Market and competitive environment
This Business Review for the financial year ended 31 December 2009 provides a review of the business and strategy of InterContinental Hotels Group PLC (the Group or IHG), commentaries on the development and performance of the business, employee and environmental matters and a description of the risks and uncertainties impacting the business.
Global economic events and industry cycle
The economic conditions of the last year have had a significant impact on IHG and the wider hotel industry. We continue to monitor key trends and business fundamentals, such as revenue per available room (RevPAR) to ensure our strategy remains well suited to the developing environment and our capabilities, and we believe our business is resilient. Accordingly, our strategy remains unchanged. However, we see short-term risks in the pace of future openings and the recovery in consumer demand, particularly business travel.
The downturn continued to be severe in 2009, with a sharp decline in global industry RevPAR and bookings. Our industry has always been cyclical and there are signs that business and consumer confidence is returning and RevPAR is beginning a slow recovery. Historically as an industry, in previous cycles, we have experienced periods of five to eight years of RevPAR growth followed by up to two years of declines in RevPAR. Demand has rarely fallen for sustained periods and it is the interplay between hotel supply and demand in the industry that drives longer-term fluctuations in RevPAR. The difference in the recovery this time is likely to be slower increases in supply due to the ongoing finance environment remaining at more ‘normal’ levels compared with 2005 to 2008, and muted demand recovery as discretionary income growth and corporate profit growth are held back by, amongst other issues, tax increases and reduced access to credit. The Group’s fee-based profit is partly protected from changes in hotel supply or demand due to its model of third-party ownership of hotels under IHG franchise and management contracts. IHG profit varies more with hotel revenue (demand) than it does with hotel profit performance. Accordingly, IHG’s share price saw some significant recovery and stabilisation since the lows of last spring. Our share price increased by 59% in the 12 months to 31 December 2009 and those of our listed company competitors increased by an average 56% over the same period. We believe we are well placed over the coming year compared with competitors who own hotels, rather than simply operate them, as IHG does.
The global hotel market has an estimated room capacity of 18 million rooms. This has grown at approximately 2% per annum over the last five years. Competitors in the market include other hotel companies, both large and small, and independently owned hotels.
The market remains fragmented, with an estimated eight million branded hotel rooms (approximately 45% of the total market). IHG has an estimated 8% share of the branded market (approximately 3% of the total market). The top six major companies, including IHG, together control approximately 41% of the branded rooms, only 18% of total hotel rooms.
Geographically, the market is more concentrated with the top 20 countries accounting for more than 80% of global hotel rooms. Within this, the United States (US) is dominant (approximately 25% of global hotel rooms) with China, Spain and Italy being the next largest markets. The Group’s brands have more leadership positions (top three by room numbers) in the six largest geographic markets than any other major hotel company.
Drivers of growth
US market data historically indicates a steady increase in hotel industry revenues, broadly in line with Gross Domestic Product (GDP), with growth of approximately 1.5% per annum in real terms since 1967.
Globally, we believe demand is driven by a number of underlying trends:
- change in demographics – as the population ages and becomes wealthier, increased leisure time and income encourages more travel and hotel visits: younger generations are increasingly seeking work/life balance, with positive implications for increased leisure travel;
- increase in travel volumes as airline capacity grows and affordability improves, accentuated in some regions by the strength of the market positions of low-cost airlines;
- globalisation of trade and tourism;
- increase in affluence and freedom to travel within emerging markets, such as China and Brazil; and
- increase in the preference for branded hotels amongst consumers.
Branded v unbranded
2009 branded hotel rooms as a percentage of the total market
|Europe, Middle East and Africa (EMEA)||34%|
Source: IHG analysis, Smith Travel Research (STR).
Within the global market, just under half of hotel rooms are branded; however, there has been an increasing trend towards branded rooms. Over the last three years, the branded market (as represented by the nine major global branded hotel companies) has grown at a 3.8% compound annual growth rate (CAGR), twice as quickly as the overall market, implying an increased preference towards branded hotels. Branded companies are therefore gaining market share at the expense of unbranded companies. IHG is well positioned to benefit from this trend. Hotel owners are increasingly recognising the benefits of franchising or managing with IHG which can offer a portfolio of brands to suit the different real estate opportunities an owner may have, together with effective revenue delivery through global reservations channels. Furthermore, hotel ownership is increasingly being separated from hotel operations, encouraging hotel owners to use third parties such as IHG to manage their hotels.
Potential negative trends impacting hotel industry growth include the possibility of increased terrorism and increased security measures, environmental considerations and economic factors such as the longevity of the downturn.