Holiday Inn 2013 Annual Report Download - page 18

Managed and franchisedmodel
Ourbusiness model is focused on franchising and managing
hotels, rather than owning them, enabling us to grow at an
accelerated pace with limited capital investment. Currently,
88per cent of our Group operating profit (before regional and
central overheads and exceptional items) is derived from
franchised and managed operations. This business model
allows us to focus on building preferred brands based on guests’
needs, and on strong delivery systems, such as our branded
hotel websites and call centres. Our model allows us to create
greater returns for owners whilst leaving asset management
and real estate to our local third-party owners with the
necessary expertise.
We adapt this business model by market as necessary, for example,
in some markets we have in place managed leases to allow our
business to grow. Managed leases are properties structured for
legal reasons as operating leases but with the same characteristics
as management contracts. In other markets we choose
partnerships and joint ventures where appropriate.
A key characteristic of the franchised and managed business
model is that it is highly cash generative, with a high return on
capital employed. The asset-light approach means IHG benefits
from the reduced volatility of fee-based income streams,
ascompared with the ownership of assets, resulting in a
high-quality income stream. It enables us to focus on growing
our fee revenues (Group revenue excluding owned and leased
hotels, managed leases and significant liquidated damages)
and fee margins (operating profit as a percentage of revenue,
excluding revenue and operating profit from owned and leased
hotels, managed leases and significant liquidated damages).
Dependent upon the market maturity, owner preference and,
in certain cases, onthe particular brand, hotels can be franchised
or managed. For example, inthe US, a mature market, IHG operates
alargely franchised business, working together with our owners to
deliver preferred brands. In contrast, in Greater China, IHG operates
a predominantly managed business where IHG is responsible for
operating the hotel on behalf of its owners.
Fee revenues and Fee margins are KPIs – see pages 38 and 39.
Capital expenditure
In some situations, IHG supports its brands by using its capital
to build or support the funding of flagship assets in high-demand
locations in order to drive growth. We plan to recycle capital by
selling these assets when the time is right and to reinvest
elsewhere in the business and across ourportfolio.
We have committed up to $150 million to assist with the launch
of our EVEN Hotelsbrand to demonstrate the success and
economics of the brand. In 2013, IHGacquired three existing
hotels which are being converted to EVEN Hotels, the first of
which are due to open in 2014. In the future, we would look to
recycle this capital, just as we previously did for both the
Staybridge Suites and Hotel Indigo brands.
Asset disposals
As part of our asset-light approach, in May 2013, we disposed of
our leasehold interest in InterContinental London Park Lane for
gross cash proceeds of £301.5 million ($469million). IHG secured
a 30-year management contract onthe hotel, with three 10-year
extension options at IHG’s discretion, giving an expected contract
length of 60 years.
In December 2013, we announced our agreement to dispose of
80per cent of our interest in the InterContinental New York
Barclay for $240 million and retain the remaining 20per cent
in a joint venture with a total circa $175 million refurbishment.
Under the agreement, IHG will secure a 30-year management
contract on the hotel, with two 10-year extension options at
IHG’s discretion, giving an expected contract length of 50 years.
In February 2014, the Group signed an agreement to sell the
InterContinental Mark Hopkins San Francisco for $120 million in
cash and enter into a long-term management contract on the hotel.
Our breakdown by managed, franchised, owned and leased hotels for
each region is set out on pages 40 to 50.
As at 31 December 2013: Brand
ownership
Marketing and
distribution Employees
Hotel
ownership
IHG capital
intensity
IHG
income
Franchised
We operate 3,977 hotels under franchise
agreements (84.67%)
IHG IHG Third-party Third-party Low
Fee % of
rooms
revenue
Managed
We manage 711 hotels (15.14%) IHG IHG IHG &
Third-party* Third-party Low
Fee % of total
revenue plus
% of profit
Owned and leased
We own and lease 9 hotels (less than 1%) IHG IHG IHG IHG High All revenues
and profits
*IHG often employs the General Manager only.
The System Fund
In addition to management or franchise fees, hotels within
the IHG System pay assessments and contributions which
are collected by IHG for specific use within the System Fund.
The System Fund also receives proceeds from the sale of
IHG Rewards Club points (see page 50 for further information).
The System Fund is managed byIHG for the benefit ofhotels
in the IHG System with the objective of driving revenues for the
hotels. Total income for the System Fund in 2013 was $1.35 billion
(2012: $1.25 billion) and these funds are used to pay for marketing,
the IHG Rewards Club loyaltyprogramme andthe global
reservation system. TheSystem Fund is planned to operate at
break even and does not result in a profit or loss for IHG.
Our business model
16 IHG Annual Report and Form 20-F 2013
Our business model