Commission file number: 1-10409

 

 

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:  Yes  þ      No  o

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:  Yes  o      No  þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:  Yes  þ      No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      No  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark which financial statement item the registrant has elected to follow:

 

Item 17 o      Item 18   þ

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes           o                No           þ

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

 

 

TABLE OF CONTENTS

 

 

As used in this document, except as the context otherwise requires, the terms:

 

 

References in this document to the “Companies Act” mean the Companies Act 2006 of Great Britain; references to the “EU” mean the European Union; references in this document to “UK” refer to the United Kingdom of Great Britain and Northern Ireland; references to “US” refer to the United States of America.

 

The Company publishes its Consolidated Financial Statements expressed in US dollars following a management decision to change the reporting currency from sterling during 2008. The change was made to reflect the profile of the Group’s revenue and operating profit, which are primarily generated in US dollars or US dollar-linked currencies.

 

In this document, references to “US dollars”, “US$”, “$” or “¢” are to United States currency, references to “euro” or “€” are to the euro, the currency of the European Economic and Monetary Union, references to “pounds sterling”, “sterling”, “£”, “pence” or “p” are to UK currency. Solely for convenience, this Annual Report on

Form 20-F contains translations of certain pound sterling amounts into US dollars at specified rates. These translations should not be construed as representations that the pound sterling amounts actually represent such US dollar amounts or could be converted into US dollars at the rates indicated. The noon buying rate in The City of New York for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New York on March 25, 2011 was £1.00 = $1.6086. For further information on exchange rates please refer to page F-23.

 

The Company’s fiscal year ends on December 31. The December 31 fiscal year end is in line with the calendar accounting year ends of the majority of comparable US and European hotel companies. IHG will continue to report on a December 31 fiscal year-end basis, as the Group believes this facilitates more meaningful comparisons with other key participants in the industry. References in this document to a particular year are to the fiscal year unless otherwise indicated. For example, references to the year ended December 31, 2010 are shown as 2010 and references to the year ended December 31, 2009 are shown as 2009, unless otherwise specified, and references to other fiscal years are shown in a similar manner.

 

The Company’s Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and in accordance with IFRS as adopted by the European Union (“EU”). IFRS as adopted by the EU differs in certain respects from IFRS as issued by the IASB. However, the differences have no impact on the Group’s Consolidated Financial Statements for the years presented.

 

In keeping with UK practice IHG believes that the reporting of profit and earnings measures before exceptional items provides additional meaningful information on underlying returns and trends to shareholders. The Group’s key performance indicators used in budgets, monthly reporting, forecasts, long-term planning and incentive plans for internal financial reporting focus primarily on profit and earnings measures before exceptional items. Throughout this document earnings per ordinary share is also calculated excluding the effect of all exceptional operating items, exceptional interest, exceptional tax and gain on disposal of assets and is referred to as adjusted earnings per ordinary share.

 

The Company furnishes JPMorgan Chase Bank, N.A., as Depositary, with annual reports containing Consolidated Financial Statements and an independent auditor’s opinion thereon. These Consolidated Financial Statements are prepared on the basis of IFRS. The Company also furnishes to the Depositary all notices of shareholders’ meetings and other reports and communications that are made generally available to shareholders of the Company. The Depositary makes such notices, reports and communications available for inspection by registered holders of ADRs and mails to all registered holders of ADRs voting instruction cards with specific reference to the section of the Company’s website on which such notices, reports and communications can be viewed. During 2010, the Company reported interim financial information at June 30, 2010 in accordance with the Listing Rules of the UK Listing Authority. In addition, it provided quarterly financial information at March 31, 2010 and at September 30, 2010 and intends to continue to provide quarterly financial information during fiscal 2011. The Consolidated Financial Statements may be found on the Company’s website at www.ihgplc.com.

 

This Form 20-F contains certain forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 with respect to the financial condition, results of operations and business of InterContinental Hotels Group and certain plans and objectives of the Board of Directors of InterContinental Hotels Group PLC with respect thereto. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “believe”, or other words of similar meaning. These statements are based on assumptions and assessments made by InterContinental Hotels Group’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

 

Such statements in the Form 20-F include, but are not limited to, statements under the following headings; (i) “Item 4. Information on the Company”; (ii) Item 5. Operating and financial review and prospects”; (iii) “Item 8.

Financial information”; and (iv) “Item 11. Quantitative and qualitative disclosures about market risk”. Specific risks faced by the Company are described under “Item 3. Key information — Risk factors” commencing on page 10.

 

By their nature, forward-looking statements are inherently predictive, speculative and involve risk and uncertainty. There are a number of factors that could cause actual results and developments to differ materially from those expressed in, or implied by, such forward-looking statements, including, but not limited to: the risks involved with the Group’s reliance on the reputation of its brands and the protection of its intellectual property rights; the risks related to identifying, securing and retaining franchise and management agreements; the effect of political and economic developments; the ability to acquire and retain the right people and skills and capability to manage growth and change; the risk of events that adversely impact domestic or international travel; the risks involved in the Group’s reliance upon its proprietary reservations system and increased competition in reservations infrastructure; the risks in relation to technology and systems; the risks of the hotel industry supply and demand cycle; the possible lack of selected development opportunities; the risks related to corporate responsibility; the risk of litigation; the risks associated with the Group’s ability to maintain adequate insurance; the risks associated with the Group’s financial stability, its ability to borrow and satisfy debt covenants; compliance with data privacy regulations; the risks related to information security; and the risks associated with funding the defined benefits under its pension plans.

 

 

 

 

 

 

Dividends

 

InterContinental Hotels Group PLC paid an interim dividend of 8.0 pence per share (equivalent to 12.8 cents per ADS at the closing exchange rate of August 6, 2010) on October 1, 2010. The IHG Board has proposed a final dividend of 22.0 pence per share (equivalent to 35.2 cents per ADS at the closing exchange rate on February 11, 2011), payable on June 3, 2011, if approved by shareholders at the Annual General Meeting to be held on May 27, 2011, bringing the total IHG dividend for the year ended December 31, 2010 to 30.0 pence per share (equivalent to 48.0 cents per ADS).

 

The table below sets forth the amounts of interim, final and total dividends on each ordinary share in respect of each fiscal year indicated. Comparative dividends per share have been restated using the aggregate of the weighted average number of shares of InterContinental Hotels Group PLC. For the purposes of showing the dollar amount per ADS in respect of the interim and final dividends for each of 2006 and 2007, such amount is translated into US dollars per ADS at the Noon Buying Rate on the UK payment date. In respect of the interim and final dividends for each of 2008, 2009 and 2010 such amounts are translated from US dollars into GBP at the prevailing exchange rate immediately prior to their announcement.

 

Ordinary dividend

 

 

Special dividend

 

 

This section describes the principal risks that could materially affect the Group’s business. The factors below should be considered in connection with any financial and forward-looking information in this Form 20-F and the cautionary note regarding forward-looking statements contained on pages 5 and 6.

 

The risks below are not the only ones that the Group faces. Some risks are not yet known to the Group and some that the Group does not currently believe to be material could later turn out to be material.

 

The Group is reliant on the reputation of its brands and the protection of its intellectual property rights

 

Any event that materially damages the reputation of one or more of the Group’s brands and/or failure to sustain the appeal of the Group’s brands to its customers could have an adverse impact on the value of that brand and subsequent revenues from that brand or business.

 

In addition, the value of the Group’s brands is influenced by a number of other factors, some of which may be outside the Group’s control, including commoditization (whereby price and/or quality becomes relatively more important than brand identifications due, in part, to the increased prevalence of third-party intermediaries), consumer preference and perception, failure by the Group or its franchisees to ensure compliance with the significant regulations applicable to hotel operations (including fire and life safety requirements), or other factors affecting consumers’ willingness to purchase goods and services, including any factor which adversely affects the reputation of those brands.

 

In particular, where the Group is unable to enforce adherence to its operating and quality standards, or the significant regulations applicable to hotel operations, pursuant to its franchise and management contracts, there may be further adverse impact upon brand reputation or customer perception and therefore the value of the hotel brands.

 

Given the importance of brand recognition to the Group’s business, the Group has invested considerable resources in protecting its intellectual property, including registration of trademarks and domain names. However, the controls and laws are variable and subject to change. Any widespread infringement, misappropriation or weakening of the control environment could materially harm the value of the Group’s brands and its ability to develop the business.

 

The Group is exposed to a variety of risks related to identifying, securing and retaining franchise and management agreements

 

The Group’s growth strategy depends on its success in identifying, securing and retaining franchise and management agreements. This is an inherent risk for the hotel industry and franchise business model. Competition with other hotel companies may generally reduce the number of suitable franchise, management and investment opportunities offered to the Group and increase the bargaining position of property owners seeking to become a franchisee, or engage a manager. The terms of new franchise or management agreements may not be as favorable as current arrangements and the Group may not be able to renew existing arrangements on similarly favorable terms or at all.

 

There can also be no assurance that the Group will be able to identify, retain or add franchisees to the Group system or to secure management contracts. For example, the availability of suitable sites, planning and other local regulations or the availability and affordability of finance may all restrict the supply of suitable hotel development opportunities under franchise or management agreements. In connection with entering into franchise or management agreements, the Group may be required to make investments in, or guarantee the obligations of, third parties or guarantee minimum income to third parties. There are also risks that significant franchisees or groups of franchisees may have interests that conflict, or are not aligned, with those of the Group including, for example, the unwillingness of franchisees to support brand improvement initiatives.

 

Changes in legislation or regulatory changes may be implemented that have the effect of favoring franchisees relative to brand owners.

The Group is exposed to the risks of political and economic developments

 

The Group is exposed to the inherent risks of global and regional adverse political, economic and financial market developments, including recession, inflation, availability of affordable credit and currency fluctuations that could lower revenues and reduce income. A recession reduces leisure and business travel to and from affected countries and adversely affects room rates and/or occupancy levels and other income-generating activities. This may result in deterioration of results of operations and potentially reduce the value of properties in affected economies. The owners or potential owners of hotels franchised or managed by the Group face similar risks which could adversely impact the Group’s ability to retain and secure franchise or management agreements. More specifically, the Group is highly exposed to the US market and, accordingly, is particularly susceptible to adverse changes in the US economy.

 

Further political or economic factors or regulatory action could effectively prevent the Group from receiving profits from, or selling its investments in, certain countries, or otherwise adversely affect operations. For example, changes to tax rates or legislation in the jurisdictions in which the Group operates could decrease the proportion of profits the Group is entitled to retain, or the Group’s interpretation of various tax laws and regulations may prove to be incorrect, resulting in higher than expected tax charges.

 

The Group requires the right people, skills and capability to manage growth and change

 

In order to remain competitive, the Group must employ the right people. This includes hiring and retaining highly skilled employees with particular expertise or leadership capability. The implementation of the Group’s strategic business plans could be undermined by failure to build resilient corporate culture, recruit or retain key personnel, unexpected loss of key senior employees, failures in the Group’s succession planning and incentive plans, or a failure to invest in the development of key skills.

 

Some of the markets in which the Group operates are experiencing economic growth and the Group must compete against other companies inside and outside the hospitality industry for suitably qualified or experienced employees. Failure to attract and retain these employees may threaten the success of the Group’s operations in these markets. Additionally, unless skills are supported by a sufficient infrastructure to enable knowledge and skills to be passed on, the Group risks losing accumulated knowledge if key employees leave the Group.

 

The Group is exposed to the risk of events that adversely impact domestic or international travel

 

The room rates and occupancy levels of the Group could be adversely impacted by events that reduce domestic or international travel, such as actual or threatened acts of terrorism or war, epidemics, travel-related accidents, travel-related industrial action, increased transportation and fuel costs and natural disasters, resulting in reduced worldwide travel or other local factors impacting individual hotels. A decrease in the demand for hotel rooms as a result of such events may have an adverse impact on the Group’s operations and financial results. In addition, inadequate preparedness, contingency planning or recovery capability in relation to a major incident or crisis may prevent operational continuity and consequently impact the value of the brand or the reputation of the Group.

 

The Group is reliant upon its proprietary reservations system and is exposed to the risk of failures in the system and increased competition in reservations infrastructure

 

The value of the brands of the Group is partly derived from the ability to drive reservations through its proprietary HolidexPlus reservations system, a central repository of all hotel room inventories linked electronically to multiple sales channels including the Group’s own websites, call centers and hotels, third-party intermediaries and travel agents.

 

Lack of resilience in operational availability could lead to prolonged service disruption and may result in significant business interruption and subsequent impact on revenues. Lack of investment in these systems may also result in reduced ability to compete. Additionally, failure to maintain an appropriate e-commerce strategy and select the right partners could erode the Group’s market share.

The Group is exposed to inherent risks in relation to technology and systems

 

The Group is reliant upon certain technologies and systems (including IT systems) for the running of its business, particularly those which are highly integrated with business operational processes. Disruption to those technologies or systems could adversely affect the efficiency of the business, notwithstanding business continuity or disaster recovery processes. The Group may have to make substantial additional investments in new technologies or systems to remain competitive. Failing to keep pace with developments in technologies or systems may put the Group at a competitive disadvantage. The technologies or systems that the Group chooses may not be commercially successful or the technology or system strategy employed may not be sufficiently aligned with the needs of the business or responsive to changes in business strategy. As a result, the Group could lose customers, fail to attract new customers or incur substantial costs or face other losses.

 

The Group is exposed to the risks of the hotel industry supply and demand cycle

 

The future operating results of the Group could be adversely affected by industry overcapacity (by number of rooms) and weak demand due, in part, to the cyclical nature of the hotel industry, or other differences between planning assumptions and actual operating conditions. Reductions in room rates and occupancy levels would adversely impact the results of Group operations.

 

The Group may experience a lack of selected development opportunities

 

While the Group is operating in 100 countries and territories, if the availability of suitable development sites becomes limited for the Group and its prospective hotel owners, for example, due to saturation or changing geo-political circumstances, this could adversely affect the Group’s future growth pipeline.

 

The Group is exposed to risks related to corporate responsibility

 

The reputation of the Group and the value of its brands are influenced by a wide variety of factors, including the perception of key stakeholders and the communities in which the Group operates. The social and environmental impacts of business are under increasing scrutiny, and the Group is exposed to the risk of damage to its reputation if it fails to demonstrate sufficiently responsible practices, ethical behavior or fails to comply with regulatory requirements in a number of areas such as fraud, bribery and corruption, safety and security, sustainability and responsible tourism, environmental management, equality, diversity and human rights, and support for local communities.

 

The Group is exposed to the risk of litigation

 

The Group could be at risk of litigation from many parties, including guests, customers, joint venture partners, suppliers, employees, regulatory authorities, franchisees and/or the owners of hotels managed by it. Claims filed in the US may include requests for punitive damages as well as compensatory damages. Exposure to litigation or fines imposed by regulatory authorities may also affect the reputation of the Group.

 

The Group may face difficulties insuring its business

 

Historically, the Group has maintained insurance at levels determined to be appropriate in light of the cost of cover and the risk profiles of the business in which it operates. However, forces beyond the Group’s control including market forces, may limit the scope of coverage the Group can obtain and the Group’s ability to obtain coverage at reasonable rates. Other forces beyond the Group’s control, such as terrorist attacks or natural disasters may be uninsurable or simply too expensive to insure. Inadequate or insufficient insurance could expose the Group to large claims or could result in the loss of capital invested in properties, as well as the anticipated future revenue from properties, and could leave the Group responsible for guarantees, debt or other financial obligations related to such properties.

The Group is exposed to a variety of risks associated with its financial stability, ability to borrow and satisfy debt covenants

 

While the strategy of the Group is to extend the hotel network through activities that do not involve significant amounts of its own capital, the Group does require capital to fund some development opportunities, and to maintain and improve owned hotels. The Group is reliant on having financial strength and access to borrowing facilities to meet these expected capital requirements. The majority of the Group’s borrowing facilities are only available if the financial covenant in the facilities are complied with. Non-compliance with covenants could result in the lenders demanding repayment of the funds advanced. If the Group’s financial performance does not meet market expectations, it may not be able to refinance existing facilities on terms considered favorable.

 

The Group is required to comply with data privacy regulations

 

Existing and emerging data privacy regulations limit the extent to which the Group can use personal identifiable information. Compliance with these regulations in each jurisdiction in which the Group operates may require changes in the way data is collected, monitored, shared and used, which could increase operating costs or limit the advantages from processing such data. In addition, non-compliance with data privacy regulations may result in fines, damage to reputation or restrictions on the use or transfer of information.

 

The Group is exposed to the risks related to information security

 

The Group is increasingly dependent upon the availability, integrity and confidentiality of information including, but not limited to, guest and employee credit card, financial and personal data, business performance and financial reporting.

 

The reputation and performance of the Group may be adversely affected if it fails to maintain appropriate confidentiality of information and ensure relevant controls are in place to enable the release of information only through the appropriate channels in a timely and accurate manner.

 

The Group is exposed to funding risks in relation to the defined benefits under its pension plans

 

The Group is required by law to maintain a minimum funding level in relation to its ongoing obligation to provide current and future pensions for members of its UK pension plans who are entitled to defined benefits. In addition, if certain plans of the Group are wound-up, the Group could become statutorily liable to make an immediate payment to the trustees to bring the funding of defined benefits to a level which is higher than the minimum legal requirements. The contributions payable by the Group must be set with a view to making prudent provision for the benefits accruing under the plans of the Group.

 

In particular, the trustees of the Group’s UK defined benefit plan may demand increases to the contribution rates relating to the funding of this plan, which would oblige relevant employers of the Group to contribute extra amounts. The trustees must consult the plan’s actuary and principal employer before exercising this power. In practice, contribution rates are agreed between the Group and the trustees on actuarial advice, and are set for three-year terms. The funding implications of the last actuarial review are disclosed in the notes to the Group’s Consolidated Financial Statements on page F-30.

 

The Group’s revenue and earnings are derived from hotel operations, which include franchise and other fees paid under franchise agreements, management and other fees paid under management contracts, where the Group operates third-parties’ hotels, and operation of the Group’s owned and leased hotels.

 

At March 25, 2011, InterContinental Hotels Group PLC had a market capitalization of approximately £3.7 billion, and was included in the list of FTSE 100 companies, a list of the 100 largest companies by market capitalization on the London Stock Exchange.

 

InterContinental Hotels Group PLC is the holding company for the Group. Six Continents Limited (formerly Six Continents PLC), which was formed in 1967, is the principal subsidiary company. The Company’s corporate headquarters are in the United Kingdom, and the registered address is:

 

InterContinental Hotels Group PLC

Broadwater Park

Denham

Buckinghamshire UB9 5HR

Tel: +44 (0) 1895 512000

Internet address: www.ihgplc.com

 

InterContinental Hotels Group PLC was incorporated in Great Britain on May 21, 2004 and registered in, and operates under, the laws of England and Wales. Operations undertaken in countries other than England and Wales are subject to the laws of those countries in which they reside.

 

Group history and recent developments

 

The Group, formerly known as Bass and, more recently, Six Continents, was historically a conglomerate operating as, among other things, a brewer, soft drinks manufacturer, hotelier, leisure operator, and restaurant, pub and bar owner. In the last several years, the Group has undergone a major transformation in its operations and organization, as a result of the Separation (as discussed below) and a number of significant disposals during this period, which has narrowed the scope of its business.

 

On April 15, 2003, following shareholder and regulatory approval, Six Continents PLC (as it then was) separated into two new listed groups, InterContinental Hotels Group PLC (as it then was) comprising the Hotels and Soft Drinks businesses and Mitchells & Butlers plc comprising the Retail and Standard Commercial Property Developments businesses (the “Separation”).

 

The Group disposed of its interests in the soft drinks business by way of an initial public offering (“IPO”) of Britvic, a manufacturer and distributor of soft drinks in the United Kingdom, in December 2005.

 

Acquisitions and dispositions

 

From Separation to December 31, 2010, 185 hotels with a net book value of $5.3 billion have been sold, generating aggregate proceeds of $5.6 billion. Of these 185 hotels, 166 hotels have remained in the Group’s global system (the number of hotels and rooms franchised, managed, owned and leased by the Group) through either franchise or management agreements. At December 31, 2010, the Group owned 15 hotels.

 

The following provides details relating to the hotels disposed and retained pursuant to the asset disposal program.

 

 

During 2010, the Group disposed of the Holiday Inn Lexington for $5 million and the InterContinental Buckhead, Atlanta for $105 million. During 2009, the Group disposed of the InterContinental Sao Paulo for $22 million. During 2008, the Group disposed of the Holiday Inn Jamaica for $30 million.

The Group also divested a number of equity interests for total proceeds of $17 million, $15 million and $61 million in 2010, 2009 and 2008, respectively. The most significant interests sold were a 31.25% interest in the Crowne Plaza Christchurch and a 17% interest in the Crowne Plaza Amsterdam in 2008. In 2010, a loan repayment of $11 million was also received.

 

The asset disposal program which commenced in 2003 has significantly reduced the capital requirements of the Group whilst largely retaining the hotels in the Group’s system through management and franchise agreements.

 

Capital expenditure in 2010 totaled $95 million compared with $148 million in 2009 and $108 million in 2008. 2009 included the $65 million purchase of the Hotel Indigo San Diego.

 

At December 31, 2010 capital committed, being contracts placed for expenditure on property, plant and equipment and intangible assets not provided for in the Consolidated Financial Statements, totaled $14 million.

 

On October 24, 2007 the Group announced a worldwide relaunch of its Holiday Inn brand family which is now substantially complete. In support of this relaunch, the Group has made a non-recurring revenue investment of $63 million which has been charged to the Consolidated income statement as an exceptional item since the 2007 relaunch. During 2010, $9 million (2009 $19 million, 2008 $35 million) was charged.

 

Return of funds

 

Since March 2004, the Group has returned over £3.5 billion of funds to shareholders by way of special dividends, share repurchase programs and capital returns (see table below).

 

A £150 million share repurchase program was announced on February 20, 2007. During 2010 no shares were repurchased. By March 25, 2011, a total of 14.4 million shares had been repurchased under the £150 million repurchase program at an average price per share of 831 pence per share (approximately £120 million). Purchases are made under the existing authority from shareholders which will be renewed at the Company’s Annual General Meeting. Any shares repurchased under these programs will be canceled.

 

Information relating to the purchases of equity securities can be found in Item 16E.

 

 

 

Hotels

 

The Group is an international hotel business which owns a portfolio of established and diverse hotel brands, including InterContinental Hotels & Resorts, Crowne Plaza Hotels & Resorts, Holiday Inn Hotels & Resorts (including Holiday Inn Club Vacations), Holiday Inn Express, Staybridge Suites, Candlewood Suites and Hotel Indigo. At December 31, 2010, the Group had 4,437 franchised, managed, owned and leased hotels and 647,161 guest rooms in 100 countries and territories around the world. The Group also manages the hotel loyalty program, Priority Club Rewards.

SEGMENTAL INFORMATION

 

Geographic segmentation

 

The following table show the Group’s revenue and operating profit before exceptional operating items and the percentage by geographical area, for the years ended December 31, 2010, 2009 and 2008.

 

 

 

 

 

The Group is an international hotel business which owns a portfolio of established and diverse hotel brands, including InterContinental Hotels & Resorts, Crowne Plaza Hotels & Resorts, Holiday Inn Hotels & Resorts (including Holiday Inn Club Vacations), Holiday Inn Express, Staybridge Suites Candlewood Suites and Hotel Indigo. At December 31, 2010, the Group had 4,437 franchised, managed, owned and leased hotels and 647,161 guest rooms in 100 countries and territories around the world. The Group also manages the hotel loyalty program, Priority Club Rewards.

 

Industry and market trends

 

2010 was a turnaround year for the global economy, with clear signs that the global recession was easing during the second half and business and consumer confidence returning. This assisted the hotel industry’s recovery from a challenging economic period. The lodging industry is cyclical, tending to reflect the state of the general economic cycle. Historically, in previous cycles the industry has experienced periods of five to eight years of growth in revenue per available room (RevPAR) followed by up to two years of decline. Demand has rarely fallen for sustained periods and it is the interplay between hotel supply and demand that drives longer-term fluctuations in RevPAR.

 

The expected recovery in demand took place in 2010. The more modest increases in industry pricing, or average daily rate, which along with occupancy make up RevPAR, was caused by the increase in supply of hotel rooms globally, a legacy of the growth in hotel construction which began prior to the downturn.

 

The sustained success of the economic recovery is likely to be determined by both the challenging choices policy makers are faced with regarding austerity measures and the issues surrounding sovereign debt, along with the response of corporations and the financial sector. Corporations will need to play an important role in the recovery through sustained investment and job creation, and the Group, with an ambitious program to open new hotels, anticipates the need to recruit approximately 160,000 people over the next few years.

 

The Group monitors key industry drivers and business fundamentals, such as RevPAR, to ensure its strategy remains well suited to the environment and the Group’s capabilities.

 

Different regions, countries and types of demand vary in the speed they recover and it is our understanding of local demand drivers, combined with a global outlook, that help us anticipate the needs of different types of guest demand and so continue to develop the business to meet these needs. As an example, the Group’s recent launch of new tools to support meetings and events in our hotels was well-timed with the earlier than anticipated recovery in this type of demand. Many commentators thought meetings and events business would remain subdued into 2011.

 

There are a number of external drivers from which IHG expects to benefit:

 

 

Our strategy

 

With a portfolio of well-established brands, in the best developed and emerging markets, the Group is using its size, scale, people and expertise to realize its Vision of becoming one of the world’s great companies. The Group will be a great company when guests love to stay with us, people love to work for us, owners love our brands and investors love our performance. This strategy is measured by a series of key performance indicators around ‘‘Where we compete’’ and ‘‘How we win’’ (pages 22 and 23).

 

The Group’s strategy has ensured that it remains the largest hotel company in the world, by number of rooms. By grounding its operations and growth in its core purpose of creating Great Hotels Guests Love, the Company uses elements of its strategy, such as the business model of third-party ownership, to grow faster than its global competitors.

 

Delivering the elements of the Group’s strategy

 

Competing with an appropriate business model

 

The Group’s business model has a clear focus on franchising and managing hotels, rather than owning them outright, enabling the Group to grow at an accelerated pace, with limited capital investment. Furthermore, the Group benefits from the reduced volatility of fee-based income streams, as compared with the ownership of assets.

 

A key characteristic of the franchised and managed business is that it generates more cash than is required for investment in the business, with a high return on capital employed. At December 31, 2010 87% of operating profit before regional and central overheads, exceptional items, interest and tax is derived from franchised and managed operations.

 

Where necessary, the Group actively supports its brands by employing its own capital to showcase “best-in-class” operations through flagship assets.

 

The Group’s business model creates opportunities to build relationships with independent hotel owners and generate revenues by offering access to our global demand delivery systems, where guests can book their hotels through the Group’s booking channels, including branded websites and call centers. The latest example is our strategic relationship with Summit Hotel Properties Inc. (“Summit”), a US hotel investment company focused on branded hotels. On any unbranded hotel bought by Summit, the Group now has first rights to give the hotel a Group’s brand and earn fee revenues through generating demand for that hotel.

 

The key features of the Group’s business model are represented in the following table and charts.

 

The following table shows the number of hotels and rooms franchised, managed, owned and leased by the Group as at December 31, 2010, 2009 and 2008.

 

 

The Group’s continuing operating profit* by ownership type for the year ended December 31, 2010:

 

 

The Group’s global room count by ownership type at December 31, 2010:

 

 

 

 

Competing in developed and emerging markets

 

When considering open hotel rooms and those in development, the Group has leadership positions in 15 of the top 20 markets globally. These markets alone account for over 80% of global lodging spend. These include large developed markets such as the United States (“US”), United Kingdom (“UK”), and Germany, as well as emerging markets like China.

 

The US is the largest market for branded rooms, with 3.4 million. The segment in the US with the greatest share is midscale, with 1.3 million branded hotels rooms, and the Group’s Holiday Inn brand family is the largest operator in this segment.

 

The Group is also focused on growing in large markets such as the UK and Germany where it ranks second and third, respectively in terms of number of available rooms. The benefits of a large hotel presence across these high-value self-supporting markets for the Group include the ability to build relationships with the largest possible number of guests.

 

The Group is the largest hotel company in China, the emerging market with the greatest scale, having 0.5 million branded rooms. The Group, which was the first international chain to open hotels in the country, remains the largest, with close to 50,000 rooms. The rapid pace of openings for the Group and the wider lodging industry shows that China, and other emerging markets are behaving as the Group has seen in developed markets over the past 50 years. The strong demand drivers for hotels suggest these will remain key growth markets.

 

Outside the largest markets, the Group focuses on achieving presence for its biggest brands in key gateway cities which show the potential for high demand from business and leisure guests, and where its brands can generate revenue premiums.

 

In the hotel industry, the future supply of hotels and hotel rooms is visible through the pipeline, and the Group’s pipeline reflects the sustainability of its leadership position.

 

In 2010, the Group’s portfolio opened 35,744 rooms in 29 countries, and signed a further 55,598 into the pipeline, across 38 countries. The Group currently has 204,859 rooms in 1,275 hotels under development in 64 countries.

The Group’s pipeline ensures sustainable development in new and emerging markets that best suit the Company’s strengths and anticipate the future needs of customers. The Group has committed development teams ensuring a sizeable pipeline in developing markets: during 2010 the Group opened 7,253 rooms in Greater China, representing 20% of all new rooms opened by it across the globe during 2010.

 

The Group’s pipeline is the largest branded hotel pipeline in the world, representing 18% of all hotels under development, including those that are independent or unaffiliated.

 

Winning with our scale and expertise

 

The major benefit the Group brings to guests who stay in the Group’s portfolio of hotels, and owners who invest with us, is our system to help guests book and stay with us, and then maintain the relationship with them after they leave. This includes having hotels in key locations, great brands with consumer appeal, efficient reservations systems, global web presence, our loyalty rewards schemes, along with other elements. Together, these form the largest such ‘system’ in the industry and are the engine of our business, delivering, on average, 68% of total rooms revenue in 2010.

 

With continued focus on the success of this global system, we have developed “best-in-class” marketing and technology to support our hotels and drive incremental revenues.

 

Our focus on key geographical markets where we operate a large number of hotels, such as the US, UK, China, Middle East and Germany, means we can run hotels and our operating system with greater efficiencies, delivering more to the consumer at a lower cost.

 

The size of the global hotel market is estimated by the Group to be close to 20 million rooms. Competitors in the market include other branded hotel companies, both large and small, international and domestic, and independently owned hotels.

 

IHG remains the largest branded hotel company, with our share currently at approximately 10% of the branded rooms (Smith Travel Research), and a presence in 100 countries and territories. Leading research (Smith Travel Research) calculates that there are 6.6 million branded hotel rooms, with the remainder a combination of independent hotels, guesthouses and other types of lodging.

 

Although currently less than half of all hotel rooms are branded, the benefits of being part of a brand are recognized by many owners and the growth of branded rooms has exceeded the growth of unbranded rooms over the past 10 years. Raising finance is still an issue globally, and branded hotels are perceived as offering greater security through global reservations systems, loyalty schemes, and international networks. Branded hotel companies, such as the Group, are attractive to independent hotel owners and are therefore gaining market share at the expense of the unbranded portion of the industry. The Group is well positioned to benefit from this trend.

 

Hotel owners are increasingly recognising the benefits of franchising or managing with the Group, which can offer a portfolio of brands to suit the different real estate opportunities an owner may have, together with effective revenue delivery through global reservations channels. Furthermore, hotel ownership is increasingly being separated from hotel operations, encouraging hotel owners to use third parties, such as the Group, to manage their hotels.

 

Winning with our people and values

 

Our Vision can only be realized if we have collaborative and engaged employees, delivering the right experience to our guests through shared values and living our brands. We have extensive on-boarding, communication, development and recognition programs, aligned under our employment brand, “Room to be yourself”, providing the right environment for our people to be successful.

Our people dictate our culture, and the Group is aligned around great values which are consistently brought to life through a set of five behaviors, the “Winning Ways”:

 

 

Business relationships with others

 

The Group maintains effective relationships across all aspects of its operations. The Group’s operations are not dependent upon any single customer, supplier or hotel owner due to the extent of its brands, market segments and geographical coverage. For example, the Group’s largest third-party hotel owner controls just 3% of the Group’s total room count.

 

The Group continued to enhance and streamline its procurement processes during 2010, and with the implementation of initiatives to combat waste and enhance relationships with suppliers, the Group is striving to ensure best-practice is employed throughout the Group. With a focus on ensuring high-quality goods and services are sourced at competitive prices, the Group strives to ensure enhanced value for the Group, our hotel owners and shareholders.

 

IHG is proud of its strong and important relationship with the IAHI, the Owners’ Association for owners of hotels in the Group’s seven brands across the world. IHG meets with the IAHI, in large and small groups, on a regular basis and works together to support and facilitate the continued development of the Group’s brands and systems. During 2010, the combined work of the Group and IAHI implemented several enhancements to the Group’s system.

 

Examples of such enhancements include:

 

Holiday Inn relaunch  — the near completion of the $1 billion global relaunch of the Holiday Inn brand family;

 

InnSupply  — improving purchasing efficiencies and streamlining the procurement processes across both organizations;

 

Way of Sales  — developing “best-in-class” practices for the sales operations of both organizations, having identified critical roles for generating revenues;

 

Celebrate Service week  — giving recognition and thanks to the many thousands of front-line employees, and emphasizing engagement through the Group’s brands; and

 

People Tools  — enhancing the recruitment, hiring, training and retention practices across both organizations, with specific focus on reflecting the individual qualities of each brand. These tools are supplied to all hotels: managed, franchised and owned and leased.

 

Many jurisdictions and countries regulate the offering of franchise agreements and recent trends indicate an increase in the number of countries adopting franchise legislation. As a significant percentage of the Group’s revenue is derived from franchise fees, the Group’s continued compliance with franchise legislation is important to the successful deployment of the Group’s strategy.

Measuring our success

 

We measure our success in terms of shareholder value, as well as through a set of strategic priorities. These form our key performance indicators (KPIs) to ensure a consistent approach to running the business. These KPIs consist of “Where we compete”, including the appropriate business model, key target markets and consumer segments; and “How we win”, including financial returns, our people, the guest experience and responsible business.

 

Where we compete

 

How we win

 

 

 

 

Footnotes on page 25.

 

 

 

 

Global System

 

In addition to management or franchise fees, hotels within the Group’s system pay cash assessments and contributions which are collected by the Group for specific use within the System Fund (the “Fund”). The Fund also receives proceeds from the sale of Priority Club Rewards points. The Fund is managed for the benefit of hotels in the system with the objective of driving revenues for the hotels. The Fund is used to pay for marketing, the Priority Club Rewards loyalty program and the global reservations system.

 

Priority Club Rewards:   The Group’s worldwide loyalty scheme, Priority Club Rewards, is the largest of its kind in the hotel industry. Members enjoy a variety of privileges and rewards as they stay at the Group’s hotels around the world. The global system room revenue generated from Priority Club Rewards members during 2010 was $6.6 billion. Priority Club Rewards membership reached 56 million customers as at December 31, 2010, compared to 48 million as at December 31, 2009.

 

Central Reservations System Technology:   The Group operates the HolidexPlus reservations system. The HolidexPlus system receives reservations requests entered on terminals located at most of the Group’s reservations centers, as well as from global distribution systems operated by a number of major corporations and travel agents. Where local hotel systems allow, the HolidexPlus system immediately confirms reservations or indicates alternative accommodation available within the Group’s network. Confirmations are transmitted electronically to the hotel for which the reservation is made.

 

Reservations Call Centers:   The Group operates 10 reservations call centers around the world which enable it to sell in local languages in many countries and offer a high quality service to customers.

 

Internet:   The Group introduced electronic hotel reservations in 1995. The Internet is an important communications, branding and distribution channel for hotel sales. During 2010, 24% (24% in 2009) of global system room revenue booked via the Internet through various branded websites, such as www.intercontinental.com and www.holidayinn.com, as well as certified third parties.

 

The Group has established standards for working with third-party intermediaries — online travel distributors — who sell or re-sell the Group’s branded hotel rooms via their Internet sites. Under the standards, certified distributors are required to respect the Group’s trademarks, ensure reservations are guaranteed through an automated and common confirmation process, and clearly present fees to customers.

 

During 2010, global system room revenue booked through the Group’s global systems (which includes Priority Club Rewards members, central reservations and call centers, global distribution systems and the Internet) was 68% (68% in 2009).

 

Sales and Marketing

 

The Group targets its sales and marketing expenditure in each region on driving revenue and brand awareness or, in the case of sales investments, targeting segments such as corporate accounts, travel agencies and meeting organizers. The majority of the Group’s sales and marketing expenditure is funded by contractual fees paid by most hotels in the system.

Global Brands

 

Brands Overview

 

The Group offers hotel brands that appeal to guests with different needs and tastes. This requires a portfolio of large global brands, growing alongside innovative new brands to meet the unique experiences our guests desire.

 

The hotel industry is usually split into segments based upon price point and consumer expectations. The Group is focused on the three segments that together generate over 90% of branded hotel revenues: midscale (broadly 3 star hotels), upscale (mostly 4 star), and luxury (5 star).

 

 

 

 

 

 

 

InterContinental Hotels & Resorts (“InterContinental”) is the Group’s 5-star brand located in major cities in over 60 countries worldwide. With over 60 years’ experience, the brand’s understanding of high quality, understated service and outstanding facilities, coupled with a genuine interest in our guests differentiate it in a competitive segment. The philosophy of the brand is to enable every guest to maximize the enjoyment of their stay — specializing in engaging guests with the destination by sharing local knowledge to create authentic experiences that enrich our guests’ lives and help them broaden their outlook.

 

InterContinental hotels are principally managed by the Group. At December 31, 2010, there were 171 InterContinental hotels which represented 9% of the Group’s total hotel rooms. During 2010, nine InterContinental hotels were added to the portfolio, while four hotels were removed.

 

 

 

Crowne Plaza Hotels & Resorts (“Crowne Plaza”), in the upscale, 4 star segment, specializes in offering state-of-the-art business and meeting facilities that provide productive, successful and energizing experiences to guests who believe travel is fun and rewarding.

 

The majority of Crowne Plaza hotels are operated under franchise agreements in the US and Europe, and managed in other markets by the Group. At December 31, 2010, there were 388 Crowne Plaza hotels which represented 16% of the Group’s total hotel rooms. During 2010, 29 Crowne Plaza hotels were added to the portfolio, while seven hotels were removed.

 

The Holiday Inn Family of Brands

 

The Holiday Inn family of brands is the world’s largest midscale hotel brand family by number of rooms, and the Group’s most significant operation. Focused around a relaxed atmosphere, the brands are designed to support both business travellers and families. During 2010, the brand family neared completion of a $1 billion refresh, updating their image by upgrading facilities, service and amenities, ensuring the brands continue to remain competitive within their midscale markets. The Holiday Inn family was the first international hotel chain to open in China in 1984 and the first hotel chain to launch a direct bookings website in 1995.

 

 

 

 

Holiday Inn Hotels & Resorts (including Holiday Inn Club Vacations) (“Holiday Inn”) are predominantly operated under franchise agreements. At December 31, 2010, there were 1,247 Holiday Inn hotels which represented 36% of the Group’s total hotel rooms, of which 64% were located in the Americas. During 2010, 53 Holiday Inn hotels were added to the portfolio, while 131 hotels were removed.

 

 

 

 

Holiday Inn Express hotels are almost entirely operated under franchise agreements. At December 31, 2010, there were 2,075 Holiday Inn Express hotels worldwide which represented 30% of the Group’s total hotel rooms, of which 84% were located in the Americas. During 2010, 122 new Holiday Inn Express hotels were added to the portfolio, while 116 hotels were removed.

 

 

Staybridge Suites is the Group’s upscale extended stay brand, offering a sociable, family-like atmosphere. It was the fastest upper-tier extended stay brand to reach the 50-hotel and 100-hotel milestones, and was ranked highest in the prestigious J.D. Power and Associates’ 2009 North America Hotel Guest Satisfaction Index Study for extended stay hotels. In 2008 Staybridge Suites opened its first EMEA hotel in Liverpool and has since opened properties in Cairo, Abu Dhabi and Newcastle.

 

The Staybridge Suites brand is principally operated under management contracts and franchise agreements. At December 31, 2010 there were 188 Staybridge Suites hotels, which represented 3% of the Group’s total hotel rooms, of which 96% (183 hotels) were located in the Americas. During 2010, seven hotels were added to the portfolio, and one hotel was removed.

 

 

 

Candlewood Suites is the Group’s midscale extended stay brand that gives its guests all the essentials they need for a home-like stay at great value. Shortly after being acquired by IHG in 2003, Candlewood Suites won J.D. Power’s award for highest extended stay guest satisfaction in North America in 2004 whilst also ranking first in the Market Metrix Hospitality Index survey for customer satisfaction. Candlewood Suites continues to lead the way in midscale extended stay lodging, with the most properties under development.

 

The Candlewood Suites brand is operated under management contracts and franchise agreements. At December 31, 2010, there were 288 Candlewood Suites hotels, which represented 4% of the Group’s total rooms, all of which were located in the Americas. During 2010, 35 hotels were added to the portfolio, and one hotel was removed.

 

 

 

Hotel Indigo is the Group’s boutique and youngest brand, launched in 2004, and focuses on a guest that appreciates art and design and that is seeking affordable luxury. Hotel Indigo provides guests with the refreshing design and intimate service synonymous with a boutique along with the consistency, reliability, and accessibility of a branded hotel. Each hotel is unique and reflects its local neighborhood with local murals and images, a vibrant color palette and locally sourced and seasonal menu items.

 

The Hotel Indigo brand is principally operated under franchise agreements. At December 31, 2010, there were 38 Hotel Indigo hotels, 35 located in the Americas. During 2010, five hotels were added to the portfolio, and no hotels were removed.