Since news broke of Hyatt’s plans to exit Expedia Inc. barring an ameliorated contract arrangement, there’s been fervent speculation over the fallout for both companies. But this isn’t the tech giant’s first rodeo. Choice Hotels International pulled the same move in 2009, and three months later they were back in the fold. During the trimester interim, Expedia CEO Dara Khosrowshahi told financial analysts on an earnings call that “as far as the financial impact, it is minimal to none” and that “Expedia has been able to recapture the volumes from other chains and independents.”
Negotiating by the Numbers
At the time, Choice had a portfolio of more than 6,000 hotels in 36 countries. Hyatt has about 10 percent of that negotiating leverage with a total of 698 properties in 56 countries. Assuming all Hyatt properties work with Expedia, which has approximately 385,000 properties in its lodging supply, as Khosrowshahi stated during the company’s April earnings call, Hyatt comprises less than .2 percent of the OTA’s global accommodations inventory. The fractional loss would be immaterial to Expedia.
But if Hyatt isn’t heeding the lesson of scale and lack thereof, the brand is also disregarding the two instances when Expedia improved its commission structure; once in 2004 when Hyatt signed on to the OTA’s direct connectivity program, making Expedia bookings more cost-effective for hotel owners, and again in 2012 with the global rollout of the Expedia Traveler Preference program. According to the company’s 2016 annual report, the company “reduced negotiated economics in certain instances to compensate for hotel supply partners absorbing expenses such as credit card fees and customer service costs.” In both cases, the changes to Expedia’s cost structure benefited all lodging partners and that doesn’t bode well for Hyatt’s current position.
Trading Down
But it’s the brand’s owners who stand to lose the most from a distribution model that would exclude one of the world’s largest travel marketplaces in exchange for a heightened focus on the relaunched World of Hyatt loyalty program, funded at least in part, by a mandatory 7-percent fee increase owners will pay as of July 1. As recently as last October, Khosrowshahi told analysts on Expedia’s third-quarter earnings call that the company has tracked its performance in markets with strong presence of brand hotels and those without. “We continue not to see any measurable difference between the two, so [loyalty rates] don’t seem to be affecting our results,” he said.
According to Robert Cole, senior research analyst, lodging and leisure travel, at travel research firm Phocuswright, Hyatt hotel owners shouldn’t expect to see their results affected by World of Hyatt either. “They shouldn’t be called loyalty programs, but rewards programs because their transactional,” said Cole. “It’s a value-related service and generally speaking, most of the points volume is generated by corporate travelers who convert their employers business travel spend into a leisure travel benefit. True loyalty is when you’re willing to pay a premium for a brand.”
With the exception of most road warriors, the majority of travelers are brand agnostic precisely because constant brand proliferation is eroding loyalty among guests, as Deloitte cited in a May report on Maximizing Revenue in Hospitality.
In the Phocuswright’s U.S. Consumer Travel Report 8th edition, travelers aged 18 to 34 are found to be brand agnostic, which is why 38 percent of them typically book hotels on an OTA compared with just 18 percent who book direct.
Expedia has built its business on consumers seeking choice and convenience and in doing so, has come to reach travelers in 75 countries, through 200 points of sale, operating in 35 languages. To sever those ties with the expectation of growing World of Hyatt membership beyond its currently estimated eight million existing members is a gamble that Hyatt is willing to take at its owners’ expense. Cole summarized the stakes, saying “commissions are paid upon delivery and in exchange for lower risk, hotels pay a premium, but large scale sales and marketing initiatives are paid in advance and there’s risk associated.”
Gone Baby Gone
For Hyatt’s owners, most of whose properties are located in the Americas and who look to the OTA for inbound international guests, that business could be in jeopardy. Expedia CFO Mark Okerstrom reported that Asia, Latin America and Europe were strong markets during the company’s first-quarter earnings call this year. According to Expedia’s 2016 Annual Report, "Brand Expedia," localized sites in 33 countries generates 36 percent of its worldwide gross bookings and 43 percent of its worldwide revenue through international points of sale and targets 65 percent of revenue through business and points of sale internationally.
In addition to losing access to Expedia’s global consumer reach, Hyatt is also writing off room nights that come in through the OTA’s package bookings. In “The Power of Package Bookings for Hotels,” the white paper published by Expedia Lodging Partner Services earlier this year, packages are found to drive higher average daily rates, longer lengths of stay and longer booking windows. Owners will not only miss out on bookings driven by tradition wholesaler packages, but also on the new dynamic package product that Expedia is currently developing. The new product will discount the total cost of a trip comprised of à la carte bookings, such as hotel, airfare and car rental. “These are things that, at least our early test suggests, consumers really want,” said Okerstrom on the first-quarter earnings call.
They certainly won’t find packages, wholesaler or otherwise, on World of Hyatt.