As distribution evolves, hotel owners want reprieve from brands

(Distribution costs go up)

As distribution evolves, hotel owners are calling for increased flexibility in their contracts with global brands. And while the larger brand operators have resisted, there is evidence among the smaller brands that reduced fees are now available. 

The latest push against the brands came at the Annual Hotel Conference, held in Manchester, England, earlier this month. At the event, Simon Allison, chairman and founder of hospitality real estate investors’ organization HOFTEL, said that “the only leverage that owners have is not paying the brands fees on bookings the brands don't generate.”

The brands were eager to retaliate. “We've all become a lot better on contractual flexibility; we've had to because of more competition in the market,”  Tim Walton, VP international hotel development, Marriott International, said. “Our interests are aligned with the ownership community, but we are the guardian of the brand. We are a pure-play hotel management and franchising company. It will never be our model to be a long-term owner of real estate. We were relative Johnny-come-latelies to franchising in the UK, but now we've embraced it.

“There is a vast range of services that owners and development can take advantage of. Not all brands are created equally and some are viewed as commodities and you get what you pay for. We have the expertise to provide a vast gamut of support.”

Who Wins?

Historically, it's the brands who have contractually come out on top, noted Tom Page, partner and global head of hotel & leisure group CMS. Hotel management contracts have usually tilted in favor of the hotel operator/brand, not the hotel's owner.

“In relation to reservation fees, hotel management agreements have always been completely flexible, but that flexibility has always benefited the operator,” Page said. “Operators have always retained the ability to change their standard system-wide reservation fees from time to time as they see fit. Usually the only comfort an owner has is that any changes must be made across the whole system."

Brand hegemony, however, is now being challenged, especially as the Internet and mobile has made booking a hotel that much more simpler—not to mention the myriad online travel agencies that sell rooms. The neo-distribution landscape is forcing operators to evolve their pricing.

"In practice, some operators have actually lowered their fees in recent years as many bookings now come through web and mobile bookings rather than call centers," Page continued. "The move to electronic distribution comes with a high up-front development cost, but a low marginal cost per booking. This is one of the factors driving operator consolidation as those high development costs can be amortized across a higher number of bookings and allow them to compete more effectively with OTAs.

A Fix?

Page's recommendation is to reduce or remove fees owners pay for OTA bookings. “Paying reservation fees on top of OTA fees for bookings operators receive through OTAs is a contentious issue, but any one owner cannot negotiate out of this, as operators have to keep all reservation fees standard across the system. But operators could use the flexibility they already have to offer to remove or reduce operator reservation fees on OTA bookings," he said.

"The pressure to do this will need to come from owners’ associations and industry influencers. But there will also be market pressures, as owners will start to vote with their feet. But when the practice is common across most major operators and owners are tied into 20-year contracts, this movement will take a long time to work through the system."

If owners can't be accommodated, there is the idea that owners could shift to smaller brands for added flexibility. “Some smaller operators who are less constrained by thousands of existing contracts and an expensive cost base find it easier to offer owners more flexibility," Page said. "We know of one branded operator who has actually offered reduced management fees (and not just reservation fees) on revenue generated from OTA bookings, to give them a competitive advantage over their global competitors.”

The debate has been fueled over the past year by the move by the leading global hotel operators to push direct bookings, which has driven many owners to question the cost of offering discounted rates to members of loyalty programs. 

Peter O’Connor, professor of information system for Europe's Essec Business School, went as far as to tell delegates at the recent Hotel Distribution Event that “the merchant model generates more net revenue than a discounted loyalty program.” 

In a paper expanding on this theme, O’Connor reported on franchise agreements. “This analysis only examines the situation at the transaction level but the longer-term implications for owners are even more worrying. Many major consulting companies use a multiple of room revenues as a key component of their asset valuation model, and thus the $1.37 net revenue difference, multiplied by thousands of transactions, could potentially have a dramatic effect on the real estate value of the hotel property.

“And of course the increased power of the hotel brand, strengthened by higher loyalty club membership and better controlled distribution statistics, means that franchise contract negotiations will be that bit more difficult.

“Overall, despite how they are being presented by hotel brands, current loyalty club-based initiatives are bad for the industry, artificially driving down room rates and demonstrating that hotel owners need to develop a far more comprehensive understanding of how exactly their property is being, and should be, distributed.”

At the event, Matt Luscombe, chief commercial officer, Europe, InterContinental Hotels Group, defended the discounts. “The level of channel shift from discounted channels to direct means that RevPAR isn’t being hit,” he said.

Marriott International has, so far, been the only operator to offer much color on the impact of the discounting, outside the much-repeated comments over increased loyalty scheme enrollments. “It has had a modest impact on RevPAR in Q2, probably in the 30- to 40-basis-point range on reported RevPAR, which in a sense you could look at and say that is a negative impact of it,” president & CEO Arne Sorenson told analysts during the company’s second-quarter results call. “But this is a long-term question for us.”

A study from Deutsche Bank reported that hotel owners were complaining that discounts for loyalty members were simply discounting bookings that would have previously paid full price.

As the operators look to franchises to grow their brands and the competition between them grows (the merger of Marriott International and Starwood Hotels & Resorts means an enlarged portfolio of 30 brands, for example), owners can be more demanding of their terms. The cost of bookings may prove an effective stick to a more favorable negotiation.