No Intercontinental drift as China slows

Instead of chasing the dragon, the hotel chain cut back its debt. Now it believes it can ride out the downturn in the east, writes Simon Evans from Shenzhen

Fifteen years ago, the road from the Hong Kong border to Shenzhen was little more than a dust track to a run- down fishing town. Today, a gleaming three-lane motorway takes you to a city boasting a population of more than 10 million people. Shenzhen is bustling with people and full of shops selling the latest iPhones, laptop computers and other gadgets yet to reach European shores.

In the heart of the city sits a gleaming new Holiday Inn Express. It's modern and clean and sports the new insignia of Holiday Inn's $1bn (£675m) rebranding programme. It is one of more than 100 hotels in the Peoples' Republic run by the London-listed Intercontinental Hotels – there are another 100 in the pipeline.

Last month, the world's largest hotel group signed another agreement to operate a hotel in China – this time the new Indigo boutique brand in Shanghai. The opening means that China is now the second-most important country for Intercontinental, surpassing the UK.

The scramble for tourist yuan is well under way. And Intercontinental believes it has stolen a march on its rivals.

"A generation in China is now making decisions about which brands they grow up with," says Peter Gowers, the man charged by Intercontinental's chief executive, Andy Cosslett, with running the company's burgeoning Asia Pacific operation. "People are very brand conscious here. We've been present in China for many years more than our rivals and in the long term we think the prospects for this region are phenomenal."

Clearly that is true – what other economy can post annual growth rates of 8 per cent? But in the short term dark clouds are gathering.

Take the headline for a lead story in the English-language paper China Daily recently: "Hotels facing meltdown blues". The article revealed that one Intercontinental outlet in Beijing – the company has 16 in the Chinese capital – had suffered a 10 to 15 per cent fall in bookings recently. Meanwhile, Chinese hotel owners are also seeking a delay of one to two years in the implementation of the Holiday Inn rebranding programme.

But it's not all negative. The advent of a new breed of super wealthy in the region can be illustrated by the booking of the presidential suite in Intercontinental's flagship Hong Kong hotel for six months – at the princely sum of £10,000 a night.

So how does Cosslett gauge the current environment for hotels? "Back in August I said that talk of the slowdown was being overdone," he argues. "There certainly was lots of exaggeration. At the time, I was being told things that were manifestly wrong. I really think we are in danger of 'enjoying' the gloom a little bit too much. Even now people are flying in similar numbers to the same time last year."

Cosslett, a rugby obsessive with features that show the wear and tear of his playing days, recently unveiled strong third-quarter numbers to the stock market – a point that was overshadowed by the precipitous fall-off in performance during October.

"It was an extraordinary month: sales fell of a cliff and there was a sharp deterioration in the trading climate," says Cosslett. "Was that a shock or the beginning of a longer-term trend? I just don't know at the moment. I think we'll have to wait until March to assess things properly."

But while we might have to wait another few months, that hasn't stopped Cosslett instigating a wide-ranging costs review of the business.

Immediate plans include the offshoring of some functions to places such as the Philippines, while advisory costs are also set to be trimmed back. "Using the consultants was all about getting the company more globally aligned," says Cosslett. "We now have a new global procurement system in place which should enable us to drive costs down."

He adds: "It might not seem that much to you, but these things weren't in place when I arrived" – which is perhaps a thinly veiled swipe at his predecessor at Intercontinental, Richard North, now chairman of the ailing Woolworths retail chain.

Job losses also seem likely, although Cosslett is keen to stress that decisions on the extent of the cuts haven't been made yet.

He promises that costs will come in lower next year but won't put detailed numbers on the programme. "We are in the process of renegotiating procurement so it's too early to say."

Of course, it's not just Intercontinental that is negotiating with suppliers at the moment. Once-big-spending corporates and banks are reining back too – and where they allow executives to rest their heads while on their travels is being scrutinised too.

"What we are seeing is that whereas a company might have chosen from 10 or so hotel groups in the past, they are now only looking to deal with, say, three," says Cosslett. "Given that we have a range of hotels, catering across the price brackets, we have found ourselves making such shortlists on an increasing number of occasions. We are also seeing that corporate bookings are coming in much later and we have to be much more flexible."

He adds: "I think that scale really counts more than ever in this environment. It must be very, very tough for the independent operators at the moment."

Life would also have been much more difficult for Intercontinental if the company had not restructured itself into a capital-lite management company a few years back.

Unlike rival Hilton, bought by the private equity giant Blackstone last year for a whopping $26bn, Intercontinental isn't saddled with debt of any significance, having sold off the rump of its hotels around the globe. It retains ownership of just 16 hotels – gateway or flagship outlets such as the Intercontinental in Hong Kong – with the rest being either franchised or managed operations. All the group's hotels in mainland China, for example, are managed.

"Our capital structure means we are in a very good position to face a downturn," says Cosslett.

It also helps that Intercontinental renegotiated its $1.2bn bank debt facility in April, ahead of the maelstrom that has wrecked financial markets.

"My financial director is a genius," says Cosslett with a smile. "We now enjoy the same facility at roughly the same rate. If we'd have waited then, the facility would have been a lot more expensive. Who knows if we'd have got it in this environment."

With the accent on costs, I ask Cosslett, as we speak in the coffee bar of the oddly Spanish-themed Intercontinental Shenzhen, how he intends to spark revenue into life this year?

His answer is tapping into the 40 million customers who count themselves as loyalty scheme members. It's the world's biggest scheme of its kind, he tells me.

"These people are more important to us than ever before. Knowing what they want is the key. The benefits they get could be in the form of an upgrade, discounts or simpler things such easier check in processes. It's about giving the customers what they want."