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Agency model spurs concern over brand fees
November 29 2012

At the heart of the issue is whether franchisors and brand managers should be collecting fees for demand they did not generate but instead was generated by third parties.

  • Expedia’s ETP program could benefit management companies and brands to the tune of $81 million in increased fees.
  • A handful of brands have been listening to owner concerns and have even made attempts to go back to the negotiating table with Expedia.
  • Franchise and management fees are only one of the issues owners have with Expedia’s agency model.
By Jason Q. Freed
News Editor

GLOBAL REPORT—Expedia’s introduction of the agency model and subsequent negotiations with hotel brands have raised larger concerns from hotel owners regarding the collection of continuing fees and the fiduciary responsibility of brands to represent the best interest of their owners.

At the heart of the issue—which has spurred a group of owners and asset managers to open new dialogue with all of the major brands—is whether franchisors and brand managers should be collecting fees for demand they did not generate but instead was generated by third parties.

“Is the entire model working anymore?” asked Maxine Taylor, executive VP of asset management for The Chartres Lodging Group, which owns nine assets and provides third-party asset management services to five more. “Early on, third parties only drove 1% of our business, but now it’s 10% of our business. Those fees have grown exponentially. Last year, I paid over $1 million in fees on demand driven by (online travel agencies) to one hotel alone.

Maxine Taylor
The Chartres Lodging Group

“The model is going to break.”

For as long as contracts between brands and hotel owners have existed, brands have been collecting a portion of rooms revenue. The percentage varies depending on whether the brand only serves as a franchisor or also manages the property.

But as more room demand is driven by third parties, owners and asset managers are beginning to question why they pay fees on demand that is not driven by the brand. The Expedia Traveler Preference program brought the issue to light to owners because collecting gross revenue at the hotel rather than net revenue after commissions will lead to an increase in fees owners pay to brands although the revenue achieved by the hotel is the same.

Rethinking contracts
“Owners need to rethink the definition of revenue in their management contracts,” said Michelle Russo, president of HotelAVE, an asset management and ownership company, who authored a whitepaper saying the ETP program could benefit management companies and brands to the tune of $81 million in increased fees. “Is it appropriate to pay marketing fees on all of the revenue or just the revenue generated by the brand? No one really thought about it when they were negotiating their contracts.”

“Hotel owners, when they negotiate new management contracts, really need to think about this given there’s not one source of demand anymore,” she continued. “Each of these channels have different costs associated with them, and as an industry, we need to address whether the traditional 3% is appropriate, or do we need to move to more of a base fee that is related to profit generation not revenue generation.”

Michelle Russo

As an example, instead of paying 5% to the brand on all revenue, Russo suggested a model where owners would pay 6% on revenue generated by the brand and 4% on revenue driven by a third party. Or even 10% on revenue driven by the brand and 0% on revenue driven by a third party, she said.

“I think everything is on the table. It is not my view that franchise fees should stay static,” she said. “We should incent our brands to align with us. If they have the best channel, I would be willing to pay them more and a lot less for revenue they didn’t generate.”

Many of the larger brands declined requests for comment on this topic. Marriott International, which has signed an agreement and began rolling out the ETP program in October, did not respond to multiple requests for comment. Scott Carman, director of customer marketing communications for Hilton Worldwide, which has signed the agreement but delayed rollout after receiving owner reaction, declined comment. An executive with Hyatt Hotels & Resorts declined comment, citing ongoing negotiations with Expedia.

Flo Lugli, executive VP of marketing for Wyndham Hotel Group, provided the following statement: “Given that we are in negotiations with Expedia, it is inappropriate for me to speak specifically. Generally, however, Wyndham welcomes discussions around new opportunities and models that can drive additional value to our franchisees/owners, and we look forward to understanding from Expedia how they view this program can do just that.”

However, both Taylor and Russo said the large brands have been listening to their concerns and have even made attempts to go back to the negotiating table with Expedia. The goal for brands is to get Expedia booking margins lowered further so that the net result of the ETP program would not be a loss in profit for owners, they said. Expedia spokesman Adam Anderson confirmed that both Marriott and Hilton have signed agreements to participate in the program, but the timetable for rollout is up to the brands.

Bigger issues
Franchise and management fees are only one of the issues owners have with Expedia’s agency model. In addition, making the hotel the merchant of record also burdens the hotel with credit-card processing fees and relinquishes OTAs from the municipality tax issue.

Jim Butler, an attorney with the Jeffer Mangels Butler and Mitchell Global Hospitality Group who regularly oversees hotel-management agreements, said brands who also act as managers have certain fiduciary duties that are imposed by law, including preferring the owners’ interests over their own. He said larger commissions and increasing market share for OTAs “raises the issue to a different level” and brings to light “a circumstance that no one ever anticipated” when negotiating management contracts.

Jim Butler
Jeffer Mangels Butler and Mitchell Global Hospitality Group

Russo said even if brands agreed to a change in the way fees are collected, it is difficult to get management contracts amended mid-term (some can be as long as 50 years). Butler, however, said amending them would be as simple as a policy change.

“They could just do it as policy, assuming it is a fiction that the hotel receives the (gross rate),” he said.

As far as Expedia is concerned, the business model of negotiating with brands on behalf of owners is best for all parties involved. Expedia CEO Dara Khosrowshahi told he thinks the brands represent the owners “quite well.”

“A hotel owner through a brand can usually work with us at a lower margin than an independent, which reflect the kinds of negotiations that we have with the big brands,” he said. “We have deep relationships with them; we’ve been working with them for years, but I’ll tell you those negotiations are not easy negotiations.

“We’ve been partnering up with the brands for some period of time,” Khosrowshahi continued. “We have been talking to owners; we want to establish long-term relationships with some of the larger ownership groups, but in general the brands are who we work with and we expect that to continue going forward.”

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