IHG has become the latest chain to axe commissions for hotel group bookings. But at a time of rising competition and soaring advertising and marketing costs is this wise? Unsurprisingly, views on the issue are polarised

Last week IHG became the third chain after Marriott and Hilton Worldwide to announce that it would cut group hotel bookings in the US from 10% to 7% - a whopping 30% drop. In the US alone, the groups and events space is worth $300 billion to hotels, with $140 billion spent on room revenue ($30bn) and food & beverage, audio-visual and other ancillary services ($110bn).

IHG operates over 4,000 hotels in the Americas including InterContinental Hotels & Resorts, Kimpton Hotels & Restaurants and Crowne Plaza Hotels & Resorts, and has over a thousand in the pipeline. Now, from January 2019, travel agents and online intermediaries booking hotels for groups and events will earn 30% less from IHG in the US and Canada.

The move is being driven by the hotel megamergers of recent times. As hotel management companies have consolidated and shifted to a more asset light model, the competition and pressure to deliver to hotel owners and shareholders has intensified. Earlier this year Brian King, Marriott’s global officer of digital, distribution, revenue management and global, explained the move by saying that the firm remains “very, very committed” to intermediaries and partners, but also to hotels and hotel owners.

“The ‘why’ is clearly shareholder profit,” says Tom Magnuson of Magnusuon Worldwide, which pitches itself as a ‘low-cost alternative to franchising’. But Magnuson, who will be speaking at EyeforTravel Europe, and later in the year in Las Vegas, believes that is shortsighted that the largest chains are leveraging scale at the expense of already struggling travel agents, which “will find their world a little tougher from this”.

Tim Hentschel, CEO of Hotel Planner, a provider of online services to the global group hotels sales market, agrees. 

However, as is very often the case in the hotel industry, views on the move are polarised. Richard Lewis, CEO NPD Hotels (formerly CEO of Best Western Hotels GB, and Landmark Hotels, Dubai) for one, thinks the commission cuts are fair play. “Intermediaries never like commission cuts. Many of us remember when British Airways started to cut travel agent commissions down to 1% back in the early noughties! ABTA, representing about 7,000 retailers in the UK at the time, said its members would not be able to survive on 1% commission.”

Intermediaries never like commission cuts

He continues: Those agents, which adapted, thrived. Those that didn’t often went to the wall. The hotel industry is fragmented – even with recent mergers. This fragmentation leads to rich-pickings for OTAs and other intermediaries. But the margins they strip out of our hotels is damaging to us and more importantly, to our guests. We’re all trying to fight back. And interesting new players like WindingTree, which utilises blockchain technology, may well help us in our battle. ”

Unsurprisingly, online intermediaries like Hotel Planner have a different view. In an exclusive interview with EyeforTravel.com, Hentschel explains why he believes that hotels cutting lowest margin business is a bad idea.

EFT: Presumably the chop in commission is not great news for travel agents and online intermediaries like Hotel Planner. What is your take?

TH: I think it is shortsighted. With commissions of 10%, group bookings are already the lowest margin bookings a hotel receives. They are even lower than some hotel loyalty programmes. So at a time when alternative accommodation providers like Airbnb have seen the big bucks in meetings and events, and advertising and marketing costs (where we provide a lot of value) are soaring, should hotels be cutting their distribution reach? I don’t think so. In fact, I will bet $1,000 that overall distribution costs will increase in the next 12 months. It’s just simple economics; the costs of distribution are increasing as advertising costs increase.

Overall distribution costs will increase in the next 12 months…It’s just simple economics

EFT: Ok, but some would argue that you, as a middleman, would say that, and that this is yet another positive move to reduce dependency on intermediaries… 

TH: I’d like to see evidence that advertising rates are dropping or direct bookings costs are decreasing to justify a group distribution margin drop of 30%? Also do hotels know how they plan to fill empty rooms with lower margin business? In fact many recent studies argue that hotels will be left filling extra rooms through distressed inventory wholesale channels at 20% plus margins in the long run to make up for the drop in ‘group’ business. I can understand if the hotel reduced a 20% margin channel because they thought they could replace the business with lower margin channels. But in this case, group is their lowest margin channel at 10%, and the cuts are not customised for the needs of each hotel owner’s distribution mix. 

EFT: Yes, but the group sector hasn’t changed much in years and there is still a lot of inefficiency. Surely it’s time for a shake up? 

TH: Yes, group does have distribution cost inefficiencies that make it more expensive than it needs to be, but those inefficiencies are on the hotel’s side - the $1.2 billion in commission vs the $4 billion in hotel group sales labour costs. 

EFT: So, your view is that that hotels internal group booking processes is really where the problem lies today? 

TH: Exactly. Group commissions are only $1.2 billion of hotel expenses in the North American group market, which is worth $30bn, but hotel group sales labour racks up to $4 billion a year. Hotels need to look at internal group booking processes if they want to become more efficient. The inefficiencies in traditional group booking processes developed by the hotels pre the computer age is why their labour costs are four times more than their distribution margin costs. But to add to that, if hotel chains are looking to get the public market valuations of tech firms like Expedia, Booking, and Google, then they need to look at revenue per employee (RPE). Companies with higher RPE are getting higher valuations because they are considered to be using technology more effectively, and are therefore likely to be more competitive in future markets.

EFT: And how do they resolve that inefficiency? 

TH: What the hotel should be doing is using inexpensive tech tools that replace their high labour costs and add to customer satisfaction. In all this discussion about commission cuts, not a lot has been said about the interests of the customer. 

In all this discussion about commission cuts, not a lot has been said about the interests of the customer 

EFT: But Kalibri Labs has said that while automation can solve the request for proposal process on the meeting host side, it increases the labour costs for hotels, which get inundated with high volumes of queries...

TH: Today, a lot of technologies that are in the market can dramatically reduce hotel labour costs, while increasing customer satisfaction by giving instant responses for both group rate inquires and instant confirmation on group room block reservations. 

EFT: But hotel management companies are investing heavily in their own in-house technology to reduce dependence on intermediaries, and looking to new ways to disinterediate through blockchain for instance. 

TH: I’ve looked at blockchain and think it could be more a threat to cost-per-transaction technology companies than directly to the consumer marketing and advertising distribution channels. We at Hotelplanner, and at any of the OTAs for that matter, have a marketing and advertising value proposition that is the main driver of the money. We have over five million unique visitors a month coming to Hotelplanner and meetings.com specifically looking for information on group deals and it’s growing. Hotels cutting distribution for short-term profit is shortsighted!

EFT: In your opinion, what is the key to increasing revenue per employee and long-term success for hotels? 

TH: All companies need to grow revenues while reducing labour costs in the digital age. And that means investment in technology to replace manual jobs and there are a lot of these in the group bookings space at hotels. For example, often group rates are quoted manually on a case-by-case basis or room lists are loaded manually into the property management system. Jobs like these cost the hotel four times more than their cost of distribution, they also frustrate customers who don’t get an instant response and confirmation. By addressing this, which technology can already do in many cases, the potential for costs savings is much bigger pot of gold than the $400 million they can shave off $1.2 billion currently paid in commissions. And just for the record, for every dollar spent on a hotel room, our groups are spending $2 to $4 in the hotel on F&B, conference spaces, AV equipment and other ancillaries. So, the revenue generation of the group is so much greater than just the room spec. 

EFT: You’ve made a few acquisitions in the past year including InternetHotels.com and Hotelsatanywhere.com in 2017 and most recently Backbid. Should we expect to see more consolidation in your sector?  

TH: Yes. Lower margins mean only larger companies with diverse revenue streams and volume will survive.

Meet Tom Magnuson, CEO, Magnuson Worldwide, Tim Hentschel, CEO, HotelPlanner, Maksim Izmalyov, CEO, WindingTree and Richard Lewis, CEO NPD Hotels at the upcoming EyeforTravel Europe (June 4,5,6), where you can also rub shoulders with other leading travel industry brands