David and Goliath: where hotels brands go to die

In today’s radically changed business environment more and more hotel owners are questioning whether they should still sign long-term deals with brands that charge double-digit percentages (franchise/royalty fees + marketing fees + loyalty fees + CRS fees + performance search fees) on their property’s overall gross rooms’ revenue, but then frequently don’t deliver the system contribution necessary to justify such an investment.

simone puorto consulting - hotel brands

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Industry analyst firm Kalibri Labs recently published a significant analysis of the hotel distribution landscape which clearly demonstrates that for most properties growth in OTA contribution continues to far outpace growth in brand contribution.

According to the study,OTAs now capture a quarter of transient room night demand in key U.S. markets like New York, Orlando, and Miami-Ft. Lauderdale.

Traditional hotel brands take their cut off the top, taking a fixed percentage of all gross rooms’ revenue, including interestingly for OTA sourced bookings, in effect making the hotel owner pay twice for the same transaction.

And whilst OTAs seem to be consistently reducing commissions to pass efficiencies onto owners, repeated studies show that traditional hotel brands continue to raise their fees.
Increase in franchise fees.

Franchise fees increased on average by nearly 6% between 2010 and 2016.  

As well as failing to adequately enforce brand standards, thus giving rise to too much variability in service delivery for customers to adequately trust the brand, the current spate of mergers, acquisitions and new brand launches is slowly but surely diluting brand equity and eroding any remaining value proposition for hotel owners.

Most of the major hotel companies now have literally dozens of brands in their portfolio. This means that many hotels are suddenly competing with sister brands for the same system revenue, despite the fact when they signed up for the brand they supposedly were guaranteed exclusivity through an area of protection clause. 

And what about the new darling of the hotel industry – chain-sponsored soft brands? These have lower costs, fewer brand standards and, on the surface, seem like an enticingly sweet deal. But signing up with a chain sponsored soft brand still involves significant upfront and ongoing costs and, at the end of the day, you’re still dividing up the same fixed chain driven distribution pie with your sister properties, so the potential to drive additional business is comparatively limited.

 
And if you’re thinking soft brand deals come with shorter contract lengths, think again: despite industry perceptions, Autograph Collection and Marriott branded properties in fact have the same term length.

Luckily, we are now entering a new era in hotel distribution, one where technology companies have the potential to level the playing field for independents without the onerous fees typically associated with traditional chains.  

In the future, we will likely see additional new innovations that will generate significant pay-per-performance driven occupancy from diverse technology players such as Amazon, Google, Facebook, and Alibaba, supplementing the already substantial amount of business being driven by today’s OTAs.


Regardless of whether you’re a branded hotel owner or an independent, there are five important things you can do today to get ready for the oncoming revolution in travel distribution:
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- Push back on Gross Rooms Revenue based deals. Don’t pay for something that the distributor hasn’t actually contributed to providing. If an OTA is delivering the business, why are you paying the brand?   Although independent contracts with OTAs are typically at a higher commission than those under a brand affiliation, it is usually far cheaper to list independently when all the additional brand fees and charges are taken into account.

- Consider signing up for independent soft brands. Preferred and Leading Hotels of the World offer representation and easy access to distribution technology at a more reasonable cost. One of the competitive strengths of such companies is their attractive loyalty programs, which drive substantial amounts of business at competitive fees verses large brands and their soft brand siblings. 
In addition, there are also CRS providers like Travelclick and Synxis who can get you connected to the GDS at minimal cost.

- Work with your OTA market managers. Optimize the business you can get from these still-growing channels and take maximum advantage of the free tools they provide, including in particular market intelligence and revenue management services. And remember that the most overlooked and underappreciated advantage of working with OTAs is that you only pay for bookings delivered.

- Think critically before signing or renewing long-term deals. Today’s hotel sector is simply too dynamic to commit yourself into multi-decade deals on the wrong terms. Paying GRR on declining system revenue is just bad business. Ironically the supposedly highly restrictive and over controlling OTAs typically offer the most flexible terms, with some offering 2-week outs, virtually no start-up costs, and no termination fees. This contrasts sharply with hotel brands, where you typically face significant sunk costs ranging from about $1000/room for a Wyndham to over $5000/room for a Hyatt and insane termination expenses and liquidated damages ranging between 3-5 years’ worth of fees for getting out of agreements that range between 10-20 years. And these figures don’t include the cost of extraordinary termination damages or litigation expenses. And before signing, make sure you retain well clued-in legal counsel. A good lawyer can help you negotiate reduced termination penalties and liquidated damages should the need arise as well.

Conclusions:
Over the past decade, in industry after industry we have experienced digital disruption, where the well-established giants tumble as they fail to adequately react to changing technological and consumer trends. Today that tsunami is about to hit the hotel sector.  Right now, its effect is unknown, but the one thing we can be sure of is that things will never be the same again.