Report says hotels lose out with merchant sales on the Web

By Danny King
LOS ANGELES — When U.S. hotels distribute rooms through online travel agencies (OTAs) in merchant sales, they give up twice as much in lost revenue as they pay out in commissions on standard agency sales, according to a new research report from Smith Travel Research (STR) and the American Hotel & Lodging Association (AH&LA).

The report, presented at the Americas Lodging Investment Summit (ALIS) here last week, both reflects and supports hoteliers’ efforts to rein in digital distribution costs with initiatives such as the new RoomKey.com booking site.

U.S. hotel owners collectively discounted their rooms to OTAs by about $2.7 billion, up from about $2.4 billion in 2009 and more than double the $1.3 billion in commissions paid to travel agents through GDSs, according to the 214-page report.

Additionally, distribution “costs,” in the form of those discounts and commissions, may almost double over the next few years as more reservations are booked online, according to the study.

OTA discounts on average accounted for about 25% of the approximately $10 billion in room revenue booked through OTAs.

By comparison, hotel owners in 2010 paid about $1.3 billion in commissions on the $11 billion in hotel reservations sold through GDSs, or about 12% of that revenue.

For the study, data were culled from more than 25,000 hotels between January 2009 and June 2011.

“No channel is free, though [having a guest] walking in the door is as close as you’re going to get,” said report co-author Mark Lomanno, executive board member of NewBrandAnalytics and former CEO of STR. “The most expensive channel is the online travel agencies.”

Naturally, representatives of the OTA industry say the report oversimplifies the OTAs’ role in hotel sales, saying that OTAs boost hotel occupancy through their own advertising efforts as well as initiatives such as flash sales and opaque pricing.

OTAs spend twice as much as hotels on TV advertising and four times as much on paid Internet search advertising, according to the study.

“The argument that online travel companies ‘cost’ hotels is ridiculous,” said Joe Rubin, president of the Interactive Travel Services Association, which represents the OTAs. “If online travel companies were simply a cost, then hotels presumably would not use their services.”

The subject of costs associated with the digital sales channel has become progressively more topical as more people book online. Hotels began turning to OTAs en masse in the aftermath of 9/11. As a result, OTAs, which represented just 1.4% of U.S. hotel revenue in 2001, increased their market share the following year to 2.9% and boosted that share to 7.7% by 2010, according to the study.

“The principal job of the hotel company is to get the highest possible rate for the lowest possible acquisition costs,” said Eric Danziger, CEO of Wyndham Hotel Group, in a panel discussion at ALIS. “The industry ceded away this relationship by allowing third parties to have the best access [to inventory] and rates possible.”

As a result, companies such as Expedia, Priceline, Travelocity and Orbitz have enjoyed surging revenue over the past decade, even though hotel sales have grown at less than 2% a year and took a hit during the most recent recession.

Priceline, which first gained recognition largely for its opaque pricing model, has catapulted itself to being the largest U.S.-based OTA based on revenue, primarily though overseas hotel bookings.

“Yes, OTAs are making money at the expense of suppliers, largely by providing a better shopping experience for consumers,” said Chris Anderson, associate professor at the Cornell School of Hotel Administration.

The issue is likely to take on a greater urgency for hotels because digital distribution costs may almost double between 2010 and 2015, to about $7.5 billion a year, as more reservations are booked online and fewer rooms are booked over the phone or by walk-in customers.

Hotels also are taking a closer look at the distribution numbers because of the room-price differences among booking channels.

In 2010, hotel supplier websites accounted for 16% of room-night bookings and 19% of revenue. By comparison, OTAs accounted for 11% of the bookings but just 7.7% of the revenue.

As a result, some of the world’s largest hotel companies, including Marriott International, InterContinental Hotels Group and Hilton Worldwide, earlier this month launched RoomKey.com in an effort to cut costs by gaining a larger share of the digital distribution channel.

RoomKey.com has already secured Best Western International’s room inventory and is pitching the ability for customers to gain hotel loyalty-program points through the site, unlike bookings through OTAs.

RoomKey.com is also looking at bringing in airlines and car rental companies as partners that would list their inventory on the new site, Choice Hotels CEO Stephen Joyce said in an interview at ALIS.

Either way, continued market-share growth for OTAs is all but assured because of the combination of consumers’ growing reliance on travel-oriented metasearch booking engines and the increasing use of smartphones to book rooms, according to report co-author Cindy Estis Green, co-founder and CEO of research company Kalibri Labs.

“Some of the emerging channels are going to alter the distribution landscape very dramatically over the next few years,” Green said. “It’s not all doom and gloom.”

Follow Danny King on Twitter @dktravelweekly. 
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