Online Distribution: Direct vs. Intermediaries | By Jan Tissera, TravelClick | Presentation made at PhoCusWright Travel Conference
Today I will be playing the role of devil’s advocate. As many of you know, at TravelCLICK I work with independents, brands and third party suppliers alike to drive electronic distribution to hotels. But now in the spirit of PhocusWright’s philosophy, I will be taking what some might consider a controversial position.
Let’s see what I mean. From the start, the Internet was lauded to be “the great equalizer,” the ultimate distribution tool that would allow any business to reach potential customers around the world. The Internet, technology and computers have managed to push efficiency in just about everything we do. There seemed to be no end in sight with how much technology and the Internet could boost just about every business model. And then, the e-business bubble burst. But as Thomas Friedman so nicely described in The World is Flat: that was just the beginning. The real revolution is just starting, because new tools which take advantage of our interconnectivity have now been developed and distributed. And it is all the complementarities between these tools that are truly leveling the playing field, even making room for new business models. In light of all this, the discussion about Direct vs. Indirect Distribution has become much more interesting and meaningful.
Although we all would likely agree that a balanced distribution strategy which leverages both direct and indirect channels, including third-party sites and the GDS, is the best solution to optimize hotel revenue, today I’ll focus on the advantages of direct distribution. Specifically, we will look at how direct distribution is empowering hotels like never before to drive demand, generate profitable business, and maximize ROI for owners, regardless of the affiliation they may choose. Here is just one example of the power of the Internet to level the playing field across hotels of all types. What do the Royal Crown, Sofitel Brussels, Hotel Amigo and Hotel Metropole have in common? They are luxury properties. They are located here in Brussels. They have different brand promises to their guests. They include an independent, a branded property, and representation company hotel. What they all have in common is that each of these hotels is placed on page 1 of Google’s search results when searching for “Brussels luxury hotel”. They are on the first page of a popular European OTA, Lastminute.com. And they are listed as a preferred placement on the GDS.
So, the Internet is an equalizer. Hotels can compete at previously unattainable levels. Now, no matter what the distribution strategy or marketing affiliation, hotels can compete effectively across all distribution channels. What this new playing field has done is give control for all channels of distribution back to hotels. In the excitement over the Internet as a new distribution tool, hotels unintentionally relinquished too much control of their bookings to third parties. With direct distribution, hotels can take back control of: their pricing, their brand identity, their promise to guests, and their relationship with the customer. Most importantly, direct distribution allows hotels to take back control of profitability.
To understand where the market is going, let’s look at where we have been. In yesterday’s model, hotels entrusted others to do their bookings. In Europe’s fragmented hotel industry we have not seen any coordinated effort for its distribution. Here, the mostly independent and small hotels are less than 30 percent represented in the Global Distribution Systems. The travel agents and tour operators were the lifeline to most hotels. In this model, the consumer had to use the travel agent and tour operator's access to hotel information to make informed decisions as there was little information available directly to the consumers. For those that did decide to expand their reach through electronic distribution systems, the Global Distribution Systems were the only alternative. In this model, the Brands provided the much needed visibility. It gave hotels an identity, a way to be recognized. For the consumer, the Brand delivered a level of comfort. It was a pledge to the customer to deliver ‘THE SAME’ as they traveled to unfamiliar territory. There were no travel-blogs or other review sites. In yesterdays' model, the stars system was THE hotel review system that proved your level of ‘Quality’. Some hotels did see the Web as an opportunity to present their selves online, displaying information pages about their hotel, more like an online brochure than an ecommerce site. This while some Travel agents did embrace e-commerce and ingeniously moved their models online with dramatically increased inventories, promising mass volume, but at the cost of profitability for hotels.
Things are changing as I mentioned before and it is crucial for hotels to stay abreast of the market. If they don’t, their long-term success might be jeopardized by increasing and intensified competition. Hotels who do not diversify by leveraging the multiple channels can find themselves in situations that parallel the 70’s in Spain, where tour operators dictated the room rates. The Center for Regional and Tourism Research reported that in Europe online travel sales increased by as much as 34 percent from 2004 to 2005 and reached over 25 billion in Europe in 2005. A further increase of about 25 percent during 2006 is expected. 120 million consumers are online across Germany, the UK, Italy, France, and Spain, according to Forrester Research. Broadband has become widely available, and prices have dropped dramatically. In fact, many of the new Internet users went straight to broadband. This is especially good news because, on average, broadband users are more likely to shop online than narrowband users. And PhocusWright statistics released last week predict that almost 40% of travel purchased in Europe will be booked online by 2008. Forrester, also points out that TWO of the TOP THREE most popular online activities for all users are travel related—“researching holiday destinations” and “preparing trips online.” These changes cannot be ignored. Consumer behavior is changing and hotels need to adapt their relationships to reflect these changes, or be left behind.
The Internet does appear to be leveling the playing field, and its transparency seems to be dictating the need for new distribution models. Customers shop around because it pays to shop around. In Lausanne at the ENTER conference earlier this year, Peter O’Connor and Ricard Santoma, called urgent attention to this transparency by reviewing the online pricing practices of luxury European hotels. Hotels urgently need to develop a comprehensive online pricing strategy because of Meta Search which has enabled consumers to literally search hundreds of sites in seconds. To date, the hotels’ inconsistent and illogical pricing has been to some extent hidden by the search cost, which has increased dramatically by the sprawling growth of the web and makes comparing prices tedious. Besides this, finding cheaper prices for the same product / date combination via intermediaries is not only confusing for consumers, it simply does not make good business sense: “Why would a hotel encourage its customers to buy via the intermediary for less when it means even less yield for them?” The Intercontinental Hotel Group, who was among the first to implement Best Rate Guarantees, even went so far as to implement a code of conduct and certification program for partner intermediaries. The hotel group eventually withdrew its inventory from Expedia and Hotels.com. Not surprisingly, then, we see why many hotels are moving to a “consistent online pricing policy” and have made their own web site top priority.
In 2005, European direct travel suppliers booked almost TWICE as much business as the intermediaries – with 66% of travel sales. The Internet’s capabilities have matured to the point that it really is changing the way we do business. And so a new direct distribution model has emerged. This change in the online marketplace is not only changing how consumers shop, it is influencing what they shop for. Let’s see what this means to competition for a couple sample markets.
In London, where all parties are growing, independent hotels have had a growth of 21.3 percent, leading to revenue growth of 19.2 percent—well above the market average. Independents have been able to increase their ADR by 2 percent year-over-year, which has allowed them to see increases in revenue of nearly 20 percent. Reservations also grew for this segment, illustrating that independents can command the high price for the business. Independent hotels are also making gains in Paris. Independents saw an increase in bookings of 12.7 percent, leading to revenue growth of almost 10 percent. We are also seeing some other interesting trends in the Paris market. Independent hotels are commanding a $100 premium on their ADR as compared to the branded hotels in this market. While independents have taken small increases year-over-year to maintain this high ADR, branded hotels maintained their year-over-year ADR and experienced a loss in bookings and revenue. This data, from TravelCLICK’s proprietary database, shows that independents can in fact compete with the brands today.
Indeed hotels have many choices. The choice of direct or indirect distribution is often related to brand affiliation and many times they go hand in hand. It is a business decision whether to go independent or fly a brand flag – a decision that includes distribution capability, marketing, management expertise, and more – that all together translate into a ROI. Recently, The Righa Royale, The Greenbrier, Grand American, and Grand Bohemian Hotel are just a few of the hotels that have left brand affiliations to go solo. Now the de-branding phenomenon is making its way to Europe. For example, here in Brussels, the Royal Crown Hotel recently de-branded. A brand is the product of experiences and is much more than a name or a logo. A brand is a pledge to consumers to deliver consistency in an effort to meet expectations. In Asia Pacific and the Middle East, brands are still strong because they provide comfort to Westerners in unfamiliar territories.
Franchise/management company fees do, however, represent one of the largest operating expenses for branded hotels. And while these fees are performance based, the more successful a hotel becomes, the more fees it is likely to incur. With the help of the online Franchise/Management Fee Calculator from HVS International, a hotel can conduct a comparative analysis of hotel franchise companies based on the fees they charge. These high fees can be over 10% of room revenue, which is as significant as having a ¼ share partner! In addition to distribution, other factors that hotels may want to consider when going solo are; a prime location, a physical differentiator such as a architecturally significant building or natural resource, a prominent name Unusual or differentiating amenities a hot spring or view of the Eiffel Tower. Because of this Hotels need to do their own cost/benefit analysis to determine the best choice to drive demand and convert new business at the most profitable rate.
The new model requires careful examination of the available options for distribution. Here are the typical costs for a standard two-night stay. Comparing apples to apples, we can see the reservation costs associated with the different options for the same room rate and length of stay. When we look at the average GDS fees, we come to a sample reservation cost of $25; The average OTA reservation cost is $33. And a direct booking through your Web site will cost only $7.50 in this scenario. Again, we come to the same conclusion. With a level playing field, direct distribution will yield hotels higher profits than third-party bookings. With the new model, suppliers are now responsible and in control of their image, their rates, and which channels they decide to use. The abundance of information available online through the third-party sites, the supplier sites, or the increasing number of review sites and travel-blogs has made the customer more informed then ever. In this model, ‘one size fits all’ branding may not be custom enough to close the deal. Now it is mandatory to differentiate, and to deliver not only what the customer expects but to WOW them in order to encourage more ‘word-of–mouth’ through blogs and other media.
In the new model, every customer counts. It should be no surprise that positive consumer reviews have helped increase sales on Amazon.com and eBay for years and now are doing the same for Travelocity, Expedia, and Sheraton. And thanks to interconnectivity, all this information is updated real-time. It’s fast and dynamic in every way! Plus the range of tools available to analyze vast amounts of aggregated data, enable targeted marketing campaigns with pinpoint accuracy, as well as careful calculations of the ROI. Most importantly, however, we have to acknowledge that with this real-time model our industry has become even more competitive. Thankfully, we have tools to help manage this new model.
Hoteliers are getting back in the driver’s seat, with more tools to reach even more channels. Today there are Central Reservation Systems and enhanced web booking engines that help hotels merchandise and differentiate their properties. New content management solutions help manage and distribute rich digital content including photos, video, room plans, and other brand-defining elements that need consistency across all channels. Today channel management solutions can quickly and easily manage the ever-increasing number of channels including GDS and OTA Web sites through a single user interface. Integrated marketing and CRM help you keep in contact with your most important asset. All this, together with real time market based Competitive Intelligence, makes hoteliers informed and in charge of their distribution. In fact, those who have taken control of their destiny are being rewarded with higher revenues.
Electronic marketing has become critical to driving demand for all hotel types. A full range of online marketing strategies has helped elevate independents to the same level of marketing power as brands. New elements with high levels of user-driven content like Google maps can help increase traffic, too. Whether it is sponsored placement with a pay-per-click campaign, or highly effective word-of mouth promotion through a travel blog, the result is the same: more demand for your hotel, through your most cost-effective channel.
In the new distribution model, the customer is key and much of the hotel’s efforts will be direct to the consumer. As the distribution landscape continues to evolve, as channels become more numerous and as customer behavior changes, the Central Reservation System will continue to be the distribution focal point. Today, the CRS is not just a transaction engine, it is a merchandising engine. Hotels need to drive demand through the CRS so consumers can up-sell on their own by adding amenities and creating their own packages during the purchasing process. And don’t lose sight of the demand drivers such as search marketing, PPC, email marketing and travel-blogs, where every customer counts, and every click can help sell our product. Hotels of any size, and especially independent hotels, can compete with online demand drivers that direct traffic to their websites and help convert customers.
Now that everything is so connected there is consistent 2-way communication. A wealth of market intelligence enables hoteliers to make even more informed decisions on their distribution and marketing strategies. And CRM-like applications keep hotels in touch with their most important assets – their customers. This model is an integrated one, where all channels matter, but the GDS and other intermediaries may need to change the way they do business to stay competitive. And because it is an integrated model, we need comprehensive solutions to fully leverage our new interconnected world.
Clearly, hotels can garner significant savings by avoiding high franchise fees, costly intermediary commissions and management costs by going independent and direct. However, globally, hoteliers will agree that one of the biggest and most compelling advantages of direct distribution is that the hotel can gain full control to develop its image and more accurately represent itself. The quality and attractiveness of your hotel today is not just based on the number of stars and your rates, but by how your customer writes and talks about you. Travel-blogs, do influence today’s travelers.
The new reality is that the purchase process is more considered and is more convoluted. As a result of using the internet, significant numbers of consumers change their minds and actually switch brands during the shopping phase. The ease by which the consumer can gather and compare information during this shopping phase demands differentiation. The lack of freedom to do so, by being part of a franchise and the commoditizing effect of being distributed through an intermediary, is causing some hotels to reevaluate their strategies. Besides this, we should not underestimate the benefits of direct interaction with, let us not forget, your customer. The direct and more personal communication with your customer allows for up-selling and bundling of other services. It can directly affect revenue, and customer satisfaction. It can build loyalties and might even encourage the ever so important “word of mouth”. The direct exchange of information will also provide more detailed customer data that will allows for better follow-up and real Customer Relationship Management, including the ability to spot trends for strategic purposes.
Undoubtedly competition will become fierce in the new online environment, and it will demand hotels to look at their cost of distribution more carefully. In this environment, differentiation will be crucial, it will determine who survives. So in summary: in the new model, the customer is central and much of the hotel’s efforts will be directed to this customer. And as the distribution landscape continues to evolve, as channels become more numerous, and as customer behavior changes, the Central Reservation System will become the distribution center point. It makes sense because, as I have shown you today, direct-to-customer bookings deliver maximum profitability, control over identity, and improved customer loyalty. Today, everything is connected and there is a wealth of information out there that allows hoteliers to be in control of their distribution, in control of their customer relationships and in control of their own financial destiny.
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