Hoteliers in the United States are paying, on average, 16 percent to 18 percent to acquire customers, with many paying as much as 25 percent to 35 percent, according to two experts from Kalibri Labs. About half is paid to third parties and half is paid for direct expenses.
The company collected data for more than 25,000 hotels from big and small chains as well as independents from more than 100 brands with 3 million rooms in the U.S, tracking more than 5 billion transactions.
“At every stage along the revenue cycle where there’s more expenses and more hands in the till, you can see the industry gets a little bit less efficient,” Mark Lomanno, partner and senior advisor of Kalibri Labs, said during a recent webinar, “Examining Hotel Performance and the Growth of OTAs,” which was hosted by the Asian American Hotel Owners Association.
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For the 12 months ending June 2016, guest-paid revenue saw an increase of 4.6 percent; hotel-collected revenue was up 4.5 percent; contribution to operating profit and expenses (COPE) revenue increased 4.3 percent; and net revenue rose 4 percent.
“If the industry was exactly as efficient in ’16 it was in ’15, that net revenue percent change should have been equal to the guest-paid revenue percent change,” Lomanno said. “In a market where they’re getting even more efficient, that number could be even higher.”
Another way to look at the data is to determine how much of the customer spend went to the bottom line, he said. In 2016, guests paid $146.9 billion on hotel rooms. Of that, $143.4 billion was reflected on hotel profit-and-loss statements.
“That means consumers spent $3.5 billion purchasing hotel rooms that never showed up on a hotel P&L,” Lomanno said.
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When subtracting expenses associated with specific transactions, or the COPE revenue, the industry’s take is down to $134.6 billion, he noted. Then, if sales-and-marketing expenses are subtracted to get the net revenue, the take is down to $123.3 billion.
“Adding all those things together, the industry has spent about $23.6 billion getting the customer in the door, which is a fairly substantial piece of that pie,” Lomanno said.
Revenue capture is the net revenue as a percentage of the total guest-paid revenue. In the 12 months ending June 2016, the industry captured 83.9 percent of customer spend to apply to operating business and other expenses of running a hotel, he said. That percentage declined slightly from the previous year (84.4 percent).
“That doesn’t seem like a lot, but when you start calculating that in terms of actual dollars … that 0.5-percent revenue capture loss resulted in additional expenses of $729 million that the industry spent to get the customer in the door,” Lomanno said.
Another way to look at the data is on average individual hotel basis. Kalibri Labs estimates that guest-paid revenue was about $123. When subtracting what the guest paid but that never showed up on a P&L, average ADR in the U.S. was understated by about $3.
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“Why is that important? Because in determining your marketing and sales plans and your rate growth going forward, you really want to know what the customer spends, not just how much is able to show up on a P&L,” Lomanno said. “And in some markets, that number was considerably higher than $3,” such as markets that generate a large portion of business through third-party intermediaries like New York.
P&L and non-P&L transaction costs were up 16.1 percent and 17.3 percent, respectively.
Lomanno said that each of those cost categories is growing at a faster rate over the two-year period than customer spend, which is up 8.4 percent. This trend highlights the decline in hotels’ efficiency.
OTAs Take a Bigger Piece of the Pie
Online bookings represent about 42 percent of U.S. roomnights, according to the research. For the 12 months ending June 2016, Brand.com represented 20 percent; online travel agencies took 12.4 percent; and GDS was at 9.5 percent.
OTA roomnight share has grown 28.1 percent from 2014 through 2016, according to Lomanno. Meanwhile, Brand.com’s share has grown 9.1 percent and property direct has declined 12.8 percent.
“To oversimplify the situation, when they don’t get to the property directly, where do they go? They go to the OTA channels or Brand.com,” Lomanno said.
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When consumers go to OTAs, they encounter three different types of models: opaque, retail and net, or merchant. Opaque declined by 9.6 percent; retail was up 108.1 percent; and net was up 23.7 percent.
“What surprised us was the traditional net, or merchant, model, where the customer pays ahead of time and the commission is kept by the OTAs continued to rise over the three-year period. We expected that to be flat or slightly down with more of a movement toward the retail channel,” Lomanno said.
The research shows that for every one roomnight that was booked indirect, 3.3 were booked direct in 2014; three were booked direct in 2015; and 2.7 were booked direct in 2016.
Economy, Midscale Takes a Hit
Lower-tier hotels—those hotels in the economy and midscale segments—saw guest-paid revenue per available room rise 4.1 percent in 2016. Hotel-collected RevPAR was up 3.6 percent, while COPE RevPAR increased 3.1 percent.
“Economy and midscale hotels have the strongest growth from a guest-paid point of view. Guests were actually paying more than any other category for lower-tiered hotels. However, when you look at what the hotels kept of that growth, they only kept a smaller amount because their growth rate, COPE RevPAR, was only 3.1 percent,” said Cindy Estis Green, CEO and co-founder of Kalibri Labs. “If hotels could take advantage of that full growth rate, then the COPE RevPAR would have grown also at 4.1 percent. So, the gap reflects the rise in acquisition costs.”
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For every one roomnight booked indirectly at lower-tiered properties, 5.9 were booked directly in 2014; 5.3 were booked directly in 2015; and four were booked directly in 2016.
“Even though guests paid a lot more, there was a big shift at the lower end of the market in taking much more business through third-party channels,” Estis Green said, adding that guests are going to OTAs to make the same bookings.
“For the exact same piece of business, hotels are now paying 15 [percent] to 25 percent more,” she said.