Can Six Continents Stem Online Wholesaling?

Author: PhoCusWright Inc.

Published: March 04, 2003

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PhoCusWright's FYI

March 4, 2003



Can
Six Continents Stem Online Wholesaling?

By Dr. Bill Carroll






The market, not chains, properties, wholesalers, travel agents or consumers,
control price. The market has, and always will, control price in a capitalist
system.


Hotels, aided
by their chains, management companies and franchisors, can control the
availability of their inventory. They are most knowledgeable about allocating
their inventory to improve profits. This is the best that Six Continents
can hope to do.


Ernst and
Young in its 2002 National Lodging Survey called 2002 the "perfect
storm" of negative demand impacts: recession, terrorism, stock market
deflation induced wealth loss, corporate governance malfeasance, and a
general reduction in business travel. Those effects, combined with an
inability or an unwillingness to adjust the supply of rooms, have caused
downward pressure on hospitality prices; in effect, driving control from
hoteliers' hands.


A primary
concern of Six Continents is online wholesaling. For decades, specific
hotels have given (up) price control to tour wholesalers. The Hawaii market
continues to be a classic example. The Internet simply expanded wholesalers'
reach.


Entities
such as online wholesalers and travel agencies, GDSs, Fortune 1000
corporations, and mega brick-and-mortar agencies are exploiting this phenomenon
to exert influence on price. In particular, the online agencies and wholesalers
have employed their user base, the power of the Internet and industry
fragmentation to bring wholesaling to a mass market. Dismal economic conditions
have only fueled the fire. Estimates of the size of the online wholesaling
market range from 2-5% of total hotel sales, though concentrated in the
leisure and unmanaged business segment.


Exacerbating
the economy's negative consequences and the online wholesalers' efforts
is the public display of prices. This has helped mega-agencies and corporations
place separate pressure on hotels in price negotiations for corporate
business. This is causing hotels to lose even more control.


TravelWeb
to the Rescue?


One effort
by Six Continents and other hoteliers, in their words, "to gain control
over price," is to encourage consumers to search and book rooms with
the hotel or chain directly rather than through intermediaries. That effort
can only be partially successful. Ultimately, consumers want to compare
prices and services and be rewarded with a low or the lowest price, irrespective
of brand. To a degree, the value of brand can still be preserved through
"star classification" schemes in price searches. That a chain
Web site gives the lowest price for the brand property is of little consequence
to a consumer who simply wants the "lowest price" for a given
quality level property.


Intermediaries
are also not necessarily interested in the lowest price for the customer.
They are interested in driving customers to their site by having lower
prices than their competitors. However, they are, or should be, ultimately
interested in the best deal (margin) for themselves, tempered by a necessity
to at least ameliorate their user base with the perception of giving the
"best deal." (Note: Check out the guarantees for the online
agencies and wholesalers.)


A collection
of chains have attempted, again in their words, "to gain back control"
of price thorough the formation of TravelWeb. The end-game is to create
a quasi-wholesaler switch through which the chains' hotels can manage
single image wholesale inventory.


By being
a portal as well, TravelWeb places pressure on margins (and net rates)
collected by companies like Expedia and Hotels.com. TravelWeb, acting
as a portal and through its affiliates, can offer prices plus terms and
conditions that are more favorable than its competitors: Expedia, Travelocity,
and Hotels.com. TravelWeb would also accept higher net rates. This creates
competition in both the consumer and net rate market. The issue is, "at
what cost to promote, develop, and maintain?"


Meanwhile,
Expedia and Hotels.com, both majority owned by USA Networks, together
account for nearly two-thirds of all non branded online hotel bookings.
Their gross bookings nearly doubled last year, and this year they expect
gains of 40% or better.


In principal,
TravelWeb is a good idea. Unfortunately, it is an egg that has not yet
fully hatched. When and if it does, it will be interesting to see what
emerges. TravelWeb could be a "goose egg," considering what
it must spend on advertising, promotion and development to challenge USA
Networks. It could be a turkey, considering the number and need for cooperation
among its parents (Hilton, Hyatt, Marriott, Six Continents, Starwood and
Pegasus). To be successful, TravelWeb needs to be a vulture with the ruthlessness
of an eagle in seizing market share. We'll see.


The recent
Bear Stearns report rightly reported that Six Continents appears to be
planning for the time when demand for hotel rooms improves. Six Continents
can and should take the steps it can to "gain control over price"
or, more aptly, control over the amount of low contribution inventory
available. They need mechanisms to quickly and effectively evaluate and
then turn off the lowest margin producing business as occupancy rises.
They also need mechanisms to shift the room mix to higher prices (lower
price-elastic) business demand as that segment returns from recession.
They need to encourage loyalty or a reason to book with Six Continents
directly (or through higher net rate proprietary or semi proprietary channels
like TravelWeb) rather than with a competitor or an intermediary. The
latter can be done by giving loyalty points, more services, better rooms
and more favorable terms and conditions than available through external
intermediary channels.


This may
be what's behind Six Continent's new online loyalty point auction, their
guarantee of the "lowest rate found online less-10%" for booking
on the chain's Web site, elimination of frequent guest points for non-proprietary
site bookings, and their waiver of cancellation and attrition fees for
group business for 2003. The problem with all of this is that it is easily
matched or undercut by competition and costly to communicate with uncertain
and, potentially, marginal returns. That doesn't mean that they shouldn't
take these steps. It just means they could have marginal near term benefits
in a down market.


Can
Travelocity Help Protect Six Continents' Pricing?


Six Continent's
deal with Travelocity allows Travelocity's merchant (wholesale) model
"to distribute rooms for Six Continent with dynamic pricing and real-time
availability, linked directly to Six Continents' reservations and yield
management systems." This has the potential to give Six Continents
more control over price.


Travelocity
is under pressure to grow its hotel revenue as a way to catch up with
its larger and more profitable competitors in the hotel segment. This
suggests that Travelocity will be aggressive with its public prices and
with advertising spend as a way to gain market share. If the deal with
Six Continents is an indicator, Travelocity has actively entered the wholesaler
market and is aggressively seeking access to hotel inventory. Now fully
owned by Sabre, Travelocity also has more financial resources and a strategic
fit to pursue increased market share.


Can Local
Conditions Turn the Tide of Lost Price Control?




An improved economic climate, deals with intermediaries like the one between
Six Continents and Travelocity, and high occupancy rates are a necessary,
but not a sufficient, condition for revenue and profit improvement for
Six Continents, and other chain properties as well. In order to raise
prices (or control the availability of lower rates), some form of legal
cooperative "price raising" behavior must occur among local
(competitive set) properties. Success here depends on local players having
sufficient information and the discipline to game, in the economic sense,
a rational and sustainable rise in price.


Economic
gaming (or game theory) suggests that a small group of competitors, with
full information and consistent behavior over time, under certain conditions
can achieve the joint payoff of rising rates while avoiding price undercutting.
Success depends on access to complete price and availability information,
consistent behavior by members of the competitive set, supportive local
supply and demand conditions, and the costs of price undercutting outweighing
the benefits. Unfortunately, these conditions are infrequently met, or
not quickly achieved. In such cases, economic game theory predicts a likely
breakdown in "price raising" activities.


Time
Will Tell


At both a
macro- (chain) and micro- (competitive set) level, there is great uncertainty
that a favorable outcome of more hotel availability control and higher
prices will emerge in the near future. Even if the necessary macro-conditions
of rising occupancy and access to negotiated inventory and price control
systems evolve, the micro-conditions of successful economic gaming by
individual properties to raise prices may not. That will take more time,
if it happens at all, or to the extent necessary to raise prices above
pre-2001 levels.


There appears
to be no near term revenue bonanza for Six Continents as a result of its
announced actions. Believing a chain alone can wrench control over price
from the market is folly. Without the necessary and sufficient conditions
of demand exceeding supply, accommodating price and availability control
systems and successful competitive set economic gamming, Six Continents'
actions in isolation are little more than building sand castles against
the tide of overwhelming economic forces.




* Dr. Bill Carroll is a Visiting Assistant Professor at Cornell University's
School of Hotel Administration and the CEO of Marketing Economics, a private
consulting company serving the travel industry. He is also author of The
PhoCusWright Report titled Hotel & Lodging Commerce: 2002-2005,
and is a contributing writer/analyst for PhoCusWright Inc.