Millennium & Copthorne Hotels Regulatory News (MLC)

Risk

Potential Impact

Mitigation Activities

Trend

Competition, trading and market factors

The hotel industry operates within an inherently cyclical sector, where competition, both online and offline, is increasing. The growth of room supply, without corresponding increases in demand, may lead to downward pressure on rates, which in turn could negatively impact the Group's performance. The hospitality industry also is seeing a degree of consolidation in pursuit of scale and the benefits associated with it.

In addition, trading can be directly affected by localised events-such as natural catastrophes, country or regional geo-political matters-as well as global, macro-economic trends impacting travel and hotel stays.

Finally, the Group operates in numerous jurisdictions and trades in various international currencies, but reports its financial results in pound sterling. Fluctuations in currency exchange rates and interest rates may be either accretive or dilutive to the Group's reported trading results and net asset value. The 2016 referendum vote in the UK to leave the European Union, for instance, resulted in a sustained devaluation of the pound sterling. Unhedged interest rate exposures pose a risk too. Rising interest rates may result in increased borrowing costs and impact the Group's profits.

• The diverse nature of the Group's portfolio, both geographically and in respect of its breadth of brands, provides a natural hedge against various external risks. The Group has a concentration of hotels in key gateway cities such as London, Singapore and New York to benefit from corporate and leisure travel. As a niche owner-operator, the Group keeps a close watch on local events and developments to align its investment and marketing spend to target relevant customer segments and adapt to changing hospitality trends.

• The Group's internal Treasury Management Committee monitors and addresses treasury matters, including investment and counterparty risks, in accordance with the Group's treasury policy. The Board and Audit & Risk Committee receive regular updates on treasury matters.

• Foreign exchange exposure is primarily managed through the funding of purchases and repayment of borrowings from income generated in the same currency.

• Interest rate hedges and fixed-rate lending facilities are used from time to time to manage interest rate risks.

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Investment and asset management

The Group's hotels require investment, typically in cycles of minor and major refurbishments, to maintain their competitiveness. Refurbishment projects invariably impact on revenues, particularly when major renovations require the hotel to be closed for extended periods. Also, refurbishment projects or other capital projects may overrun on time and costs or may not deliver the expected returns on investment. The size of investment and appropriate allocation of limited resources across a diverse portfolio are also key considerations. The ability of the Group to make the right investment decisions at the right time, and devote appropriate resources to its investment programme, is crucial to enabling long-term, profitable growth.

• The Group continues to develop property specific refurbishment plans, which focus on the capital expenditure requirements of each property in terms of regular maintenance and product enhancement to help ensure the products remain competitive. These plans generally are developed by the hotel management teams and reviewed and approved at the Group level.

• Refurbishment projects are generally phased in order to minimise the impact on revenues. Where it is justified, a decision to fully close and reopen a hotel after renovation can be taken, in order to help reposition the hotel, for instance.

• With regard to large-scale capital projects, such as the Sunnyvale, California mixed-use development, the Yangdong development in Seoul and the refurbishment of the former Millennium hotel in Mayfair, London, dedicated project managers and cost consultants are engaged to help oversee the projects and track spending against approved budgets. A Senior Vice President of Technical Services was appointed in September 2018 to help improve global oversight over, and monitoring of, large projects.

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Brand equity and customer loyalty

Brand equity and customer loyalty influence consumer choice and are created by understanding customer needs, clear and consistent communication and consistently delivering products and services that meet those customer needs. Further, the Group's ability to protect its intellectual property rights in its brands is fundamental to delivering on these endeavours. Competition is fierce, and the Group's scale and marketing expenditure cannot match those of larger competitors. Generally, the Group operates properties which it owns and therefore is able to exercise control over the service and product quality of those hotels. In addition, management of hotels involving third-party or joint-venture relationships in certain markets gives rise to the risk of non-performance by those parties, affecting the ability of the relevant hotels to deliver service and product quality consistent with the Group brand and operating standards. Failure to create brand equity and customer loyalty could affect the pace of future revenue growth as well as the pricing power, image and reputation of the Group.

• The Group has in place brand standards that are designed to maintain a level of product consistency based on the brand collection to which a particular hotel belongs whilst allowing flexibility in order to maintain the personality of the property. The brand standards capture the key messaging behind each of the Group's brands.

• To raise the profile of our brands and to help build brand equity, marketing campaigns are highly targeted and often leverage strategic partnerships. In 2018, the Group launched the M Collection and promoted the Leng's Collection. It also signed a sponsorship agreement with the Chelsea Football Club and redesigned its loyalty programme for launch in 2019.

• Investment continues to be made in protecting the Group's brands from misuse and infringement, by way of trademark registrations, enforcement of intellectual property rights, domain name protection and enforcement of management agreements. The Group utilises third party online brand monitoring and protection agencies to assist with the Group's enforcement activities.

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Health, safety and security

The health, safety and security of guests, visitors and employees is a fundamental expectation and there is a breadth of regulatory requirements across different jurisdictions relating to health and safety matters. Failure to implement and maintain sufficient controls regarding health and safety issues could result in serious injury or loss of life, lead to regulatory investigations and expose the Group to significant claims, sanctions or fines, both civil and criminal, as well as reputational damage.

Whilst health and safety matters often are local to a particular venue or location, security concerns can be affected by global geopolitical events.

• The Group has health, safety and environmental management systems in place, which include policies, procedures, testing, self and third-party audits, training and reporting. Where possible, these seek to align with the requirements of best practice accredited systems (e.g., OHSAS 18001). By following these standards, the Group strives to work to the highest standards of health and safety.

• Following the tragic event at Grenfell Tower in London, in June 2017, related to flammable cladding, the Group assessed its portfolio globally, testing and confirming that such cladding is not used at any of the Group's owned and managed properties.

• Management seeks to identify emerging risks at the earliest opportunity to ensure clear roles and responsibilities, internal controls and other steps to minimize these exposures to the greatest extent possible.

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Talent management and succession

Hospitality is a people business. The Group's brands and ability to deliver consistent service quality are dependent on its ability to attract, develop and retain employees with the appropriate skills, experience and aptitude. Generally in the industry, frontline employees are prone to higher levels of turnover. Also, with the growth in room supply, demand and consumer choice globally, it becomes increasingly important for operators to be able to find and retain senior leaders who inspire and motivate staff. Failure of the Group to properly plan for the recruitment and succession of key management roles may impact service quality, consistency and/or delay the execution of the Group's strategies.

Not unique to the Group, a considerable proportion of hotel staff in the UK, and particularly in London, originate from European Union countries. The ability of the Group to retain appropriate staff, as well as the cost of doing so, may be impacted depending on if and how the UK exits the European Union.

• The Group has strong regional and local management structures threaded together with a common commitment towards ensuring a rewarding and empowering work environment. This is supported by performance management and recognition systems, compensation and benefits programmes, e.g., bonus plans, service reward programmes, share plans, and internal and external training and development programmes.

• The Group strives to provide internal talent with opportunities for development and advancement as a matter of priority.

• The Nominations Committee and wider Board are tasked with ensuring proper succession plans are in place for key members of the senior management team.

• The Group is keeping on top of the developments relating to the UK's potential exit from the European Union as they unfold and management are continuing to review the potential impact of the developments. A 'Brexit Steering Group' has been established to ensure the Group considers material risks and to develop appropriate mitigation strategies. This allows the Group to remain nimble and ready to respond to different issues and scenarios.

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Revenue channel optimisation and cost of sale

Keeping abreast of digital transformation and online competition is critical given the growing proportion of the Group's hotel rooms being booked online. Online travel agencies ("OTA") tend to have higher commission rates compared to traditional travel agents and are taking an increasing share of bookings across the sector. Over time, consumers may develop loyalties to the OTAs rather than to the Group's brands. These trends may impact the rising cost of sale ultimately affecting profitability. Other costs related to metasearch engines and tools that help direct online traffic towards our own websites are increasing. On the supply side, sharing economy platforms, such as Airbnb, may expand their market share and compete with more traditional business and leisure accommodations.

• The Group continues to refresh its digital marketing strategy and invest in its e-commerce, customer relationship management, revenue management and reservations systems in order to help increase rates, retain existing customers and generate new business. In 2018, the Group restructured its sales organisation and developed a global sales account management tool to focus on growing corporate business in particular.

• Fundamental to the Group's distribution strategy is growing brand recognition and loyalty along with increasing direct channel bookings. In 2018, the Group continued to enhance its brand website and it will be launching a revamped loyalty programme in the first quarter of 2019.

• The Group is aggressively managing its portfolio of distribution channel partners, including established OTAs and new, niche or local players, to optimise revenue, gain access to new customers and minimise commission costs.

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Information security, vulnerability to cyber-attacks and PCI-DSS compliance

Increasing reliance on online distribution channels and transactions over the internet and mobile applications, and the aggregation and storage of guest and other information electronically, both on company-controlled servers and networks and in cloud-based environments, present heightened risks of attacks affecting the operation of those systems and networks and/or a potential loss or misuse of confidential or proprietary information. The occurrence of a cyber security event or loss of data could disrupt business, the ability of the Group to take or fulfil bookings or lead to reputational and monetary damages, litigation or regulatory fines.

In addition, various aspects of the Group's operations are required to achieve compliance with the payment card industry security standards ("PCI-DSS"), and failure to do so could result in penalties and/or withdrawal of credit card payment facilities.

• The Group's regional Information Technology ("IT") teams conduct periodic security and penetration testing, often using external consultants, and any recommendations or enhancements are implemented where necessary.

• Software systems are regularly updated to allow for the latest security updates and patches to be installed.

• Information technology policies and procedures have been updated to reflect implementation of the latest PCI-DSS compliance standards.

• The Group has in place, and regularly reviews, cyber insurance coverage to protect against certain cyber risks.

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Legal and regulatory compliance

The Group operates in many jurisdictions and is exposed to the risk of non-compliance with increasingly complex statutory and regulatory requirements, including competition law, anti-bribery and corruption and data privacy compliance regimes. Non-compliance with such regulations, which differ by jurisdiction and are areas of increasing focus by regulators, could result in fines and/or other damages, including reputational damage, being incurred, particularly in the event a data breach should occur. An area of particular regulatory focus in 2018, for example, was in relation to the implementation of the new EU General Data Protection Regulation ("GDPR").

In addition, the Group has contractual relationships in place with various counterparties, including customers, suppliers, employees and other parties, and provides goods and services to customers. As such, a breakdown in any of these relationships could lead to disputes and ultimately litigation, which in turn could give rise to reputational damages, management distraction and/or the Company having to incur significant costs or damages, particularly where claims are not insured or are not fully insured.

In certain countries where the Group operates, particularly in emerging markets, local practices and the legal environment may be such that enforcement of the Group's legal rights is challenging.

• The Group continues to monitor regulatory changes in the jurisdictions in which it operates in order to identify its obligations and implement appropriate compliance and training programmes. The Group has comprehensive global and, where applicable, regional policies and procedures in place to address competition law, data privacy, ethical business conduct, whistle-blowing, anticorruption and bribery, gifts and hospitality and charitable donations, among others.

• The Group undertook a comprehensive project to ensure compliance with the GDPR, including data mapping, updating policies and procedures and implementing additional controls and training.

• The Group maintains in place industry standard insurance cover to mitigate many potential litigation risks, such as employment practices liability, workers compensation and general liability policies.

• The Group has controls in place to manage and help mitigate the risks associated with its various contractual relationships, from execution through to termination, insured and uninsured litigation and other disputes. Regular litigation reports are provided to the Board.

• A dedicated Global Director of Compliance and Risk Management has been hired to enhance the Group's compliance and risk management regime.

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2018

(£M)

2017

(£M)

Short-term employee benefits

7

6

Directors

1

1

Executives

6

5

7

6