Chartered Postgraduate Diploma in Marketing (Level 7)

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1 Chartered Postgraduate Diploma in Marketing (Level 7) 561 Analysis and Decision Case Study April 2016 InterContinental Hotels Group (IHG) The Chartered Institute of Marketing 2016 Page 1

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3 Analysis and Decision Case Study Important guidance notes for candidates regarding the pre-prepared analysis The examination is designed to assess knowledge and understanding of the Analysis and Decision syllabus, in the context of the relevant case study. The examiners will be marking candidates scripts on the basis of the tasks set. Candidates are advised to pay particular attention to the mark allocation on the examination paper and plan their time accordingly. The role is outlined in the Candidate s Brief and candidates will be required to recommend clear courses of action. Candidates should acquaint themselves thoroughly with the case study and be prepared to follow closely the instructions given to them on the examination day. Candidates are advised not to waste valuable time collecting data outside of this case study. The cases are based upon real-life situations and all the information about the chosen company is contained within the case study. No useful purpose will therefore be served by contacting companies in the industry and candidates are strictly instructed not to do so as it may cause unnecessary confusion. As in real life, anomalies may be found in the information provided within this case study. Please state any assumptions, where necessary, when answering tasks. The Chartered Institute of Marketing is not in a position to answer queries on case data. Candidates are tested on their overall understanding of the case and its key issues, not on minor details. In preparation for the examination, candidates need to carry out a detailed strategic marketing audit of the case study. The audit allows candidates to demonstrate their ability to: apply the appropriate models and techniques to analyse information on a company/sector facing particular circumstances interpret the results of this audit to provide insights into the current situation and the conclusions they are able to draw utilise their own ideas and create their own models for interpreting the data. When compiling their audit, candidates should only use the information found within the case, supported by their knowledge and understanding of the syllabus. Candidates are expected to bring individuality to their audit and submit their own work. In doing so, they must not attach essay-style descriptive work that could be considered as an attempt to gain unfair advantage whilst responding to the examination tasks. The copying of pre-prepared group answers, including those written by consultants/tutors, or by any third party, is strictly forbidden and will be penalised by failure. The tasks will demand analysis in the examination itself and individually composed answers are required to pass. Candidates will then need to condense their strategic marketing audit into a SIX page summary (a maximum of six sides of A4, no smaller than font size 11. The content of tables, models or diagrams must be in a minimum of font size 8). The six sides must contain a summary of the audit only. It should not contain decisions, objectives or plans. The audit should be numbered for ease of reference when answering the examination tasks. Although no marks are awarded for the audit itself, candidates will be awarded marks for how the audit is used and referred to in answering the tasks set. Page 3

4 Candidates are advised not to repeat or copy the audit summary when answering the exam tasks. It is important that candidates refer the examiner to the audit summary, where and when appropriate, when answering the tasks. Candidates must hole-punch and staple their summary audit in the top left hand corner. They should have written their CIM membership number and examination centre name on the top of the right hand corner of each page of the audit. It should then be attached to the answer book on completion of their examination, using the treasury tag provided. Candidates must take their original copy of the case study (not a photocopy) and summary audit into the examination room. The case study may be annotated with ideas for possible decisions or courses of action. Candidates may not attach any other additional information in any format to their answer book. Any attempt to introduce such additional material will result in the candidate s paper being declared null and void. The Chartered Institute of Marketing reserves the right not to mark any submission that does not comply with these guidelines. Important Notice The following data has been based on real-life companies, but details have been changed for assessment purposes and do not necessarily reflect current management practices of the industries or the views and opinions of The Chartered Institute of Marketing. Candidates are strictly instructed NOT to contact individuals or companies mentioned in the case study or any other companies in the industry. Copies of the case study may be obtained from: The Chartered Institute of Marketing, Moor Hall, Cookham, Berkshire SL6 9QH, UK or may be downloaded from the CIM student website The Chartered Institute of Marketing All rights reserved. This assessment, in full or in part, cannot be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of The Chartered Institute of Marketing. Page 4

5 Contents Introduction 8 Branding and competitive advantage 8-9 Market trends and challenges facing the hotel industry as a whole 9-10 Customer behaviours and preferences IHG s vision, strategic direction and organisational culture Current and past marketing strategies Impact of digital and social media innovation Global issues 16 Main competitors Future outlook and risks Appendices Page 5

6 Appendices 1 UK hotel market*, by trips and nights, Forecast of total inbound and domestic hotel/motel/guesthouse TRIPS, Forecast of total inbound and domestic hotel/motel/guesthouse NIGHTS, Attitudes towards spending in hotels, September Purpose of stay in UK accommodation, September Accommodation types used to stay in the UK, August 2014 to September Online activities carried out when planning a holiday* 28 8 Reasons for choosing to book with a particular travel company* 28 9 Activities carried out by holidaymakers* Device used to book, by device used for research* Projected spending on leisure & business travel, (in 2011 US$m) Trend in the number of hotels in 20 leading country markets worldwide, InterContinental Hotels Group s financial overview, Hotel trends for 2016* InterContinental Hotels could benefit from Fairmont deal, say analysts* InterContinental, Kimpton Face Growing Pains* Using personalisation to transform loyalty offerings* 32 * full text removed; link given to article. Page 6

7 ANALYSIS AND DECISION CASE STUDY Candidate brief Scenario You are a Marketing Consultant specialising in the global hotel industry, including UK, and have been hired by the InterContinental Hotels Group (IHG). The InterContinental Hotels Group has asked you to undertake a strategic marketing audit to analyse both internal and external factors that are impacting on the future of the group. You have also been given a particular remit to consider the changing nature of the global hotel industry, including the UK, and the key issues, including the digital and social related issues and organisational and strategic risks that would impact upon the InterContinental Hotels Group in developing its future vision, strategy, growth and profitability. Finally, the company is seeking insights into how it can further develop and manage stakeholder relationships and work with various stakeholders achieving sustainability and growth. Consideration should be given to the IHG s strengths and weaknesses, core competencies, value proposition and competitive advantage, financial position and its strategic challenges. Page 7

8 Introduction For hundreds of years, stretching right back into antiquity, individuals, families and organisations have looked to cater for those on the move. From religious bodies to today s corporate approach, hotel providers have found good business in providing refuge, rest, refreshment and recreation for those who like or need to travel. Most recently, technology and globalisation have defined new standards for any successful hotelier. But whether luxury or budget, chain or boutique, and designed for business or pleasure, most of us will be able to name at least one hotel operating near where we live and work. If you stayed in a hotel in 2015, there is a greater chance that you stayed in an InterContinental Hotels Group (IHG) room than one franchised or managed by any other single company. While the Wyndham Hotel Group owns the largest number of hotels worldwide, they are beaten into second place by IHG in terms of total number of rooms (over 710,000 in 4,800 properties in 100 countries). The InterContinental brand was established by the American airline Pan Am just after World War Two, with its first hotel opening in Belem, Brazil. By the early 1980s this once-mighty US flag carrier was in severe financial trouble and sold InterContinental to the UK property conglomerate Grand Metropolitan. Two more sales followed until, in 1998, InterContinental was acquired by the ambitious UK brewing and hospitality giant Bass, whose own roots can be traced back to 1777 and the founding of the Bass Brewery in Burton-upon-Trent, in the UK. Bass was expanding into the hotel industry at the time, having already bought the Holiday Inn chain in the late 1980s. Bass sold its brewing business in 2000 and then, in 2003, the whole group was split into two separate entities: the pub 1 retail business was re-named Mitchell and Butlers plc, with the hotel business being given the InterContinental Hotels (or IHG) name as we know it today. The latter s global headquarters remained in Denham, UK, with its US operations headquartered in Dunwoody, near Atlanta, Georgia. IHG owns a number of global brands, eight of which have more than 10,000 rooms worldwide. Holiday Inn and Holiday Inn Express are the largest and perhaps best known of these, with others including Crowne Plaza, Staybridge Suites and Candlewood Suites. Only 182 of just under 5,000 worldwide carry the actual IHG name: IHG s main businesses operate under a complex franchising model which allows the company to maintain what they call an asset-light strategy, enabling them to compete effectively in the most attractive, high-growth markets and industry segments. In the UK market, in 2015, inbound trip growth to UK hotels and guesthouses was expected to recover by some 5%, having fallen by a marginally larger amount in Forecasts suggest the industry will continue to grow steadily over the next five years, mainly due to a larger number of visitors coming from the US and China. Major issues facing the hotel industry include: market growth among younger travellers; the increasing influence of technology (especially concerning booking procedures); new on-line hospitality models such as Airbnb; and greater customisation. Branding and competitive advantage IHG operates as a franchise operation with individual brands targeting different markets. 1 An establishment for the sale of beer and other drinks, and sometimes also food, to be consumed on the premises. Page 8

9 In terms of value sales, IHG remained the third strongest hotel group in the world during the period, behind Marriott International and Hilton Worldwide. It beats the Starwood and Accor groups into fourth and fifth place respectively. Its strongest overall growth areas were North America and China, although measured in revenue per room, growth in China slowed. North America is IHG s largest market, and here the company has looked to re-position its Crowne Plaza brand in the business productivity segment, and also to focus quality in its flagship Holiday Inn brand by removing over 50 hotels. IHG has a significant presence in all global regions, so it is well positioned to benefit from global growth, especially in the fast-developing markets. IHG is particularly keen to generate and sustain competitive advantage in the Chinese market in the years ahead. Through its new HUALUXE brand, IHG is aiming to build strong domestic appeal by giving Chinese visitors luxury but with a Chinese touch to then target outbound travellers using a network of its global brands when the Chinese travel abroad. IHG also considers itself as well placed to take advantage of the emerging middle classes in both Russia and India, where it has significant number of hotels in the pipeline as it is aiming to expand its Holiday Inn and Holiday Inn Express brands from a relatively low base at present. IHG s flagship brands are Holiday Inn and Holiday Inn Express, which, in the UK at least, have high awareness levels but lower usage rates compared to its rivals, in particular Premier Inn and Travelodge. The Holiday Inn brand is vulnerable to mixed consumer perceptions particularly if a regular or occasional customer of Holiday Inn (full-service) checks into a Holiday Inn Express (budget) and finds some facilities less than what he/she was expecting. While potential customers perceive Holiday Inn as accessible, functional, reliable, and friendly, the Express sub-brand tends to lead to perceptions of it also being basic. It generally has low ratings for user experience and is the least likely out of the budget brands to be considered as good value. However, it is considered relatively good value compared to higher-end chains, so it should satisfy those who are looking for a cheaper full-service experience. In common with other hotel brands, Holiday Inn is likely to appeal more to over-45s than younger groups. In particular, mothers with children under 16 are significantly more likely to rate Holiday Inn as basic, suggesting poor perceptions of family-friendly facilities. Recently in China, Holiday Inn launched a new campaign entitled Moments of Joy aimed at mothers with small children; something similar may be used eventually in the UK market to try and change these perceptions. Overall, consumers at opposite ends of the age spectrum (16-25s and over-70s) perceive the brand as offering good value. However, the traditionally bigger spenders of the Baby Boomer generation 2 look set to engage more with IHG s boutique brands of Kimpton and Hotel Indigo, an important strand of IHG s overall global branding approach. Market trends and challenges facing the hotel industry as a whole Overall, looking at the UK, 2015 was expected to see a return to steady growth in the domestic and inbound tourism markets compared to a relatively disappointing 2014 (see Appendices 1-3). Then, a 5.1% increase in tourists visiting from overseas was largely offset 2 People born during the demographic post World War II baby boom between the years 1946 and 1964 (estimated). Page 9

10 by a 5.7% decrease in the number of domestic tourism visits. Owing to the latter s larger market share, the overall market contracted by some 2.9%. With the final throes of the 2008 recession finally ebbing away, research indicates that the staycation trend may go into reverse, with more UK holidaymakers finally feeling confident enough about their finances to go abroad for their holidays rather than stay at home. According to Visit Britain s Great Britain Tourism Survey carried out in the year to July 2015, domestic trips for all accommodation types were up by 12% to 70.5 million compared to 62.9 for the same period a year earlier. Forecasts show this trend being consolidated in the next five years as the market expands to accommodate growth in incoming visits, especially from the US and China. Around 15,000 new hotel rooms were set to become available in 2015, while closures were expected to reduce. Overall, forecasts show an increase of around 10.5% to 69.5 million trips by 2020, while total nights are forecast to rise by 8.5% to million over the same period. London hotels continue to perform at a different level compared to the rest of the UK. For example, average daily room rates in the capital are almost double the price of the rest of England. Performance elsewhere in England compares unfavourably with other UK regions, with foreign consumers apparently not convinced that there are better value alternatives to London when visiting the UK. Visitors to hotels in Wales and Scotland, less constrained by high room rates, spend more of their budget on food and beverages, as well as other ancillary services: Wales and Scotland outperform London by 58% and 10% respectively in estimated ancillary revenues. Budget hotel brands such as IHG s Holiday Inn and Holiday Inn Express compete with the likes of Premier Inn and Travelodge to dominate the UK hotel market. They also account for around half of the UK s building pipeline, with over 1,500 rooms planned for development. UK consumers appear to view the Premier Inn brand particularly favourably, with the company reporting sales growth of 12.6% in the first half of 2015 and publishing plans to add a further 85,000 bedrooms to its estate by Premier Inn is a notable exception to this trend, enjoying a fairly even usage split between older and younger users. Globally, total spending on travel and tourism is projected to rise by over 40% in real terms between 2012 and Growth in leisure travel spending is forecasted to slightly outpace that of business travel spending, which supports the move of some major hotel chains to create all-inclusive resorts. Spending on domestic travel is expected to grow faster than incoming receipts. This is mainly due to the rapid growth of travel (both leisure and business) spending in the large developing countries notably the BRICS (Brazil, Russia, India, China and South Africa), where tourism is overwhelmingly domestic. The total number of hotels in 20 major country markets worldwide should have increased by about 20% between 2011 and The greatest growth is projected for major developing countries such as India, China and South Africa, but also in South East Asian nations such as Indonesia and Vietnam. Customer behaviours and preferences Major established brands such as IHG, Marriott, Radisson, Premier Inn and Best Western tend to dominate any analysis of customer preferences towards accommodation providers. But one of the most eye-catching recent customer trends has been the rise in consumer interest towards lodging providers, and in particular Airbnb (see Appendices 4-6). Page 10

11 Lodging services such as Airbnb, though still small players in the UK market, represent a growing challenge and threat to established hotel brands such as IHG. Just 3% of the population say they have used this kind of service in the past year, compared with 67% who say they have stayed in either a chain or independent hotel. However, 17% of all consumers say they would prefer to stay in Airbnb-style accommodation rather than a hotel, a more encouraging figure for the lodging providers. Younger groups tend to be more positive towards these providers which, as peer reviews improve brand perceptions and awareness, may point to future sector growth. Research shows that a greater proportion of higher earners (and therefore those more likely to travel) are using the service. With freelancers and the self-employed seeing Airbnb as a way to boost their incomes, hotels are likely to offer luxuries as a point of difference. Leisure trips account for the biggest slice of the hotel-visiting market, with business travellers accounting for only 8% of trips by volume. However, hotels have long viewed their business guests as most likely to spend more money whilst they are there. Research shows that market is likely to remain relatively flat over the next few years as companies continue to look to economise. What is more, more business travellers are being encouraged to book their own accommodation, especially via apps, and are taking advantage of incentives to spend less in return for some personal benefit. For instance, an employee could book a room for 100 or less and be rewarded with 50 of this through use of apps such as Rocketrip. This may herald a greater drift away from traditional hotels and towards newer, cheaper on-line offerings where homeowners offer spare rooms and space for rent, such as airbnb.com, spareroom.com and fivenights.com. Perhaps surprisingly, younger parents with children tend to spend slightly more on accommodation than families where children are older: 53% of fathers with children under 16 say they are prepared to spend more on their hotel experience than otherwise. UK holidaymakers also say they are prepared to economise on hotel spending when taking a holiday at home compared to when they go overseas, perhaps because they have greater knowledge of and trust in UK hotel providers. Younger customers are more likely to book hotels using hotel-booking websites or price comparison sites, looking for the cheapest prices, than older customers who are happiest to book directly with an individual hotel. While this means that hotel rooms have become commoditised for a younger demographic they will go anywhere that meets basic requirements as long as it s cheaper 50% of consumers still say they are saving their money to spend on other holiday activities. IHG s vision, strategic direction and organisational culture As one of the world s largest hotel groups, IHG franchises, manages or owns over 4,800 hotels and approximately 710,000 guest rooms in nearly 100 countries. This structure is significant and, while not unique to IHG, is fundamental to understanding the company s approach to growth, profitability and sustainability in today s market. IHG predominantly franchises its brands to, and manages hotels on behalf of, third-party owners, rather than owning real estate directly itself. The company s portfolio of hotel brands includes: Holiday Inn and Holiday Inn Express, by far IHG s flagship and most popular brands, particularly concentrated in the Americas and Europe Page 11

12 InterContinental Hotels & Resorts, a city-based luxury brand spread fairly evenly across all IHG s global markets HUALUXE Hotels and Resorts, IHG s new foothold in the growing Chinese mid-sector market Crowne Plaza Hotels & Resorts, IHG s main business travel and luxury brand; these tend to be much larger hotels, and located in cities across the world Hotel Indigo, individual boutique hotels Kimpton Hotels and Resorts, IHG s most recent brand acquisition, completed in January 2015, and the world s largest independent boutique hotel operator; together, Kimpton and Indigo carry IHG s hopes and aspirations in a segment that is widely expected to grow and become more dominant across all hotel groups operations EVEN Hotels, IHG s lifestyle brand focusing on travellers wellness Staybridge Suites, aimed at the extended-stay market, mainly US-based Candlewood Suites, like Staybridge, extended-stay apartments. Between them, Holiday Inn and Holiday Inn Express account for more than 70% of IHG s total number of hotels across the world. The largest number of IHG hotels and rooms are in the Americas, which, taken together with their coverage in Europe, account for just short of 90% of their total hotel numbers world-wide. Most of the Holiday Inns and Holiday Inn Express stock is in the Americas and Europe, reflecting the areas with the greatest numbers of leisure travellers and holidaymakers. IHG s higher-end brands Crowne Plaza and InterContinental are far more evenly spread across all continents, suggesting that the wealthier business traveller is an equally likely target customer for IHG in the developing world as in the developed world. The extended-stay market is almost exclusively a US phenomenon. As a proportion of existing stock, IHG s pipeline hotel developments are more concentrated in Africa, the Middle East and Greater China, a statement of the group s approach to future growth. IHG s core proposition is Great Hotels Guests Love. To deliver their objectives in the years ahead, IHG bases a large part of its strategy for growth on what it calls its Winning Model : strengthening its portfolio of preferred and differentiated brands; building scale in key markets; creating long-lasting relationships with guests; and delivering revenue to hotels through the lowest-cost direct channels. Effective channel management is all about reducing booking costs, with IHG claiming, Our direct channels (digital and voice) are less costly to owners than third-party intermediaries such as booking.com, expedia.com and laterooms.com. IHG underpins its strategic growth model with a Corporate Social Responsibility commitment to Doing Business Responsibly. As well as enhancing and protecting its reputation, IHG sees this as a commitment to protect the environment, create job opportunities, improve community resilience and drive innovation. IHG s Winning Model extends into the company s culture. IHG s desired Winning Ways behaviours provide a strong sense of shared purpose, and are critical to driving our business performance forward, as well as making us a great, enjoyable place to work. According to IHG s website, its Winning Ways behaviours are to: Do The Right Thing do what we believe is right and have the courage and conviction to put it into practice Show We Care being sensitive to others, noticing the things that matter and taking responsibility for getting things right Page 12

13 Aim Higher aiming to be acknowledged leaders in our industry, so we have built a team of talented people who have a real will to win Celebrate Difference celebrating local differences whilst understanding that some things should be kept the same Work Better Together We listen to each other and combine our expertise to create a strong, focused and trusted group of people. IHG wants its corporate social responsibility to be most evident through commitments to the environment and the community. IHG has developed its own IHG Green Engage system, which commits every part of its operation to achieving green targets year-on-year. IHG has set itself targets to achieve a 12% reduction in carbon footprint per room and also in water usage in water-stressed areas, as measured from a 2012 baseline although it does not say when it will achieve these targets by. IHG aims to create jobs and economic opportunities in the communities it serves through its IHG Academy programme, aiming to give new skills to 20,000 people and invest $10 million in communities between 2013 and Current and past marketing strategies Unlikely as it may seem now, today s IHG global giant is a direct descendant of an 18 th century hopeful start-up, Bass Brewery. Until quite recently, Bass was one of the UK s biggest names in brewing and drinks distribution, as well as being a mainstay of that classic British institution, the public house (or pub). Even in the 1960s the company was still building on this strategy by acquiring a number of UK regional brewing companies. In 1988, Bass changed its strategy significantly by making its first major international move into the hotel industry, buying Holiday Inns International. Only a year later, new UK legislation limited the number of tied pubs that major brewers could own. This signalled a major industry restructuring and the diversification of Bass and similar companies into other forms of hospitality. Bass reduced the number of pubs that it owned, focused on larger outlets and concentrated on developing an international hotel business. The Holiday Inns business continued to grow and, in 1991, Bass launched Holiday Inn Express, a complementary brand to the main Holiday Inn offer, targeting the budget or limited-service segment. In 1994, with the increasing segmentation of the hotels industry, Bass launched the Crowne Plaza brand, a clear move into the upscale hotel market, while allowing its Holiday Inn brand to concentrate on the mass-market sector. Bass continued to invest through acquisitions in the growing eating-out market in the UK. In 1996 the UK government blocked Bass s attempt to buy half of the Carlsberg-Tetley brewing business. This led to a modified strategy, with Bass renewing its focus on its hotels and pubs divisions. Over the next few years, it sold smaller, non-core businesses such as Gala Bingo and bookmakers (betting shops) Coral, along with its leased pub business. In a sign of yet further market segmentation by 1997, Bass created and launched a new hotel brand, Staybridge Suites by Holiday Inn, its entry into the profitable North American upscale extended-stay market. Then, in 1998, came the development that brought the names of Bass and InterContinental together. Having passed through a number of owners since being sold by the ailing Pan Am airline in the early 1980s, the relatively small InterContinental hotel company was bought by Page 13

14 Bass, who saw the opportunity to add an upscale brand to its hotel portfolio to bring synergies and cost savings. InterContinental was now a firm fixture within the Bass stable of brands. At the turn of the century, Bass acquired Bristol Hotels & Resorts, a US-based hotel management company comprising 112 hotels operating mainly under leases. This gave the group a stronger management contract presence in the world's largest hotel market, paving the way for the asset-lite strategy that dominates today. In a huge move, the group sold Bass Brewers to a major Belgian brewer for 2.3 billion, confirming the final step in becoming an international hospitality retailer rather than a domestic brewing operation. With the Bass name now sold, the group changed its name in 2000 to Six Continents plc, to better reflect the global spread of the group's businesses. In 2001, Six Continents bought the European Posthouse chain of hotels for 810 million, with its hotels in strategic locations suitable for immediate conversion to Holiday Inn. This consolidated the Holiday Inn brand in the UK and Europe. The group also bought the InterContinental Hong Kong for 241 million, strengthening its position in the upscale hotel market in the key Chinese and Asia Pacific markets. In 2002 Six Continents plc reached another momentous milestone in its development by separating the hotels and soft drinks businesses (now to be called InterContinental Hotels Group PLC) from the retail business (to be called Mitchells & Butlers plc). Completed in April 2003, InterContinental Hotels Group plc (IHG) became a distinct, discrete company, listed in the UK and US stock markets. Once a humble British brewer, the company had grown to become in the guise of IHG one of the largest hospitality conglomerates in the world. IHG acquired the midscale extended-stay brand Candlewood Suites in 2003 and, a year later, introduced a new brand, Hotel Indigo, focusing on yet another relatively new market sector, affordable boutique accommodation. The Staybridge Suites extended-stay brand launched in the UK in 2005, following its success in the US, and later that year IHG sold 100% of its holding in Britvic plc, giving it now a sole focus on hotels. IHG signed an operating joint venture with All Nippon Airways (ANA) in 2006, making the resulting joint venture IHG ANA Hotels Group Japan the largest international hotel operator in Japan, the world s second largest hotel market. In 2007, IHG announced a worldwide relaunch of the Holiday Inn brand family, comprising Holiday Inn, Express by Holiday Inn and Holiday Inn Express. This was designed to give Holiday Inn a refreshed and contemporary brand image, extending across the whole family. In 2010, IHG launched EVEN Hotels, the first mainstream hotel brand focused on wellness and fulfilling a growing demand for healthier travel. IHG also unveiled the first upscale international hotel brand designed with the Chinese traveller in mind, HUALUXE Hotels and Resorts. Recent years have seen IHG s strategic business focus incorporate service improvements as well as brand expansion moves. IHG launched its Priority Club Rewards iphone app, complementing IHG's mobile websites that provide customers with the functionality to find and book hotel rooms, check rates and view or change reservations for all seven of its brands. In 2011, IHG launched its 'Best Price Guarantee', the website guarantee for guests booking on any IHG brand site. Any guest finding a qualifying, lower room price for an IHG hotel elsewhere online started to receive their first night free and the rest of their stay provided at the matched price found. In 2013, IHG was the first in the industry to commit to free guest internet for all loyalty members worldwide. Page 14

15 Impact of digital and social media innovation The digital revolution has changed the way consumers shop for travel products. The internet is the primary method of research, and search engines allow consumers to start holiday research with just the fragment of an idea, before refining it through further inspiration. Nine in ten holidaymakers carried out research before booking their last holiday, and twothirds researched destinations online (see Appendices 7-10 for figures). The industry plays a less influential role than it used to in this process, and consumers are more likely to be influenced by each other than by content created by travel businesses. Consumers also have an increasing number of touch points through which they can engage with travel businesses. This has fragmented the consumer journey across online and offline channels, and across multiple devices. Fragmentation has been accelerated by an increased use of smartphones and tablets, as these devices offer multiple mobile apps alongside web browsing. Consumers are also better equipped to compare products than ever before, and the use of price comparison sites is high. 59% of holidaymakers say they compare prices online. These comparison sites have increased competition and made it harder for hotels and other travel businesses to earn and maintain customer loyalty. The consumer journey no longer ends with the experience of the product. Consumers use social media and review websites to share their opinions and influence others both before, during and after their holiday. One-third of holidaymakers have posted a travel-related review online, and 16% have posted or discussed holiday experiences on social media. This additional stage has changed the consumer journey from a linear path to a cycle, where each consumer s experience feeds into another consumer s decision process. These changes to the path to purchase can be grouped into three digital trends: the rise of a better informed, empowered consumer the growing role of consumer reviews and social media in the decision-making process the use of multiple channels and devices. Consumers have been empowered by the product choice and information available online, and as a result travel has evolved from a seller s to a buyer s market. Travel comparison sites have been instrumental in empowering consumers. Usage in the UK is high and these sites have enjoyed rapid growth. For example, hotel search site Trivago and travel search site Skyscanner reported year-on-year revenue increases of 68% and 42%, respectively, in Growth in the travel comparison site market is expected to continue, with compound annual growth rate in excess of 40% between 2014 and The high use of price comparison sites means consumer decisions are being influenced by metrics such as price, star ratings and consumer review scores, with research showing price as the primary driver in the decision-making process. This does not always mean the lowest price, and instead suggests consumers are using a number of metrics to evaluate value for money. These sites are also having a direct impact on the value of brand equity. Holidaymakers who booked their last trip using a price comparison site are the least likely to be influenced by a company s reputation and are 30% more likely than average to base decisions on price. These sites have increased price competition and travel products are at risk of becoming commoditised. Page 15

16 However, the use of comparison sites and their impact on customer loyalty does differ by consumer age profile, with holidaymakers aged 65+ the least likely to be motivated by price or use comparison websites. Instead, past experience and a business s reputation have the most influence over the holiday decisions of the over-65s. Consumers have also been empowered by having more opportunities to share experiences and influence others. They are also more likely to be influenced by each other than by content created by travel businesses; review sites are the most popular and most influential resource used when researching a holiday. While the influence of social media content is currently low, it is expected to increase as review websites and social media sites become more integrated, and offline word-of-mouth recommendations migrate online. Consumers influence will increase as they move from consuming content to creating it by writing reviews. A third of holidaymakers have posted a travel-related review on a review website and 16% have posted or discussed positive or negative holiday experiences on social media. Millennials 3 are significantly more likely to be influenced by content on social media, and are also more likely to post travel-related experiences and photos. Research shows that a third of consumers who visited the website of a high street agent, and a quarter who visited a travel company website, made their final booking offline. However, a growing and more disruptive challenge is that of fragmentation within the digital channel as consumers use multiple devices through their purchasing journey. Only 17% of holidaymakers who carried out research on their smartphone also used the device to book. Fragmentation has made it difficult for travel businesses to track consumer activity across devices and within mobile apps. This limitation means businesses could be less equipped to use consumer data and insight to inform business strategy and meet consumer expectations. Global issues Oil prices have fallen by over half since the start of 2014 and show no sign of recovery in the context of ongoing oversupply (stimulated by a sharp rise in US production over recent years, rising OPEC production and prospects of a future rise in Iranian exports) and slowing demand (a weakening Chinese economy). The impact on the travel sector is twofold. Firstly, with oil costing less and energy bills dropping overall, households have more to spend on discretionary leisure. Secondly, lower jet fuel costs are now starting to have an impact on airfares. Data released by comparison site Skyscanner suggests that average fares between the UK and European destinations fell by 16% between 2013 and 2015, with 4-5% falls in fares to Asia, Australasia and Africa, although fares to North America and the Caribbean rose slightly over this period. The industry returning to higher profitability after difficult years is coming under increasing pressure to pass on lower fuel costs to passengers, and the coming months should see growing price competition between carriers. Any reductions in long-haul fares should provide a major boost in demand for luxury hotel providers, with cheaper fares generally boosting hopes for all sectors. Following a large reduction by tour operators of package holiday capacity at the time of the last recession, packages have steadily increased their share of the overseas holiday market 3 Born anytime between the 1980s and the turn of the century, Millennials are considered to be those following Generation X, and carry the hallmark of exploration, interaction and emotional experience. Page 16

17 against independently booked travel over the past five years, stemming the long-term decline seen prior to One of the main reasons for the revival of the package holiday is the popularity of the all-inclusive format. Although more often associated with the value end of the travel sector, all-inclusives also play a key part in the upscale beach resort sector, such as that provided by Sandals resorts in the Caribbean. The revival of the package holiday is very positive for the luxury travel market. Many of the traditional advantages of a package, such as convenience, removal of hassles and stress from the whole customer journey, and the local expertise and on-the-ground contacts that tour operators (especially upmarket tour operators) can deliver, are also likely to be highly valued by the luxury traveller. The dominance of budget airlines in the short-haul market, the rise of online travel agents (OTAs) and the proliferation of comparison tools such as Skyscanner and Momondo have created the phenomenon of the hybrid traveller. These are independent holidaymakers who are looking to save money on the transport element of their trip in order to spend extra or trade up on more upmarket accommodation or in-destination spending. Research shows an estimated 24% of holidaymakers seek to economise on transport but will spend more for higher-quality accommodation when it comes to short-haul holidays. Some 18% of holidaymakers take the same approach for long-haul holidays. The term affordable luxury is increasingly used across the travel industry. This captures the aspirational nature of many holidaymakers, who seek a more premium-type experience than they may have had in the past, but at a budget they can afford. This trend could also be said to represent a kind of democratisation of luxury. This trend is spawning a wave of new luxury on a budget types of product. Examples include the growth of poshtels (hostels with high design concepts), budget boutique hotel concepts such as CitizenM or Moxy, and the ongoing spread of glamping (glamorous camping) products. Main competitors IHG has a number of truly global competitors, conglomerates who operate brands across most or all of an increasingly segmented market. Some of the biggest are: Wyndham (Days Inn, Ramada); Choice (Comfort Inn, Quality Inn); Accor (Ibis, Novotel); Hilton (Hilton, Hampton, Hilton Garden Inn); and Starwood (Sheraton, Four Points). Different countries also present these major groups with particular competitive challenges. In the UK, for example, IHG through its flagship Holiday Inn and Holiday Inn Express brands faces intense competition in the mid-upper market segment. Premier Inn is the UK's largest hotel brand, with more than 50,000 rooms and 700 hotels. Whitbread launched the chain under the Travel Inn brand name in 1987 to compete with Travelodge, owned at the time by Forte. Premier Inn s success is built on high levels of perceived trust and differentiation among UK consumers. Indeed, it is rated as the UK s most popular hotel brand, ahead of more luxury offerings from Hilton and Marriott. Its accommodation is almost twice as likely to be rated as an excellent experience in comparison to its budget rival Travelodge (19% versus 10%). It also performs well against high-end brands such as Hilton (23%), Marriott (21%), and Radisson (20%) in this field. Hilton Hotels is one of the largest hotel brands in the world. Part of the Hilton Hotels and Resorts Group, there are over 530 Hilton-branded hotels owned, managed or franchised in 78 countries across six continents. The brand targets both business and leisure travellers, and is seen as the most exclusive hotel brand among these consumers. While its reputation Page 17

18 is associated with high quality and stylishness, Hilton is also more strongly associated with being overpriced. This is despite it being the most used high-end brand, perhaps due to the fact that the Hilton brand has a stronger presence in consumer consciousness. Hilton is the highest rated out of all hotels for experience, justifying for many the hotel s relative high price point. Marriott International is an American company franchising more than 4,087 properties in over 80 countries around the world, with over 697,000 rooms and an additional 195,000 rooms in the pipeline. Marriott ranks just behind Hilton for perceived levels of consistent high quality, reputation, and exclusivity, although it performs slightly better than its main full-service competitor Radisson. It has relatively high levels of differentiation, which is most likely due to its ongoing commitment to incorporating technology into its properties. Marriott is considered to be slightly more functional than its nearest rivals, Hilton and Radisson, with consumers generally seeing the brand as worth paying more for. Radisson Hotels operates in nearly 1000 locations in 73 countries across the world, though its brand has its highest levels of awareness in the US. Radisson Blu is the group s brand name carried outside the US, including in the UK. Being based primarily in the south east of England only, both usage and brand awareness are the lowest of the hotel groups featured here. However, Radisson has very high experience ratings among those that use it, only slightly behind other full-service brands like Hilton and Marriott, which emphasises just how much low brand awareness affects consumer perceptions on the broader scale. It has significantly lower awareness levels among under-45s. Travelodge operates across the world, but often by independent companies unconnected with each other. It was acquired by Goldman Sachs and US hedge funds Golden Tree Asset Management and Avenue Capital Group in The Travelodge UK brand has high awareness and usage among UK consumers. Although considered basic, its plus points revolve around being both functional and offering good value. However, the brand has many negative associations, including low experience ratings, a low association with levels of high quality service, and being less stylish than its main competitors. However, due to its low prices it still draws many leisure and business travellers on a tight budget. Best Western is a US conglomerate operating over 4,000 hotels across the world, over 2,100 of which are in North America. Best Western hotels are well represented throughout the UK, having close to 300 properties; however, it has the lowest level of trust and differentiation compared with all its major competitors. What s more, awareness levels are the second lowest after Radisson, a company with relatively few properties in the UK, but it is also seen as efficient, functional and reliable with no-nonsense style and low prices. Looking more closely at global segments, the lifestyle or boutique trend in hotel branding began with Morgans Hotel first opening its doors in New York in the mid-1980s. The big chains followed in the late 1990s, when Starwood Hotels & Resorts W concept was launched. IHG followed with its midscale boutique offering, Indigo. Now, Marriott has come up with a new midscale lifestyle concept called Moxy, and Hilton has re-entered the market following the failed launch of Denizen in early Hilton s new Canopy lifestyle brand competes with IHG s Indigo and Marriott s Edition concept, itself developed in collaboration with Schrager, the iconic founder of Morgans. At its launch, Hilton said Canopy would be the streetlamp of the neighbourhood. We are all about being local, through design, food and beverage, art, and local know-how. No two Canopy hotels will be the same, and we know that's what our guests want. Page 18

19 Marriott also launched the Moxy brand in mainland Europe in 2014, an economy offering in line with the company s overall strategy of expanding outside the saturated US market. The hotels range in size from 150 to 300 rooms each, and are designed with the goal of attaining LEED (Leadership in Energy and Environmental Design) Gold certification from the US Green Building Council. Until recently, all-inclusive accommodation offerings were the preserve of dedicated leisure hotel groups. Now, looking to expand their customer bases, IHG has been joined by its main international competitors in catering for business travellers in an urban environment by creating destination resort complexes, often with an all-inclusive format, enabling the business traveller to include family time within their stay. In early October 2012, Hilton opened its first all-inclusive resort in North America in Puerto Vallarta, Mexico. This features 259 luxury rooms and suites, with four à la carte dining options available, and the resort s kids club offering a playground, arts and crafts, interactive games and even camping tents. The hotel also has 965 square metres of function space, comprising seven meeting rooms. Hyatt has also recently entered the all-inclusive segment with the Hyatt Ziva and Hyatt Zilara brands focusing initially on Latin America, where Hyatt has been expanding its presence. The two first resorts were the Hyatt Ziva Los Cabos and Hyatt Zilara Cancun, both of which are owned and managed by Playa Hotels and Resorts. The brands aim to redefine the all-inclusive segment by taking it up-market, harnessing Hyatt s distinctive appeal as an upscale hotel chain and focusing on food and beverage quality and guest service. This is designed to create a differentiated, more sophisticated allinclusive product. Future outlook and risks Increasingly, the cohort known as Millennials are dominating all hotel groups forward planning, including IHG s. Born anytime between the 1980s and the turn of the century, Millennials are considered to be those following Generation X, and carry the hallmark of exploration, interaction and emotional experience. They are the fastest growing customer segment in the hospitality industry, expected to represent 50% of all travellers by As with other sectors, hotels face the need to be more transparent and tech savvy, with a strong focus on empathy and customer connection. Technology is essential for this demographic, and they will expect technology to power their check-in, payment, eating, and shopping transactions. Millennials will expect a deeper link between tourism services and how they manage their everyday lives. As more travellers from this cohort prefer technology to human beings, bypassing the frontdesk and using a digital concierge could be the future, and communicating with guests in general may mean using more data and fewer staff. Recommendation engines will allow guests to obtain good service on an array of travel needs once handled by the hotel. Group planners will also expect easy online planning capabilities and fast rates. While a help yourself model will focus on technology to drive service, staff will need to be better able to create and deliver new models of service. Political tensions and terrorism are both becoming more visible and acute across the world, clearly affecting consumers propensity to travel or, at least, to travel to certain destinations. Punishing economic policies and austerity measures along with ethnic, cultural and religious tensions have resulted in the rise in civil unrest and deeply unsettled environments. In Europe and increasingly across the Page 19