If you’d asked me ten years ago about the future of hotel brands in the digital age, I’d have been uncertain.
NB: This is an article from Matt Luscombe, CEO at Cycas Hospitality
I could see the dramatic changes that were happening. Hotels’ ‘distribution costs’ – particularly commissions paid to online travel agents (OTAs), other online intermediaries and brand loyalty schemes – were increasing rapidly, while fees paid to ‘traditional’ partners – wholesalers, tour operators, GDS, agents and the brands, themselves – showed no signs of decline.
And those trends have only accelerated. Google remains the largest beneficiary of online growth, with a significant majority of all searches and bookings originating from its platforms. Among its largest customers – from any industry – are Booking.com and Expedia, the world’s largest OTAs (excl. China), who continue to invest heavily in online search and traditional TV advertising to remain top of mind for hotel guests. Those billions of dollars in spending each year come directly from the owners of hotels, particularly here in Europe.
There was a time, around five years ago, that the hotel chains briefly considered ‘fighting back’. IHG Rewards Club’s ‘Your Rate’, quickly followed by Hilton’s ‘Honours Discount’ and Marriott Bonvoy’s ‘Member Rate’, were an aggressive attempt by the chains to incentivise their loyalty programme members to ‘book direct’, offering their guests discounted rates that effectively ‘shared’ their OTA commission savings. The OTAs reacted strongly and, while these member rates are still available, the global brands reluctantly accepted strict, contractual restrictions on where and how they could be promoted.
In return for this, the chains (led by Marriott, using its post-Starwood scale) were successful in negotiating progressively deeper commission discounts from the OTAs. For the OTAs to reduce their commission costs from a position of relative strength seems an odd strategy, but there were three logical reasons they did this:
- First, the OTAs judged that this ‘lower price for higher volume’ trade-off worked in their favour. Their marginal cost for an addition booking is extremely low; indeed, it’s often lower than the chains’ own digital marketing programme surcharges. OTAs became a more attractive channel for hotels
- Second, the OTAs’ most important ‘brand promise’ is their commitment to having the best price. Allowing the growth of ‘member rates’ would have been deeply damaging
- Finally, by diffusing a potential distribution ‘war’, the OTAs were able to retain the global brands on their sites. OTAs recognise that their customer proposition would be substantially weakened if these brands weren’t available in their ‘shop windows’
These reasons help explain why, in an era of unprecedented distribution cost inflation, particularly in Europe, hotel brands continue to take share from unbranded hotels. The rationale for hotel owners is simple. Although, more and more customers are choosing to use Google, Booking.com and other intermediaries to search and book, when they see a branded hotel on an OTA, they are more likely to choose that hotel (at least where the brand is well-recognised and liked). For owners, costs are rising, but brands remain relevant to customers and the chains have been somewhat successful in containing commission costs, certainly compared to those paid by unbranded hotels.
Ultimately, this cost inflation has one impact: it increase prices for guests, I have no idea how much higher hotel room-rates are in Europe because of the market power wielded by Google and other players, but that’s something only the competition authorities can decide.
The world is changing, but the strongest brands and the best hotel operators continue to find ways to compete and win.
