Channels in ChangeChannels in Change~~~~~~

Distribution channel management: lodging’s next

inflection point?

““In a time of rapid change distributors and In a time of rapid change distributors and distribution channels tend to change faster distribution channels tend to change faster than anything else.”than anything else.”

Peter Drucker, Peter Drucker, Management Challenges Management Challenges

for the 21for the 21stst Century Century

… a time of rapid change? a time of rapid change?

Consolidation

Brand proliferation

Globalization

Disintermediation

Disclaimer:

This is not another talk about

The Internet

Traditional Distribution ChannelsTraditional Distribution ChannelsC

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Hot

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calls to

Travel Agency

Global Distr. System

Switch Co.

Chain Res System

@ 10% of rate

@ $3 - $5

@ $2 - $3

@ $6 to $10/call. ( in Mktng. Fee )

@ $4 to $8 #800 to hotel#800 to hotel

Traditional Distribution ChannelsTraditional Distribution Channels

1. Have grown expensive

The costs of acquiring a customer have been the fastest rising line item in US hotels over the last decade

cost of acquiring a customer:Reservation expense +Commissions +Franchise and/or marketing fees

Overall costs of acquiring customers have grown at 5% crg since ‘90

US$ 6.06/occ. rm, ’90 US$ 10.47, ’99

over 6% crg

= US$ 13.61 per stay (not incl. airline miles expense)

(base: US full service hotels; derived from PKF Trends reports, 1991 – 1999)

Of the costs of acquiring a customer, reservations, fees, and commissions have risen fastest

Traditional Distribution ChannelsTraditional Distribution Channels

1.1. have grown expensivehave grown expensive

andand

2. 2. are now undergoing chaotic are now undergoing chaotic transformationstransformations

Let’s take a look …Let’s take a look …C

usto

mer

Hot

el

calls to

Travel Agency

Global Distr. System

Switch Co.

Chain Res System

@ 10% of rate

@ $3 - $5

@ $2 - $3

@ $6 to $10/call. ( in Mktng. Fee )

@ $4 to $8 #800 to hotel#800 to hotel

Travel agencies have already reached their inflection pointAirline commission caps continue to squeeze revenuesIn ’99, population of US travel agencies contractedBusiness travel agencies have been consolidating, rebating commissions, & charging clients transaction feesConsumer agencies are shifting from business to leisure travel

Hotels and resorts still commissioning @ 10%Cruise lines @ 14% plus overrides

Internet agencies cutting into both leisure and commercial businessAll survivors are moving to fee-for-services

On-line agencies are reaching their own inflection point … Expedia and Travelocity have evolved from advertising media to bookers for commissions, to bookers for fees, and now to … Consolidators and packagers

e.g., Expedia, offering 55,000 hotels, now has an inventory of over 5,000 trips, from none in early ‘00

Again, forced by the airlines …Commission capsAirline web site ticketing, w/ price incentives Orbitz

On-line agencies (w/o brick & mortar) fast growing and profitable

Expedia, Travelocity, and Priceline among the five most visited sites ’01 ytd.

The three among only four profitable publicly traded web operations, 6 mos. ytd.

Agency ownership and integration

Carlson Travel (nee’ AMF & Wagon Lits) owned by hospitality supplier Carlson Co.Accor owns travel agencies and tour operatorsTravelocity a subsidiary of GDS Sabre (AA)AOL Avant a joint venture with Sol MeliaExpedia being purchased by cable programmer USA Networks

Owns Ticketmaster, Hotelres, CitysearchCreating an integrated e-commerce travel vendor

Global Distribution Systems: also in transition: Sabre

Owns Travelocity – competing with Sabre usersStrategy is to polarize – service surviving agencies while pioneering disintermediation

GetThere – on line B2B corporate travel siteVirtuallyThere – consumer personalized trip planning and facilitatingTravelocity concierge servicesStrategy to “own” the consumer

Foresees on-line services growing to 28% of bookings in ’04 from 6% in ‘99

Galileo – now owned by CendantBeing integrated into a comprehensive franchise agency and travel supplier company

WorldSpan – (Delta, Northwest) ?Amadeus – (Lufthansa, Air France, Iberia) ?

Global Distribution Systems: also in transition

GDS’s are attractive …Powerful

• the backbones of any intermediary and direct system for inventory control, pricing, booking and confirming

Profitable• Sabre fees per trip = US$ 11.55• Operating profit = US$ 3.04 per trip

… so long as single supplier direct sites do not capture the major share of traveler commerce

Global Distribution Systems: also in transition

Traditional Distribution ChannelsTraditional Distribution ChannelsC

usto

mer

Hot

el

calls to

Travel Agency

Global Distr. System

Switch Co.

Chain Res System

@ 10% of rate

@ $3 - $5

@ $2 - $3

@ $6 to $10/call. ( in Mktng. Fee )

@ $4 to $8 #800 to hotel#800 to hotel

The Switch – key link between hotels and GDS’s

Only twoWhizCom – car rental focus, then hotels• Acquired by Cendant in ’99• Now integrating with Galileo and with

Cendant’s nine hotel brands, RCI vacation exchange, Avis rental car, and travel agencies

Thisco (The Hotel Independent Switch Co.)• Once non-profit, then for-profit, now publicly

traded as Pegasus Solutions, Inc.

Pegasus – disintermediatoror re-intermediator – or what?

All Travelweb – 4th largest consumer on-line travel site Provides property res systems – voice and electronicNew ASP of PMS and RMS (HI) Switch for Orbitz, Sabre, Apollo, WorldSpan,and for on-lines like Expedia, Priceline…Central commission processor for 1000’s of hotels Divesting of representation services to focus on information and systems support? Summit gone; Utell?

They have a fist on the pulse of the industry!

And new distribution services that focus only on hotels

E.g., WorldRes and Inntopia, booking engines for those who need a res function on their property web siteE.g., Meeting planning RFP forumsASP’s that provide both res and pms systems via the web

Hotel central reservation systemsMulti-brand consolidations of call centers

And central revenue mgmt.

Still carrying most reservation trafficAccount for 20% - 30% of res feed to typical chain property

• Radissons usually enjoy 10% pts higher by virtue of Carlson Travel referrals

Contract rate clients use heavilyChains’ on-line sites still < 3% of bookings

• Look-to-book ratio is falling, i.e., more bookings• Independents enjoy higher % feed• B&B’s get as much as 30% through own web sites, in

form of inquiries and requests

Lastly, the property res office is in rapid transition …Skills and talents have been evolving

From reservation taking and confirming …to inventory controlling and forecasting…to selling …to managing revenue.

Multiple channels must be synchronizedMore inventory “buckets” increase complexity

Price consistency is confounded

Traditional tour & travel marketing obsolete

In sum, no other function in the hotel business is undergoing such rapid

change and turmoil as is the distribution and reservation activity

So, what are the implications …

For the industry?

For property management teams?

For H&RA education?

What might be implications for the hotel industry?

“ New distribution channels always do change what they distribute.”

Peter Drucker

Management Challenges for the 21st Century

Vertically integrated suppliers: emergence of travel management companies and sellers of “trips”?

Radisson, Cendent, Disney, Sol Melia, Accor

Vertically integrated distributors: shift to push marketing mix?Leveled playing field for independents?Centralized revenue management in name of cost control?

Which hotel and cruise companies will be first to cap commissions?

Tendency to commoditize hotels?Who will own the consumer data?

What might be implications for the hotel industry?

What possible implications for individual hotel management teams?Might net discounted prices account for larger share of transactions?Will traditional tour & travel marketing have to be replaced by alliance marketing with channels?Might promotional money displace consumer advertising in the marketing mix? Might a “channel manager” join Exec Committee? Might a new distribution paradigm emerge?

A new distribution paradigm?

Current wisdom:Manage by ADRSeek price consistencyGive all access to all inventory bucketsKeep all channels open as long as possibleMove from allocations to single image inventory

New paradigm?Manage by contribution marginsPrice channels differentiallyStarve some channels and nourish othersClose channels according to production and marginsCap commissionsUse ASP’s to address complexity w/o direct access

What possible implications for H&RA educators?Of top 12 US H&RA schools and programs, only two offer courses in channels of distributionWhat kind of education needs to be added to H&RA?What can be done to move metrics from ADR to contribution margin?What kind of career development pathways can prepare managers, including GM’s, for dealing with channels and margin management?

Channels in Change …

Channels in Change …

… a force now transforming travel and hospitality even as we watch

and ponder its implications

of