How We Sell Franchise and Management Contracts. Kirk Kinsell Senior Vice President, Franchising and Business Development

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1 How We Sell Franchise and Management Contracts Kirk Kinsell Senior Vice President, Franchising and Business Development

2 Successful franchising requires meeting 3 simultaneous needs Price / value Meet needs for the trip / occasion Brand I like and trust What guests want What IHG wants More rooms More markets More segments More relationships What owners want Cost effective access to Guests Marketing power Capital Markets Long term relationship -1-

3 Our primary goal is to franchise the brand Sell flag first (i.e. franchise) Then may sell management, depending on owner type, profit opportunity and segment: Higher price points more managed Lower price points usually franchised Exceptions for portfolio deals, e.g., Candlewood Our management economics make us more money on: Large assets, e.g. InterContinental / Crowne Plaza Large, homogenous portfolios, e.g., Candlewood -2-

4 Franchising is higher margin than managed in most cases Indicative relative economics of owned, managed and franchised models (based on a typical midscale hotel) O&L Managed Franchised $m $k $k Room Revenue 3.0 5% Total Revenue GOP EBIT Margin 25% 70% 85% 3% 6% O&L O&L contributes contributes about about 6-7x 6-7x a Management Management Contract Contract and and 8-9x 8-9x a Franchise Franchise Contract Contract Source: STR; HOST report, IHG analysis -3-

5 How does an owner choose a brand? Suitability Availability Which brand suits my location and needs? Is the brand available? Delivery What can the brand and brand owner offer me? Performance Relationship -4-

6 Large opportunity exists for new signings, mainly in upscale and midscale Average number of opportunities by segment per year (hotels) 800 Average number of opportunities by segment per year (rooms) 70, New Build Conversion 60,000 50,000 40,000 New Build Conversion , , ,000 0 Luxury Upper-upscale Upscale Midscale with Midscale without Source: STR; average based on rooms converted into or within segment plus new builds Economy 0 Luxury Upper-upscale Upscale Midscale with Midscale without Economy -5-

7 IHG is increasing development resources Upscale Management & Franchise: Today: 5 development professionals 2005: 9 development professionals Midscale Management & Franchise : Today: 14 regional development professionals 3 sales management professionals New Product: 2005: Add 3 regional staff dedicated to Hotel Indigo All sales staff supported by product, feasibility and market planning teams located in Atlanta Incentive compensation comprises 30-70% of total budgeted compensation -6-

8 Significant back-up to Development team Behind this front line sales force is a wide range of support functions: Investment analysis team Legal Property improvement plan team Market planning team Contract administration team Technical services These operations are all essential to the franchise sales process : Total approximately 56 professionals -7-

9 Franchise sales process driven by new and existing leads Leads generated by: Direct solicitation Prospecting Promotions Development seminars Existing relationships c.50% of sales c.50% of sales Opportunities measured against: A distribution plan (updated annually) Set of performance criteria, including Applicant experience Development costs/conditions Impact on existing and potential IHG distribution -8-

10 Sales targeting based on detailed bottomup plans Annual business plans are created for every market in the US in total 162 markets: Analyses existing inventory IHG Competitor Assesses whether target for existing inventory is to keep or reject Assesses remainder of market Which locations does brand have potential to be in How can that be achieved Is there a conversion opportunity What development sites are available This sets objectives for the sales force in every region of the US -9-

11 Atlanta Upscale hotels -10-

12 Atlanta Crowne Plaza major competitors and targets -11-

13 Franchise negotiation process governed for most part by UFOC Franchise contract governed by: Legal disclosure document (UFOC) Plan review/product improvement plan Prospective franchisee receives: Detailed disclosure of system performance (e.g., Priority Club, channels); Costs/ROI determined by franchisee from their projections of revenue Regional developers negotiate agreements, with higher authority required for material changes from standard set of terms -12-

14 Midscale success rate differs to that of upscale for good reason Midscale brands require 5-10 leads to convert to successful sale Timing of project, demonstrated performance in similar setting, capital cost and financing determines success Upscale brands require leads to convert to successful sale More challenging than midscale given the increased complexity of highest and best use for real estate Deal structure, demonstrated performance, capital cost and financing determines success -13-

15 After the deal, new clients become a source of future growth Development team is directed at client rather than market to leverage additional growth Very strong and broad relationships in mid-market Now building similar strength in upscale Franchise operations and hotel performance support monitor hotel quality, performance & compliance with agreements -14-

16 Many other services are provided after the deal is done Charge Used to Technology fee Management training Change of ownership fee License Renewal $ per room basis $ per workshop basis $ per room basis with a minimum per brand $ per room basis with a minimum per brand Support property management software costs (Opera and Pegasus) Support cost of workshops Support administrative costs of dealing with a new owner Support administration costs of relicensing an owner -15-

17 Many other services are provided after the deal is done Charge Used to Property inspection plan fee Quality inspection Per PIP Per visit Support cost of conducting an assessment of the property s quality needs Support cost of the visit and associated reports Guest relations fee (payable to system fund) Per complaint Support cost of handling guest complaints about a hotel -16-

18 Franchising lets IHG use other people s money in two ways Owner creates hotel Royalties create direct profit stream to IHG System fees create revenue investment to build our brands Immediate results Long-term brand value -17-

19 The fee model to IHG s P&L is generally very simple Ongoing fees Franchise RevPAR x system size x royalty % Management RevPAR x hotel size x base fee + incentive fee x GOP / NOI + accounting and technology support fees Event-driven fees Franchise front end fees on new growth F&B fees renewal fees on re-licensing change of ownership fee on property transaction liquidated damages from early terminations property inspections and compliance charges training at opening and ongoing during term of agreement Management technical service fees property inspections and compliance charges early termination (if permitted) by contract -18-

20 Franchising lets IHG use other people s money in two ways Owner creates hotel Royalties create direct profit stream to IHG System fees create revenue investment to build our brands Immediate results Long-term brand value -19-

21 System fund assessments charged as a percent of revenue or guest spend Marketing and reservations fund Charge 2.5-3% of gross room revenue Used to Fund cost of Awareness advertising Research and development of new or improved services Tactical marketing programs to support revenue enhancement Priority Club Rewards fund 4.75% of member s total bill Fund cost of frequency programme, (mostly the cost of the points awarded to guests for their stay at the hotel) In total typically c. 5% of total hotel revenues -20-

22 Conclusion Focus is franchise first Management only where it makes economic sense Significant infrastructure behind sales operation Significant part of what we do is market planning We generate c. 50% of sales from existing clients The level of market understanding required, and the relationships we have, are the product of decades of work Generates very significant barriers to entry -21-