In April, when the coronavirus crisis had sunk hotel occupancies to unfathomable lows, online travel agent Expedia Group researched what kind of support hotels and other lodging providers needed to survive the downturn in business.
At the end of May, the company announced a $275 million global recovery program for what it calls its lodging partners.
Most of the funding is in the form of marketing credits and a 10 percent reduction in commissions on new bookings.
Expedia Group also has allowed hotels to defer by 90 days the commission payments the properties collect from guests who book on OTA’s channels.
But one group of hoteliers is not buying it.
Reform Lodging, a new organization with nearly 2,000 hotel owners as members, plans to protest commission rates being charged by Expedia Group and Booking Holdings.
Reform Lodging has launched Lights Out, OTAs!, during which its members plan to remove their hotels’ rooms from the OTAs’ inventory on Friday and Saturday.
It’s the hoteliers’ first planned attack to regain control over their businesses from both OTAs and franchisers, say owners.
Expedia Group declined our request for an on-the-record interview, but a spokesperson who asked not to be identified provided background information about its relief program.
The relief is available to owners of independent and branded hotels, but the franchisers of the brands are required to opt in.
Shah is also managing principal of Yatra Capital Group, a family business that owns hotels and senior living facilities. He said Reform Lodging is a think-tank that represents the interests of hotel owners on a variety of issues created by the coronavirus crisis.
In a survey of 114 members, all but six agree that while OTAs are necessary in a crisis, their commissions are too high and threaten owners’ ability to turn a profit during the current downturn in business.
Shah recently attempted to get the attention of online travel agencies in a letter addressed to Peter Kern, CEO of Expedia Group, and Glenn Fogel, CEO of Booking Holdings, in which he asked for financial relief in the form of reduced OTA commissions.
Reform Lodging’s letter, dated Aug. 13, is indicative of the type of advocacy the organization plans to practice in the coming months.
“We realize that the OTAs have been rather quiet with respect to what’s happening right now, and we felt it was necessary to strike up a conversation with them,” said Shah.
DEAR OTA: Sagar Shah, co-founder and president of Reform Lodging, wrote this letter to Expedia Group and Booking Holdings to raise concerns about the online travel agencies’ commission rates it’s levying for reservations made through their various channels during the coronavirus pandemic. Also signing the letter is Rich Gandhi, co-founder and chairman of Reform Lodging.
Shah and members of Reform Lodging also want to send a message to major franchisers that they, too, skim too much from third-party online reservations, increasing the cost of guest acquisition beyond what owners can manage at this time.
“When it comes to a franchised hotel or property we’re not directly negotiating with the OTAs,” Shah said. “It’s really up to the franchisers. They’re the ones who strike deals with the OTA partners. And so we wanted to put all stakeholders on notice and essentially start that conversation.”
Shah did hear back from Expedia Group’s Melissa Maher, chief inclusion officer and senior vice president of marketing and industry engagement at Expedia Group. He said he had not heard from Booking Holdings as of last week.
Maher, he said, seemed sympathetic to hoteliers’ plight, but offered no additional solutions beyond Expedia Group’s relief program.
Maher declined Lodging Leaders’ request for an interview. A spokesperson with Expedia Group responded to a separate request on condition of anonymity and provided background on the company’s relief program.
It’s hard to know the size of the impact the Lights Out, OTA! might have on the OTAs as both companies are feeling the pain of the economic downturn caused by the coronavirus pandemic but they have access to hundreds of millions of rooms in their supplier inventory.
Expedia Group notes in financial documents filed with the U.S. Securities and Exchange Commission that its business success largely depends on its travel suppliers, including hotels.
It had 1.6 million properties in its global inventory pre-pandemic and lodging comprises 70 percent of its revenue. Hotels rooms are on its five channels, Expedia, Hotels.com, Trivago, Orbitz and Hotwire. Its home-sharing platform, Vrbo, provided 765,000 properties.
It said in the case of a regional or global recession, “domestic and global economic conditions can deteriorate rapidly, resulting in increased unemployment and a reduction in available budgets for both business and leisure travelers, which slow spending on the services we provide and have a negative impact on our revenue growth.”
In its 2019 annual report filed in February, the company included the then-emerging novel coronavirus among factors that could negatively impact its business because of decrease in demand and an increase in costs. It wrote it expects the “2019 Novel Coronavirus” to impact its financial results “to a material degree.”
At the end of last year, Expedia Group reported revenue of $12 billion.
Halfway through this year, Expedia Group clearly felt the impact of COVID-19 outbreak.
“The second quarter of 2020 represented the worst quarter the global travel industry experienced in modern history,” said Peter Kern, vice president and CEO of Expedia Group, in the company’s July 30th news release.
The company posted $566 million in revenue and a $740 million loss in net income compared to the second quarter of 2019 when it had $3.2 billion in revenue and $187 million in net income.
At the end of 2019, Booking Holdings reported revenue of $15 billion. Its channels include Booking.com, Priceline, Agoda and Kayak, a metasearch platform. Booking.com generates the most business for the global OTA. It has 2.3 million properties around the world, including 460,000 hotels.
As with Expedia Group, Booking Holdings also noted in its annual report released in February the emerging coronavirus as a possible threat to its business performance.
Glenn Fogel, CEO of Booking Holdings, told analysts in an Aug. 6 second-quarter earnings call that domestic travel in the U.S. and Europe buoyed the company’s results.
It posted revenue of $630 million and net income at $122 million compared to $3.9 billion in revenue and net income of $980 million in the year ago quarter.
International travel is out as domestic leisure guests seek accommodations closer to home as long as the coronavirus pandemic continues. Fogel said Booking Holdings is developing new marketing programs to help suppliers capture more of this business.
In the letter, Shah writes Expedia’s relief program will mostly benefit independent hoteliers and small hotel chains.
He notes that franchisees of major hotel brands are wholly dependent on the size of the commissions that franchisers have negotiated the OTAs.
According to Lodging Leaders’ sources, the lowest negotiated OTA commission is 10.5 percent for franchisees of Marriott International brands.
Franchisees are not privy to the details of the negotiations, something that rankles Shah and other owners.
“I would want the OTA agreement between franchisors to have more scrutiny because it’s my hunch there might be more that meets the eye in those agreements,” he said.
“Hoteliers are just looking to be acknowledged, I think they feel that over the years they’ve lost control of the narrative. With the growth of even smaller OTA shops, owners are losing control of their own products. That’s the fundamental argument here.”
REVENUE SHARE: La Quinta Inn & Suites by Wyndham in Hot Springs, Arkansas, is among six hotels VIPA Hospitality owns in the destination market. It is the largest hotel in its Hot Springs portfolio. Parth Patel, president of VIPA Hospitality, said OTA commissions coupled with the franchiser’s take for marketing and reservations, skims off a third of the rooms’ revenue. After paying other operating costs, Patel clears about one third of the room’s revenue, making it difficult to turn a profit during the coronavirus pandemic.
‘Double-dipping’ on Revenue
Parth Patel, president of VIPA Hospitality, plans to participate in Friday and Saturday’s Lights Out, OTA! Protest. “The main focus of this is to tell the OTAs and the brands also that we are tired of the OTAs having total control over our inventory,” he said.
VIPA Hospitality is a family business that owns six hotels in Hot Springs, Arkansas, and is jointly invested in five other assets in Illinois, Indiana and Michigan.
Hot Springs is a tourist-centric market and though Patel’s hotels were closed in April and May, business began to return over the summer from a low of 8 percent occupancy in April to 60 percent in July, still lower than usual.
As Patel works to eke out revenue to pay his operating costs, the biggest issue beyond OTA commissions is what franchisers charge owners for the booking through an OTA.
Patel and other hoteliers claim franchisers are unfairly double-dipping on online bookings and eating into owners’ profits.
The La Quinta Inn and Suites by Wyndham in Hot Springs is the largest hotel in VIPA Hospitality’s portfolio.
Patel uses the hotel as an example of how much he pays for online bookings.
For all of 2019, OTAs generated 36 percent of the hotel’s reservations. Expedia comprised 20 percent of the bookings, Booking.com was 15 percent and opaque channels accounted for 1 percent.
From January to August of this year, OTAs generated 44 percent of the hotel’s bookings. Keep in mind, Patel said, the hotel was closed in April and May so that’s six months’ worth of OTA-generated business. It breaks down to 28 percent from Booking.com, 14 percent from Expedia and 2 percent from opaque channels.
Add to the OTA commission of 15 percent even more charges initiated by the brand for the third-party booking and Patel sees a 30 percent skim off his room revenue. After operating costs are subtracted, the hotel clears about a third of the room revenue.
What’s unfair, he said, is the franchiser did not generate that business but it still levies a charge on the reservation.
In La Quinta Inn & Suites by Wyndham’s 2020 franchise disclosure document it lists several fees related to third-party reservations made at a franchisee’s property.
For example, the brand exacts 4.5 percent of gross room revenue for a system assessment fee, which goes toward marketing and reservations and other services. It also charges $2.25 per third-party booking. And the same amount for an internet booking.
La Quinta Inn & Suites by Wyndham is not alone in its reservation fees. It’s common practice across all brands and major franchisers.
Patel said though Expedia’s relief program is a start, it is not enough for hoteliers who are eking out a profit amid the coronavirus pandemic.
He’d like brands to be part of the relief program that goes deeper than marketing credits and deferred commission payments.
“Moving forward it has to be in partnership with the brands. Whether it’s the brands or the OTAs, someone has to reduce the fees,” he said.
“I have a problem paying a (brand) marketing fee on an OTA reservation because that’s not the brand’s marketing dollars, the business wasn’t from the brand.”
Patel said the COVID-19 pandemic has united hoteliers and “the time has come when there has to be a change in the hotel industry” to enable hoteliers’ success and ability to continue to invest in the industry. A continuation and an increase in private owners’ investment would also benefit the OTAs and the brands, he said. But with the fees the two entities charge, it’s become more difficult for owners to make a profit.
‘Unsustainable’ Business Model
Robert Cole is founder of RockCheetah, a hospitality consulting company, and he’s a senior analyst of lodging and leisure travel for Phocuswright, a travel industry research company and a subsidiary of Northstar Travel Group.
Cole said he’s not surprised that groups like Reform Lodging are waging war against the status quo in both online travel agencies and hotel franchisers.
“What you’re seeing is a conflict between the business models between hotels owners, third-party management companies, brands and online travel agencies. And when you look at it fundamentally, the hotel owner pays for everything; they’re the ultimate service provider.
“So just purely from a distribution perspective, I believe on average about 12 percent of total revenue goes into brand-related or franchise-related fees.
“The root cause of the conflict between OTAs and hotels is an existential battle because the business models are in conflict. The hotel brands get paid on every booking regardless of the source; OTAs get paid only when they produce something.”
Echoing Parth Patel’s economic analysis on his hotels, Cole derives that hotels pay a third of their gross room revenue to acquire a guest. He said it’s “an unsustainable level for the hotelier.”
Even more unsustainable is the plunge in business performance across the entire hotel industry.
Booking activity that Phocuswright tracks shows dramatic plunges into negative territory for major hotel companies as well as the OTAs over the past six months.
Just before the pandemic hit with full force, brands were outpacing OTAs with direct bookings.
Cole studied Phocuswright’s tracking of search traffic from September 2019 through August 2020.
The information he shared is only part of the picture because the data was gleaned from global searches made from desktop computers.
To demonstrate the dramatic fluctuations in online business worldwide, consider that in February, Booking.com had 69 million desktop searches on its site. That fell to 13 million in April and climbed to 80 million in July.
Cole noted that in February Hotels.com and Booking.com had the most search traffic compared to three major hotel companies, but the number of searches on their domains had declined by 5 percent and 9 percent, respectively, from September 2019.
Meanwhile, Marriott International’s searches were up 7 percent and Hilton’s were up by four percent 4 percent in the same time period. Choice Hotels International was down by four percent 4 percent.
Expedia Group owns Hotels.com and Booking Holdings owns Booking.com. The companies own many more distribution channels and, of course, the industry has more hotel franchisers, but Cole added Marriott, Hilton and Choice for the sake of demonstration.
In April, all five domains had declines in desktop search traffic ranging from 75 percent to 86 percent when compared to September 2019.
In July, Booking.com had an uptick of 6 percent in searches while the others had less of a decline compared to September 2019.
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