INTERNET WARS
The battle between the brands and the intermediaries is all about rate, inventory and automation. The good news is that there may be win-win solutions in sight.
By Mary Scoviak, Features Editor -- Hotels, 4/30/2004 11:00:00 PM
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“Internet intermediaries are not bad in the biblical sense. They just charge too much,” Hilton Hotels Corp.’s Chairman and CEO Stephen Bollenbach said during a leaders’ panel at this year’s investment conference in Berlin. This is no off-hand quip. It sums up the love-hate relationship between the brands and online merchant models and discounters. Hoteliers want the 3% to 7% annual incremental revenue intermediaries deliver. They want help selling the four (or more) out of 10 rooms that go unsold each night. They want the new markets intermediaries can tap. What they do not want is the “cost” of doing business with third parties, which includes the loss of inventory control and markup margins of 25% to 35%. Based on newly signed contracts between hotel companies and intermediaries, it appears compromise is within reach.
As Eric Pearson, senior vice president of e-commerce, InterContinental Hotels Group (IHG), points out, better times mean more clout. “We are no longer desperate to fill rooms,” he says from his Atlanta office. Handing the intermediaries a 40% markup when occupancy was 10% post 9/11 or during SARS was one thing. Now that hoteliers are building occupancy with higher rated business, those margins are unsustainable. “Smaller companies or independents may still have to face 25% to 35% margins. Larger companies are seeing a recalibration,” Pearson adds.
| The Gist |
| Hoteliers who want more bookings have to optimize the Web. Internet bookings are expected to nearly double in share of total demand from 13% in 2003 to 24% in 2005, predicts PricewaterhouseCoopers.
Internet reservations keep growing. TravelClick, Schaumburg, Illinois, reports Internet reservations received at the CRS of major hotel brands grew 34% in 2003 versus 2002. Brand Web sites were the source of 66% of the reservations. The playing field with intermediaries is leveling. Chains are using their leverage in a rising market to renegotiate margins more in the 18-20% range rather than the previous 25-35% and keep inventory at about 10%. Less is more. Forrester Research reports the average hotel chain participates in seven third-party discount programs. That may be changing. Most chains have all channels under stringent, measurable review. Expect all but the best producers to be dropped. Automation is the order of the day. Forrester Research reports 77% of chain execs cite poor technology as a reason not to give a third-party discounter more inventory. Negotiations now include demands that the process be fully automated, which usually means direct links to the chain’s yield-managed central reservation system. |
Marriott International, Hilton Hotels, IHG and other leading brands are leveraging an improving economic picture and the power of proprietary sites that deliver 70% to 80% of their Internet bookings to win reduced intermediary margins estimated at 18% to 20%. It still means bookings may cost nearly one-third more than room nights sold through proprietary sites, but it is helping chains address owners’ mandate to drive down reservation costs. PricewaterhouseCoopers (PwC), New York City, recently reported that while the Web put an extra US$715 million into hotel companies’ coffers last year, pricing pressures actually cost the industry US$2 billion in potential revenue.
Despite those numbers, Stax Research, Cambridge, Massachusetts, confirms hotel companies “are seriously gaining ground lost to online reseller models post 9/11.” In fact, Hilton Hotels Corp. reported its Web sites delivered 530,000 reservations in February 2004, a 34% increase over February 2003. And Stax Research predicts as chains’ online incentives and best rate guarantees drive more business through proprietary sites, merchant models will “soften their terms” to keep saleable brands within the fold. Many already have. In addition to margin concessions, new contracts are dismantling complaints about inventory control with hyperlinks directly into the brands’ yield-managed central reservation systems, provisions for no minimum inventory and, for companies with sufficient pull, the flexibility for hotels to switch inventory on or off.
Full automation is cutting the cost per reservation by eliminating the bemoaned labor-intensive step of dealing with intermediaries’ faxed confirmations. It also addresses some key issues separating the brands and intermediaries. “Intermediaries are only as good as their slowest link. People will not put up with long waits,” says Euan Mitchell, director of e-commerce, Thistle Hotels, London. Getting out of the “extranet,” activity which requires manuel updating, has other advantages in terms of inventory control, he adds. “If a hotel does not respond in five or six seconds, it does not come back on the search list. Direct connect into the central reservation system resolves that,” says Mitchell. It also defuses the problems of having hotels that “choose not to be on a search” showing up as fully occupied. Next, says Mitchell, “is a box we could click to switch on or off inventory on a yield-management basis.”
According to Bill DeForrest, president and CEO, Lane Hospitality, Northbrook, Illinois, the brands have done an excellent job of pushing the merchant models to lower their commission structures. “We think the cost of working with intermediaries will continue to go down,” he says. Though brand Web sites drive the majority of Lane’s Internet business, DeForrest is not about to turn off the intermediary pipeline. “Major third-party providers have established a customer base we want to talk to. There is a market segment that really has become loyal to them,” he says.
Relationship Or Reliance?
True, the intermediaries’ estimated US$150 million to US$500 million annual Internet marketing spend and dominance in key word auctions have given them the almost continual front-page Web exposure that is making them brands in themselves. But what makes them indispensable is reach. “I cannot get my brand and rates on 40,000 Web sites as some intermediaries can,” says Jacques Dubois, vice president, distribution and central reservation management, Rezidor SAS Hospitality. “Yes, global distribution systems (GDSs) are still the clear winners. The cost of distribution is significantly lower; average rates are higher. And the average spend from GDS-generated customers is generally higher as well. But if you ask about incrementality, I would say it is the intermediaries who are reaching ‘new’ customers—something we hope search engine optimization will also do.”
| What Customers Want Now |
| A study published earlier this year by Vividence, San Mateo, California, and PhoCusWright, Sherman, Connecticut, shows what hoteliers need to do to transform vacation package shoppers into bookers:
Offer dynamic, flexible package options. Sixty-eight percent of the 1,500 consumers monitored in the survey want to assemble their own package and are willing to go to multiple sites to do that. One in three visited the Web more than 10 times when planning their last vacation. Only 18% purchased all their travel services from a single site. Choose your channels strategically. “Travel agency” sites such as Expedia and Travelocity are the most prevalent places for consumers to research and purchase travel services, but search engines such as Google and Yahoo are the most common starting points for travel planning. The most visited sites by rank: 1)Expedia; 2)Google; 3)Travelocity; 4)Orbitz; and 5)Yahoo. Niche players should not be ruled out. The 1,500 consumers visited more than 2,000 sites. Thirty-eight percent said they would consider purchasing a package from a hotel site—well under the 48% for destination sites and 47% for airline sites. Make rate a sales tool. Fully, 84% said price is a major driver in their booking decision but 78% mention the time savings. Few were convinced packages really save money, pointing to an opportunity for anyone whose Web site can get the price-saving message across. |
While hotel brands work on search engine optimization, cutting the number of clicks needed to make a booking and pumping up the benefits of their sites, the intermediaries are looking for new ways to lengthen their reach. Some of the activities are clearly complementary, such as Expedia’s initiatives to build packaged business and power different components on Web sites such as Starwood Hotels & Resorts or Hyatt Hotels Corp. Others, including new efforts to go after meetings and corporate business, could become the next bones of contention. The bigger issue eventually may be who owns the customer, says Peter O’Connor, associate professor, hospitality information technology, IMHI (Cornell-Essec), Cergy Pontoise, France. Institution of loyalty programs, reportedly in the talking stages at Expedia, could fuel new tensions.
Spencer Rascoff, vice president of hotels for Expedia and sister company Hotels.com, predicts mutual benefit will diffuse those tensions. At the same time, he acknowledges there are differences. “Hoteliers are frustrated when they are paying high margins for distribution during peak periods when they would be selling out. They forget the Thanksgiving Day or the summer Sunday in Phoenix when their occupancy was 10% and we got it to 50%. It has to be a two-way street,” he says, denying that Expedia ever charged 40% markups to the major brands. “It is not accurate to say that hotels that give up the most inventory and the lowest rate get to the top of the page. What determines sort order is the customer value proposition.”
Rascoff sees the business relationship between brands and intermediaries maturing. Corporate deals with third parties now include advertising components, some of which piggyback on direct mail and e-mail initiatives. Aggressive bidding on key words is getting hotels in front of buyers who shop only price or destination rather than brand. Direct connectivity has reduced per reservation costs and resolved the headache of manually updating rates on the “extranet.” New deep links send customers directly to the hotel site’s front page. An expanding international presence means greater exposure, as do new travel packages.
Rascoff takes issue with the contention that intermediaries will undercut chains’ attempts at building corporate business. “The rates people see on our site are the brand’s corporate rates. There is no ‘Expedia rate.’ It is the clients who pay, not the hotels,” he says. Nor does he think brands are about to “forsake” third-party distribution channels because of it. “We recognize that we are drivers of incremental income for hotels. Any hotel can benefit from additional distribution. Even a hotel that is full can work on getting a better rate,” Rascoff says.
Alternative Strategies
How much chains need intermediaries depends on their size and e-commerce capabilities. “We do not have the same brand presence as the big players, so we are more dependent on the intermediaries. We cannot make it on our own,” says Craig Fong, director of sales and marketing for Singapore’s Meritus Hotels & Resorts. But dependence and over-reliance are different. Better metrics are giving Fong and other e-commerce executives in small- to medium-sized chains more ammunition in choosing channels. “You have to be on the right channels for your markets,” Fong adds. “It used to be that wholesalers contracted rate geographically. Rate transparency has changed all that. The bandwidth between the way leisure and unmanaged business travel is booked is getting narrower. We are looking at adding channels from regional players with good portals, like China’s C-Trip.”
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Although chains are unlikely to sidestep Expedia, Travelocity and Orbitz, which claim well over 60% of the market, they are taking a closer look at strong regional players. Steven Nikolov, Mövenpick Hotels & Resorts’ senior vice president of sales and marketing, has not fixed a given number of intermediaries. “We chose based on which companies have the best exposure in each of the markets we are targeting and which can open up new markets,” he says. Although eight of 10 may be “useless,” the others “have a solid business model and give real value.” He forecasts further consolidation as smaller players with niche markets are swallowed up.
Klimis Messios, president, franchising and commercial services, Golden Tulip Hotels, Resorts & Inns, says Expedia and Travelocity get the best results in major international destinations and markets where the Internet is in its infancy. In smaller cities, “locally operated Web sites receive much higher revenues,” Messios says.
Andrew Pozniak, Le Méridien’s director e-commerce worldwide, says mid-sized chains may be a step behind in getting the premium contract terms offered to the giants, but their flexibility ensures negotiating power. For corporate deals, chains such as Le Méridien are using inventory allotments and rate controls “to make it impossible for third parties to undercut us.” They are expanding their own business base by marketing to customers intermediaries bring through the door. New technology makes is possible to look at revenue management on a regional basis, not just hotel by hotel, enabling chains to make more educated decisions about which third parties to use. There is also the ultimate control: Not buying in. “We would have to have a compelling reason to take on a new intermediary. We want to spread the risk over a select group that delivers,” Pozniak adds.
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Tom Botts, Starwood Hotels & Resorts’ vice president of distribution strategy and operations, is bucking the trend toward channel reduction. “We are firm believers in competition because it reduces our dependence on any one channel,” he says. Known as a tough negotiator, Botts keeps control over broadening distribution with 25- to 30-page contracts that “police forward.” Although Starwood’s proprietary site delivers bookings at a 5:1 ratio over intermediaries, Botts considers the merchant models valuable partners. “We are very bullish about our own site, but we also recognize the value of intermediaries. Who would have thought that packages would be the fastest growing travel sector in the United States?” he says.
Recognition of intermediaries’ profit potential has not blinded chains to their real e-commerce objective: Growing business through their own sites. Marriott, often ranked as the company to catch, is leading the faster/cheaper/better race with a re-engineered Web site, which Gomez Advisors, Waltham, Massachusetts, clocks as the fastest in the industry. Marriott continues to refresh its site, using controlled online experiments to define what works and what does not, according to George Corbin, vice president of strategy and planning for Marriott’s e-commerce department.
Marriott also threw down the competitive gauntlet with its guarantee that customers who book through any of the company’s own reservation channels would not find a lower publicly available rate for the same room. While O’Connor estimates that less than 1% of customers ever challenge chains on best-rate guarantees, he says rate parity is a selling point. “People are not going to surf for hours to save US$1. They just do not want to pay $40 more for a room. That is a fast way to lose a customer,” he says.
Bala Subramanian, Hilton Hotels Corp. senior vice president of distribution and brand integration, predicts more chains will enrich sites with enhanced group and corporate travel functionality as well as micro-sites such as Hilton’s new MyLeisureTrip.com. And expect to see more niche sites, according to Felix Laboy, president of e-site Marketing, Bethesda, Maryland, who points to a California resort’s wedding mini-site that received 78,666 visitor sessions in 2003. “Search engine advertising, search engine optimization and multiple targeted e-mail campaigns via robust data capture points throughout the site can deliver triple-digit increases in online reservations and revenues,” Laboy adds.
| Pump Up Your Internet Volume |
| Accurate customer profiling is essential to maximizing Internet reach and capture. Henry H. Harteveldt, Forrester Research, San Francisco, offers these tips:
Sell the lowest-margin rates only on the proprietary site. More than six in 10 U.S. hotel bookers research hotels online but book offline. And, when they do, they usually believe offline delivers a lower rate. The Web is your least expensive sales channel, on average 29% less than the call center. Make it the lowest-priced channel as well. Tier rates to cost of sale. The one exception: bookings made on property. The issue here is less about cost of sale than reducing rate dilution by travelers trying to negotiate lower rates directly with an employee. On-site rates should mirror the call center. Use proprietary discount programs to regain customers and clout. Trim the number of rates for each room and reduce gaps between price points. Offer discount programs backed by a best-rate guarantee. Reduce the number of third-party discounters to those that deliver good value and appeal to distinct segments, whether demographic or geographic. Build a demand dashboard. Using in-house data on current and future bookings by channel, related ADRs and distribution mix by channel, you can complement bookings and yield management data to get a better picture of your e-commerce business. A standard input format makes data consistent and actionable. Integrate online meeting booking. Meetings and conventions generate about 30% of hotel industry revenues, yet meeting planners can usually only book by phone. Before the intermediaries fill the gap, companies such as Hyatt Hotels & Resorts are launching initiatives such as E-mmediate Meetings on their Web sites. Cut the clicks. It still takes an average of seven clicks to book a room. Not all customers are that patient. |
Historic Hotels of America (HHA), Washington, D.C., cannot match the spending or negotiating power of the giants, but Shirley Talbert, HHA’s director of marketing distribution, is working with member hotels to focus on niche opportunities. “There is a lot of opportunity in the online meetings market and a lot of unmanaged business travel. We can tap that by creating features for people who never planned meetings before,” she says. Talbert plans to narrow her targets to under-the-radar business sources such as corporate supporters of HHA’s parent body, The National Trust. “We are looking at more specialty sites and merchant models more interested in partnerships,” she says.
What Comes Next
Brands also are seeking more control over their discounted rooms. Thistle Hotels launched its own auction site in 2002. While few companies look ready to follow suit, Thistle’s Mitchell says it has been a good solution for selling rooms that otherwise would go unsold. Mitchell foresees further cross-channel possibilities and even looked at eBay. Next up may be auctions for meeting rooms.
In addition to going to head-to-head on the price issue, Brian Stage, executive vice president, sales, distribution and reservation services for Carlson Hotels Worldwide, expects chains to continue to add amenities to their sites such as packaged offers, lifestyle experiences and attractive prices to create more reasons to book through the brands. “We taught people to go to the Internet for the best price. But the price will not always be the only deciding factor. We are seeing the emergence of travelers looking for booking convenience and experiences,” Stage says.
Marshall Calder, Leading Hotels of the World’s senior vice president of marketing, agrees that many customers, especially in the luxury sector, respond to sites selling lifestyle options rather than price. The group’s newly created Leading Vacations responds to the high-end consumers’ needs for customized service. Leading also entered into the first airline loyalty program with Lufthansa this year, the largest of its kind. “Joint marketing activities with recognized luxury brand on and offline maximize exposure for our brand as well for individual hotels,” adds Paul McManus, CEO of Leading Hotels of the World.
Choosing packages and partnerships is fast becoming as selective a process as choosing intermediaries, says Joan Lowell, Hyatt Hotels Corp.’s vice president, electronic distribution. Hyatt is active in the participation of package rates to third-party sites as well as having its own site called Hyatt Vacations.com. While there definitely is growth in the package market, Lowell says it is still very small by comparison. However, Hyatt will continue to offer air and car packages with hotel accommodations to give customers one easy way to understand price that is also a value compared to buying each product separately. Says Lowell, “It is all about choice—if that is the way the customer wants to buy, then we should give them that option.”
Ease of booking continues to increase. To differentiate its site, Jurys Doyle Hotel Group in Ireland rolled out a new booking engine that appears on each page as customers journey through the site. Relevant locations and hotel names appear on each page. An added plus, says Lisa Shields, the group’s e-distribution channel manager, is that corporate bookers can download reports, modify bookings and automatically copy reservation confirmations to their business travelers.
Search Engines
If there is one major theme for the future, it is search engine optimization. “Nearly 80% of consumers look to search engines to guide them in the right direction,” says Jens Thraenhart, director of Internet strategy, Fairmont Hotels & Resorts. “Intermediaries have received lots of traffic because hotels have not leveraged the power of the search engines. By copying third parties’ savvy online marketing techniques, including pay per click advertising, direct listings, pop-up advertising and affiliate programs, hotel companies can be far more effective on the Internet.”
But, chains may have to move quickly to get optimal results. The search engines themselves are constantly changing the rules, says Patricia Brusha, director of revenue distribution management, New Castle Hotels & Resorts, Shelton, Connecticut. “New information has it they are the ones looking to capitalize on the power they have by increasing their costs for Web sites to be found on the net,” Brusha says. “Having stayed under the radar the last couple of years, my prediction is the costs will double and even triple to have your Web site be found through search. This will be the big headlines in 2004 and 2005.”
Investment is another issue. Search engine optimization often goes hand in hand with the problem of buying key words. Hoteliers say that is an expensive course, if necessary. Eddie Dgrance, VIP International’s senior vice president of client services, Calgary, disagrees. “Buying key words is only expensive if you do not know what the return is. Hoteliers need to apply measures and metrics and track post-click ROI. If you spend US$5,000 to get US$10,000, that is not expensive. If it is the other way around, yes, you have paid too much,” Dgrance says. The most important caveat: know how your clients buy. “You have to keep in mind that the price paid for the room is only half the equation. You may be able to price the room attractively at US$20 less if you are selling multiple nights and not paying any commissions.”
Bjorn Hanson, global practice leader of Pricewaterhouse-Coopers’ (PwC) lodging and leisure practice, New York City, sees further downward pressure on margins as fewer hotels are forced to rely on discounters. Eventually, he predicts 10% to 12% commissions, much like those paid to offline travel agencies. “Who is winning? Both the brands and the intermediaries,” says Hanson. “Brands are taking back control of the Internet. The intermediaries continue to drive incremental business. Online resellers are not the enemy as long as the individual hotel can allocate the right revenue at the right rate.”
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