Contract negotiations between Choice Hotels International and Expedia have reportedly broken down, with the Choice brands being removed from Expedia controlled websites. Max Starkov of Hospitality eBusiness Strategies authored a recent blog post on the topic, describing the hotel industry’s relationship with the Online Travel Agencies as an example of the “Stockholm Syndrome” when the kidnapped victims (hoteliers) fall in love with their kidnapper (OTAs.)
photo credit: BrymoChoice Hotels Franchisees, looking for business during an economic downturn, may need to weigh brand allegiance against online sales
As opposed to a hostage situation, the hotel industry and the online travel agencies need to realize that each plays an important role in business mix of the other. Attractive hotel margins are available for OTAs while still providing consumer value, and without hotels jeopardizing operating profitability. However, as the pendulum of negotiating power swings to favor the OTAs, hotel brands will need to maintain discipline to maintain equilibrium on terms that are mutually beneficial.
In many ways, the situation with Choice looks similar to the contentious Expedia – InterContinental Hotels negotiations of 5 years ago.
In 2004, Expedia tested the mettle of InterContinental franchisees and the control of its hotel brands by asking the question “What is more important to a hotel, its Brand, or Expedia?”
Jim Young of InterContinental was miraculously able to gain alignment with corporate management and the franchise groups to ensure uniform rate and distribution integrity across the InterContinental portfolio. As a result, InterContinental made the strategic decision to sacrifice as much as 30% of its online sales volume and terminate its distribution relationship with Expedia.
InterContinental’s resistance to Expedia represented a watershed moment for hospitality industry. It helped other hotel brands remain resilient and to reinforce pricing controls that had been undermined by the OTA’s in the downturn following the 2001 World Trade Center terrorist attacks. The resulting negotiations and enforcement of strict Best Available Rate (BAR) agreements helped shift booking growth from OTA websites to hotel brand websites.
The environment in 2009 is very different. The US Hotel industry is still seeking a bottom to its steepest and deepest recession in memory. Based on statistics provided by Smith Travel Research and HVS, the 1980 through 1983 recession saw a cumulative reduction in hotel room demand of 5.7%. The present recession – estimated by HVS to end in 2010 – is currently projected to see an 8.4% cumulative drop in US hotel demand.
Conversely, hotel room night volume generated from Online Travel Agencies are anticipated to grow 30% in 2009 and 15% in 2010 according to PhoCusWright. This dynamic alone has considerably increased the negotiating power of the OTAs in a large number of markets. With declining demand, OTAs are in a better position to deliver on the promise to shift share from competitors to partners providing exclusive rate concessions, higher margins or value-added benefits.
While the OTAs strength is growing, the ability of the hotel brands to adequately defend themselves from predatory distribution terms may be waning somewhat. Several hotel companies, pressed to reduce overheads and sustain profitability under depressed market conditions have made deep reductions in their electronic distribution teams, including groups tasked with monitoring BAR pricing violations. OTAs and travel wholesalers began to recognize changes in enforcement levels as early as mid-2008 when hotel occupancies were in decline and rate increases were moderating.
With most major markets experiencing consecutive year-over-year declines in both occupancy and average rate, hotel owners, already reeling from diminished property valuations, may be increasingly willing to trade some margin over the mid- to long-term for incremental short-term business. The challenge for hotel franchisors is to manage the integrity of chain-wide pricing policies & maintain competitive positioning until a recovery is underway and business stabilizes.
So with the relative strength of OTAs increasing and the hotel brands declining, Expedia once again poses the question, this time to Choice Hotels franchisees, “What is more important to a hotel, its Brand, or Expedia?”
The breadth of the impact is not insignificant. The Choice brand hotel groups are: Cambria Suites, Comfort Inn, Comfort Suites, Quality, Sleep Inn, Clarion, MainStay Suites, Suburban Extended Stay Hotel, Econo Lodge, and Rodeway Inn. This comprises 5,800+ hotels and 472,000+ hotel rooms. Expedia’s booking websites include: Expedia, hotels.com, Hotwire, Venere, Egencia, Classic Vacations and eLong. The discontinuation of negotiations has not impacted listings in Expedia’s media brands such as TripAdvisor.
The prognosis for Choice may not be good – After reviewing several major US destinations, it appears that a handful of Choice branded properties in each market remain available on the Expedia sites. Presumably, these properties have struck independent wholesale agreements with Expedia. If the participating hotels meet with greater success than those closed out, word may spread among the franchisees, weakening Choice’s brand value proposition.
From its experience with InterContinental, Expedia learned some valuable strategic lessons:
- Negotiate more favorable contractual terms when industry sales are in decline
- Negotiate aggressively with hotel brands in sectors with broad competitive product availability
- Market Managers secure agreements with individual brand hotels to benchmark the benefit of maintaining an ongoing relationship
Choice however may be facing some serious challenges – from both internal and external sources:
- Will Choice franchisees be willing to provide a unified front and resist contracting directly with Expedia?
- Will Choice be able to successfully replace the volume previously provided by Expedia from the brand website and the other OTAs?
- Will competitive hotel brand business development teams be able to convert Choice properties due to Expedia relationship?
- How will hotel investors and lenders perceive Choice brand affiliations compared with others groups that have Expedia agreements?
With reduced room night demand, strategically pruning the size of its hotel portfolio can actually help Expedia improve productivity to its most important and dedicated hotel partners. The key to success for the hotel companies is to keep strategically important and high demand properties tightly aligned with corporate pricing and distribution strategies. This is particularly important considering Expedia’s push to support localized 24 and 48-hour sales that undercut standard BAR pricing.
Hotel brands that are able to maintain strategic alignment with its franchised hotel portfolio through the downturn will be best positioned to negotiate successfully with Expedia. Those groups will also have the best prospect to emerge stronger when the industry begins to recover. Organizations that are unable to maintain alignment with their hotel portfolios may walk a path facing increasing strategic compromises and will run the risk of having the brand marginalized as the business environment improves.
The choices made by Choice Hotels International franchisees in the coming weeks may not only impact the Choice brands, but may validate a process that could potentially be replicated across other hotel chains by Expedia and other OTAs.
About Robert Cole
