REPORT FROM THE U.S.—When it comes to hotel room distribution strategy—comparing the cost of each channel and shifting mix accordingly—the conversation often involves hotel managers, brands and third-party distributors. However, one group of hoteliers is beginning to raise its voice in the matter, particularly when it comes to an evident shift from merchant to agency model.
Hotel owners are speaking up, fearful that decreasing profit margins aren’t being sufficiently addressed during third-party contract negotiations. Specifically, the terms of Expedia’s newly introduced agency model are being worked out in board rooms between brands, managers and Expedia—and owners are left out in the hallway waiting to hear the results.
In August, Expedia introduced its Expedia Traveler Preference program, which will allow travelers to choose whether to pay Expedia at the time of booking on the site (merchant model) or pay the hotel upon checkout (agency model). Expedia said it has more than 13,000 hotels signed up for the ETP program, including brands such as Hilton Worldwide, Marriott International, Melia Hotels, Iberostar Hotels & Resorts, La Quinta Inns & Suites, as well as many independent hotels.
Marriott went live this week, and Expedia expects more than 75 of the chain’s properties to be fully functioning by the end of the week, according to Expedia Spokesman Adam Anderson.
However, because of confidentiality agreements, owners of those hotels have reportedly been left out of talks and are finding out the details only as the programs go into effect.
“There are three constituents that are affected: Expedia, brands and owners,” said Michelle Russo, president of HotelAVE, an asset management and ownership company. “The group that ends up with the additional cost load with no additional revenue or profit benefit is the owners. But the other two groups are the ones that negotiated the agreement.”
At the heart of the profitability issue is the fact that when travelers pay at the hotel rather than up front on the site, commissions and fees are paid on the retail rate rather than the wholesale rate. This potentially leads to additional management fees, brand fees, marketing fees and credit card commissions—all paid by the owner, Russo said.
Pressure on profits Russo conducted some financial analysis of Expedia’s shift to an agency model and—while she admits it might not be 100% accurate because commissions may change and some figures aren’t available to the public—she released a white paper that concluded the move will reduce expenses for Expedia by approximately $23 million while creating an additional $24 million in revenue for management companies. Combined, that leads to a $47-million loss in profit for owners, she said.
Russo's figures were calculated assuming 100% of bookings from Expedia will shift from merchant to agency model. Expedia expects agency versus merchant bookings to eventually be closer to 50-50, a spokesman told HotelNewsNow.com.
At any rate, Russo's report said: "Owners will cover 100% of the cost and will not receive one penny of additional revenue."
Russo told HotelNewsNow.com that the negotiation process between third parties and brands/management companies brings into question the fiduciary responsibilities of management companies “to be making agreements that are not in the best interest of owners they represent.”
“The owner position needs to be considered in this renegotiation,” she said.
Russo said most brands have owner advisory councils that are usually consulted before decisions like this are made. She is not part of any but said there has been “confusion” over when franchisees have been informed about the results of third-party negotiations.
“I think owners generally hoped that these renegotiations were an opportunity to corral all the travel agencies—whether online or brick and mortar—into a more travel-agent-like commission,” she said. “Expedia did make adjustments to their commission, but it doesn’t bridge the entire gap of the costs.”
Brian Berry, VP of revenue management for Host Hotels & Resorts, echoed Russo’s sentiments that a shift to an agency model should be more cost neutral for owners.
“There’s a lot of frustration with the ownership community on what this does for profitability,” he said. “Yes, the hotel recognizes a higher average rate, but there are incrementally more credit card fees, incrementally more management fees, incrementally more (furniture, fixtures and equipment), incrementally more administrative burden on the hotel, franchise fees.
“We have full faith the operators are doing their analysis and good faith with Expedia to make sure those agreements—whatever they may be—will keep us whole,” he continued. “But we need to know what ‘keep us whole’ means. It’s that we deliver—dollar for dollar, hopefully—and have a business case that delivers dollar for dollar.”
Pros vs. cons
Since the program was introduced, Expedia has touted the additional demand it will bring to hotels because travelers—especially international ones—will be more inclined to book if they can pay later at the hotel rather than up front.
“We regularly talk to owners about our programs and services, their wants and needs, and industry issues and opportunities,” Expedia’s Anderson said. “When we work on a contract with a brand, the brand represents the interests of their franchisees. That said, we want the owners to know that they can benefit significantly from the ETP program.”
Anderson said early testing from Expedia shows participating hotels receive more bookings (particularly international), bookings with longer lengths of stay and better search results sort order.
Russo said additional demand is a possibility but also said the amount of incremental demand is hard to forecast, and brands and management companies should be more focused on the increased cost of existing business.
“That transfer of lost profit is going to Expedia, brands and managers,” she said. “What we’ve been saying to our hotels is this makes a revenue manager’s job a lot harder because now you really have to ask, ‘How do you get that incremental business that is not dilutive to more affordable channels?’”
She said Expedia’s Traveler Preference program takes away Brand.com’s advantage of letting the guest pay later.
“Brand.com’s advantages were points and you can pay at checkout. Now they just have the points,” she said. “I’m not sure how they are going to prove that the incremental business cost justifies the additional cost and also the qualitative risk of moving share from historically less expensive channels to more expensive channels.”
From the revenue management perspective, including more agency-model demand simply means learning how to best take advantage of a new demand model, said Greg Cross, senior VP of revenue management for Hyatt Hotels Corporation.
“I remember trying to convince Expedia to dump the merchant model back in 2002, when we wanted them to move to an agency model and they said ‘absolutely not.’ Ten years later now, everybody has forgotten that era and everybody is very comfortable working with the merchant model, and now we want to move that piece of cheese and everybody feels very uncomfortable about that,” Cross said.
Cross said hoteliers were not experts in e-commerce or online sales and—whether they want to admit it or not—the expertise was developed by third-party agencies.
“More rooms are being sold online now than any other channel,” he said. Expedia “has a competitor that’s doing extremely well in Europe and Asia with an agency model and is now creeping into market share space in North America. So what do you do? Do you just sit there and let that happen? Or do you decide that you’re going to change with the times and give the customer what the customer wants, which is more choice options?”
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