Hotel Companies Look East for Growth

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In its preliminary 2011 results, Intercontinental Hotels (NYSE: IHG) reported strong growth in China and emerging markets helped to offset weakness in its European operations. The world's largest hotel company is best known for its Holiday Inn and Crowne Plaza brands. 

Hotel companies' performance is measured by revenue per room or revpar and by that measure, IHG's results for Europe were poor with revpar in the fourth quarter of 2011 actually declining by 0.3% from the year prior. No surprise then that the company said the eurozone remained a source of “considerable uncertainty”. 

It should also come as no shock then that Intercontinental Hotels is moving away from Europe and setting its sights on emerging markets including the Middle East, southeast Asia and in particular China. Its CEO Richard Solomons gave a hint as to the company's strategy: “We are increasingly positioning ourselves in emerging markets because that's where the gross domestic product growth and demand is.” 

Intercontinental Hotels especially has its sights on China where it has done business since 1984 and is the largest branded hotel company in the country. IHG is doubling the number of rooms it has in China to around 100,000 over the next five years in order to capitalize on growing domestic demand. The company said the investment in China represents more than a quarter of its planned hotel building pipeline. 

Mr. Solomons has a valid point about demand in China. Most estimates are for China's rapidly expanding middle class to be twice the size of the middle class in the United States within 15 years. In addition, forecasts are that by 2025 China will have as many hotel rooms as the United States. The large majority (75%) of guests at IHG's hotels are already domestic Chinese travelers and not tourists from overseas. 

Not so long ago, even IHG's competitor JW Marriott Jr of Marriott International (NYSE: MAR) spoke about China's potential, saying that “China is arguably the world's most compelling tourism market.” Mariott last fall announced a deal to open a hotel per month in China, taking it from 56 hotels to over a hundred in the next three years.

That is a problem for Intercontinental Hotels...its competitors are also building up their presence in China rather quickly. Research firm Lodging Econometrics said in November that there were 1,385 new hotels in various stages of development in China. 

One of its rivals Starwood Hotels & Resorts Worldwide (NYSE: HOT) is so serious about China that in June 2011 the CEO Frits Van Paasschen temporarily moved the corporate headquarters to Shanghai. The company just opened two new hotels on February 9. Another rival Wyndham Worldwide (NYSE: WYN) already has 401 hotels in China, a gain of 131 in little over a year. 

Of course, all of these companies face a risk and not just from cheaper Chinese rivals. Intercontinental Hotels, for example, has a lot of their developments being built by local property developers. So they are potentially exposed to a bursting of the property bubble in China. 

There is a land rush mentality right now in the hotel business in China. In the long-term, the hotel companies are right – China is where the growth is. But over the next few years, a shakeout may occur among the players rushing to build hotels in China right now leaving only a few winners. It is still unknown which of the foreign hotel companies will succeed, but IHG, with its long history in the country and understanding of the Chinese consumer, should be one of them.

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