Friend or foe? That’s the question the hotel industry has been asking for the past decade about third-party reservations Web sites such as Hotels.com, Travelocity.com and Priceline.com. The question appears to be coming to a head with this week’s revelation that Expedia, the owner of the Hotels.com site, has pulled all hotels affiliated with Choice Hotels International from its sites.
Third-party reservations sites, also called online travel agencies, offer many hoteliers an outlet for excess room inventory during lean times. They have been as important for some hoteliers during the current recession as they were for them during the aftermath of 9/11. There’s no denying they filled a void in the industry; otherwise they would not have survived.
But some industry observers say the third-party sites are nothing more than vultures who are eroding average daily rates to the point where a hotel room is a commodity no different than the bars of soap that adorn a guestroom’s shower. I believe that’s partially true. These third-party sites have trained consumers to look for the lowest possible price, and while that’s good news for consumers, it’s not-so-good news for hotel owners who are trying to make a profit.
Another knock on these sites is the markups they achieve for hotel rooms that they obtain at reduced prices from hoteliers, who in some cases are desperate to get heads in beds. These markups sometimes reach as high as 25 to 30 percent, hotel operators have told me. That makes some hoteliers do a slow burn … as if they believe these third-party sites don’t have the right to make money themselves. That’s a ridiculous thought in a capitalistic society. Up to this point, no one is forcing hotel operators to sell rooms through the OTAs.
Internet reservations sites are masters of marketing. Hotels found themselves behind a huge 8-ball following 9/11 when owners and operators realized that the OTAs were going to be a force they had to deal with. Brands responded with a low-price guarantee on their sites, but despite all of the things the hotel industry has going for it, a single-minded marketing message is one thing it lacks. The power of the brands was no match for the marketing magic of the dot-com distribution sites.
In some ways, the hotel industry is responsible for allowing these third-party sites to thrive. As far as I know, there was but one attempt by a group of hotel companies to form a collaborative site to allow consumers to comparison shop, but that fizzled. The lack of foresight for hotel companies to actually work together to develop a site remains a mystery. Anti-trust issues aside, the industry as a whole could have capitalized on the advent of the Internet, but it did not.
A final knock on these OTA sites is that because they conduct business online, they aren’t subjected to local sales taxes. Countless municipal, county and state governments have gone to court to try to collect taxes from these sites, and while there have been some rulings ordering the sites to pay up, the appeals process has made it so the rulings have become nothing more than paper tigers.
The latest brouhaha
The Choice-Expedia rift boils down to the fact that third-party sites have secured a certain amount of control over the sale of hotel rooms. If Expedia is trying to force all Choice properties to turn over control of all of their rooms to it, then Choice had no choice but to not agree. If it agreed to that stipulation, its Silver Spring, Maryland, headquarters would be over run with irate franchisees.
Choice executives have not responded to interview requests about the subject. In an interview with Hotels magazine, Choice CEO Steve Joyce said “Expedia wanted Choice to literally give up control of its inventory and pricing and wanted to penalize franchisees who did not give Expedia 100 percent access all the time.”
If that’s true, Expedia is going for the gold. To allow complete access, including real-time inventory and pricing, in some ways would render corporate property-management systems somewhat useless. Or at least they would be less effective. Under the scenario that Joyce paints, Expedia is trying to, for all intents and purposes, become the revenue manager for Choice’s properties. That’s not going to sit well with owners.
Expedia, through a spokesman, has declined to be interviewed. It released a statement that confirms it no longer offers Choice properties on its sites “because of the inability to reach an agreement on the terms of a new contract, despite numerous extensions granted by Expedia in the hopes of securing a mutually acceptable deal since the original contract expired in May 2007.”
The statement goes on to say that “many of the issues under discussion were principles which both parties had been operating under during the prolonged extension period, and are commonplace throughout the industry.”
Read the full statement from Expedia here.
It’s going to be interesting to see how other hotel companies react to this situation. Other companies must be watching closely and in many cases will undoubtedly be rooting for Choice to prevail. In this case, prevailing for Choice could mean forcing Expedia to abide by its demands and wishes, or it could mean Choice proving to its franchisees that representation on Expedia’s third-party sites aren’t necessary (in other words, replacing the business derived from those Web sites with other, higher-yielding business).
A couple of my sources have forwarded me a letter that Expedia apparently wrote to Choice’s franchisees. The Expedia spokesman mentioned earlier confirmed that the letter was authentic.
In the letter Expedia tells the franchisees that a series of communications that Choice sent to franchises lays the blame for the situation “squarely on Expedia’s shoulders.”
The most telling parts of the letter: “As an initial point, we feel it is important to clarify that we did not ask Choice for anything we do not already have in place with other strategic, long-term lodging partners…
“First and foremost, Expedia seeks to create value for our partners by making their inventory available to the world’s largest source for online travel. … Indeed, Expedia has delivered a stable source of volume to our partners in a challenging environment.
“Secondly, parity from our partners with respect to rates, room availability and customer treatment, allows Expedia to provide our travelers with maximum value. It is important to note that parity applies both in industry down-cycles and industry up-cycles….”
Read the entire letter here.
I can’t help but think back to the inaugural Hotel Data Conference, presented by Magnuson Hotels, in August. (Full disclosure: It was organized by HotelNewsNow.com and its parent company Smith Travel Research.) At that conference, Brian Ferguson, VP of lodging demand and analysis for Expedia, said his company’s job in the industry is clear.
“In terms of friend or foe … What people are trying to get at is that seeing all of these rates together and having consumers go through and choose the cheapest three-star in the neighborhood is what’s really driving down rate,” he said. “I don’t really see that as an Expedia issue. I see that as a reality of where we are today. That’s the Internet.”
And while he admitted that consumers do use Expedia simply to choose the cheapest rate regardless of brand, he also said, “There are no rates that are on our site that aren’t given to us by hoteliers. We don’t set the rates.”
Read more of Brian Ferguson’s comments at the conference here.
That’s the “A-ha!” moment for me. If Expedia is now trying to set the rates, it’s barking up the wrong tree. Otherwise, it is another tool that hoteliers can use to fill their rooms, which after all is their No. 1 goal. The real issue is allowing hotel operators to use the means necessary to generate enough revenue to pay their bills and stash some cash for a rainy day. Does Expedia help them do that? Yes. But if it means dropping prices on every room available to commodity levels, that’s going to be a hard sell in the hotel industry.
As STR president Mark Lomanno and other STR executives have preached time and time again, if hotel owners and operators want to stash more cash in good times and bad they need to make sure they are educated in a revenue management system that works toward that goal. Sometimes giving away rooms at dirt-cheap prices is a valid route, other times it’s not. Ultimately, that’s the balancing act a hotel owner or operator must achieve.
From the franchisees
Several Choice franchisees I contacted said they’d comment anonymously because they “didn’t want to roll in the mud on this one,” as one of them put it. The general message they had was clear: Choice needs to make sure there’s representation on every major third-party site available, but giving total access to room inventory to those OTAs is not in the best interest of the hotels.
I believe that Choice executives believe that allowing such a thing will damage revenue streams for franchisees, which translates into lower revenue for the mother ship. That’s not a good thing for any company, let alone one who has to deal with the whims of Wall Street like the publicly traded Choice does.
I also believe Expedia sees this recession as an opportunity to further entrench itself in the hotel industry—an industry that already has made Expedia a lot of money. It has every right to try to make as much money as it can, just as Choice has every right to accept or reject the proposed deal.
So let’s face it, this is a disagreement about sharing the pie. Rarely does that kind of disagreement end with everyone happy. Both Choice and Expedia are telling the Choice franchisees that they have their best interest at heart. But Choice has plenty more at stake, and as the keeper of the brands, the company’s executives sometimes have to take a stand. Whether this stand is right or wrong remains to be seen, but it’s a stand that makes this the biggest story of the year.