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Hotels in 2020: A Scenario

(Note: All names in this essay are imaginary and any resemblance to individuals or corporations is not to be construed as having any bearing in reality.)

Jimmy Smitherson, the Director of Revenue, Marketing and Sales of the Rebellion Hotel has a problem. It’s not one of occupancy. The hotel has long since passed all FIT sales onto RoomSteady, an OTA management liaison that meticulously manages occupancy to meet a stated target. Rather, it was a new decree from TravelOrx, the leading OTA formed after several years of ravenous mergers and acquisitions. Between all the boilerplate banter, Jimmy read, “As of October 1, 2020, the Rebellion Hotel will no longer be considered a part of our combined distribution systems.”

The OTA was firing the hotel! How could this have happened? How did the tables reverse so quickly from supplier to distributor? Just ten years earlier, OTAs only represented roughly 10% of total sales, hardly enough to cause any real panic. Hotel management, eager to build occupancy levels and smooth the peaks and valleys in their businesses, embraced these Internet distribution systems. It was easy; just assign the inventory and let the revenue manager sort out the delivery. In doing so, there was no need to advertise or even promote. After all, that was the OTAs’ responsibility, wasn’t it?

Like any good thing, hotels continued to lap at the bowl of OTA volume offers. What was 10% or 20% of FIT sales soon became 35% and then well over half of total sales. OTA advertising on television, online, newspapers and even movie theaters was smart, sticky and very persuasive. Winning numerous CLIO awards, the OTAs had the financial clout to hire savvy Hollywood producers and Madison Avenue’s finest agencies.

Once the 50% threshold was breached, hotel management recognized that their revenue manager was the pivotal position in their business. Why keep directors of marketing around when marketing was reduced to paltry local ads, the odd web site update, wedding and the annual incentive shows?  With so much leverage, the revenue manager assumed the directorial position in planning committees, incorporating both marketing and sales disciplines.

The revenue director became a position cemented in hard data. Every decision inferred a return on investment. Advertising? You best ensure the ad has a set offer rate and expiry date so it could be measured. As for advertising that focused on brand building and imagery? Forget it. Not quantifiable. As such, director of marketing titles became misnomers; carryovers from the hotel’s glory days when marketing budgets were actually a significant figure and creative branding decisions were essential.

For awhile, the world was perfect. With occupancy delivered through the OTAs, general managers were happy; operations were streamlined. However, profit margins remained mediocre, as the OTAs continued to mark up their commissions to offset their own ever-growing advertising and promotion costs.  And here was the festering tapeworm in every hotel’s belly. By controlling the airwaves, the OTAs controlled the loyalty of the customer base – winning over the younger generations as the baby boomers ebbed from the market.

The pivotal year was 2020. Early in the year, TravelOrx boldly acquired the important All-Americas Hotel Group and their 16,000 properties. At first, the industry just shrugged it off. The price TravelOrx paid was nearly 75% over All-America’s market share price, irking some eyebrows on Wall Street, but quickly sealing the deal.

Within three months, All-America properties consistently appeared at the #1 and #2 spots on the TravelOrx website. By month six, TravelOrx installed a built-in loyalty program aligning purchases of All-America properties with airlines and car rentals. The reward incentives were exceedingly consumer friendly. Not to be outdone, the remaining OTAs moved to acquire other major hotel chains. The series of rapid acquisitions were touted by Wall Street gurus as a ‘synergistic coming of age’ for the hospitality industry.

A conglomerate turf war also became natural. Each of the OTA powerhouses built effective marketing programs to galvanize their respective franchises and sign on new hotel allegiances. Unaligned properties, like the Rebellion Hotel, were left with the scraps – low rankings, reduced prices and ever-higher OTA commission rates – until even those became undesirable and were cut off all together.

Jimmy was stuck. His general manager needed a plan. The Rebellion Hotel had not done any real marketing in over four years. Their advertising agency, if you could call it that, consisted of a part-time freelancer whose ‘creative’ consisted of a mix between local F&B and spa ads, but not really much else. Jimmy’s college education and business background were both fully in line with the OTA-evolved industry – all finances and statistics. Good as he was with numbers, he had no real experience in brand strategies and ad purchases; tools of a bygone era.

Losing the entire fourth quarter was a disaster beyond anything he could think of. It was also the only real blip in occupancy he had ever encountered in his eight year hospitality career. Jimmy tiptoed into the weekly planning committee, panicked sweat drenching his undershirt. Was it his fault the property was in this predicament or he merely a pawn in a much larger game?

His solution shocked the room. Provocative and bold, he proposed to move the hotel away from the FIT business. Jimmy’s plan reflected the core dynamic in the marketplace – aging boomers. Now predominantly in their 70s, the demographic sought downsized accommodations; not quite ready for nursing homes, but without sufficient funds to acquire high-priced condos.

By appealing to these long-term customers, the Rebellion Hotel effectively shielded itself from the volatile FIT turf war currently underway. With fewer boomers traveling each quarter, the independent traveler market was now completely dominated by younger consumers – people who after years of exposure to alluring OTA advertising campaigns and online reservation systems were all in the OTAs’ pockets with no alliances to any one hotel brand in particular. Moreover, the net rate from long-term residences wasn’t that much different than the previous year’s yield after factoring OTA commissions.

Given all that the hotel industry has been through in the past twenty years, how did the general manager and the rest of the room react to this proposal? What would you recommend in Jimmy’s place? How do you think the FIT market will shift as the baby boomer generation continues to age? Can you foresee the OTAs moving into the hotel business or will antitrust prevent such actions? What are your thoughts on the future of hospitality distribution channels? All are good questions to ask yourself and discuss with your colleagues.

(Article by Larry Mogelonsky, published on eHotelier on December 9, 2011)

Larry MogelonskyHotels in 2020: A Scenario