IHG: Capturing the Bleisure Market

InterContinental Hotels Group (IHG) is a British multinational hotel company, operating over 855,000 hotel rooms across brands ranging from Holiday Inn Express to InterContinental. With operations dating back to 1777, IHG has long been a fixture in the hospitality industry.

Historically, IHG has consistently had one of the highest net income margins in the industry by differentiating itself through premium experiences and a portfolio of mostly upscale brands. However, recent external pressures have depressed IHG’s historically high margins. Between 2013 and 2018, IHG’s total revenue increased at a compounded annual growth rate of 15 per cent, driven by the 2015 acquisition of Kimpton Hotels, but net income attributable to equity holders decreased from $372 million to $351 million due to increased costs of goods sold and administrative expenses.

A key driver of these issues is the invention of modern hotel comparison services such as Expedia and Booking.com which have quickly commoditized the hotel industry. Whereas past stays were historically driven by brand recognition and amenities, the emergence of booking apps have led to consumers choosing hotels solely on price. Surveys conducted by Egencia, a travel management company, show that 68 per cent of travellers see little to no noticeable difference between hotel chains. Furthermore, IBM discovered that only half are willing to pay a 10-per-cent premium to stay in their favourite hotel. The advent of Airbnb has also contributed to IHG’s margin compression as the start-up has achieved approximately 20-per-cent market share in the hotel industry.

To manage competition with other hotel chains and start-ups like Airbnb, IHG must find a way to differentiate itself. A low-pricing strategy is neither a unique nor sustainable form of competitive differentiation and risks commoditizing product offerings. IHG’s success has been built by differentiating on premium experiences but in recent periods, the American Customer Satisfaction Index (ACSI) has consistently ranked IHG hotels lower than comparable hotels under the Marriott and Hilton umbrellas. Loyalty is in decline as consumers are switching brands more frequently than ever before.

As pure leisure travellers increasingly focus on price, they become more unlikely to produce attractive financial returns for IHG. Instead of targeting these travellers as they have historically, IHG should aim to pursue a differentiation strategy with customers who are more likely to value experiences and stay loyal. Business Leisure, or “bleisure”, travellers offer the most viable opportunity for IHG to effectively differentiate on premium experiences, maintaining the company’s competitive position and pricing strategy.

Bleisure, a growing percentage of the business travel market, encompasses the entire range of leisure activities that business travellers undertake during corporate trips. Bleisure guests are less price-sensitive than pure leisure travellers as they can take advantage of paid vacation days to extend their stay and explore their destination after they have completed their business engagement. It is a trend that is becoming increasingly popular within the hospitality industry, with approximately 2.2 million bleisure trips made in 2017.

Yelp Partnership: Seizing the Bleisure Market
To effectively address the bleisure market and increase revenues, IHG must increase their focus on personalizing guest experiences. This can be done by partnering with a business directory platform that is similar to IHG, in that it has local business relationships as well as a global reach. Yelp is such a platform and would give bleisure guests in IHG hotels more reason to extend their stay, while benefiting Yelp from an increased user base.

Yelp, with 142 million unique users per month, is one of the most popular apps for reviews and recommendations on local businesses. They provide a comprehensive platform featuring a wide range of local businesses that span across various industries including accommodations, restaurants, tourist attractions, and entertainment venues. To differentiate themselves from competitors, Yelp is redesigning their website to feature more curated recommendations by using advanced data analytics to offer personalized lifestyle and accessibility, dietary, and interest-based recommendations to users.

In the partnership, Yelp brings a diverse set of local attractions, reviews, price estimates, and automated reservation capabilities. On the other hand, IHG possesses information on the customer’s length of stay and their demographic data. The merging of these two information sources allows Yelp and IHG to do together what they couldn’t do alone–offer personalized recommendations in a bundle. This would be presented through a unified booking platform for IHG customers. Offerings would include meal reservations, tourist attractions, and other activities tailored to user preferences. Following the selection of desired experiences, users are given a price quote which they can choose to accept, after which Yelp’s system will automatically make bookings.

Such a partnership would be effective in targeting corporate guests who often do not have time to research travel plans or leisure activities, and addresses the growing demand for authentic experiences. By presenting bleisure travellers with personalized travel recommendations throughout their trip, IHG can appeal to these individuals at various points of their stay, presenting more opportunities for IHG to increase customer satisfaction.

Yelp would also benefit significantly from the partnership; given IHG’s upper-scale focus in the hotel industry, the users driven to their new platform would have greater disposable income to spend on local businesses partnered with Yelp. Compared to other hotel companies whose guests are more price-sensitive, IHG brings a unique, untapped customer base to Yelp. As a result, Yelp would realize increased revenues from rising ticket sales and restaurant reservations made through their platform. With demographic information provided by IHG when forming recommendations, Yelp will also be able to improve its understanding of the relative popularity of different businesses among tourist segments. Additionally, IHG serves as a particularly attractive partner because it is actively investing in predictive data analytics and has the necessary tools to effectively derive value from the vast amounts of data both companies have to offer.

IHG will benefit financially by extending the average length of customer stays and reducing lost revenue from un-booked rooms. By making an impression on business travellers with personalized experiences, IHG can increase the likelihood that these travellers will opt to return to IHG for future travel.

IHG hotels will experience accelerated top-line growth by increasing the willingness of business travellers to extend their stays. Quantitatively, this comes in the form of improved occupancy rates and revenue per available room (REVPAR), allowing IHG to achieve growth without sacrificing its margins and premium brand image.

A recent study by Skift found 89 per cent of business travellers were moderately likely or likely to extend a work trip for pleasure. Given that there are more than 405 million business trips in America per year, this represents a $129 billion annual opportunity to IHG, assuming an average extension of two nights at the average nightly rate of $179. Conservatively estimating that five per cent of these total trips actually end up being for bleisure purposes, this would give IHG a total addressable market of $6.5 billion.

Long Term Strategy for Growth
A partnership with Yelp adds significant immediate value and also facilitates further opportunities in the future for both firms. The ability to collect data on customer behaviour both inside and outside of rooms would enable IHG to increase their customer retention rate and REVPAR through an offering of premium hotel amenities and destination attractions in package deals. Moreover, the information gained from this partnership allows IHG to improve its existing internal concierge service, offering more data-driven and accurate activity recommendations. This will position IHG to be a leader in a rapidly shifting area of the hospitality sector. Most importantly, these insights enable IHG to better understand the bleisure market, allowing them to make informed decisions regarding partnerships, expansions, and overall business strategy in the future.

However, IHG and Yelp must be aware of the long-term risks the companies assume when consolidating and tracking such granular personal user data. In the event of a data breach, which would expose a guest’s travel preferences and hotel stay history, IHG could face a significant decline in brand reputation and long-run declines in revenue. These costs would be heightened by legal fees, expenses to repair corporate image, and unpredictable costs due to increased political intervention. Therefore, IHG and Yelp must invest in securing user data, with guarantees in place that collected data exclusively be used to improve guest stays with no third-party sale of information or advertising on IHG’s side.

Investing in a partnership with Yelp will allow IHG to target a rapidly growing consumer market while fighting back against the growing commoditization of hotel services. If they can successfully convince bleisure travellers to extend their stays, IHG has the opportunity to significantly improve their market share and re-establish their value proposition of providing premium experiences.