It has been interesting to watch the major hotel companies’
recent attempt to shift bookings to their direct on-line channels by
incentivizing members of their loyalty programs with “exclusive offers”,
including reduced rates, free Wi-Fi, and special packages.
For decades, the big chains have invested enormous resources
in an effort to build customer loyalty—beginning with loyalty programs in the
early 1980s. This battle for customer loyalty has heated up in recent years as online
travel agencies emerged, gained strength and market share.
A new battle has begun to emerge. One between distribution
channels and which ones customers use to book their reservations. This new and
expanded fight now playing out across the industry pits direct channels against
in-direct channels.
Today, approximately 10% of a major chain-affiliated hotel’s
reservations come from OTAs. It is significantly higher for small chains and
independent hotels. The cost per reservation made through an OTA is several
times greater than the cost per reservation made directly through a chain’s
website. The continued increase in OTA bookings is having a major impact on the
lodging industry’s overall profitability.
To their credit the major airlines began to confront this
issue in the mid-1990s when their distribution costs were approaching a
staggering one-sixth of total revenue. Following a number of bold moves airline
distribution costs have been reduced to a point where today it represents only
a small fraction of total revenue. The positive effect that this has had on the
airline industry’s overall profitability has been enormous.
For several years now, hotel owners, operators and
franchisees have been experiencing this same pain. They have, however, been
conflicted on what to do and how to respond out of concern for losing business.
The trend line of in-direct bookings has been on a steep incline and is
forecasted to continue if left unchecked. The pain apparently has reached a
breaking-point and has forced the major chains to act.
Member Exclusive Offers is their first bold move. Check.
Offering loyalty program members exclusive offers is a
dramatic departure from the major chains’ long-standing distribution strategy known
as “single image,” whereby 100 percent of a chain’s transient room inventory
and pricing is located in one central repository accessible via all channels
regardless of whether they are direct or in-direct. Opaque channels were the
only exception. This change in strategy came after much thoughtful debate and
discussion in various board rooms around the industry.
While it is too early to gauge whether or not this move has
been net-positive for the major chains, early signs shared on quarterly earnings
calls show an increase in bookings through direct-channels. Bookings through
OTAs also continue to rise, but the pace is slowing.
These concerns surrounding distribution channels and their
costs don’t just apply to transient bookings, but include the meetings and
conferences segment as well. Depending on the size and type of hotel, group
business as a percent of total revenue ranges from 25 percent to 80 percent.
For full-service hotels (especially convention hotels and resorts) performance
in this important segment is vital to overall profitability.
Similar to OTAs, group intermediaries have emerged over the
last several years. They have gained strength and market share, and today
account for a whopping 40 percent to 50 percent of a major chain’s group
business. Hotels are now forced to pay huge commissions and overrides on
business (and customers) that previously booked directly with them. This has
driven up the hotels’ overall cost-of-sale and significantly impacted their
profitability.
There are virtually no barriers to entry in this space. As a
result, you have a wide array of intermediaries who provide services ranging
from simply sourcing leads to providing full-service meeting planning—services
that provide far more benefit to the end-user customer than they do to any
single hotel. Hefty commissions and overrides are paid regardless of services
provided and in many cases are shared or passed through in total directly to
the end-user customer.
What has been happening here is an outrage, and at some
point soon the lodging industry will be forced to act. Could this be their next
bold move?
Hotel owners, operators and franchisees have come to realize
that by optimizing only for the short-term they have risked destroying future
value. This recent bold move and those that will surely follow begin to address
this very important industry issue.
It won’t be easy but it sure will be interesting to watch.
David Townshend was senior vice president,
global sales at Marriott International. He is currently executive vice
president, Partnership Travel Consulting, LLC.