Friends Or Foes? | The Gloves Are Off In Th Fight For Dominance Of The Online Distribution Channels
The gloves are off in th fight for dominance of the online distribution channels, with hotel giants like InterContinental getting tough with third-party suppliers. In the first of a two-part series, we look at the issues involved – and ask whether
IN THE RED CORNER, InterContinental Hotels Group. In the blue corner, Expedia.com. The gloves are off in a brutal slogging match for dominance in the hotel-distribution arena - with neither side pulling any punches. It's a prize fight of mega proportions, with billions of dollars in revenues at stake from internet punters who have turned these former sparring partners into bare-knuckled bruisers.
Round one went to Expedia and other third-party online bookers, which saved the necks of many a hotelier during recent troubled years by filling up distressed inventory and ensuring much-needed cashflow.
Round two went to InterContinental (IHG) and other hotel giants, which launched Best-Rate Guarantees that promised to match - and better - any online third-party rates for consumers who booked on their own branded websites.
Round three also went to IHG when it landed one in Expedia's solar plexus late last year by severing ties with the online giant following a dramatic rebound in the industry. Seconds out, round four ...
Hotel groups like Le Meridien - a flyweight compared with IHG's heavyweight status in the industry - have taken ringside seats and continue to hedge their bets. They're determined not to get caught up in the fray, choosing instead to bide their time before throwing in their towels with the winners.
The issues were laid out during the recent International Hotel & Restaurant Association (IH&RA) Annual Congress in Istanbul, with management from IHG and Expedia facing off on stage. On the sidelines were distribution experts from Hilton, Le Meridien and Ju--m-eirah International, as well as Priceline.
The scene was set by Peter O'Connor, associate pro-fessor of Hospitality Information Technology at the Essec Business School, who cut to the chase: "For several years, hotel distribution has been in chaos. For quite awhile, we have been making a big mess of how we sell our products.
"The internet has changed everything - and travel is the number-one product sold online. But hotel companies have been - and continue to be - very slow to react. They have not taken advantage of all the online advantages that are out there, and this has allowed several online intermediaries to come in and take first-mover advantage.
"All of these have different business models, but what they all have is a very sharp business sense - what they provide is a one-stop travel shop. They provide everything the consumer could possibly want."
According to O'Connor, the online distributors "are becoming agents rather than suppliers".
There has also been considerable industry consolidation, with certain intermediaries becoming more powerful and starting to dominate the sale of travel online. "This can be good or this can be bad, but what it means is that you have to like it or lump it," says O'Connor. "You have to work with intermediaries - they will sell your rooms night after night after night - but the problem is that, often, it will have a big effect on the rate you are actually achieving.
"It took one of the largest hotel companies in the world to actually stand up and say, 'Stop, we're not going to do this anymore!'"
IHG fired the first shot a couple of years ago with its Best-Rate Guarantee and a range of other promises aimed at making the consumer book direct - it promised the lowest internet rate, no booking fees and privacy.
It also started to address the other side of the equation - the actual properties - and set very strict guidelines as to who the properties could work with.
O'Connor sees a number of key issues, including:
- Distribution costs;
- Who controls the price - the hotel or the intermediary?;
- Who has ultimate control over inventory?;
- Buying keywords and trade names; and
- Ownership of the customer.
"If people book online through an intermediary, they have control of the customer and they will probably book there again.
"But hotel companies obviously want to make them book direct so that they can interact and engage in customer-relationship management with them," says O'Connor.
A recent report by Smith Travel Research estimated that $1 billion in profits has changed hands from suppliers to online intermediaries - with no apparent value added to customers.
Basically, the hotel industry was caught napping, while the intermediaries were fast off the mark. Now that the industry is back on its feet after five brutal years, it is desperately trying to claw back that lost business.
The impact of IHG's bold decision to drop Expedia is being closely watched by other hotel groups, which are wondering whether it is one the group might come to regret.
The 64-billion-dollar question is: in an increasingly cut-throat industry, is it wise to cut yourself off from any potential revenue source - particularly one as big and powerful as Expedia?
Paul Mulcahy, IHG's e-commerce director for Europe and the Middle East, explains why the group took its tough stance.
"Often in the past, some third parties were engaging in practices that misled the consumer. They promised things that could not exist, such as savings that could not be found because we knew that no one could get those rates from us. Or saying that our hotels were sold out when they were not.
"In the offline world, there are very clear rules about brands and how your brands are used but, with the unfortunate Wild-West world of the internet, it is possible to buy trademarks via keywords.
"For instance, if you search for Holiday Inn and then what pops up is not the original website but a third party instead, it shifts business and confuses the consumer.
"IHG is a manager of brands. We franchise more than 90% of our hotels today - so branding is what the value of the company is all about.
"We have very clear mechanisms to protect our brands online and our certification criteria are predom-inantly about bringing those brand standards online. We bring a bit of discipline to online distribution.
"The issue is simple: online intermediaries must add value and bring something new to the table. Why would we pay a third party 20%-30% for business that we would have got anyway?
"Obviously, coming off any shelf is never good, but we've said, 'We prefer to bite the bullet now, put some rules in place, and try and get this thing back on track'.
"We are absolutely committed - and we will walk away from people who do not meet the criteria.
"We want to ensure we can continue to be in business and that the customers can actually have a physical product to find."
Expedia is "still not clear" why it was not certified by IHG, according to Henrik Kjellberg, VP Europe for Expedia and Hotels.com.
"We used to be the darlings [of the hotel industry] two or three years ago. We had flexible inventory and flexible rates, but this 'halo' suddenly turned into horns. Suddenly, we are being accused of either pricing too high or pricing too low.
"We haven't really changed our model, so we're a bit baffled by the whole thing.
"Most of our business goes to independent hotels, but having the big brandnames and the big chains is important to us. We hope we can prove to them that we can add value. These are smart businessmen, they know they're getting business.
"We respect IHG's decision not to work with us. We don't have to work with every brand in the market and we accept that IHG doesn't have to work with us.
"We're not here to create a big fight with InterContinental and rule the world - we're about partnerships.
"Our main base has always been independent hotels, but we now have big agreements with [such companies as] Marriott, Le Meridien and Disney. They have expressed every intention to keep on working with us."
Kjellberg refutes IHG's claim that Expedia and other online intermediaries do not add value.
"We take a huge marketing risk. We own the customers the first time and, after that, we fully believe that it's up to the hotels to bring the customers into their fold.
"We share inventory with the hotels and allow the flexibility of giving rooms back.
"How do you define fairness? If we are talking about buying keywords, we are absolutely in agreement with IHG and we do not buy their key words.
"In the past, we were buying them - but we realised it was such a huge issue for the hotel industry, and we've stopped because we realised it was impossible to have good relationships with any chains because of this.
"But you can still have small players buying your keywords, anyway.
"To make it clear, we are playing by the rules, but if our competitors don't - and hotels don't have an agreement with them - then they end up losing and so do we because it's an un-policeable area."
Kjellberg strongly disagrees that Expedia and other online intermediaries do not add value. "We do add value - certainly to independent hotels; perhaps less to the big brands, because they also have the capability of marketing themselves. But if we didn't add value, we'd be out.
"Let's not forget that consumers rule - they can now actually check, compare and see what the prices are."
He says that some of the concerns are due to increased competition among hoteliers that didn't exist before, "because there was much less price clarity".
"Many of the chains are putting guidelines into place, and I'm fine with that - it's a natural evolution of the market. But when you hear terms like 'consumer/supplier friendly', it's usually about the margin, and we expect there to be tough commercial negotiations between ourselves and our partners.
"But it's important to distinguish between being predatory in the market and having tough margin discussions - which is a separate point."
So, are IHG and Expedia partners or enemies, friends or foes? IHG's Mulcahy: "The online space is massively important to us. We've grown dramatically online in the past year, and it's something that we're very passionate about.
"We don't work with Expedia today but, in the future - if we can have a partnership that has the same values as our company that protects the consumers and our hotel owners - then certainly it could be different."
Expedia's Kjellberg: "The door is always open with us and we think that, commercially, we do add a lot of value to both independent and chain hotels. We believe we can do that for IHG, as well.
"Partners in the future, perhaps - definitely not enemies."
Why InterContinental decided to get tough with the online players ...INTERCONTINENTAL came out with a set of certification criteria last May, which laid down the rules that third-parties must adhere to when distributing its inventory online.
"We want to make sure that the business is incremental business that we could not have got otherwise, so justifying the high commissions we pay," says Mulcahy.
"It ensures that our online suppliers do not mislead consumers, and also protects our hotels and owners by making sure they are getting the full value of the business. "We really do believe that intermediaries have a part to play, but our position is very clear."Today, 70% of our business is racked - but there is 30% out there that really gives us extra reach into customers that we could not get otherwise.
"However, we want to make sure that when we're paying very expensive commissions for that 30%, it is incremental - and the only way to do that is to make sure that our keywords are not being abused.
"Certainly, in the past, all third-party intermediaries and their affiliates were doing this.
"That's something that just can't happen. In the offline world, if someone opened a guesthouse and put Holiday Inn or Hilton or IKEA over the door they'd be in court by lunchtime."What's different about online?"
Expedia 'just a normal travel player' - with overheads to match
ACCORDING to Expedia's Kjellberg, most of the major chains still give off-line players "special treatment".
"I get arguments like, 'We are happy to pay these offline guys 25%-40% because they print a brochure and have a bus with their logo on, so they have a lot of costs'.
"To me, that's a bit of a strange argument because we put all of that marketing online.
"But we don't see ourselves as an online player - we used to be three years ago, but we are a travel player today.
"We happen to be online because there are a lot of consumers there but, internally, we look at ourselves as a normal travel player.
"We have the same type of costs that any other travel player has had for decades. It's just different - we pay less on brochures because our brochure is online, but we pay more on advertising on the internet."
In the next article: hotels that love Expedia- and why.
Copyright | HOTEL Asia Pacific. Contact Publisher/Editor Steve Shellum at [email protected]
Steve Shellum
(852) 2443 7352
HOTEL Asia Pacific
