REPORT FROM THE U.S.—After 10 years of learning how to operate effectively under merchant-model agreements, many parties across the distribution landscape might find themselves having to learn the ins and outs of the agency model sooner rather than later.
After Expedia introduced its Expedia Traveler Preference program earlier this month—which would allow travelers to choose whether to pay Expedia at the time of booking (merchant model) on the site or pay the hotel upon checkout (agency model)—sources told HotelNewsNow.com they expect the agency model to take off immediately.
“I believe the agency model is going to sunset the merchant model and that the merchant model is going to go away very quickly,” said Mark Carrier, president of B. F. Saul Company Hospitality Group. “They’re going to move extremely quickly to the agency model, and I think it will happen almost overnight.”
Sources said hotel brands pushed Expedia to use the agency model more prevalently in its early goings, but Expedia was hesitant and instead chose to push its merchant model. Today, the online travel agency is being driven toward an agency model by its competitors—namely Booking.com, which operates on an agency model—and its customers.
“If the consumer is given the choice to pay at the time of booking or pay later, it’s just a no-brainer,” Carrier said. “The consumer is going to lead this, and the adoption will go very quickly.”
“Some travelers prefer to pay at the time that they book, and others prefer to pay at the time of travel,” said Adam Anderson, spokesman for Expedia. “We believe we will better serve our customers by offering them an option.”
In fact, franchising giants Marriott International and Hilton Worldwide recently have finished negotiations with Expedia and are currently reporting to their franchisees that they’ve negotiated agency-model contracts at decreased margins.
Marriott and Hilton “are going to be working with the hotel collect model in the new agreement,” said Sloan Dean, VP of sales and marketing for Interstate Hotels & Resorts, which manages properties under both brand families, among others. “With the pressure from the major brands, Expedia started to realize they’re going to start losing suppliers.”
Effects on hoteliers
Dean said the new contracts, which are announced to franchisees but not made public, will “slightly erode” Expedia’s margins.
However, for hotel owners, he said lower commissions will only balance out the higher franchise and credit-card fees that will be owed on the gross rate in an agency model rather than the net rate in a merchant model.
Nolan Wrentmore, VP of revenue management and e-marketing for Aimbridge Hospitality, said he thinks the hotel industry is “in too deep to get away” from merchant models. Brands, he said, would “absolutely love” to go in the direction of the agency model, but hoteliers will be reluctant.
Riana Frahm, account manager at ResNexus.com, which helps independent hotels connect to the global distribution systems, said her hotelier clients prefer the merchant model because of the headaches an agency model can cause regarding cancellations. Despite that, several of her clients recently reported difficulty trying to sign new merchant contracts with Expedia.
“Back at the beginning of this month, a hotelier went to sign up with a merchant model and said no one was contacting him,” Frahm said. “Expedia said merchant agreements were on hold for the next few weeks.
“They say they are restructuring their internal systems but haven’t elaborated on the reason for the hold as of yet,” she said.
Expedia’s Anderson told HotelNewsNow.com that Expedia is in the process of rolling out a new tool to “make the process of a hotel signing up with Expedia more efficient and less time consuming.”
Effect on rate parity
Anderson said Expedia’s introduction of an agency model is driven purely by customer demand. Whether the shift from merchant model to agency model will help hotel brands and third-party distributors avoid increased scrutiny over price-fixing issues is up for debate.
Last month, the U.K.’s Office of Fair Trading issued preliminary results of its investigation into price fixing by hotels and OTAs, saying in a statement of objections that Booking.com, Expedia and InterContinental Hotels Group have infringed competition law.
Within the past two weeks, two different lawsuits—one in California and one in Texas—were filed, both accusing several major hotel brands and OTAs of colluding on price and limiting travelers’ ability to secure deals on hotel rooms.
The lawsuits call into question the practice of rate parity, or the idea that the negotiated net rates and commissions are adjusted so the rooms appear at the same price everywhere online.
Interstate’s Dean called the California lawsuit “a fishing expedition” and said OTAs, and brands for that matter, have no ability to control the price of hotel rooms. Rather, the hotel operator sets the price.
“If we use the same logic, then it is highly anti-competitive to ‘fix’ the hotel rates in the (global distribution system) and ‘force’ thousands of travel agents to sell at the same rate,” added Max Starkov, president and CEO at Hospitality eBusiness Strategies.
Sources said the agency model would alleviate price-fixing scrutiny because third-party distributors are never the merchant of record; they’re simply listing inventory at the same price that it is sold to the consumer. The supplier then pays the distributor an agreed-upon commission. Third parties are less likely to discount the product because the commissions tend to be much lower, sources said.
But Dean said whether rooms are distributed over a merchant model or agency model has no effect on rate parity. “At the end of the day there’s a best-rate guarantee in both the merchant and agency model,” he said.
If rate-parity agreements do go by the wayside and hotel rooms are sold at different prices on different channels, Dean said it could turn out to be a positive for hoteliers.
“If everyone has discipline, not having parity across all channels would be a wonderful thing,” he said. “We can price hotel direct the cheapest, and then the OTAs would all be screaming for parity again.”
