One-On-One: Hotels Thwart Third Parties

Last month, Marriott International executive vice president of business development Bruce Wolff described to BTN editors how the lodging industry implemented cross-channel rate parity and regained Internet pricing control from third parties. For example, 85 percent of Marriott's $2.1 billion in Internet sales was booked through Marriott.com in 2004.

BTN: Only a few years ago, hotel companies seemed to defer to the discount merchant model sites. What happened?

Bruce Wolff: It got to the point where the industry had no choice but to act. We looked aggressively at the marketplace and took a series of steps to create a competitive alternative to the merchant models, which publicly said they were getting margins of 25 percent to 40 percent. In addition, they were requiring inventory blocks from hotels, had little automation and were providing no price integrity. We thought that we could do better, both for ourselves and on behalf of travelers.

BTN: How important was it that hotel companies including Marriott established best rate guarantees to drive bookings to their own sites? How successful have the guarantees been?

Wolff: They were important because they showed our intention to provide rate parity. From Marriott's standpoint, the guarantee has been hugely successful. If you think about numbers, we do about five reservations a second each business day. This includes global distribution system reservations, phone calls, Marriott.com, everything put together. In a month, the number of claims we get about the guarantee are minimal and most of those claims turn out to be unsubstantiated. We suspect it's a comparable success for other hotel companies.

BTN: How did hotels come to lose control of their pricing in the first place?

Wolff: Remember, we're a very fragmented industry. Beyond the world of corporate travel, boutique hotels and independent properties play a big role in overall leisure sales, so we're very fragmented. Unlike the airline industry, where you basically have five players that dominate the marketplace, in our case the top five brands account for less than half the number of guest rooms. Even within a brand, there are multiple owners that have individual rights to set pricing. Consequently, you have a very diverse market. What's more, in 2000 and 2001, a lot of people in the industry weren't particularly sophisticated about third-party merchant sites. You had salespeople from the sites going out and saying, 'If you give me a good price, I can give you a lot of business.' People fell for it.

BTN: Wasn't the industry's sense of desperation during the downturn part of the merchant model's success?

Wolff: The downturn certainly exacerbated the problem, but merchant model rates started to gain popularity slightly before the downturn began. It basically started when the third-party intermediaries stopped focusing on the airline side of the business and went to the hotel side. However, instead of going to the chains, they went to individual properties. General managers at some of these properties made short-term decisions to allot inventory to these sites. Hotels started getting a lot of business from the merchant model sites, even with their high margins and other costs, to the point where the thought of losing that source of business just became abhorrent.

BTN: By this time, hotels must have been at the downturn's low point.

Wolff: They were, and at that point any business looks good. From an industry standpoint, these intermediaries were not generating new business. Travelers booking through the channel were going to travel anyway, so the intermediaries weren't creating any value for us. If they had taken some of the profits and rolled them into stimulating business, that would be one thing, but they weren't. In some cases, customers got a slightly better deal, but the one who really got the deal was the merchant model site. Their 25 percent to 40 percent margin didn't help the consumer. It certainly harmed us.

BTN: Did merchant sites create additional competition?

Wolff: We already had fierce competition in the hotel industry. When I testified before a congressional committee on TravelWeb, they were concerned about suppliers getting control of distribution channels. They were looking at Orbitz on the airline side too. One congresswoman was concerned that when she flew from her home district to Reagan Airport, there were only two airlines to choose from. Consequently, she was concerned about pricing pressure. But I pointed out that, by comparison, when she arrived at Reagan, there actually were 98 hotels with rooms available for sale within 10 miles of the airport. That's really intense competition.

BTN: How much has the rebound contributed to the industry's success regaining pricing control?

Wolff: We actually started before the turnaround began, but the prospect of a turnaround helped us. Part of the conversations with the intermediaries always was, 'You know good days are going to come at some point. Why not prepare for that time now? Because otherwise, once the good days come, it's going to be a crash for you. If you built a more supplier-friendly model, then we'd do more business with you during the good times.'

BTN: Now that availability is an issue, especially in the key cities midweek, is it fair to assume the merchant sites have less inventory?

Wolff: In the old model, intermediaries used to require room blocks for participation. Room blocks ensured they had rooms to sell. Even during the worst of the downturn, there were instances of high demand where you couldn't get a room at certain chains' hotels unless you went to a merchant site. You couldn't get rooms on the hotel's own site because the hotel had exhausted its supply of rooms, but the merchant site was smart enough to hold out its block until the remainder of the inventory became scarce. Now there are only rooms on the merchant site if we have rooms to sell. If we don't, the intermediaries aren't going to get them. It benefits Marriott and it benefits the traveler.

BTN: What features of the new model are you most pleased with?

Wolff: We don't allow sales through room blocks. Margins industrywide are about half what they were. Remember, with the lower margin, you're not paying a GDS fee and a credit card fee, so it's much closer to the 10 percent travel agent commission than you would think. All our sales now are taken only when we want them. All the merchant sites either are fully automated or in the process of automating, so the properties don't have any extra work connected to these bookings. So the model we created for TravelWeb—no room block, lower cost of participation, price integrity and automation—has ended up being adopted by the entire industry.