Hilton Hotels Corp. this month became the first major hotel company to set formal limits on the practice of online reverse auctions, creating four key stipulations to which its owned and managed properties must adhere before they can participate.
Hilton recommended that owners of its franchised hotels, who determine their own rates, adopt the same guidelines, which cover the duration of the agreement, performance assurances, definition of competitive set and the criteria being used to reach the final decision.
Hilton's announcement comes during a bid season in which corporate accounts increasingly are considering online reverse auctions, wherein select hotels in a market are invited to bid prices down for a corporate account.
Among the users are several large corporate accounts, including PepsiCo, which last month announced it will conduct online auctions this year for full-service hotels in Atlanta, Chicago and Dallas. It also is considering the practice in Irvine, Calif., and Louisville, Ky.
Such small companies as Openwave also will be conducting an auction this year, but other companies that had in the past are unsure if they will again.
Bayer Corp., Charles Schwab, Compaq Computer Corp., Dell Computer Corp. and General Electric, are among those companies that conducted reverse auctions last year, some on an experimental basis, and not all have committed to repeating the process.
At San Francisco-based Charles Schwab, Curt Mattos, director of travel services, said he still was not certain if the firm would use the method this year. Last year, Schwab conducted auctions for full-service hotels in Los Angeles and extended stay properties in Indianapolis.
"Those experiences were successful for us. We got excellent rates for good caliber hotels. But my one concern is if auctions would be as beneficial this year, considering the strong buyer's market that now exists," he said. "The objective of an auction, after all, is to inspire competition. This year, because of market conditions, buyers have more leverage, so it may be possible to achieve the goal without an auction. Overall though, I'm still enthusiastic about the technology, providing the scenario makes sense."
Industry sources said reverse auctions for hotels first gained attention last year when General Electric held an auction in Raleigh, N.C., obtaining a $31 nightly rate at a full service hotel where negotiated rates had been in the $69-to-$75 per night range. The hotel then had trouble delivering its customary service levels. However, GE would not comment on its experience.
Hilton's Steve Armitage, senior vice president of sales, said, "We fully respect the fact that everyone needs to be competitive and fair. That's always been our philosophy, but, first and foremost, an auction period should be defined. Auctions are fast and can be done cost-effectively, but they also can be done more frequently. Consequently, we want to know the duration of the business we're talking about." He described auctions where the business ostensibly was for a year and "all of a sudden, two months later, we're asked to go through another auction. We have to know if we're talking about two months worth of business or a year."
At the end of the second quarter, Hilton's system totaled 2,037 properties and 333,900 rooms, including owned, managed and franchised hotels.
In traditional travel management practices, a volume commitment is made in return for a consideration on rate. The advent of reverse auctions has turned that model on its head. "In the past, we did business based on the client's past history," Armitage said. "With reverse auctioning, past performance goes out the window, particularly with those accounts that only are concentrating on price. Consequently, if we do an auction for 5,000 room nights in a certain market, we need assurances 5,000 room nights are there."
Similarly, auctions have faced criticism for having properties at different price points and possibly in different locations bidding against each other in the same event. This is why Armitage said Hilton wanted to know, going into the auction, which properties are in the competitive set. "We don't expect to know exactly what our competition is quoting. We don't today and, if we're fair and know our business, we wouldn't have to know that in the future," he said. "But we definitely want to know, for example, that a full service product is competing against a full service product."
In a hybrid on the traditional model, Openwave in Redwood City, Calif., is in final discussions to conduct an auction this year that would combine midprice and full service hotels in a single market. "In order to address the concerns of the full-service properties, we've asked that an identifier be included on auction screens," said Rick Wakida, global travel manager. "This would denote which paddles were full service properties and which were limited service. Then there'll be no confusion as to who everybody was competing against." At the end of the auction, Wakida could choose properties from both categories to be Openwave's preferred hotels in that market.
Armitage said he had seen too many auctions where the criteria underlying the selection weren't clearly stated. "You want to know the rules of engagement. Because, candidly, when you ask what the criteria are and find out it's just price, regardless of anything else, that might change the hotel's handling of that auction," he said. "On the other hand, if they're also asking about whatever services and values you have in addition to price, it's easier to agree to participate."
The third-party vendors that are providing the online technology to conduct the auction said they are working to resolve these objections. Yet, the vendors' technology platforms differ in various ways. In ProcurePoint Travel Solutions' system, for example, participants are aware of who they are competing against. "Suppliers know the identity of all other competing suppliers in advance of the auction," said Chris Kane, vice president of marketing of the Sausalito, Calif.-based firm. During the actual auction, however, competing hotels only are identified online by their paddle number
(BTN, June 3).While other major hotel companies haven't disseminated formal rules for their properties to adhere to, they are fine-tuning their strategies. "As a general statement, we don't like reverse auctions because they commoditize the travel business," said David Ogilvie, vice president of global corporate travel for Starwood Hotels & Resorts Worldwide. "As it happens, we're offering a lot more than a commodity would. Where we need to participate in them in certain markets, we will, but we'll go into these auctions knowing what our strategy is."
Likewise, Brian McCabe, senior vice president of sales and marketing for Millennium Hotels, said buyers conducting auctions run the risk of focusing too heavily on price to the exclusion of other factors. He recalled a major auction that was worth more than 100 room nights a day. "We predetermined to lose it," he said. "We're still a personal industry. The personal assurance of service, that has to have an importance."
Ogilvie also is aware that there's a certain bidder psychology that can come into play during the actual online event. "You have to be careful not to get caught up in the heat of the moment," he said.
Other companies, meanwhile, realize the number of auctions is growing, but have not yet formulated a strategy. At Marriott International, for example, "We're still studying the subject," said Dave Townshend, senior vice president of global sales for the Americas.