trips reached 2.9 billion, a 10% year-over-year (or YoY) growth. China has already become the world’s third largest destination for inbound travel, the world’s largest for outbound travel, and the world’s largest for domestic travel, with 80 million outbound travelers and 133 million inbounded travelers in 2012. By 2020, the number of outbound travelers is expected to reach 150 million. A number of InterContinental Hotels Group’s peers such as Wyndham (WYN), Starwood (HOT), Marriott (MAR), Hyatt Hotels (or H), and Hilton Worldwide (HLT), which saw an initial public offering (or IPO) last year, have revealed plans to expand in Latin America and China.

Continue to Part 5

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