Strategic Report

Our business model

We predominantly franchise our brands Since launch, we have signed over 200 In addition to our core brands, we are focused
and manage hotels on behalf of third-party franchise hotels in Greater China, which on growing our portfolio in high-potential
hotel owners. As an asset-light business, attract full franchise fees. areas, and have launched and acquired new
we focus on growing our fee revenues and brands in the mainstream, upscale and luxury
Our asset-light business model means that
fee margins, with limited requirements segments in recent years.
we do not generally employ colleagues in
for capital. This enables us to grow our
franchised hotels, nor do we control their We have also developed state-of-the-art
business whilst generating high returns
day-to-day operations, policies or technology to drive hotel demand, be it
on invested capital.
procedures. That being said, IHG and our through our mobile booking app or cloud-
Whether we franchise or manage hotels is franchised hotels are committed to based hotel solutions. Our distribution channels
largely determined by market maturity, owner delivering a consistent brand experience, (booking sites and call centres through which
preference and, in certain cases, the particular conducting business responsibly and hotel rooms are marketed and booked) allow
brand. For instance, in more developed delivering our purpose of providing True hotel owners to reach potential guests at
markets such as the US and Europe, over 90% Hospitality for everyone. See page 28 for lower costs of sale, with the proportion of
of IHG hotels are franchised. These hotels more information. revenue from rooms booked through IHG’s
tend to be limited service. By contrast, in direct and indirect channels having steadily
emerging markets such as Greater China over IHG owner proposition increased over the last few years.
80% of IHG hotels are managed by IHG, where We focus on ensuring our brand portfolio,
Our investments in development resources
we look after the day-to-day running of the loyalty proposition, systems and expertise
has meant that we can provide outstanding
hotel on behalf of the owner. These hotels provide a rich and distinctive offer that stands
operational support to owners. We have
tend to be full service. out to consumers and is attractive to owners.
embedded new processes to help reduce
Over time, we expect the Chinese market to To keep our brands relevant to guests and the time taken from hotel signing to ground
move towards a franchised model. We evolving trends, we commit to developing our break and opening. Our hotels also have
successfully launched the first tailored established brands with new designs, service access to a suite of applications designed to
franchised offer for Holiday Inn Express® in enhancements and operational support that help them manage and improve
2016, and have since extended this to drive demand and returns, and keeps True performance, with the aim of further
include Holiday Inn® and Crowne Plaza®. Hospitality at the heart of our offer. boosting returns.

How we generate revenue

Franchised hotels Revenue from reportable segmentsa
We receive a fixed percentage of rooms revenue following a Our revenue is directly linked to the revenue
guest staying at a hotel. This is our fee revenue. generated by the hotels in our system.

IHG fee revenue

Our fee revenue:
Rev PAR Fee business
$ X Owned, leased
IHG System Fund
Rooms 28% and managed
Guests Hotel X
lease hotels
Hotel owner Royalty rate

Managed hotels Owned, leased & managed lease hotels 72%

From our managed hotels, we generate For hotels which we own or lease, we record
revenue through a fixed percentage of the the entire revenue and profit of the hotel in
total hotel revenue and a proportion of our financial statements. Our owned, leased
each hotel’s profit. and managed lease hotels have reduced Franchised Managed
from over 180 hotels 18 years ago, to
26 hotels at 31 December 2019. 614,974
rooms
262,253
rooms

How we deliver value Central Owned, leased and

Revenue is principally managed lease
Franchised hotels and managed lease hotels, by optimising
6,336
technology fee
We deliver value to our hotel owners the performance of these hotels. income see page 72
through the cultivation of hotel brands,
rooms
economies of scale, access to shared Other stakeholders
systems and resources, and centralised As part of our purpose to provide True
marketing activity to drive hotel Hospitality for everyone we believe it is
guest bookings. important that we deliver value to all our
stakeholders. Whether it is our workforce,
Managed hotels and owned, leased and hotel owners, guests, suppliers,
managed lease hotels shareholders or society, we want to create
As well as the benefits we deliver through a positive impact on them and the world
our franchise model, we drive value to our around us. See pages 24 to 40 for more a
Excludes System Fund results, hotel cost reimbusements
and exceptional items.
managed hotel owners, and owned, leased information.

10 IHG  |  Annual Report and Form 20-F 2019

IHG revenue from reportable segmentsa and the System Fund

System Fund Total Gross Revenue

IHG manages a System Fund on behalf 2019: $27.9 billion. This comprises:
of our third-party hotel owners, who pay • Franchised hotels = • Managed hotels = • Owned, leased and
contributions into it. This includes a total rooms revenue total hotels revenue managed lease hotels =
marketing and reservation assessment total hotels revenue
and a loyalty assessment.
The System Fund also receives proceeds (Only owned, leased and managed lease hotel revenue is directly attributed to IHG.)
from the sale of IHG Rewards Club
points under third-party co-branding
Third-party hotel owners pay:
arrangements.
The System Fund is managed by IHG
for the benefit of hotels within the IHG
system and is run at no profit or loss Fees to IHG in relation to the licensing Assessments and contributions are
over the long-term. In 2019, IHG of our brands and, if applicable, hotel collected by IHG for specific use
recognised $1.4 billion of System management services. within the System Fund.
Fund revenue.

IHG revenue from reportable System Fund revenues

segments
2019: $1.4 billion
2019: $2.1 billion
The System Fund is not managed to a
Revenue attributable to IHG profit or loss for IHG over the longer
comprises: term, but for the benefit of hotels in
the IHG system, and comprises:
• Fee business revenue from reportable
segments: in 2019, 72% of our revenue • Assessments and contributions
came from franchise and management paid by hotels.
fees, and central revenues: • Revenue recognised on consumption
–– Franchise fees = RevPAR x rooms of IHG Rewards Club points.
x royalty rate.
(See page 72 for more information.)
–– Management fees = fee % of total
hotels revenue plus % of profit.
–– Central revenue (principally
technology fee income –
see page 72).
• All revenue from owned, leased and
managed lease hotels.

IHG reported Group revenues (excluding reimbursable revenue)

Profit from hotel revenues Key elements of System

Fund expenditure
After operating costs of sale, our
margin by business model is: • Marketing and sales activity.
• Fee margin : 54.1%.
b • IHG Rewards Club loyalty
programme.
• Owned, leased and managed
leasec: 9.1%. • Global distribution systems, such
as our Guest Reservation System.
Not all of our costs can be allocated
directly to revenue streams and For examples of how we have
these are shown as central costs. deployed the System Fund in 2019
to support our strategic priorities,
please see pages 19 to 23.

a
Excludes System Fund results, hotel cost reimbursements and exceptional items.
b
Definitions for Non-GAAP measures can be found on pages 55 to 59. The reconciliation for fee margin can be found on page 216.
c
The margin for owned, leased and managed lease is calculated from the results related to owned, leased and managed lease included within reportable segments (see page 214
revenue of $573m and operating profit of $52m).

IHG  |  Annual Report and Form 20-F 2019  |  Strategic Report  |  Our business model 11
Strategic Report

Our business model continued

Disciplined approach to capital allocation

Our asset-light business model is highly Our priorities for the uses of cash are
cash generative and enables us to invest in consistent with previous years and
our brands and strengthen our enterprise. comprise of three pillars:
We have a disciplined approach to capital
allocation which ensures that the business
is appropriately invested in, whilst Capital investments net ($m)
maintaining an efficient balance sheet.
250
225 211
Beyond this, we look to return surplus cash
200
to shareholders through ordinary and special 175 166
dividends and share buybacks. 150
125
Our objective is to maintain an investment- 100
75
grade credit rating. One of the measures
Invest in the business to 50
we use to monitor this is net debt: EBITDA 25
and we aim for a ratio of 2.5-3.0x. This drive growth 0
-25 2018a 2019
is equivalent to our previous guidance Through strategic investments and our
of 2.0-2.5x before the adoption of day-to-day capital expenditures, we  Maintenance capex, key money and
IFRS 16 ‘Leases’. continue to drive growth. selective investments
 System Fund capital investments
Dividend policy  Recyclable investments
The Board consistently reviews the Group’s
approach to capital allocation and seeks to
maintain an efficient balance sheet and Ordinary dividend progression (�)
investment-grade credit rating. IHG has a
progressive dividend policy and an excellent 120
track record of returning funds to
100
shareholders through ordinary and special
dividends, and share buybacks, with the 80 11% CAGR
ordinary dividend seeing 11% CAGR since
86
78
71

60
64

2003. This is in addition to special returns  aintain sustainable growth

M
58
52

of funds detailed on page 242. When

in the ordinary dividend
47

40
43
39

reviewing dividend recommendations, the

35
29
2007 12 29

Directors take into account the long-term IHG has a progressive dividend policy
2008 12 29

20
2006 10 26
2005 8 19
2004 8 19
2003 7 17

consequences of any recommendation. which means we look to grow the

2019 40
2016 30

2018 36
33
2013 23

2015 28
2014 25
2011 16
2010 13

2012 21
2009 12

0
The Company looks to ensure that any dividend per ordinary share each year.
2017

recommendation does not harm the

long-term sustainable success of the  Interim  Final
Company and that there are sufficient
distributable reserves to pay any
recommended dividend.
Shareholder returns 2003-19 ($bn)
For more details on our dividend policy 5.9 13.8
and approach, see pages 4 and 73.

7.9
 eturn surplus funds
R
to shareholders
In January 2019, we paid a $500m
capital return to shareholders via a
special dividend and share Asset Operational Total
consolidation. disposals cash flows

The 2018 comparatives have been restated to reflect the adoption of IFRS 16 ‘Leases’
a

12 IHG  |  Annual Report and Form 20-F 2019

Disciplined approach to capital expenditure
Capital expenditure incurred by IHG can be summarised as follows.

Type What is it? Recent examples

Maintenance capital expenditure, key Maintenance capital expenditure is Examples of maintenance spend include
money and selective investment to devoted to the maintenance of our maintenance of our offices, systems
access strategic growth. systems and corporate offices along with and our owned, leased and managed
our owned, leased and managed lease lease hotels.
hotels.
Examples of key money include
Key money is expenditure used to access investments to secure representation
strategic opportunities, particularly in for our brands in prime city locations.
high-quality and sought-after locations
when returns are financially and/or
strategically attractive.

Recyclable investments to drive the  ecyclable investments are capital used

R Examples of recyclable investments
growth of our brands and our expansion to acquire real estate or investment in prior years include our EVEN Hotels
in priority markets. through joint ventures or equity capital. brand, where we used our capital to
This expenditure is strategic to help build develop three hotel properties in the
brand presence. US to showcase the brand. Over time,
we expect to divest our interest in
We would look to divest these
these hotels.
investments at an appropriate time and
reinvest the proceeds across
the business.

System Fund capital investments for The development of tools and systems Recently, we rolled out our new
strategic investment to drive growth that hotels use to drive performance. pioneering cloud-based Guest
at hotel level. This is charged back to the System Fund Reservation System (GRS), one of IHG
over the life of the asset. Concerto’s comprehensive set of
capabilities, which we developed with
Amadeus (see page 224). In addition,
during the year we made a strategic
investment, alongside other large hotel
companies, in Groups360 to create an
online sourcing and booking solution
for meetings.

IHG  |  Annual Report and Form 20-F 2019  |  Strategic Report  |  Our business model 13