Hotels tighten control of online inventory

BETHESDA, Md. -- After haphazardly building an Internet sales pipeline, the lodging industry sprang a $1 billion leak -- and major hotel chains are now aggressively working to plug the hole.

The problem began when hotel franchisees signed deals that were too favorable to popular travel Web sites, which account for the majority of all rooms booked online, and sold rooms at rates that drained the big hotel companies' profits. But with the dot-com seduction over, the chains are much tougher negotiators, said Bruce Wolff, executive vice president of sales and marketing at Marriott International Inc., the world's largest lodging company.

"We have no problem with them making money," Wolff said of the travel Web sites during an interview at the company's Bethesda headquarters. "But we needed business terms that were a little better than existed."

Using a combination of financial carrots and sticks, Marriott and other chains are also beginning to drive a greater percentage of online shoppers to their own Web sites, a migration that lowers the hotels' distribution costs significantly.

Consumers should get the same rates at hotel-owned sites, although they won't find the comparison shopping tools available at sites including Expedia, Hotels.com, Orbitz and SideStep. Those sites believe such tools will make them more competitive.

"Supplier sites are good for loyal customers," said Kurt Weinsheimer, a vice president at the hotel division of Orbitz. "But the vast majority of consumers want the capability to shop multiple brands."

The hotel chains' current revenue leakage, as the industry refers to it, stems from the fragmented way in which they began doing business with third-party sites in the late 1990s.

With Marriott, Hilton Hotels Corp., Hyatt Corp. and other chains slow to establish their brands on the Internet, hotel franchisees eager to tap this new marketing channel had little choice but to rely on fast-growing travel Web sites. So the sites signed lucrative deals with thousands of hotel operators desperate to fill rooms during the nationwide travel slump. And because the owners had little expectation of getting customers otherwise, they made their inventory available at extremely steep discounts, allowing the third parties to charge whatever they wanted.

Online shoppers snapped up bargains, property owners got some extra business and travel Web sites routinely pocketed 25 percent to 40 percent of the money collected from each sale. It was much more than the 10 percent commission traditional travel agents received, but amid weak travel demand and the relative lack of customer traffic at the hotel chains' own Web sites, it seemed reasonable at the time.

"They definitely didn't have things under control a couple of years ago," said Jake Fuller, a hotel analyst at Thomas Weisel Partners in New York.

That is beginning to change, although Fuller said that in 2003, the hotel industry would have earned an extra $960 million had sales through third party Web sites been processed at traditional travel agency rates, and even more if customers had booked at hotel-owned Web sites. Smith Travel Research, which tracks hotel prices and occupancy rates, put the figure at slightly above $1 billion, or about one-sixth of the total value of hotel rooms purchased online last year.

Indeed, with online sales a significant and growing portion of the business -- 9 percent of all hotel reservations were made on the Internet in 2003, up from 7 percent the year before -- too much money is at stake to allow past practices to continue. The hotel chains are now doing much more online and off-line marketing and advertising around their own Web sites, which are better designed and easier to use.

Greater centralization

More important, they've embraced a strategy of greater centralization, channeling their energy in two key areas: getting as many people as possible to book rooms at hotel-branded sites; and negotiating one-size-fits-all distribution deals that limit just how much third-party Web sites can mark up prices.

The days of 40 percent markups for the major hotel chains' inventory are fading fast, executives and analysts said, with travel Web sites now pocketing anywhere from 15 percent to 30 percent of the value of each room they sell. For every $100-a-night room, that puts as much as $25 more into the hands of individual hotel owners and their parent companies.

Last March, Hyatt flew hundreds of hotel managers from around the country to its headquarters to explain why they were better off leaving the distribution negotiations to the parent company, which could secure volume-based discounts.

"There's no question that the suppliers are really starting to wield more clout," said Henry Harteveldt, an online travel analyst for Forrester Research in San Francisco.

One disincentive several hotels are using is that they're not allowing customers to earn loyalty points when they book at a third-party Web site.

Hotels also aim to lure more customers to their own sites by keeping Internet room rates consistent across every distribution channel. That way, the logic goes, customers will feel confident they're not missing out on a better deal somewhere else. Marriott, for example, launched a nationwide advertising campaign to hail its "Look No Further, Best Rate Guarantee."

Recent data shows this combination of tactics may be working. Of the 27 million rooms booked online in the fourth quarter, 39 percent occurred at hotel-owned sites, compared with 37 percent in the same period a year ago, according to an analysis by Thomas Weisel Partners.

Executives at travel Web sites counter, however, that the hotel chains' new online strategy has made them somewhat less competitive with thousands of independently owned hotels. The independents can still make special offers on travel Web sites and have greater flexibility to adjust prices, up or down, among the different distribution channels when it makes sense, explained Spencer Rascoff, vice president of hotels at InterActiveCorp, which owns Expedia and Hotels.com.