Dreaming of a Rebound

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Uncluttered front desks, a bright logo, plush beds and a groovy bar have remade the Holiday Inn in Stamford, Conn.

Holiday Inn could hardly be considered a hip hotel. But in the '60s and '70s, it was the category killer, with a new inn opening around the world every three days. The first hotel for the age of mass travel, it was the go-to lodging for everyone from families (kids clamored to stay there because of the pool every property had) to rock stars (Elton John wrote an ode to the chain, and the Who had such a rollicking party at a Holiday Inn in 1967 that its members were rumored to have been banned for life; today's W would kill for that honor). Heading into the 21st century, the brand got a bit threadbare. With more than 3,000 franchisees needing to be kept in line, standards deviated. You never knew what you might get when you stepped across the threshold. Other hotel brands, such as Hampton Inn and Marriott's Courtyard, began to attract business guests in particular with fresh new buildings, efficient business-travel-friendly design and larger rooms.

Two years ago, Holiday Inn, the largest division of InterContinental Hotel Group (IHG), recognized that it risked being marginalized and embarked upon a total refreshment of the brand: a new logo, a new bedding program, new showers and new marketing and advertising. Holiday Inn is a franchise brand, meaning owners pay a licensing fee and a percentage of their revenues, while the corporation takes care of marketing, advertising and reservations. Those owners will collectively invest $1 billion (including $60 million from IHG), making this the largest brand revamp in hotel history. "Everything you touch and feel is new," says Jim Abrahamson, IHG's president of the Americas.

Reviving an iconic if tarnished hospitality brand is tough enough. Suddenly having to execute that plan in the midst of a global recession is going to show what IHG management is made of. With 1,319 Holiday Inns and 2,018 Holiday Inn Expresses worldwide, the brand launched by Kemmons Wilson in Memphis, Tenn., in 1952 is a behemoth, far larger than its competitors. (Marriott's Courtyard has 800 locations worldwide; Hilton Garden Inn, 350; and Hyatt Place, 150.) Helping drive IHG's $1.8 billion in sales, Holiday Inn aims to continue growing — with 362 new Holiday Inns and 631 Expresses in the pipeline and China as one of its hottest markets — while dumping hotels that fail to meet brand standards. So far, about a third of Holiday Inns and Expresses have been refreshed, and IHG says that by December 2010 all hotels worldwide will be converted.

The company is asking owners to invest that $1 billion at a cash-short time. Revenue per available room (revPAR), the primary industry barometer, is down 18% year to date industry-wide, according to Smith Travel Research. And in Holiday Inn's segment, room revenues are down more than 17%, while occupancy is down almost 12%. Holiday Inn's category isn't the worst hit — that would be luxury hotels — but it's not in great shape. The next segment down the line, midscale hotels that don't offer food and beverage service (the Holiday Inn Express category), has fared better, with room revenues down 9% and occupancy down 11%.

Investing during a downturn is challenging, says Kevin Kowalski, Holiday Inn's global brand manager, but he lists brands that did — FedEx, Pizza Hut and Taco Bell — and came out stronger. Hotels might even have an added advantage, in that they can rework rooms that aren't occupied. "It's a bold move," says Abrahamson, "but you have to make bold moves during tough times." For IHG, that means increasing its sales force by 25% and ponying up for a multimillion-dollar ad buy. And despite posting a 38% drop in operating profits so far this year, the company has been able to hold market share.

No one thinks reinvesting in the brand is a bad idea. "What's the alternative?" asks Bjorn Hanson, a hospitality professor at NYU's Tisch hotel school. "To stay still?" But it's a tough sell on Wall Street and among some franchisees. The cost per hotel for the refresh runs from $100,000 to $250,000. Those that have spent the money, says Abrahamson, have seen a 5% rise in revPAR in a 10-month period, with a hotel in Pittsburgh, Pa., even seeing a 17.7% rise, an uptick that IHG concedes is at the top end. "Five percent is very attractive when that effectively drops through entirely to hotel profits," says Simon Champion, an equity analyst at Deutsche Bank. "That means that you could get payback within 12 to 24 months on a $150,000 investment — a better return than you'd see if you put your money in most places."

Still, even with the promise of those returns, as many as 35,000 rooms may leave the brand this year, and IHG has been questioned closely by Wall Street about the number of removals. Chief executive Andrew Cosslett admitted in a May earnings call that Holiday Inn could lose "a few more on the way than we originally planned" and that the company is working with owners who are having a tough time financing.

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