Amid discussion about the death of the hotel merchant model, distributors, including Expedia Corporate Travel and WorldTravel BTI, are retooling the concept in different ways and offering it to corporate clients as a supplement to their negotiated hotel programs and published rates.
The model, which allows distributors to mark up low net rates rather than await commission payments, flourished for some online distributors in recent years when hotels were desperate for business. That retailers were generating merchant model markups of up to 30 percent or more produced substantial friction between its purveyors and the hotels, leading to the major chains' moves to assert control over pricing and cut the retailers' margins on merchant rooms
(BTN, Nov. 10, 2003).Despite the commotion it caused, the merchant model has not gained more than a single-digit percentage of hotels' revenues. Its business-travel usage is small, partly because of the onerous restrictions with which it comes. "The hotel merchant model has minimal relevance for managed corporate travelers," said American Express vice president of supplier relations Andrew Winterton, in a prepared comment. "Therefore, it has seen little adoption. In general, the merchant model is a nonrefundable, inflexible approach that is alien to the specific needs of the corporate travel buyer."
"You have to look at the merchant rate as being a nonflexible rate," said David Witham, Carlson Wagonlit Travel vice president of worldwide hotel and car relations. "However, there are corporate travelers that are quite prepared to pay upfront and not have flexibility, especially if they know their plans. Under the merchant model, the risk is on the traveler."
Others also believe the prepaid aspect of the merchant model is now palatable to a fair number of business travelers.
According to WorldTravel BTI senior vice president and general manager Jerry Murck, "We're talking to accounts daily, and they say there are some occasions where prepaying generates substantial savings."
WorldTravel's "response to the merchant model phenomenon," he said, is a Hotel Rate Manager product developed in partnership with CNG Travel, an Ireland-based hotel room distributor that is publicly traded in London and owns Tzell Travel Specialists in New York. The solution books client-negotiated, consortia, published and merchant global distribution system rates, as well as CNG's prepaid merchant inventory. The product, which contains components developed by WorldTravel, was tested last year in six sites and now is in place at more than 20 offices. Bookings made outside of the GDS are attached to existing GDS passenger name records for servicing and consolidated reporting.
CNG also is working with corporate booking tool provider Outtask
(BTN, March 15) and corporate agency TraveLeaders. It claims to be doing business with four of America's top five corporate agencies and to be deriving merchant rates from 16,000 hotels, including a deal with Travelweb, majority-owned by Priceline as of May.
Expedia Corporate Travel two months ago hired corporate travel veteran Richard Markus to run supplier relations, and his primary focus is hotels. With regard to hotels that have taken on a best rate guarantee strategy, he said, "We do need a product where we can strip away restrictions and provide amenities like cancellations, 6 p.m. checkin and loyalty program points," Markus said. "Part of my job is to help develop a different strata of rates hotels can offer that are more corporate-friendly. It's in place with a few limited partners in a few limited markets, but I expect to make very good progress over the summer."
All the major online agencies are working to better apply the merchant model to the corporate market
(BTN, April 26). Travelocity's hotels vice president Josh Feuerstein early this year said, "We're starting to see a lot of blending between leisure and corporate products. We're talking to hotel supplier partners to find out what's the right mix for them on Travelocity Business."
Expedia's Markus sees the model as an opportunity for hotels to improve their marketing to businesses that do not negotiate their own rates in a given city—emphasizing the robust display of information enabled by the Internet. Expedia is attempting to show that "it's not just about the rate," and few dispute the fact that a Web interface offers suppliers interesting marketing opportunities and offers travelers a better understanding of the product they are buying.
Still, rate matters. "I do not feel hotels will deeply discount that corporate rate," said Joan Lowell, Hyatt Hotels Corp. vice president of electronic distribution, regarding Expedia's merchant rates for corporations. "Our position would be that if that's the corporate traveler's choice of booking channel, then we'll be there at the same rate we would give any other agency. The online agencies are not as dominant in the corporate space, and we certainly don't want to be in a position where they start negotiating corporate rates."
It was the brick-and-mortar TMCs that were the talk of the latest gathering of hotel and distribution executives, at the New York University Hospitality Investors' Conference two weeks ago. They praised the resilience and cost-effectiveness of the traditional travel management company.
"The traditional agencies were written off rather too early," said InterContinental Hotels Group senior vice president of Americas brand performance Tom Seddon, whose company later this month will update the marketplace on the progress of talks on rigorous new standards on third-party distribution IHG announced in April
(BTNonline, April 20). "One of the intriguing things is that, if you step back and look at new-model agencies, they make traditional agencies look extraordinarily efficient."
"I would echo that," said Marriott International executive vice president of sales and marketing programs Bruce Wolff. "The question is, 'Where do we spend our efforts?' The GDS is a great place for that because that's where the money is. A lot of our competitors have bet against the future of the travel agency, saying for sure they are going away because information is flowing to consumers online. But what many have failed and still fail to grasp is that there's a difference between what you can do and what you do."
Global distribution systems—some of which also are garnering merchant content—are showing growth in hotel bookings. Sabre in March surpassed 2 million hotel bookings in one month for the first time ever. According to president and CEO Sam Gilliland, TMCs book "probably" more than 85 percent of the more than $15 billion in hotel revenues processed by the GDSs. "There's a lot of growth because more and more travel agencies are getting used to booking hotels via the GDS," he said. "There are many corporate programs, with rates loaded for specific corporations, and the bottom line is, we'll continue to see the lion's share of the bookings coming through the GDS."
At Amadeus, hotel bookings in the first quarter grew by 15 percent over the first quarter of 2003. According to Cendant Travel Distribution chairman and CEO Sam Katz, Galileo this year is seeing improvement in the rate of bookings that have a hotel room attached to air. "Ninety percent of GDS transactions are still air, so we like to say happiness is a low base," he joked.
That low base reflects severely depressed early 2003 demand, as well as Corporate America's lower compliance on hotel than on air when it comes to traveler bookings through the preferred agency. Still, overall GDS bookings continue to represent a significant share of the total. According to a March announcement from TravelClick, 35 percent of bookings handled in the central reservations offices of 30 major brand hotels come through GDS channels, while Internet sites contribute 27 percent. Pegasus Solutions said growth in the online channel has not come at the expense of traditional TMCs, as April 2004 GDS bookings had returned to April 2001 levels among 10 major brands.
Pegasus chairman, president and CEO John Davis claimed that far lower merchant margins seen by online agencies after the playing field-leveling actions of large-brand hotel chains will impair their abilities to compete in the corporate market. In other words, beating traditional TMCs on hotel rates had been one of the differentiating factors for online-originating agencies, and that's waning. While he has since qualified the statements
(see interview), Davis in February surprised some in asserting that "the day of the 20 percent markup will come to an end this year. Major chains this year will go to a commission-based product. It could be 15 percent or 18 percent, or it could vary based on weekday or weekend."
Others disagreed, though they did acknowledge a change in the merchant model's potential. "There's no question the margins will change, but it's a little too early to be eulogizing the merchant model," Travelocity's Feuerstein said.
"The world of the merchant model retailers setting the retail prices is rapidly moving into the past," said Erik Blachford, president and CEO of Expedia and IAC/InterActiveCorp Travel, in February. "It will be interesting to see where it shakes out." An Expedia official explained that what Blachford meant was the merchant model is "evolving."
The first quarter of this year saw IAC clock 39 percent growth in total merchant hotel revenue and a 36 percent rise in total merchant room nights, to 7 million. "Hotels.com experienced the highest day of bookings in its history during the quarter," the company said. At the same time, Orbitz's overall hotel revenues more than tripled due to strong growth in its merchant program and Travelocity booked 66 percent more hotel room nights year over year.
"There are exceptions and radical differences between the big chains and the independent hotels, many of which now like the idea they can undercut the chains," said Expedia's Blachford, referring to a marketplace distinction Pegasus' Davis also acknowledged. "There's a dynamic here that's not changing anytime soon. Talking about the old agency commission model seems to imply that ad rates in the local paper are the same as those on NBC. If I were running a chain, there is a lot of logic to a best rate guarantee, but you take away from the ability for local properties to compete in the local markets."
Indeed, getting individual hotels to comply with brand initiatives can be a challenge. As Davis joked, "Hotels can't control pricing, inventory, policy, but other than that, they have all the control in the world. The property owner has a much different view of the world than the people in the glass tower. 'I'll sell the rooms for $1 a day if I want to'—figure that one out."
One way to corral property-level people who may otherwise negotiate rates that are detrimental to efforts on parity is InterContinental Hotels Group's enforcement of its standards on participation in third-party Internet distribution channels, announced in April. The company said it is willing to drop franchisees from InterContinental-branded Web sites and the global distribution systems if they do not comply with the standards.
"I don't think there will be many acting in bad faith," said IHG's Seddon this month. "We've had pretty good compliance enforcing our Internet best rate guarantee, and it's actually even easier to enforce whether you're on these sites or not, so the question is 'What's your sanction?' "
Seddon described an "escalating" set of sanctions that would be imposed on properties that demand to be listed on non-certified sites, starting with those properties being "pushed down in the sort order on our Web sites. A couple weeks later, we'll take them off our Web sites." He said IHG's own branded sites deliver three times as much in revenues as third-party distributors, which represent 2 percent of the company's total. Ultimately, Seddon said, rogue properties also would be removed from the GDSs. "Effectively, they'll have lost 35 percent to 40 percent of their revenues," he claimed, again emphasizing that he doesn't expect the enforcement to be frequent.
IHG in April said that as of this month, it would no longer tolerate third-party sites undercutting its best rate guarantees, identifying properties as sold out when they are not, promising discounts that are not available or failing to break out taxes from distributor fees. "We just don't want to be on a shelf that doesn't share our core values," Seddon said. IHG also said it would not work with third-party sites that have not already automated or shown a commitment to automating reservations that today are often sent by fax for entry into the hotel's central reservations system
(see story).