Tipping the Balance

26th July 2006 (Last Updated July 26th, 2006 18:30)

Faced with unfulfilled potential, hotel chains are learning some hard lessons about e-distribution. As third-party contractors become competitors, hotels must take back greater control of their margins, Best Western Germany CEO Gabriele Schulze tells Jim Banks.

Tipping the Balance

With the boom in online hotel reservations, it might seem that hotels stand to gain significantly from exposure on as many travel websites and booking portals as possible. After all, if their hotel rooms are visible to the widest number of potential guests, occupancy rates might be expected to rise.

Unfortunately, many independent hotels and large chains are finding that the apparently simple logic of extensive market visibility is flawed. Partnering with online intermediaries does not necessarily result in improved occupancy rates, and attempts to do so can, it seems, lead to extra costs instead of higher revenues.

Forced to adapt rapidly to the market dynamics of the online environment, hoteliers now have to learn quickly that the promise is not necessarily the same as the prize. A growing number now feel unable to discern where value can be found in the complex and sometimes confusing online marketplace.

“With the complexity of distribution today, as we know from our own hotels and from our competitors, it seems that the industry is a bit lost at the moment,” says Gabriele Schulze, CEO of Best Western Hotels Germany.

“There are hundreds, even thousands more channels available than there were ten years ago. We get the impression that the hotel industry finds it difficult to understand the differences between them.”

In many ways, contracts with distribution partners are not as clear as they were a decade ago, when hotels had simpler relationships with wholesalers.

Online intermediaries, which have become ever more powerful players in the sale of hotel rooms, increasingly sell rooms directly to customers, but the hotel industry’s pricing strategies have not always adapted to keep pace with the marketing models these third parties employ.

As a result, margins from sales through certain online booking portals have fallen, while occupancy rates have not necessarily improved. In turn, the hotel operators have found themselves losing out in a big way.

“It is no longer the hotel that chooses the margin,” notes Schulze, “so there is a need to change the strategy for working with distribution partners. The industry was foolish to make the third parties as powerful as they are. They asked us for prices, but we didn’t have the right contracts in place to get the right prices for hotels.”

MEASURING VALUE

The potential advantages offered by the internet as a distribution channel – most notably greater visibility at a relatively low cost – are still valid and achievable, so many hotel operators are asking themselves why the costs of distribution are rising.

The answer is becoming clearer as more and more hotels change the way they measure value.

Yield management, which takes into account the many factors that affect the margin of profit per room booked, is throwing more light on where the shortfalls come from. Best Western and others have begun to recognise that some online intermediaries are contributing to hotels’ loss of revenue.

“There are two major factors to consider when measuring the price of distribution, which is becoming more of a problem, especially in Germany,” observes Schulze. “Here there is overcapacity and demand is not growing, so it is very difficult to increase rates.

“Also, there are more distribution channels selling rooms that were previously booked directly through the hotels. Business is growing for the intermediaries, but there are no extra guests staying in the hotels. Merchant models, returned auctions and so on are all very clever ways of increasing commissions for the intermediaries.”

Hotels are starting to measure the total cost of distribution, with the aim of maximising rates and yield per room. Results have indicated that increased revenue cannot be achieved just by increasing occupancy rates, further underlining the negative effect of losing margin to some online third parties.

BOLD NEW STRATEGIES

In light of these findings, many hotel chains are rethinking their marketing strategies in order to take back some control of their margins and achieve a more sustainable balance of power.

Best Western’s approach typifies the new thinking that is emerging. Its strategy is based on seeking preferred partners for online distribution, with the hotel chain setting the criteria.

“We need to limit the number of online channels we use, and we need to manage them well,” explains Schulze. “We don’t need to be on every online travel portal. So, our new strategy is based on the idea of preferred partners chosen by the hoteliers. If you look at intermediaries like Expedia and Travelocity, they wrote the programs for how a hotel could become a preferred partner. We say that the hotel industry should be in control.”

The premise of Best Western’s strategy is that hotels should decide the number of rooms sold through each channel, as well as determining the price at which those rooms are sold. It is applying this approach to all its sectors: business, leisure and conferencing.

InterContinental was the first to lay down quality rules to its distribution partners, and the trend has rapidly been adopted by other chains, most notably Hilton. Because of its structure, which incorporates many independent hotels, Best Western has taken a little longer than most, but is making rapid strides.

Another key aspect of Best Western’s strategy is driving more customers to its corporate website. As a brand, it benefits from the fact that 70% of its online bookings already come directly through its corporate website. It puts this down to the fact that it has built a strong brand in the bricks-and-mortar world, not just in the online environment.

Schulze believes this strategy has advantages for customers as well as hotels, mainly because online intermediaries offer neither the best after-sales support nor the best deals: “Customers used to think that third parties gave you the best price, but now the best deals come through hotels’ own corporate websites. By "deals" I don’t just mean lower prices, as that would damage the online partners we work with, but we can offer many more options and we can implement many different pricing strategies – if customers can accept certain restrictions, such as cancellation charges.

“To get business away from third parties, we are building more and more direct connections to important channels for business travellers, offering better data quality and multi-language availability to corporate booking systems. We are communicating more directly with companies.”

Another crucial advantage of driving business to hotels’ proprietary web channels is that the data they gather on guests can be used to personalise services in ways that third parties cannot. Hotels can leverage their CRM investments to align offers closely with customers’ needs, based on profiles of their previous activity.

PEACE NOT WAR

” Best Western’s strategy is based on seeking preferred partners for online distribution, with the hotel chain setting the criteria.”

Schulze is particularly keen to stress that she is not criticising all online intermediaries, and that relationships with third parties are still important to Best Western’s marketing strategy. The goal is not to go to war with these distribution channels, but to partner with them more sensibly.

“We still want good partners – we just want fewer of them,” Schulze explains. “We must create a win-win situation for ourselves and for the partners we work with. We will pay higher distribution costs if a channel can reach a market that the hotel cannot directly tap into through its own reservation system and marketing channels.”

Furthermore, the same approach is being taken in the offline world, as Best Western re-examines its relationships with traditional travel agencies. It is also seeking to improve the quality of its own online booking system while increasing its multi-language capability, which small, independent hotels would find difficult to implement for themselves.

The group is also looking to implement a single-image inventory in order to simplify content management – in other words, comprehensive, up-to-date information on rooms and prices.

Ultimately, Best Western hopes to tip the balance of power back to one of equilibrium, giving both hotels and online intermediaries a chance to benefit from the current market appetite for online booking.

Furthermore, it believes that this change can come about quickly. “These are big challenges, but the environment changes quickly, so we will see some change in the next year, and that is fair, as the market changed very quickly [before],” adds Schulze.

With the success of the strategies adopted by Best Western, Hilton and InterContinental, more hotel operators are following suit, which will pressurise online intermediaries to re-examine their own business models. If the result is a better experience for hotels and their guests, such moves can only improve the overall health of the hotel industry.