Hotels Unite in Battle for Online Reservations
Ever since she coordinated her Italian honeymoon using a computer and a credit card, Karen McDermott has been hooked on planning trips over the Internet. She’s hardly alone, since millions of Americans regularly buy plane tickets online.
What puts the 35-year-old New Yorker on the cutting edge is that she regularly books hotel rooms online, where only 4% of reservations are made.
“I’m looking for a good deal and the convenience,” said McDermott, a research librarian who has used Travelocity.com to reserve rooms in San Francisco, Cincinnati and Washington in the last year.
Though online spending for hotels remains small compared with purchases of airline tickets, the marketplace is growing fast, with annual sales expected to reach $7.7billion by 2006, or double the forecast for 2002. Yet many of the nation’s leading hotel chains have little to celebrate, because consolidators and Internet travel companies control as much as 95% of these sales.
The largest consolidator, Hotel Reservations Network Inc., buys rooms in bulk from hotel franchisees at extremely low prices and resells them through thousands of affiliated Web sites and on its own retail site, at www.hotels.com. It’s a great deal for bargain-hunting travelers as well as for Dallas-based HRN, which is able to mark up nightly rates by 28% on average, according to analysts.
HRN’s stock price has more than tripled since its first day of trading in February 2000.
After HRN, which had $536 million in revenue and a net profit of $13 million last year, the next-biggest discount seller of hotel rooms is Expedia Inc. of Bellevue, Wash. Both companies are majority-owned by USA Networks Inc. of New York.
The result is that hotel firms are losing on several fronts: Their ability to set prices is weakening, franchisees’ profit margins are under pressure and well-known brands could become watered down.
“You want consumers to view Marriott differently than, say, Hyatt,” said Jake Fuller, an analyst at Thomas Weisel Partners in New York. “These companies have spent billions to build their brands.”
Ready to defend themselves and to try to recapture lost revenues, five major hotel companies will begin a joint online-distribution venture in late spring or early summer called Hotel Distribution Network. Based in Dallas, its main goal is to undo the primacy of rival HRN, which is responsible for about nine out of 10 hotel rooms sold over the Internet, according to analysts.
The distribution network’s founders are Hilton Hotels Corp., Hyatt Corp., Marriott International Inc., Six Continents Hotels Inc., Starwood Hotels & Resorts Worldwide Inc. and Pegasus Solutions Inc., an electronic reservation company.
The network’s interim chief executive, Joe Humphry, said the company will offer a “better value proposition” to its owners’ franchisees and other individual hotel owners that currently sell excess inventory cheaply to consolidators and travel Web sites.
“It has become a very profitable business,” said Humphry, whose company has spent two years planning a strategy while consolidators and Internet travel sites reaped profits from this sector.
“A lot of the owners of the hotels feel it has been at their expense. In the future, they need to sell at rates that are more economical for them,” Humphry said.
Practically speaking, that means the distribution network will try to woo franchisees away from consolidators by offering them a better price per room and promising to reduce the time and expense it takes to process online reservations.
The venture might sound like the hotel industry’s version of Orbitz, the online distributor started last year by five major airlines, but it is fundamentally different, said Henry Harteveldt, Forrester Research’s Internet travel analyst.
For starters, the distribution network was not established as an alternative to the computerized booking systems used by travel agents and their online counterparts. By using Pegasus’ technology, the network ensures that its rates are available through every distribution channel. And the network will be solely for hotel rooms, whereas Orbitz offers much more than airline tickets; in fact, Orbitz will be the first major retailer to sell the network’s inventory.
By next year, the distribution network will sell directly to consumers over its own Internet site, at www.travelweb.com.
“It will challenge dominant online hotel sellers and can carve out a meaty role for itself in the long run,” Harteveldt said, “but it won’t win the top prize because the industry is too fragmented.”
HRN President Bob Diener agreed there’s plenty of business to go around. So though the firm he co-founded is under attack, Diener said he does not feel threatened.
“We don’t see any impact on our growth potential,” Diener said.
But Diener obviously is looking over his shoulder. One month after Hotel Distribution Network said it would not charge cancellation fees to consumers, HRN said its fee would drop to $10 from $50.
That is exactly the kind of effect hotel executives hoped the new joint venture would have.
“We think there’s room for new competition in this area,” said Bruce Wolff, Marriott’s senior vice president of distribution and sales and a member of the distribution network’s board.
Marriott is ahead of the rest of the industry in that 6% of its sales occur online and three-quarters of those transactions take place on its Web site. But even as the world’s biggest lodging company embraces this low-cost distribution channel, Marriott and its competitors are locking arms for another reason--Hotel Distribution Network will boost its participants’ revenues by marketing their full range of nightly rates--not just the lowest-priced inventory, as HRN does.
The problem with HRN’s model, Wolff said, is that it sends the message that the best hotel deals are available only online--a boon to Web surfers, perhaps, but a potential sore spot with the 95% of consumers who still reserve hotel rooms in more traditional ways.
“Those who don’t buy online really aren’t that happy,” he said.
