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Part 3 of 3: De-Mystifying Distribution - Implications for the Hotel Industry

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June 01, 2005
Cindy Estis Green - cme25@cornell.edu

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© 2005 Hospitality Upgrade. No reproduction without written permission.

The online distribution landscape is a dynamic one. GDS volume multiplied 10 times in 20 years but the Internet volume multiplied 15 times in five years. While projected room revenue through online channels vary, PhoCusWright estimates it to be in the range of $20 billion U.S. for 2005 and almost $25 billion U.S. for 2006. After the lowest point following Sept. 11, 2001, the industry endured a painful transition to the online travel agencies largely selling merchant model (net wholesaler rates) and has managed to move into a more balanced position where it is in better control of inventory and rates. Now meta-search engines specializing in travel are moving into a stronger posture with both the consumer and the hotels that appreciate consumer referrals but don’t want to give out inventory to more online suppliers.

This fast moving wave advances as hotels and chains work toward developing marketing strategies to take advantage of benefits and protect themselves from risks.

These changes have a significant impact on the hotel industry one that should be managed through knowledgeable and thoughtful planning to gain the greatest advantage. Some major implications are described below.

Building a Technology Infrastructure Is a Strategic not Tactical Issue
Distribution technology should be understood well beyond the IT department. Operations, finance, and marketing also need a fuller understanding of the technology behind the new distribution networks. The details of this technology can make all the difference; details like how well the systems can be integrated (XML and HTNG) and whether or not they comply with travel industry standards like OTA. These are not just acronyms to let the technology team ask about. The computer language/architecture of XML facilitates integration between systems. HTNG is an industry organization working toward building customer and vendor alliances designed to develop integrated and progressive customer-centric technology within the hospitality industry. OTA is the OpenTravel™ Alliance that has formulated standardized coding for travel technology companies to facilitate messages for interfaces between systems.

Utilizing the systems represented by these acronyms can make the difference between selling out or not; they can make a difference of $20 in an average rate because the revenue manager was able to open or close allotments in selected channels in time for the demand flow at higher rates. This central marketing function to optimize revenue can only happen effectively with the use of better and more integrated technology solutions.

The financial services industry is a good model of how technology looks when it is a strategic imperative. The hospitality industry must follow suit in its own way. Fragmentation of its ownership and management, combined with its high capital and fixed costs, limit its ability to invest in technology infrastructure. While there are practical challenges, technology still must be a high strategic priority.

If hotels don’t take the technology initiative, their online intermediaries will and customer relationships will shift in favor of the most consumer-friendly systems.

The Players Staying in the Game
Travel agents will not be going away anytime soon. Neither will global distribution systems, online travel agency Web sites or call centers disappear, rather they may morph into other entities and evolve to survive in the new marketplace, but they will continue to be a part of the scenery. Traditional travel agencies have already gone online and now the large third party sites are offering the equivalent of travel agency functionality, complete with customer service call centers, for consumers, business travelers and smaller travel agencies. Global distribution systems will continue to do what they were designed to d processing millions of airline transactions really fast with minimal downtime. They will supplement their traditional revenue stream by joining in the Web site frenzy by buying and organically growing new sites to address each new emerging online market. They already compete with the online travel agency sites and they will continue to do so.
Battle of the Brands Is Underway
The third party intermediaries have had an advantage in the last four years by taking the consumer market by storm. Of course, when InterActive

Corporation (Expedia, Hotwire, Hotels.com, Travelscape), the largest of the online travel agencies spends $600 million in advertising in one year (2004), its no wonder they are viewed as the gorilla in the marketplace. But in this type of market, size is not the only factor.

Brand value for hotel owners and consumers also comes into play. The mega online agencies and the search engines are establishing potent brands that are competing with the well-established brands like Marriott, Holiday Inn and Hilton. Brand recognition and brand loyalty are at stake and all parties are playing to win. Hotels will have to reinvent the product and service offerings that constitute the central tenets of their brand value. A challenge is underway for hotel brands to retain owners who think they can effectively compete as an independent by mastering the use of the distribution levers.

There is the hotel owner who wants value in the brand so his property can earn more revenue relative to the fees he pays the brand, which historically has come through reservation flow. Then there is the brand value for the consumer who needs to think of a hotel as something other than a commodity when making a hotel selection. The hotel brands need to consider both constituents as they build their competitive portfolio in this battle of the brands.

Additionally, the brands are in a high-speed race to meet market needs. The large online agencies are moving fast to bring high demand products like dynamic packaging of air, hotel and car rental direct to the Internet user’s computer. Both large and small hotels are following by establishing cooperative programs with other travel vendors and by offering packaging of hotel-related services like room, restaurant bookings, spa, golf and theater tickets.

In the area of online distribution and branding, chains and independents can each compete effectively. The most powerful weapon in any hotel’s arsenal (independent or chain) is its own Web site. They have come to realize that they have to manage their own Web site and they also have to master marketing through search engines. Searches for a generic hotel in a destination far outstrip the number of searches for a specific brand hotel in a destination by brand loyalists.

Words for Sale
In order to deal in this world of managing one’s own Web site along with the search engines, hotels are using intelligence wisely. Search engine keywords are a burgeoning market. The large mega-agencies easily outspend the hotel companies and the larger chains can outspend the smaller chains and independents to win priority page positions for the queries of the most commonly used keywords for each destination. Legal disputes are outstanding between hotel brands and search engine companies as to who has the rights to the words that include a hotel or brand name.

Deliberate execution of a Web strategy and the skillful leverage of a hotel’s own Web site are essential for independents and brands alike.

Hotel Brand Leverage
The hotel brands began to insist on rate parity by online agencies so a consumer would not find different rates on different sites. They also began to aggressively promote best rate guarantees on their own branded Web sites to assure consumers they would not find a lower rate elsewhere on the Internet. This, combined with highly controlled inventories, has moved more online control to the hotel companies.

The three-way competition for consumer’s attention between the online travel agency Web sites, the search engine companies and the hotel brands will rage on for a long time. Brand supremacy is the prize and managing distribution channels well is a major component of the strategy to win it.

Business Intelligence Will Make It or Break It
In the 1980s and ‘90s hotels depended on basic market share information such as the Smith Travel statistics. Despite their appearance of simplicity, this data brought a much higher level of sophistication to hotel’s own metrics and has continued to be supplemented with more and better sources.

The quantity and quality of information available for revenue management and for customer profiling varies greatly. Revenue management tools are not a luxury anymore—they are a necessity. The systems that support revenue management are not well integrated and too much of the process is still manual.

Integration of systems and improved channel management will be the determining factors in how well any hotel or chain navigates the turbulent distribution waters.

One day soon, a trend will emerge where business intelligence through online channels will be used heavily for customer relationship management and retention. With so much competition for Internet users' mouse clicks, this is likely to happen sooner rather than later. Customer information and its management will be necessary to support this trend. Today, customer clicks and eyeballs are the Holy Grail of distribution. In the future, owning the customer relationship will become the new Holy Grail.

Industry organizations and associations have taken the role as information hubs so industry trend information can be quickly known and accessible to executives.

Changes are happening so quickly there has to be a place to go to stay abreast of it. HSMAI, AH&LA, HFTP, HEDNA are some of the few taking the lead particularly in those issues relevant to distribution. Marketing and information technology are the two primary focal points.

The Paradox: Consolidation with De-Centralization
The booking opportunities for hotel rooms are being consolidated into fewer electronic channels and the few companies controlling those channels are getting larger, while demand continues to de-centralize and grow in a much dispersed way as more consumer and businesses choose to make hotel selection decisions electronically.

Well over 90 percent of the Internet hotel volume through online travel agencies is produced by only eight Web sites and these eight sites are owned by five companies. Many travel industry organizations are buying other companies in the food chain so they have a hand in each step in the travel booking process. At the same time, the booking of reservations for all travel segments has become much more de-centralized. A large portion of business travelers are now booking their own business on their office PCs. Many travelers want to find out for themselves what their travel options are. Addressing this de-centralized audience will take new marketing communications strategies.

Against this backdrop, it is a time when individual hotels have to take responsibility for managing much more of the distribution strategy than they ever have in the past. Hotels have to master which levers to turn business on and off as needed, and there are many levers to manage.

Europe is the New Horizon 
In 2004 in the United States independent hotels represented approximately three out of every 10 hotels; in Europe, independents are seven out of 10 hotels. The European market, as projected by PhoCusWright, will double from 12.7 billion in 2003 to 27.3 billion in 2005. It has always been more fragmented in its hotel management and ownership than North America. Consumers are learning they can make their own bookings and the hotels in Europe are experienced managers of wholesaler business.

The large U.S.-based online agencies have gained strongholds already in Europe with Expedia being the top player in 2004. Some European players have made great strides as well. Lastminute.com/Opodo (now owned by Amadeus) is a joint effort of the European airlines, much like Orbitz was created in North America. A new player, I-XEO based in Switzerland is about to launch a new travel portal with what appears a very extensive usage of dynamic packaging. There are many things happening in Europe; anyone who can take advantage of this growth should be there.

Cindy Estis Green, managing partner of The Estis Group, is a marketing consultant with over 25 years of experience in hospitality marketing, specializing in sales and marketing information systems. She can be reached at cme25@cornell.edu. This article is excerpted from a special report entitled De-Mystifying Distribution, produced by TIG Global and published by the HSMAI Foundation. Contact www.hsmai.org or (703) 610-9024 for a full copy of the report.

Source: TIG Global

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