If the growth in the number of hotel rooms being offered on daily coupon websites like Groupon and LivingSocial has proven anything, it's that one hotelier's spark to ignite demand is another's fire sale.

With 2010 leisure sales lagging previous years, Colorado's Vail Cascade Resort & Spa launched the first of its three flash-sale offers with LivingSocial, and the results were immediate.

Flash reservations"We needed something to jump-start occupancy, and it worked really well," said Amy Hudgins, director of revenue management at Vail Cascade. In fact, she said, the resort is planning more LivingSocial offers for 2012. "It's an acquisition strategy for us, a way to reach new customers that we can't necessarily get our hands on with the limited marketing dollars available to us."

Talk to a hotel-chain representative, however, and a completely different viewpoint emerges.

"We have looked at these types of sites and, due to the high discounts and high costs, found that they offer little value," said Chris Silcock, global head of revenue management at Hilton Worldwide. "In addition to the very low profit offered from these models, we have found that rather than generating demand, they tend to shift demand around in a market at a lower price, therefore offering little medium- to long-term value as a distribution model."

Such responses typify a relatively new distribution channel for hotels that has grown rapidly in the past few years. But at the same time, the hospitality industry is divided over whether such a channel actually helps the industry's bottom line or merely drives down the price of hotel rooms.

While an online seller such as Expedia will typically secure a room at about a 20% discount from the hotel's published rate, Groupon, LivingSocial and other so-called flash sites generally cut deals at a far larger discount. The deep discount enables them to let subscribers bid on rooms that are often 40% to 50% lower than a hotel's standard rate and include additional amenities such as meals, free parking and local entertainment.

The practice has rapidly gained favor with travelers who, the flash-site executives say, would not have otherwise booked trips.

Groupon, which went live in 2009, launched Groupon Getaways With Expedia in July, which, the companies said, would offer consumers "deeply discounted, highly compelling travel deals from among the more than 135,000 hotels worldwide that work with Expedia." The site follows the standard Groupon formula, where customers have a limited time to buy a discount voucher good for future travel, then must book the stay within the expiration period.

The results were immediate. In August, Getaways' first full month of operation, the unit generated $10 million in revenue. While Groupon hasn't broken out the division's sales since then, Getaways accounted for about 9% of Groupon's $147 million in North America sales in October, according to a December blog post from Yipit, a daily-deal aggregator.

Tim OShaughnessyMeanwhile, closely held LivingSocial, which debuted its Escapes section in November 2010, has booked more than 600,000 room nights at more than 800 hotels since then, according to Doug Miller, LivingSocial's senior vice president of new initiatives. LivingSocial says it has 46 million subscribers worldwide.

LivingSocial CEO Tim O'Shaughnessy, speaking at a conference hosted by travel research firm PhoCusWright in November, stated: "This is the fastest-growing travel business that potentially has ever existed. This is different than the current model out there. The current model drives down brand and price. We have a platform to tell the story of the brand."

At stake is the flash sites' piece of online hotel-booking revenue, which is expected to surge during the next few years as the U.S. economy continues to recover from the recession and more people book rooms on the Internet. Between 2009, a relatively soft year, and 2013, annual online U.S. hotel bookings by leisure travelers will have jumped 44%, to $39.2 billion, and will account for a third of all hotel bookings, PhoCusWright said in a November report. (PhoCusWright is owned by Northstar Travel Media, the parent company of Travel Weekly.)

Some independent operators say such sites give them additional visibility and a better chance to compete with the deep-pocket marketing efforts of big-name hotels and enable them to fill rooms that would otherwise sit empty.

Meanwhile, flash-sale sites are pitching the fact that most of the bookings -- LivingSocial estimates about 70% -- are made by people who had not planned to take a trip before being presented with the offer.

Hotel-chain executives and some analysts, on the other hand, say such sites can cannibalize business by selling deals to people who had already been familiar with the hotel in question, albeit at a discount.

U.S. average room rates for the first nine months of 2011 rose 3.6% from a year earlier, according to research firm STR, and some larger hoteliers fear that additional purchases through daily-deal sites could hinder their efforts to bolster their bottom line by hiking rates further.

Lorraine SileoAs a result, flash sites appear to be working almost exclusively with independent hotels and lodges. A Dec. 29 review of Groupon Getaways offers to New York-area subscribers revealed that of 31 hotel deals being offered, just one -- a Holiday Inn in Surfside Beach, S.C. -- was a brand-name hotel. That property offered Sunday-through-Thursday two-night stays with a dining credit for $103 total, representing a 43% discount from the hotel's standard rate, according to Groupon.

And with worldwide name recognition and sophisticated websites, brand-name hotel companies and their hotel owners don't appear to be boosting their interest in cutting deals with flash sites anytime soon.

Marriott International spokesman John Wolf said that Marriott has advised its hotel owners to avoid making deals with discount coupon sites "when it is rate-driven only." However, the company is amenable to hotel owners using flash sites "for value-added packages in which the rate is opaque."

"As private sales sites grow in volume and number, it is clear that properties, either independent or loosely managed, are attracted by the allure of selling distressed inventory in a new way," added Lorraine Sileo, vice president of research at PhoCusWright. "While opaque is useful for the chains, the flurry of private sale, daily deal, group buying and flash sale sites are largely considered taboo."

For agents, the idea of having heavily discounted rooms on flash sites is no less taboo. Most agents play down daily-deal sites as a potential competitor because the stays tend to be short and are purchased by travelers who'd be unlikely to consult an agency anyway. However, others say that if the suppliers they work with got in the game, it could fray their relationships.

"We're not going to stand silently if the owners that we support all year round are giving daily deals to those sites and not the same prices to us," said Sean Tolkin, manager in training at World Travel Holdings, who said that currently, the suppliers that work with his brands do not offer such flash site deals.

Regardless, travel remains a highly visible component within a flash-sale industry that's growing rapidly and offers items ranging from hot dogs to oil changes to eyelash-tinting treatments. In the U.S., revenue generated from daily deals and flash sales was estimated to have more than doubled last year, to $1.97 billion, and will more than double again, to $4.17 billion, in 2015, media industry consultant BIA/Kelsey said in a September report.

Henry HarteveldtMeanwhile, Groupon generated $1.12 billion in revenue for the nine months ended Sept. 30, up eightfold from a year earlier, the Chicago-based company said in a November filing with the Securities and Exchange Commission. Groupon went public in early November at $20 a share and opened its first day of trading at $28 before plunging as low as $16 in the ensuing weeks. The stock was trading at about $21 as of late December.

"Clearly, these sites came along at the right time in the economy," said Henry Harteveldt, an industry analyst with Atmosphere Research Group. He said such sites appeal to so-called "neofrugal" travelers looking for unique experiences at a discount. "The recession hit us all with the ugly stick."

Additionally, Groupon, which doesn't break out revenue by goods categories, may have generated as much as $400 million in gross travel sales in 2011, PhoCusWright estimated in a report released last year. Some of Groupon's flash-sales offers have generated as many as 4,000 room-night sales for a single hotel, according to PhoCusWright.

"We're getting customers who weren't otherwise going to travel, and we're using the power of suggestion," said Simon Goodall, vice president and general manager of travel at Groupon. "Suppliers that use this love it because they understand it's an incremental customer."

Hoteliers also get the benefit of selling rooms, albeit at a discount, that don't ultimately get used. Harteveldt estimated that as many as 15% of the flash-sale vouchers that are sold are never redeemed.

Moreover, Vail Cascade's Hudgins said that flash sites provide the additional value of giving the property operator enough background about the traveler to generate additional revenue by target-marketing particular amenities and potentially enticing a return visit at the standard rate.

"The beauty of it is you get all of that customer information, and that is not something you'll get from a lot of other third-party channels," Hudgins said. "We can engage with them immediately and send out spa specials, food and beverage specials, things they can take advantage of on the property."

What the proliferation of daily deals means for other parts of the travel and hospitality industries remains to be seen, however.

Uf TukelWith cruise operators selling vacations at a higher price point and for time periods longer than the one- to three-night stays typically offered by Groupon or LivingSocial, flash sites are unlikely to have much of an impact on that industry, according to Uf Tukel, co-president at cruise-booking company iCruise.com.

"While I agree these sites create some demand for travel that may not have otherwise existed, I believe these are incremental travel getaways and not replacements for their larger vacation plans," Tukel said. "Our clients typically book five months in advance and have specific travel interests and destinations in mind."

Meanwhile, online restaurant-reservation booking service Open-Table in November reportedly announced it would pare down the "Spotlight" daily deal program that it launched in 2010 because of negative feedback from restaurant owners.

And while many of the deals sold on flash sites throw in various amenities and activities in addition to the room stay, the practice isn't likely to have much of an impact on a tour-packaging business in which less price-sensitive travelers are more likely to spend more, plan ahead and consult an expert for more intricate travel itineraries, said Margie Jordan, CEO of Jordan Executive Travel Service.

"Groupon and other sites offer a product often with fine print, blackout dates and restrictions," she said. "For DIY travelers looking for the nothing more than a hotel/resort stay, Groupon and other sites may be an option. The online daily-deals websites are not a threat to travel agents. The only real threat is the lack of consumer education as to what we really do."

Still, such flash sites will likely strike deals with a growing list of suppliers that are looking to lure new customers who will return for standard-priced goods and services.

And such rapid consumer adoption of flash sites continues to lure more players into the fray. In August, a month after Groupon and Expedia launched Groupon Getaways, Travelocity introduced a flash-sale product called Dashing Deals, which provides a daily deal on hotels worldwide and offers hotels at about 50% off of standard rates as well as perks such as breakfast, show tickets or spa credits. And last month, eBay said its PayPal online payment division will start offering daily coupons this year to its more than 100 million account-holders in an effort to take on Groupon and LivingSocial.

None of which pleases Hilton Worldwide's Silcock.

"The last thing the hotel industry needs is another high-margin, heavily discounted, unfenced distribution channel," Silcock said.

Follow Danny King on Twitter @dktravelweekly and follow Johanna Jainchill @jjainchilltw.


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