Hoteliers Push Consolidation, Buyers Drive Deeper Discounts

Travel buyers, who already significantly reduced the number of properties they work with in key cities, once again are under pressure from hoteliers to consolidate further. Buyers are holding the line, relying on continuing industry weakness to obtain desirable rates. In some cases, however, they are seeking negotiated rates in more cities to provide greater marketshare chainwide, or they are making greater use of less-demanding small and midsize hotel companies, as well as independent properties.

"At some point, it becomes hard to consolidate further because you've done as much as you can," said Kari Knoll Kesler, sourcing specialist for travel, meetings and promotions for ING Americas in Minneapolis. "We've consolidated our top seven cities, but beyond that it calls for a different strategy."

ING's online booking tool allows travelers to book only one preferred hotel in its top cities until it sells out. The system then allows a back-up hotel to be booked. "This assures hotels that have made the consolidated list between 90 percent and 95 percent of the volume in that market," she said.

Yet, cutting back too far on the number of properties can leave buyers at a disadvantage. "Even in this economy, certain cities can have a shortage of rooms on peak nights due to a lot of citywide conventions," said Jim Haddow, chief of global procurement for A.T. Kearney in Alexandria, Va. "Consequently, we're careful not to limit our inventory to the point where we'll have more demand than we can accommodate."

In theory, buyers support the rationale behind consolidating, to a point. "With travel volumes down the past few years, you often can do better by including fewer properties in your program and then driving more business to those select few. You have greater leverage," said Sue Wiese, travel manager at Acxiom in Conway, Ark.

Of 19 travel buyers surveyed this month by consultants Eclipse Advisors, 16 intended to consolidate the number of hotels they use in 2004. Furthermore, 12 of the 19 buyers said the current consolidation followed an initial round in 2003. "The percentage of buyers intending to consolidate varied," said Karen Richard, Eclipse Advisors managing partner for hotel solutions delivery. "One buyer plans to cut by 40 percent, but that is on the high side. More typical were cuts in the 20 percent to 30 percent range, which is significant, especially if it's on top of earlier consolidations."

The push to work with fewer providers in a market also has gained momentum from companies combining their transient and group spend. "In our major destinations, we've reduced the number of hotels we work with to between two and five, depending on the level of demand, and this includes transient and group," Haddow said.

One consolidation scenario to avoid is travelers booking preferred hotels for room types where no rate was negotiated, according to Erin Barth, vice president of global procurement services at JPMorgan Chase in Jersey City, N.J. "When you consolidate too much, the risk is that the hotel will sell out the room type where there's a negotiated rate, which in our case is the standard room, and travelers will start booking room types that come with higher-tier rates," she said.

The hotel inventory in the destination has to be sufficiently deep or further consolidation won't make sense. "Some of our operations are in areas where there are a limited number of properties, so options to consolidate necessarily are limited," said Keith Berg, travel manager at Becton Dickinson in Franklin Lakes, N.J.

Similarly, buyers may need to keep a hotel in their program, despite low production, for particular reasons. "An individual hotel may be popular with travelers from one business unit, usually because of location," Barth said. "It may not help another chain's marketshare, but it still needs to remain in the program."

Buyers who consolidate and make the error of excluding popular hotels risk incurring travelers' displeasure, confirmed Joe Carino, president of New York-based Carino Collection, a hotel representation firm. "Travelers have complained loudly, especially when the rates and value-adds at the excluded hotel are the same," he said. Berg carefully tracks where travelers actually spend most nights in a destination. "We consolidate from there. Otherwise, you're going to have renegades, people going outside of the program," he said.

At ING, Kesler this year is moving beyond her seven primary markets to deliver further consolidation. She's focusing on her program's mid-tier cities, where there is still sufficient leeway to allow for further trimming. "In many of these cities, we may only have 500 room nights a year, so shifting marketshare won't have the same impact on hotels' occupancy as in the primary cities," she said. "We're trying to get negotiated rates in more and more cities to deliver that marketshare. Typically, this means negotiating with hotel companies so we can deliver more volume at the chain level, rather than the property level."

In these secondary destinations, small to midsize hotel chains frequently have an advantage. They can be less demanding than the large chains and more willing to grant national or global account status to a buyer. When a few of these chains are combined, their global distribution can come close to matching the reach of some of the major chains.

Kesler applies a similar approach to ING's tertiary cities, where there are likely to be only 150 to 500 room nights a year. Here, the intention is for travelers, whenever possible, to book one of the preferred chains' hotels and receive a rate that is a fixed percentage discount off the corporate rate. "This also ends up driving more marketshare to the chains, which has been the goal," she said.

Likewise, Wiese already has consolidated the number of hotels in her preferred program's primary cities. When Acxiom travelers need to book a hotel outside of these destinations, Wiese works with her travel agency, typically booking an independent hotel that is part of a soft brand—a collection of hotels that are marketed under a common umbrella to compete with traditional brands. "There won't be enough annual room nights involved to warrant a negotiated rate and this way we steer clear of the whole marketshare issue," she said. "It just gives us more flexibility, plus we find the independent usually competitive on rate."