NEW YORK—Everyone wants to own the customer. For hotel companies and online travel agencies alike, there’s a benefit to controlling the space and terms in which guests book business.
During the past 24 months, OTAs have tightened their grip. But just like the hotel industry in general, shifts in power between resellers like Expedia, Orbitz and Priceline and their hotel company counterparts are cyclical. So who will take charge during the rebound?
Panelists discussed that question yesterday during the seventh annual Dean’s Leadership Series at the Metropolitan Club in New York City.
Chris Anderson, an assistant professor at Cornell’s School of Hotel Administration, said hotel companies are becoming more rational in terms of pricing. As industry fundamentals improve, revenue managers are becoming more discerning in how and through which distribution channels they raise rates.
OTAs still play a viable role in that process, however. Expedia and others aren’t out to destroy the hotel industry, Anderson said.
Dave Pavelko, head of travel for Google, agreed.
“The reality is if the OTAs weren’t providing value, then in theory the suppliers would pull out of the distribution channels,” he said. “With occupancy the way it is … you need a third-party distribution to kind of help you with that.”
“I don’t necessarily see a power shift in one way or the other … unless somebody does something drastic where they’re willing to take a risk (and pull out of an OTA altogether),” Pavelko added.
A recent PhoCusWright study suggests otherwise. While OTAs are still integral to distribution strategies, 2010 will be the first year offline reservations will grow at a faster rate than online reservations, Anderson said.
But back to the original question: Who owns the customer?
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Panel moderator Michael Johnson, dean of Cornell's School of Hotel Administration, listens as Jay Shah of Hersha Hospitality Trust discusses the changing state of hotel ownership. |
No one, argued Jay Shah, CEO of Hersha Hospitality Trust. “Across the last five to 10 years, there’s been a real shift. I think the question is: How much does the consumer own us?”
Consumers can now generate the type of experience they want by dictating the terms of travel, he added.
Said Anderson: “Consumers at some level are mercenary in what they want to pay and who they want to stay with.”
Who owns the asset?
The question of ownership was a recurring theme throughout the discussion. But whereas there was some debate over who owns the customer, panelists generally agreed on who owned the majority of assets today.
It seems underwater owners and lenders holding assets are disappearing as more new investors are buying up hotels.
“You’re seeing a lot of lenders that may not have been as keen at taking assets back … becoming a lot more confident in sales,” said Shah, who cited improving fundamentals, particularly in the top 15 metropolitan statistical areas, as the primary driver.
The sales perspective improved dramatically during the past six to nine months, said Joe Long, chief investment officer and executive VP of development for Kimpton Hotels & Restaurants.
“There is equity in these assets,” he said. “It’s not a full recoup of equity, but it’s something, and lenders are going to be less willing to do some of the deals they were doing prior to the market heating up.”
Whereas many lenders previously bought into the “extend-and-pretend” phenomenon to avoid taking back underwater assets, they are now far more willing to sell hotel properties as debt comes due, according to Sush Torgalkar, managing principal of Westbrook Partners.
“A lot of the lenders so far have been selling a lot of their positions more recently as the loans come near maturity,” often at a slight discount to groups like Westbrook as opposed to going through foreclosure, he said.
This trend will invariably lead to more assets trading hands during the coming months and years, panelists agreed.
“The positive of all of that is there’s going to be assets moving out the hands of unintentional owners to financial buyers or investors who are going to be selling for an (internal rate of return),” Shah said.
Deferred maintenance
Coming out of any recession, it’s inevitable that a lot of hotels will have deferred maintenance, Shah said.
Brands have worked with owners in this respect, pushing out FF&E requirements or property improvement plans, Torgalkar said. But at the same time, it’s in everyone’s best interest to improve the quality of the existing product.
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The capital expenditure rollout will likely be a tale of two cities. Assets in secondary and tertiary markets where the recovery, if there is one at all, is much slower won’t jump to make investments right off the bat, Shah said. But in primary markets, the rapid rebound in industry fundamentals requires a similarly rapid investment to polish the product and maintain market share, he said.
Nickeled and dimed
Extra leg room, checked bags, priority seating—airline companies have found a way to charge for almost everything. Customers might not like it, but this nickel-and-dime strategy has yielded extra revenue. Should hotels follow suit?
The hotel industry has done so for decades. Properties have always charged for phone, Internet, parking. But hotels are going the opposite way of the airlines, offering more inclusive features and complementary value-adds.
“That’s a tough one at the property level,” Cornell’s Anderson said.
Ancillary charges are one of the reasons the airline industry is so commoditized, however, so Anderson doesn’t recommend hoteliers mirror that behavior.
“It’s hard to take away what once was free without impacting the brand,” he said.