REPORT FROM THE U.S.—Changes in the world of digital distribution are resonating throughout the hotel industry, with issues such as online travel agency commissions and the growth of sharing economy competitors affecting hoteliers’ day-to-day decision-making.
Guests’ expectations and behavior during the booking process are shifting; the rules that govern distribution—including rate parity—are in a state of flux; costs are increasing and intermediaries are seizing more and more control. Kalibri Labs addresses these factors and the state of digital distribution in its “Demystifying the Digital Marketplace” special report, the first portion of which was recently released. Parts two and three of the study are slated to be released during the fourth quarter of 2016.
Report co-author Cindy Estis Green, CEO and co-founder of Kalibri Labs, said the hotel industry is experiencing drastic change due to the dynamics of distribution.
“The digital market has forced hotels to rethink the way they acquire customers,” she said via email. “Managing the high costs, keeping up with rapid-fire changes, knowing that disruption has become the new normal puts a premium on the intelligence needed by hoteliers to make informed decisions. Managers will have to become savvy about all things digital so they can be nimble and take advantage of the new opportunities.”
Here are five takeaways from the first part of the report.
1. OTAs are gaining, not losing, share
Pushes to win more direct bookings have garnered much attention and discussion, but consumers have grown more likely to book through third-party distribution channels like OTAs than even four years ago.
(Chart: Kalibri Labs)
According to the report, “One way to measure the impact of growing intermediation is to look at the ratio of rooms booked directly with a hotel, through Brand.com or other hotel-owned channels, to rooms booked through a third party such as an OTA, GDS, traditional travel agent or wholesaler. In 2011, this figure was at a high of 4.3 direct bookings for every 1 indirect booking. For the year 2015, this figure has decreased to 2.7 direct bookings for everyone 1 indirect. These figures represent the entire U.S. market for hotels with an ADR above $100.”
This is particularly bad news when viewed in conjunction with Kalibri Labs’ recent research showing the so-called “billboard effect” is dead.
“The concept promoted by the OTAs that was called the ‘billboard effect’ claimed the visibility given to hotels by listing with OTAs resulted in many more bookings on brand.com as a result of a presence on the OTA,” the report reads. “The 2015 study was conducted by systematically testing this theory using three different statistical models. The study indicates, unequivocally, this ‘billboard effect’ does not exist and it appears that the multibillion-dollar marketing spend by the OTAs has benefited the OTAs at the direct expense of brand.com.”
2. Costs are rising
The Kalibri Labs report laid out some startling statistics for the hotel industry, including the roughly $25 billion in customer acquisition costs paid in 2015 on $145.4 billion in guest-paid revenues. That year also marked a percentage decrease in revenue capture.
(Chart: Kalibri Labs)
And the report points out that “commissions paid to third parties are still rising at twice the rate of room revenue growth for the period from 2011 through 2015.”
(Chart: Kalibri Labs)
Because of these challenges, it’s more important than ever for hoteliers to get the right distribution mix to drive profitability.
“This environment calls for an imperative to modify the evaluation of revenue performance,” the report states. “Whereas once the traditional methods of tracking top line revenue and market share
were sufficient, now managing gross margins and revenue after cost of sale may prove to be more insightful and beneficial in an ever-changing and increasingly turbulent online arena.”
3. New entrants are making a mark
While OTAs remain powerful, a sea of new entrants into the online distribution space has made the “legacy OTA” model less influential, according to the report. At the same time, competitors in the sharing economy like Airbnb and metasearch players like Google and TripAdvisor are growing more influential.
From the report: “Airbnb is potentially a major competitor for traditional hotel companies in major urban markets. Although they don’t own any inventory, Airbnb has access to one of the largest inventory bases of rental units in the world and has exceeded the market cap of hotel giants such as Marriott, Wyndham and Starwood. Although hotel companies and Airbnb will co-exist in the same space, Airbnb may have an effect on hotels’ revenue and profit margins.”
4. The landscape is changing
There are various forces changing digital distribution, including OTA consolidation, shifts in rate parity rules and key changes in how business travel is done.
The report points out that consolidation has marked a “major shift” for OTAs, as The Priceline Group has acquired Travelweb, Booking.com and Agoda, and Expedia has acquired Travelocity, Orbitz, HomeAway and several other related companies.
“Priceline and Expedia are the unquestioned leaders in the OTA space in North America and Europe,” the report reads. “That said, they may be challenged by TripAdvisor and by Google Hotel Finder as their instant booking services expand and sign up more hotel providers. As OTA consolidation increases, the bargaining power of hotel owners and operators decreases.”
On a more positive note, hotels are gaining more wiggle room with last room availability and rate parity restrictions.
From the report: “The constraints in the market around last room availability (LRA) and rate parity have been in play over the last few years and have become much more flexible over the last two years. For a hotel, having flexibility in deciding the rates and inventory offered in each channel are key to achieving an optimal channel mix.”
The report claims the traditional RFP process could grow obsolete within the next few years based on new entrants into the marketplace.*
“No need to lock in annual rates through a bidding process when a traveler can get the lowest rate available up to the day before arrival and when travelers ‘self-police’ their travel by receiving incentives; these changes put into question the future role of Travel Management Companies (TMCs),” the report reads.
5. Travelers plan in different ways
Another issue that makes digital distribution even more complex for hoteliers is that consumer behaviors and expectations are shifting, with the planning process growing more complex.
Inspiration for travel is growing to be increasingly social, and the planning process is growing longer, according to the research.
Travelers’ choices may depend on an exceptional recommendation from friend, an eye-catching photo or article or even a destination visited in a TV show or a movie,” according to the report. “These choices could also simply be a pricing decision for those who view the travel experience as a commodity.”
The report claims that hoteliers should have the best possible content to drive business, and hoteliers need to carefully consider how they deploy that content.
From the report: “By providing content directly, the hotels enable third parties to create a powerful marketing and merchandising resource. This resource is then used to drive consumer traffic and engagement, for which the hotel then pays a premium, generally in the form of commissions.
“What at first seemed like an easy way to get new, low-cost imagery through third parties, this practice may have deeper and more troubling long-term implications. Gatekeepers will be able to use their sway over consumer traffic and engagement as leverage and hotel properties will not have a choice to provide whatever is asked by the third party.”
*Clarification, 18 October 2016: An earlier version of this story incorrectly stated that Kalibri officials already view the RFP process as outdated.