Trends In Hotel Distribution Channels
How the customer books his room can make a big difference to a hotel’s bottom line. Intermediaries can take a good chunk out the gross amount a guest pays for his overnight. A room booked through a travel agent and the GDS (global distribution system) typically costs the hotel 15% of the reservation’s total. Contrary to popular belief, third-party websites are no bargain either for the hotelier, as they keep about 13% of a booking’s value. So-called “merchant” websites (such as Priceline.com or Hotwire) which basically buy inventory from hotels usually average a 33% mark-up on the rooms they sell. Bookings arriving via the central reservation system of voluntary chains (such as Minotel) can cream over 25% of the client’s original payment between travel agent, tour operator and chain fees. Many tour operators working in mass leisure destinations only pay 50%-60% of the normal room price to the hotelier who is lodging their clients.
Fortunately for hoteliers, the predominant distribution channel for hotels remains direct contact with the property (via telephone, fax or e-mail), which, according to Horwath’s Worldwide Hotel Industry Study, accounted for 34% of all advance reservations in 2002, but which is down from 38% in 1995 . This proportion varies between 27.5% for hotels in Africa and the Middle East and 40.5% for hotels in Europe. Even in the technologically advanced USA, the country’s leading franchisor, Cendant, estimates that 70% of its room nights are generated by walk-ins. According to the Horwath study, hotels’ in-house or outsourced central reservations offices represent approximately 26% of advanced reservations (including call centres and hotel representatives). Travel agents are most important as a distribution channel in Africa/Middle East, Asia and Europe, whereas tour operators grab the largest percentage of reservations in Africa/Middle East and Oceania. Tour operators have a virtual stranglehold on many markets in “sun and sand” mass tourism destinations. In Tunisia, for instance, they account for about 95% of all hotel overnights.
Thus, overnights generated by electronic means of distribution still constitute much less than half of the total at about 24% (includes travel agent and GDS in figure 1 below). Although internet distribution has grown rapidly from (0.8% of the total in 1996 to 3.3% currently, according to Horwath), it is still relatively unimportant. A PhocusWright/Bear Stearns study concerning the US hotel market showed a similar total for electronic bookings of 27% in 2001, of which 6% were via the internet, evenly split between own website and online travel agencies (Priceline, Expedia, etc.) Furthermore, this study predicts a rise to a total of 20% of bookings by internet in 2005, split 11% - own website and 9%- third party. Jupiter Media Metrix makes a slightly less optimistic prediction, forecasting the percentage to rise from 7% in 2001 to 16% by 2007.
Clearly, hoteliers have an interest in promoting the internet channel, as it is far cheaper, especially direct booking on the hotel’s own site. A WTO report on E-commerce estimated that the cost of direct reservations by traditional means (i.e. fax, telephone, e-mail, etc.) could be as much as 300% higher than processing the same reservation through the GDS, which costs between $3-$5.Furthermore, most reservations, passing through the GDS, are generated by travel agents who charge an average fee of 10%. Bookings via a chain central reservation system cost the hotel $6 to $10 and reservations by a toll free telephone number $4 to $8.
Meanwhile the variable cost of a direct online reservation on a hotel property’s own site is only about $1.50. However, fixed start-up costs must be taken into account. A study of over 200 Swiss hotels, carried out by Roland Schegg and Thomas Steiner of the Lausanne Institute of Hospitality Research at the Ecole hôtelière de Lausanne in 2003, found that the cost of building a single hotel property website varied between Sfr.1,000 (€ 645) and Sfr.19,400 (€12,516) with an average of Sfr. 5,000 (€ 3,226). Such amounts are quickly amortised after a few years of operation. Furthermore, the study found that yearly operating expenses varied between Sfr. 200 (€ 129) and Sfr.3,000 (€ 1,935), with an average of Sfr.1,000 (€645).
For the moment GDS (global distribution systems) still dominate the electronic distribution of hotel rooms. There are four principal global distribution systems, Amadeus, Galileo (a subsidiary of Cendant), Worldspan and Sabre. The GDS were originally set up for the electronic distribution of airline tickets via travel agents, but over time have become increasingly important as a booking channel for hotel rooms. In all, there are over 180,000 GDS terminals around the world primarily placed in travel agents, but also in the travel offices of some large multinationals. A hotel needn’t belong to a chain to access the GDS network. Utell, a subsidiary of Pegasus, a provider of reservations-related technology and services to the hospitality industry, offers GDS connectivity to some 4,500 independent hotels in 147 different countries. The number two and three in this business are Lexington Services and SynXis, who count 3,867 and 4,106 hotels, respectively in their networks. (The ranking is established according to total number of rooms, not hotels.) Pegasus also provides CRS (central reservation system) services to some 8,000 hotels, as well as to an additional 20 hotel brands representing 12,000 properties through CRS software licences.
As can be observed in Figure 2 below, the GDS still largely dominate electronic distribution of hotel rooms with a 68% share last year. But their share is being rapidly eroded due the much higher growth rate of the internet. In fact, for the first six month of this year, overall electronic booking increased by only 1.6%, while online reservations rose by 35.5%, according to Travelclick, a company that tracks electronic reservations for hotel companies.
Figure 2 Composition of Electronic Central Reservations 2001-2002
Indeed, according to Travelclick’s E-TRAK Study*, consumer online spending on hotel services has exploded at an annualized growth rate of 50% since 1999, although the rate of increase is estimated to have slowed to 25% in 2003, as the total reaches $7.5 billion. By the end of 2003, Travelclick forecasts that the internet share of electronic distribution will have reached 39%.
Figure 3 Consumer online spending on hotels in ($billion)
Hotel internet distribution is basically divided into two sub-channels – the proprietary sites of chains and individual hotels, on the one hand, and the third party web-based travel intermediaries, on the other. Amongst the latter group, there are also several distinctions to be made. Priceline, the leader in terms of reservation volume generated, and Hotwire are auction sites which basically exist to offload “distressed merchandise”. For instance, a client can go one Priceline’s website and offer to pay so much for a certain class of hotel (3-star, 4-star, etc.) for so many nights in a given city. The chains and other hoteliers provide Priceline with a certain allotment of rooms on specific dates at a fixed price. If the auctioneer finds a match, the sale is made. Priceline, of course, gets to keep any difference between what the client bids and the offer price of the hotel chain. Expedia and Travelscape are online travel agencies controlled by USA Interactive, a growing online consumer conglomerate, who acquired its stake in Expedia from Microsoft in February 2002.
Figure 4 The top ten third party internet distribution sites as reported by E-TRAK participants in order of 2002 hotel reservation production
Travelocity is an online travel agency, that is powered by the GDS Sabre. Orbitz has increased its distribution of hotel rooms at a rapid rate recently. A consortium site founded by the major US airlines, it subsequently branched out into the hotel sector.
Priceline, Travelocity and Expedia remained in the same top three positions in the first quarter of 2003 as was the case in the prior quarter.
Hotels and chains, however, are fundamentally dissatisfied with the role of net-based travel intermediaries, which like their traditional counterparts cost the hoteliers money in commissions and spreads. Hence, they are making every effort to attract customers to their proprietary websites. Four Seasons, at the top end of the quality scale, don’t allow any direct bookings over third-party websites. The handwriting is in on the wall. This year the share of the third party websites sites is forecasted to drop to 47%, from an estimated 50% two years ago. PhocusWright and Bear Stearns predict that the percentage should fall to 45% by 2005.
Things may move faster than predicted, however, due to recent developments. Earlier this year, Hilton (USA) threw down the gauntlet announcing that they would no longer award HHonors points or air miles for online bookings unless they occurred on www.Hilton.com. In addition, Hilton has concluded a “preferred hotel agreement” with Expedia that will link individual property’s central reservation system with Expedia’s database, thus still allowing Hilton franchisees to unload their excess inventory. In September 2003, Starwood followed suit by announcing that as of January 1, 2004, Preferred Guest members will not be eligible for any in-house benefits when booking through third-party internet channels.
Third-party booking sites are not sitting on their hands. They, too, have begun to offer their own loyalty benefits. Travelocity already moved in April 2001 with the launch of their Preferred program, which boasts over 120,000 members who enjoy discounts on car rentals, access to airline club lounges and personal concierge services in exchange for booking at least five times a year. To gain “Preferred Elite” status, the customer must book 10 times per year. USA Interactive, the owner of parts of Expedia, Travelscape, Hotels.com, as well as the recently (September 2003) purchased discounter, Hotwire.com, is also making loyalty a key part of its strategy. Recently, the company struck a deal to acquire a controlling interest in an independent points exchange site, Points.com. In April the company’s CEO, Barry Diller, announced plans to create a new brand name to tie his various properties together, combined with the launching of loyalty programs on each site. There is even talk that Diller will start to buy hotels.
