Distribution Dollars
by Patrick Quek, August 2000
The methods through which hotels reach their customers and sell rooms continue to evolve. Be it the increased use of global distribution systems, the evolution of the Internet, or the perceived demise of the travel agent, many recent discussions have focused on lodging industry distribution systems. Most of these discussions have stressed on the potential efficiencies that new technologies have to offer. Yes, technology is expensive, not only to develop and install, but to maintain as well. However, if the hotel can reach the consumer directly, then it can avoid paying commissions to third-party intermediaries.
Paying the Middle Man
Just how much money are hotels paying to third party agencies or systems to sell their hotel rooms? Perhaps more importantly, has it been worth it? From our Trends in the Hotel Industry database, we analyzed the payments made by the same 892 hotels to travel agents, reservation/referral systems, or other commissionable entities from the period 1994 through 1999. Not included in these payments are any personnel costs, capital expenses for hardware, or franchise royalties and marketing expenses. In 1999, we estimate that the average hotel in our sample paid approximately $1,014 per available room in travel agent commissions and reservations expenses. This represents 3.9 percent of the rooms revenues, or 2.6 percent of the total revenue for the average property in the sample. It is important to note that not all rooms are booked via a commissionable channel. Therefore, it would be inappropriate to infer that the average commission paid by a hotel is 3.9 percent of revenue.
Less Bang For The Buck?
From 1994 through 1999, travel agent commissions and reservations expenses grew at a rather strong compound annual growth rate of 14.1 percent. What benefit did theses hotels receive for this increase in payments? On the surface, it appears that there has been a diminishing "return-on-investment" for these expenditures. During the same six-year period, rooms revenue for the sample grew at a compound annual rate of only 6.1 percent, while the hotels experienced an actual decline of 0.6 percent in the number of rooms occupied. In other words, the payments made to distribution channels that are supposed to provide increased volume and revenue grew faster than the net benefit to the average hotel. What is not known (due to the absence of appropriate data for this sample) is the exact volume activity sold through the distribution channels which these payments represent. However, assuming that most commission rates have either remained flat or declined, then the rooms sold through these channels must have displaced rooms that had been historically sold directly by the hotel. In addition, it is documented that fewer people are using travel agents, so the majority of these increased room nights are most likely coming from the newer "on-line" systems. Whether booked through travel agents, GDS, or the Internet, it appears that hotels are becoming more dependent on third-party distribution channels to sell their rooms.
A Rising Cost
Measured as a percent of revenue, travel agent commissions and reservations expenses have increased during the past six years. In 1994, these expenses represented just 2.7 percent of rooms revenue and 1.8 percent of total revenue. As stated before, we estimate these same measurements to be 3.9 percent and 2.6 percent respectively in 1999. Given the near-term outlook of limited growth in revenues, hotels have found it increasingly important to examine and control all their expenses in order to maintain or increase their profits. Now that commissions and reservations expenses have reached 2.6 percent of total revenue, they have become costs significant enough to monitor. For all-suite hotels, this number approaches 4.0 percent of total revenues. However, at conference centers, resorts, and extended-stay properties, these costs are of less significance.
Book Direct
In an attempt to lower distribution costs and enhance consumer's perceptions of purchase empowerment and service, most of the major national chains have added a room-booking capability to their web site. This portion of the site allows customers to check availability and rates, and make a reservation directly (or what appears to be directly) with the hotel. According to a PhoCusWright presentation at the October 1999 Travel Industry Association's Marketing Outlook Forum, approximately $600 million in hotel sales were booked via hotel web sites in 1999. This number is expected to increase to nearly $2 billion in 2001. Despite the continued growth in hotel company Internet booking capabilities, it should be noted that not all hotel companies are truly maintaining their own systems. Some chains are still paying a commission or fee to a third-party agency for use of their booking technology on the hotel company's web site.
The Distribution Dilemma
Hotels and hotel companies, face the dilemma of a growing dependence on third party distribution channels, along with the growing cost of compensation to those parties. A major question arises: should hotels bite the bullet and continue to pay this increasing expense, or, seizing today's technology, attempt to replicate these distribution systems themselves and attempt to reach the consumer directly? Assuming you can reach the same people and replicate the volume, avoiding commission payments would appear to drop more dollars directly to the bottom line. However, what needs to be analyzed are the start-up and maintenance costs for a distribution system that will deliver the results, and these can vary depending upon the complexity of the system. The solution requires careful planning and analysis.
Patrick Quek is president and CEO of PKF Consulting and Hospitality Asset Advisors International. He is located in the firms' San Francisco office.Patrick Quek is president and CEO of PKF Consulting and Hospitality Asset Advisors International. He is located in the firms' San Francisco office.