Special Report May 21, 2007, 12:01AM EST

How Andy Cosslett Restyled IHG

The CEO of InterContinental Hotels Group talks about his business model, the power of branding, and the bright future for the industry

by Kerry Capell

When Andrew Cosslett took the helm of InterContinental Hotels Group (IHG), the world's largest hotel group, he knew little about the industry. But what the former senior executive with British packaged goods giants Cadbury Schweppes (CSG) and Unilever (UL) did know was the power of branding.

In his two years as CEO, Cosslett has turned IHG into a fast-growing portfolio of seven well-defined brands. The Windsor (England) company's brands include the upscale InterContinental and Crown Plaza; mass-market favorites Holiday Inn and Holiday Inn Express; extended stay chains Candlewood Suites and Staybridge Suites; and the recently launched affordable boutique Hotel Indigo.

The biggest change, however, has come in IHG's business model. Instead of owning the bricks and mortar, the group is now mainly a manager and franchisor of hotels similar to its three big U.S. rivals: Hilton Hotels (HLT), Starwood (HOT), and Marriott International (MAR). In 2003 the company owned 202 of the 3,700 hotels in its portfolio. Cosslett has since sold 175 of them, returning a total of $7 billion to shareholders in the process.

The result has been lower revenues but much more stable and faster growing earnings, something investors love. The shares are up 14% for the 52 weeks ending May 16. On May 9, the company reported a 5% rise in operating profits from continuing operations, to $88 million, for the three months ending Mar. 31.

Revenues from continuing operations rose 10%, to $388 million, but would have risen 20% if the effects of currency fluctuations, largely the weaker dollar, were stripped out. BusinessWeek London correspondent Kerry Capell spoke with Cosslett at the company's headquarters about the future of IHG and the industry.

What are the growth prospects for the hotel industry?

It is a golden time for us. We have many tailwinds pushing us along as an industry. The first is the Internet: Hotels follow travel trends, and more people are booking online. Currently, 18% of our rooms are booked online. Most of those bookings are through our own Web sites, with less than 1% coming through travel agents' sites.

Another factor is the success of low-cost airlines worldwide that is making travel easier and more affordable for more people. Plus, people are wealthier, living longer than ever before, and traveling more. And finally, for the first time we have massive nations that are able to travel, such as Russia, the whole of Eastern Europe, and China.

For the industry, Asia represents the biggest single growth opportunity because the demand factors are so compelling. We can't see an end to growth in Asia for all brands, but particularly the top-end brands.

You've been expanding rapidly in China.

We are the largest international hotel group in China and have been in the country with Holiday since 1984. Because we have been in China longer than any other foreign hotel group, many Chinese think we are a domestic company.

Some 85% of the patronage of our Holiday Inns in China are Chinese domestic travelers. We are committed to double the number of hotels in China from 68 today to 125 by the end of 2008.

We are expecting that over the next decade, 100 million outbound trips a year will be made from China. These Chinese travelers will come to all these big cities around the world and look for brands they think are Chinese, such as Holiday Inn.

But we also expect China will become the world's No.1 inbound tourist destination over the next 10 years. So the luxury end of the market also offers amazing growth opportunities. We have six InterContinental hotels open there now and 11 more signed up.

The other big one is what happens to the domestic traveler within China. We see a parallel with the U.S. in the 1950s and 1960s when the government built major highways linking the country. China is doing the same. But even based on current demand, across all categories, China is today short of 1 million branded hotel beds, we believe. Fewer than 10% of hotels in China are branded, so there is huge potential.

With so many hotel groups operating a similar management and franchise model, is it getting tougher to find new hotels?

No. If you look at our current signing pace, it is four times what it was five years ago. Other major companies have also increased their pace of signings. So what is happening is the big companies are getting bigger because they have the scale, marketing prowess, and systems capability. The people who will be squeezed won't be the big guys or the niche players but the ones in the middle. There are a lot of them.

If you look at the top four operators—Marriott, Hilton, us, and Accor—we probably have 10% of world's hotel beds between us. What that tells me is there are tremendous opportunities for these companies to take a bigger chunk of the market.

The other big dynamic that separates this market is that 60% of hotel beds today are not branded. That is changing rapidly. In the past 10 years the hotel market has grown at 3% per annum and the branded hotel market 11%. So clearly the dynamics are all moving in favor of branded chains.

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