Commission cuts don't make good business sense, according to
Michael Dominguez, chief sales officer for MGM Resorts International. Groups
are the most profitable revenue stream for hotels, and third-party commissions
-- which only apply to sleeping rooms -- are part of the cost of doing
business, he said.
"I'm looking at the math. If you're paying more in
commissions, it's because you made more revenue, and the commission is a
percentage of the revenue."
After Hilton followed Marriott's lead last week, reducing
commissions paid to third parties from 10% to 7%, Dominguez shared his views on
this hot topic with Meetings & Conventions, Travel Weekly's sister
Q: Were you surprised that Marriott, and now Hilton, decided
to reduce third-party commissions?
A: I understand the chains are trying to show value to
owners, and they're looking for increases in profit margins. It doesn't
surprise me that Marriott went there, and that Hilton was going to go there.
I'm not saying it doesn't make sense. I understand their
rationale. But I don't understand the timing. When GDP is growing, and overall
revenue has grown for five consecutive years, and this doesn't even represent
the majority of our business -- the data doesn't connect to all those dots.
Q: MGM is not planning to reduce commissions. Why not?
A: Over the years, we've lived with this model, and that's
baked into our rates as a cost of doing business. It is important to look at a
more holistic view of business versus a narrow snapshot. We consider all the
revenue related to group business -- F&B, A/V, etc. -- which,
comparatively, far exceeds the profitability of other channels of business.
I sat with our senior management, and we looked at our total
revenue and our patterns, and we asked ourselves, "What does 3% represent?
Is it material to our success? Does it matter in the greater scheme of things?"
And the answer was no.
Q: Why are meetings more profitable than other business?
A: A report released last week by Kalibri Labs found that
meetings in the U.S. represent $300 billion in total spend, with $140 billion
coming from room revenue. This means that more than half of group revenue comes
from noncommissionable business.
The other channels will carry a larger cost margin with less
overall revenue contribution. Revenue for group business far outweighs
transient. I think it's interesting that [Marriott and Hilton] keep talking
about the cost of getting the business, yet they're not talking about the value
of that business.
Q: If room revenue is about 40% of group spend, what are you
really paying in commissions?
A: If 60% of your revenue for groups is non-rooms -- and
therefore noncommissionable -- then the actual commission you're paying on
revenue is about 5.5% or 6%. Meanwhile, if you look at transient business, you're
paying well north of 10% to the OTAs.
Q: How will this affect corporate customers?
A: If you look at the big corporations, their budgets are
not increasing dramatically, and commissions have been a factor in offsetting
costs. I would expect that clients, especially those with SMMP [strategic
meetings management program] models, will look at cost and will be reducing in
And you can't tell me it's not going to give somewhere else.
It's literally a shell game at some point; we're just moving the revenue
Q: Do you mean hotels will offer other forms of rebates,
like a free reception or a credit to the master account?
A: Sure. It's accounting. It's a big bucket of concessions
Q: Do you think other hotel chains will follow?
A: In certain companies, yes, where there is more of a
management model. But companies like Omni and MGM, which own their hotels -- so
they're not paying fees to a management company -- are in a different position.
There are enough independent hotels that the independents will act very
differently, I think, as well.
Q: Are Marriott and Hilton doing damage to relationships and
A: Without a doubt. What happens when we have a major
downturn? If we were to approach this as an industry, it probably deserves more
dialog and more warning.
These are interesting times. It would be premature to make
any predictions about how this all pans out. But you have to remember, it's
still a relationship business. I think that's important. I think communication
is important. I'm a firm believer that it's not only important to do the right
thing, it's important to do the right thing in the right way.
Source: Meetings & Conventions