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.
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