InterContinental Hotels Group is undergoing companywide cuts to save $125 million per year by 2020 in order to fund several growth initiatives, including the development and acquisition of new brands.
DENHAM, England—InterContinental Hotels Group officials want to make significant investments in their business to boost growth, and they announced a strategic plan—along with corresponding cuts to fund that plan—during a call with investors Tuesday.
Speaking during IHG’s full-year 2017 earnings call, CEO Keith Barr* said the company is working on “implementing new strategic initiatives to accelerate our growth (and finding) efficiencies to fund that growth.” He said the corresponding cuts will help preserve IHG’s short-term profitability of the business.
Barr outlined a five-point plan for the company that broadly seeks to:
- enhance the company’s scale;
- strengthen its loyalty program;
- invest in technology to better drive revenue;
- improve owner support and grow franchising into “new areas”; and
- bolster the company’s existing brands and develop new brands.
Barr said that last point might be the most important.
“Every part of our model ultimately revolves around our brand portfolio,” he said.
He said part of the efficiency efforts are a new organizational structure for the company, which now features three regional CEOs for the Americas; Greater China; and Europe, the Middle East, Asia and Africa, and mergers technology and digital sales efforts under former chief information officer and current Chief Commercial and Technology Officer Eric Pearson.
“This change brings together our sales, channels, revenue management and technology capabilities under one function, maximizing revenue deliver into our hotels,” Barr said. “It also allows us to free up capacity to deliver efficiencies and allows us to bring new products to market much more quickly.”
Cutting to preserve profitability
CFO Paul Edgecliffe-Johnson said IHG is seeking to realize $125 million in annual savings through its efficiency program by 2020. A total of $50 million is expected to come through the company’s P&L, which would be used to fund improving its “owner proposition” and adding new brands, and $75 million from the company’s system fund, which would be used to improve existing brands, strengthen the IHG Rewards loyalty program and “enhance revenue delivery.”
Analysts questioned whether the cuts would threaten the company’s ability to deliver on its core business or if the new strategic investment was a sign the company had historically underinvested. Barr said that isn’t the case.
“This is effectively just (reallocating) resources,” he said. “We’ve made significant investment over recent years around technology, brands and markets, and as the business has matured, we now recognize that we can reallocate those resources to higher growth areas.”
Edgecliffe-Johnson compared the cuts to the strategy adopted by Hilton while the company was under private ownership.
“I don’t see it as a risk to our core competence,” he said. “We’re pretty buttoned up in terms of how we’ll do it. It will take a little while to come through, but it will be done in a very measured way.”
He said about 40% of the savings are expected to be realized this year, achieving 80% in 2019 and the remainder of the $125 million in 2020.
Edgecliffe-Johnson noted there will be some one-time costs associated with the program, though.
“Given the comprehensive nature of these actions and the structural and process changes to the organization that are required to be implemented, we expect to incur around $200 million in exceptional cash costs in relation to the program,” he said.
Possible brand changes, additions
On the brand-growth front, IHG plans to grow its Holiday Inn and Crowne Plaza brands in China and change the “owner proposition and operating model” for Kimpton Hotels & Restaurants. Barr said the company would announce details on Kimpton changes at a later date. He also the company is making efforts to lift best practices on design and F&B from Kimpton for the rest of the company’s brand portfolio.
In terms of new brands, company officials noted the Avid brand has seen 75 signings so far, including expansion into Canada with plans to grow into Mexico soon.
Barr also said the company has plans to launch a new upscale conversion brand at some point in 2018.
“We think there’s a real opportunity for an upscale brand that offers the guest something more informal and differentiated combined with the reassurance and quality standards of a branded chain,” he said. “From an owner perspective, they want a brand that can be easily financed and provides a strong return on investment.”
Barr promised this unnamed brand will have “a strong visual identity with a focused set of high-value brand standards” while requiring “limited” capital from owners with efficient operations. He said growth for this brand is targeted to the company’s EMEAA regional initially before expanding to China and the Americas.
The company also would like to see brand growth in the luxury space and has plans to acquire one or more “small, asset-light” luxury brands to “incubate and grow.” The new brand would operate at a price point higher than the InterContinental brand and could be in the resort space, he said.
“A more comprehensive luxury offer will have numerous halo benefits, including helping us strengthen our loyalty offer and attracting more B2B customers,” he said.
Barr told analysts that the company is “not thinking of exiting any brands” currently in their portfolio.
Full-year 2017 results
For the year, IHG saw global revenue-per-available-room growth of 2.7%, with 6.3% growth in Europe, 6% in greater China and 1.6% in the Americas. The U.S. saw RevPAR growth of 1.2% for the year.
The company touted 4% net rooms growth, which is the highest mark reached since 2009.
IHG announced full-year gross revenue of $25.7 billion, an increase of 5% year over year, and operating profit of $759 million, an increase of 7%.
As of press time, IHG’s stock was trading at £4,559 ($6,379.48) on the London Stock Exchange, down 3.2% year to date. The Baird/STR Hotel Stock Index was down 0.3% for the same period.
*Correction, 20 February 2018: An earlier version of this story used an incorrect title to describe Keith Barr's role at IHG.