The economic collapse of nearly ten years ago brought not only havoc to the hospitality industry, but also created a new type of hotel owner: the activist owner. These owners are knowledgeable, curious, involved, and demanding.
There is a lot happening in 2018 that hotel owners should be happy about. After the best Q1 on record earlier this year, it is shaping up to be another stellar year in hospitality with demand (2.4%) outweighing supply (2%); occupancy increasing by 0.4%; ADRs growing by 2.6%; and RevPAR increasing by 3% (STR, PWC).
The hospitality industry is enjoying its longest expansion and healthiest growth in decades, yet, are the owners happy?
For one, in spite of record-breaking industry benchmarks, profitability is falling and net room revenue—i.e., revenue that remains with the hotel after accounting for distribution costs (OTA commissions, traditional agency commissions, and other distribution expenses)—has been declining steadily over the past several years. In 2017 U.S. hotels earned roughly $155.2 billion in guest-paid revenue but paid an estimated $25.2 billion to acquire guests in the form of OTA commissions and other distribution costs, retaining significantly lower net room revenue of $130 billion (Kalibri Labs). Revenue capture—i.e., net room revenue that remained with the hotels—declined from 84.9% in 2015 to an estimated 83.5% in 2018 (Kalibri Labs).
As far as falling profitability is concerned, 2018 is shaping up to be a repetition of 2017. The overall growth in room revenue, occupancy, and RevPAR that many hoteliers have been enjoying in recent years cannot possibly compensate for “the loss of wealth” in the form of steadily increasing distribution costs via the OTA.
So what should hotel management companies (HMC) do to increase profitability for owners and fulfill their fiduciary obligations as responsible managers? Naturally, any good and responsible HMC can do a lot to improve the bottom line for their hotel owners. However, here we will focus only on increased profitability as a result of smarter distribution and digital marketing strategy.
#1: Lower the Distribution Costs
Hotel managers understand that distribution cost is one of the very few cost drivers they can proactively influence to reduce overall expenses. Why? Except for distribution costs, hotel operators have difficulties controlling the other main cost drivers in hotel operations:
- Labor Costs: creeping up due to unionized labor contract and mandated minimum wage/living wage increases in many municipalities.
- Debt Service: at best, interest rates on commercial loans are staying flat.
- Franchise Fees (Rewards, Marketing, Royalty, Reservation, etc.) are creeping up, as usual.
- Utilities: normally 5% of gross. Water, Sewage, Gas & Electric are all creeping up; Water & Sewage are growing fast lately.
- Real Estate Taxes: always creeping up at the whim of local municipalities.
Note: The importance of these cost drivers varies property by property and largely depends on the size of the hotel, the condition of the physical plant, whether property branded or independent, amount of debt, and geographic location.
Distribution cost, as a cost driver, has been rising steadily over the last seven years due to OTAs increasing market share versus hotel direct bookings. A few years back, a study by Kalibri Labs, “Demystifying the Digital Marketplace,” provided concrete evidence that this dramatic shift exceeded 40%.
Direct online bookings are by far the most lucrative and cost-efficient bookings at any hotel, resort, or casino. As a point of reference, across the HEBS Digital hotel client portfolio, the average direct channel distribution costs (bookings via the property website or directly attributable to the digital marketing efforts) are 4.5%, compared to the hefty OTA commissions of 15%-25%.
Hotel managers should make it their priority to increase direct bookings, which come at 3-5 times lower cost compared to the OTAs, and improve their overall direct versus OTA distribution ratio, which will improve profitability to ownership.
For owners, any dollar “saved” from distribution adds directly to the bottom line (Net Operating Income, or NOI) and the investment return. In this sense, the more inexpensive direct bookings, the better. The fewer expensive OTA bookings, the better.
#2: Adopt a Portfolio-Focused Approach
We see time and again HMCs utilizing myriad vendors that do not talk to each other, and in many cases do not even know each other. This may include different website design vendors and digital marketing agencies for the different properties of the managed portfolio, or even different vendors for the same managed property: one for CRM, a second for the property website, a third for SEO, a fourth for SEM, a fifth for online media, and so on. Recently we encountered an HMC with a portfolio of dozen hotels that was using 28 different vendors for their digital marketing!
Any HMC can benefit immensely from adopting a portfolio-focused (versus property-focused) approach by hiring a single “Agency of Record” to handle website design and digital marketing for the whole portfolio of managed properties, thus reaping significant savings from economies of scale.
Here are just a few of the benefits and cost savings from the portfolio-focused approach:
