Analysis on the Cost Structure of Intercontinental Hotel Group

This report analyzes the cost structure of Intercontinental Hotel Group, evaluating the various costs it incurs and appraising its business. It also evaluates the internal and external factors that have a bearing on the cost and performance of the company.

ANALYSIS ON THE COST
STRUCTURE OF
INTERCONTINENTAL HOTEL
GROUP

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
OBJECTIVES .................................................................................................................................3
FINANCIAL STRUCTURE OF IHG ............................................................................................3
IMPORTANCE OF THE EFFECTIVE MANAGEMENT OF COSTS AND REVENUE ...........4
COSTS INCURRED BY IHG ........................................................................................................4
REVENUE STREAMS OF IHG ....................................................................................................5
INTERNAL AND EXTERNAL FACTORS BEARING ON COSTS AND PERFORMANCE
OF IHG ...........................................................................................................................................6
PESTEL ......................................................................................................................................6
SWOT ANALYSIS ....................................................................................................................6
ANALYSIS OF THE COMPETITIVE ADVANTAGE OF IHG...................................................7
RECOMMENDATIONS ................................................................................................................7
CONCLUSIONS .............................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Intercontinental Hotel Group PLC (IHG) is one of the prominent hotel business with about
400,000 associates operating in over 100 countries to deliver effective hospitality to its clients.
IHG runs owned, franchised hotels and on behalf of third parties with mainstream hotels such as
Hotel Inn, Holiday Inn Express and Staybridge Suites among others, upscale hotel such as
Hualuxe hotel and resort, Crowne Plaza Hotels and resort, Even Hotels, Hotel Indigo, Luxury
brands a such as Six Sense, Intercontinental hotel and resorts, Regent Hotels and Resorts and
Kimpton hotels and restaurants among others. (IHG, 2019)
OBJECTIVES
This report will analyse and on the cost structure of INTERCONTINENTAL HOTEL GROUP
evaluating the various costs it incurs and appraise s in its business. It will also evaluate and
analyse the internal and external factors that have a bearing on the cost and performance of its
company, and this will include the PESTEL factors affecting its current business climate, the
SWOT analysis of the company and the analysis of competitive advantage with some
recommendations on how management could improve business and profits.
FINANCIAL STRUCTURE OF IHG
Financial structures indicate the balance together with all liabilities of the company and its
assets, (Hernandez-Perz, et al., 2019). For the six months ended June 30, 2018, US $ 286 million
in cash was provided for operating activities. Net cash outflows on investing activities totalled
US $ 102 million and net cash outflows on financing activities the value of US $ 69 million. Net
debt as of June 30, 2018 was $ 1,802 million and amount of $ 233 million in respect of
InterContinental Boston's finance lease obligations. The Group had a net liability of US $ 1,162
million as of June 2018 (restated to US $ 1,301 million as of December 31, 2017), considering
that its internally caused trademarks are not recorded in the balance sheet under Brazilian GAAP.
(Funds library, 2019)

IMPORTANCE OF THE EFFECTIVE MANAGEMENT OF COSTS AND
REVENUE
The focus of revenue management helps companies like IHG to exploit their organisation
individually to drive additional revenues (Avinal, 2004), at the same time the cost management
defines what plans of expected cost to guarantee the project is on budget(Richard, et al., 2016).
In this case the revenue of IHG in 2018 the hotel gets in total gross revenue amount of $ 28
billion. In 2018, about 77% of revenue came from franchise and administration fees and core
revenues. Management fees rate of total hotel revenue much more TM5100: FINANCE FOR
HOSPITALITY, TOURISM AND EVENTS 3 profit, technology fee Revenue.
COSTS INCURRED BY IHG
Hotel companies like IHG are service providers and consumers of human labor, service supplies,
and other essentials to ensure spontaneous provision of good hotel services.
IHG’s sunk costs are the construction costs, acquisition costs such as $39m of a 51% stake in
Regent Hotels and Resorts in July, acquisition of Six Senses Hotels and Resorts Spas,
Rebranding costs of $300m in February 2019 and attainment of business operation certificate’s
in different countries and cities of operation.
In large hotels like IHG PLC, labor costs share a big percentage of the expenses. Such number
indicates that main players in the industry has the general incentive to improve their service
quality. Largely by investing in other services sectors in order to improve their reputation in the
hotel industry an ideology IHG has embraced so well with expansions every year.
“Scale economies” is effective when the scale of production increases, costs will go down. In
hotel industry, scale economies are mostly depending on rate of room occupancy. Once
occupancy rate increases, average costs will decrease. However, in boutique hotels, economics of
scale also rely on other services. For example, the IHG hotels are 5-star boutique hotel all over
the world. Except room occupancy rates, the hotels have accessorial restaurants and Spa services
as basic requirement (IHG, 2018).

“Economies of scope” specify that total cost of production is lower when two products are
produced together than that of producing separately if there is joint cost. In the case of IHG,
consumers are not only purchasing the comfortable room services, but also likely experiencing
other qualified services inside the hotels, guide guests in travel reservations, tours and
sightseeing among other services. The joint cost would be the expense of location. All the high-
quality services and packages attract more customers to their hotels, and hotel itself can lower its
average costs. TM5100: FINANCE FOR HOSPITALITY, TOURISM AND EVENTS 4
REVENUE STREAMS OF IHG
IHG, which is considered one of the largest hotel companies in the world, has more than 5,000
properties spread around the world prove where distribution is heading. Reserves made through
GDS - which will usually be the commercial end of the market - have also increased. Which
means more marked and change of face of the direct channel. Digital revenues at this time have
increased more than £4 billion per year. Which means that it will increase more and more of the
mobile, the revenues of this channel are £100 million per month and that has increased 50%
annually (IHG, 2018).
INTERNAL AND EXTERNAL FACTORS BEARING ON COSTS AND
PERFORMANCE OF IHG
One of the main characteristics in hotel and restaurant management like IHG is that business can
hardly control demand. This is because demand for hotels and restaurants is decided by external
factors, like economic climate, customers’ preferences, competitive pricing and industrial
environment. However, internal factors too certainly have an influence on business performance
and costs. Internal factors are represented by, for example, extent of business investment, level of
innovation, costs of workers and firm size. External factors can refer to t productivity level of
hotel restaurant branches in region location businesses, competitors’ price, tourist demand, etc
(IHG, 2018).

PESTEL
Economically, competition from other hotel service providers affects costs and performances of
IHG. It has great approach towards competition, for which they have guest need orientation
programme where their services are tailored as per requirements. Also, with growing global
economy and increasing disposable income of clients, IHG PLC must do match to these
standards if they are to remain one of the leading hotel companies in world (IHG, 2018).
Geographical location is an important factorr for hotel performance. All plants reap productivity
benefits from being in places where occupational distribution of workers matches demand for
labour by occupation. IHG has many establishments in different cities making their variety of
choices unlimited for guests.
SWOT ANALYSIS
This will analyse the strengths and weaknesses of the company.
Opportunities:
TM5100: FINANCE FOR HOSPITALITY, TOURISM AND EVENTS 5 IHG recently
partnered with a hotel group in India, named SAMHI ground, where it will re - open about 2000
Holiday INN Express hotel rooms. In next 5 years, IHG In China also the British multinational
will start to expand another 300 new hotels. (Gowrea, 2018).
Weakness:
In 2017, IHG suffered a major weakness in IT privacy. Which covered in about 1,200 of the
hotels were infected with credit card theft malware as well as guest information (Kastrenakes,
2017).
RECOMMENDATIONS
IHG have expansions in different countries with emphasis on their overall selling brand to match
the ever – increasing customers for hotel industry and to include investors in areas of franchising,
association and joint venturing. Continue divesting funds generated from the hotels to reinvest
elsewhere across the business; this will help IHG in overall growth and matching costs to
different cost centres. IHG can increase on its partnership with different stake holders to avoid
risks associated with competition. Proper financial planning and currency forecasts should be
adhered to such that the risk of political and economic developments. Group should maintain an

overall standard of procedures, guideline and systems among others such that standard of group
and its reputation is kept in line and associated risks like reputation risks will be history.
CONCLUSIONS
In summary, IHG PLC has a great establishment, worldwide coverage, standard set, strategic
model aimed at growth and development, a well – balanced board with hotels, joint ventures and
associations. With their asset – light business modelling, there is minimal funds spent on capital
expenditures and this in turn leads to high profitability margin overall that should be maintained.

REFERENCES
Books and Journals
Business travel. (2019). Direct or indirect? Where IHG gets its revenues: Business Travel IQ.
[online] Available at: https://www.businesstravel-iq.com/Analysis/Direct-or-indirect-
Where-IHG-gets-itsrevenues [Accessed 27 Nov. 2019].
Avinal, E. A., 2004. Revenue Management in Hotels.. Journal of Foodservice Business
Research, 7(4), pp. p51-57. 7p..
Hernandez-Perz, J., Cruz Rambaud, S. & Lorenzana de la Varga, T., 2019. Economic situation,
the key to understanding the links between CEOs’ personal traits and the financial
structure of large private companies.. PLoS ONE. , 14(7), pp. p1-15. 15p..
Richard, B., Shi, W. & Yang, C., 2016. HOTEL Revenue Management: From Theory to
Practice. Anatolia: An International Journal of Tourism & Hospitality Research, 27(2), pp.
p283-284. 2p..
Online
Gowrea, V., 2018. InterContinental Hotels Group. [Online] Available at:
https://www.howandwhat.net/swot-analysis-intercontinental-hotels-group-plc/ [Accessed
27th Nov 2019].
IHG, 2018. Annual Report and Form 20-F 2018. [Online] Available at: https://www.ihgplc.com
[Accessed 27 Nov 2019].
IHG, 2018. How we win - InterContinental Hotels Group PLC. [Online] Available at:
https://www.ihgplc.com/files/reports/ar2012/docs/IHG_Review_How_we_win.pdf
[Accessed 26th Nov 2019].
IHG, 2019. About us. [Online] Available at: https://www.ihgplc.com/en/about-us
Kastrenakes, J., 2017. 1,200 InterContinental hotels were breached by credit card stealing
malware. [Online] Available at: https://www.theverge.com [Accessed 27th Nov 2019].