InterContinental Hotels Group smashed its year-end expectations for 2017, and is drawing on its performance to create more opportunities upmarket.
Keith Barr, IHG’s newly appointed CEO as of last July, was at home on the company’s fourth-quarter 2017 investor call as he revealed a 4-percent increase in group revenue last year, up to $1.78 billion from $1.71 billion in 2016.
Amidst the good news, Barr also said IHG will not be paying out any special dividends in 2018. This move came as something of a surprise in a year where tax reform has delivered a resounding bonus to many businesses. Rather than pay shareholders a little extra today, IHG is taking its money and reinvesting it into new brands for tomorrow. With 13 brands already under the company’s umbrella, totaling nearly 800,000 rooms (and a further 244,000 rooms on the way), IHG has narrowed its focus to three main segments for future growth: mainstream, upscale and luxury.
In the mainstream segment, the company’s plan is clear. After the launch of its newest brand, Avid, in September of last year, the nascent brand managed to record 75 signings on the books, with its first hotel expected to open in Oklahoma City in Q3 2018. In the upscale segment, Barr said the company is developing another brand, intent on tapping into a customer base with a growth potential of $20 billion through 2025.
“Our guest research shows that many consumers are looking for something more than traditional, big-box hotels,” Barr said. “We think there is a real opportunity for an upscale brand that offers the guest something more formal and differentiated, combined with the reassurance and quality standards of a branded chain.”
Barr said this new upscale brand, which has yet to be identified, will focus on conversions and will draw on IHG’s ability to provide a low-cost, high-revenue delivery system, and will also have access to its loyalty program. It will be available this year, he added.
“Later this year we will be launching an upscale conversion brand that ticks all of those boxes,” Barr said. “The rollout will be led from our [Europe, Middle East, Africa and Asia] region, where we know there are a number of independent hotels—and those belonging to small brands—which would benefit from coming into the IHG system.”
Lastly, Barr stated an intent to further stake out the luxury segment in 2018, but in this case IHG is looking to acquire one (“or two,” Barr said) small, asset-light luxury brand(s), similar to its acquisition of Kimpton Hotels for $430 million 2014.
Because IHG is pushing outward into established segments, the company deemed it fit to reorganize its organizational structure. As of Jan. 1, 2018, Elie Maalouf was appointed regional CEO, Americas; Kenneth Macpherson, previously CEO of Greater China, has been appointed regional CEO of EMEAA; while Jolyon Bullet stepped into Macpherson’s previous position as regional CEO, Greater China.
As for how the company plans on paying for all of these initiatives, Barr said IHG is adopting new guidelines to accelerate its growth, targeting a return of roughly $125 million in annual savings by 2020. This is why IHG will not be offering any new returns for its shareholders, despite realizing $108 million in exceptional tax credit which will be realized in cash terms over a period beginning in 2018. Going forward, IHG’s effective tax rate will hang around the mid to low 20 percentage point range, and IHG will be increasing its total dividend by 11 percent for the year.
Looking back at 2017, Paul Edgecliffe-Johnson, IHG’s CFO, credited the company’s “resilient” fee-based business model for its success. IHG's RevPAR grew 2.7 percent last quarter while its net system size was up 4 percent, driving an 8-percent increase in underlying operating profit. IHG’s full-year operating profit also increased 7 percent to $759 million, rising above its previous forecast of $752.1 million.
IHG’s decision to disappoint shareholders today by refusing to gift them with extra cash may manifest into a strategic advantage in just a few months’ time. Barr didn’t seem concerned—he’s too busy looking for a new luxury brand to buy.
“These initiatives are focused around redeploying and refocusing resources to leverage our scale; strengthening our loyalty program; continuing to prioritize digital and technological innovation; enhancing our industry leading franchise proposition; strengthening our existing brands; and adding new brands where we see the greatest potential for growth,” Barr said.