The world's biggest hotelier won't let the downturn stop expansion

At 6&rsquo;3&rdquo;, the chief executive of InterContinental Hotels Group (IHG) Andrew Cosslett has broad shoulders &ndash; and with the battering the travel sector has taken over the last year it is just as well.<br /><br />Not surprisingly, the economic downturn has hurt the world&rsquo;s largest hotel group, which boasts 630,000 rooms across more than 4,300 hotels and a market value of &pound;2.3bn. Business demand has slumped, people are travelling less&nbsp; and when they do they demand sizeable discounts.<br /><br />Cosslett, a stocky confident man who tends to dominate most rooms he is in, says: &ldquo;Since the collapse of Lehman Brothers we have seen a deterioration in occupancy, and room rates have started to come down this year.&rdquo;<br /><br />He adds: &ldquo;People book later and look for value. Searches on our websites have shot up because of this. Customers know they can book late and still get a hotel. People have moved from pre-booking three to six months before a trip to booking a week before they go. This makes managing our room inventory more difficult.&rdquo;<br /><br />IHG has seen the biggest decline among its business customers, who account for 60 per cent of the group&rsquo;s sales.<br /><br />He says: &ldquo;We all know there are emails flying around asking workers to please travel less, and to trade down to smaller hotels. But this will come back. There is no substitute for doing business face to face.&rdquo; <br /><br />Cosslett continues: &ldquo;Big companies are making decisions that will take years to unwind&rdquo;. And he adds that the group will have some &ldquo;hard conversations&rdquo; this year with some of its corporate clients, which include IBM and GE, over room rates as firms look to cut travel costs. <br /><br />There was more evidence of the turbulent conditions the travel industry is operating in last month when IHG posted a 38 per cent slump its first-half operating profits to $179m (&pound;109m). But IHG surprised some analysts by maintaining its interim dividend at 12.2 cents. <br /><br />The firm said it was &ldquo;too early to say&rdquo; if the sector had reached the bottom of the market. Cosslett added: &ldquo;It could be two years before we get back to levels of travel we were at before.&rdquo;<br /><br />However, IHG&rsquo;s market price held steady when it reported its numbers because it was able to reassure its investors, including Sir David and Sir <br />Frederick Barclay, the media and retail investors, who own 10 per cent of the business, that the group remains a sector leader.<br /><br />The chain said that its revenue per available room (revpar) &ndash; the key industry measure &ndash; fell 16.2 per cent, but this is below industry average falls of between 18 to 20 per cent. IHG added it would up cost savings this year to $80m from previous guidance of $70m.<br /><br />But more importantly IHG, which mostly runs its hotels through a system of franchises and management contracts, said it was continuing to rapidly add hotels to the group. The firm said it added 229 hotels with a net gain of 27,000 rooms in the first six months of the year, and said it is on track to open 400 hotels this year, which will match 2008. <br /><br />That, needless to say, must remain its number one long-term priority if it wishes to continue growing when the recession comes to an end. Cosslett says the business will &ldquo;almost certainly&rdquo; open fewer hotels in 2010, which makes sense as long as it only remains a temporary pause.<br /><br />Cosslett, who is relaxing in a meeting room on the first floor at the London Stock Exchange when City A.M. meets him, insists the firm&rsquo;s relatively strong revpar and its hotel building programme are the key indicators to watch for.<br /><br />He says: &ldquo;That outperformance is important. It tells the investor that we are on the right course, and ready to take advantage of recovery when it comes.&rdquo;<br /><br />He points out that IHG has a pipeline with developers of 1,599 hotels, which will add a further 226,000 rooms.<br /><br />The Manchester-born boss, who began his career as a marketing man at Unilever followed by Cadbury Schweppes, says: &ldquo;The acid test of a brand builder is are developers prepared to come to you and sign up to build hotels under our banner.&rdquo;<br /><br />He adds: &ldquo;Our pipeline has grown over the last three to four years, so this shows that developers like what we are doing. We are still signing a hotel deal almost every day, although last year we were running at almost two deals a day.&rdquo;<br /><br />Cosslett is keen to point out that the long-term trends for the business &ndash; which runs seven hotel chains including the upmarket InterContinental and Crowne Plaza and the mid market Holiday Inn &ndash; are good. He says: &ldquo;We look out to 2012 and further, not just the next 6-12 months. People are travelling more. They are in retirement longer; they are living longer. The long-term trends in this market are very positive. We are planning and shaping the business with these trends in mind.&rdquo;<br /><br />A key part of those plans is the $1bn revamp of over 3,000 Holiday Inn outlets, accounting for two-thirds of sales, which the group expects to complete by the end of next year. This will be an opportunity for the firm to strengthen its grip on the quality of the product, and make sure that the hotels are sufficiently homogenous around the world. <br /><br />Cosslett says: &ldquo;About 25 per cent, or around 900 hotels, will lose our banner because these hotels will not be able to, or will not want to, pass our quality threshold. But 1,100 new Holiday Inns will come on stream to boost the brand over next three to four years.&rdquo;<br /><br />IHG will only provide $60m of the refurbishment cash. The rest comes from the owners of the hotels that run their operations under IHG&rsquo;s banner. This is because since IHG&rsquo;s split from Six Continents, formerly Bass Breweries, in 2003, the group has gradually transformed itself from a traditional hotel owner to a hotel management and franchise business.<br /><br />The actual owners of its hotels now range from the government of Singapore, rich Middle Eastern investors, to specialist property firms like the Hospitality Properties Trust. IHG has sold off the majority of its properties for around $3.6bn &ndash; it now owns less than 30 hotels, usually flagship ones &ndash; handing back over $3bn to investors.<br /><br />When Cosslett took over after 15 years at Cadbury Schweppes and 11 at Unilever, in 2004, he was seen as a striking choice because he was from a marketing background, and not someone who was schooled in the hotel business. But his dynamism and experience of handling big international brands has allowed the chains to grow rapidly while keeping a distinctive feel from one another.<br /><br />Cosslett may be a burly confident figure, but he has much to be confident about. He has consistently managed to outperform his rivals, grown the business and boosted shareholder returns. Investors will hope he can continue the same trick throughout this downturn.