Since March this year, the global hospitality industry has been reeling under the greatest slump in history, due to the COVID-19 pandemic.
According to STR, hotel occupancy in the U.S. will fall to an all-time low of 42.6% in 2020, while revenue per available room (RevPAR) is projected to be as low as $42.84, and demand will shrink by 50.6% for the full year.
With travel now opening up at a tethering pace after months of no demand, the hospitality industry is in survival mode; shaving costs swiftly and effectively is the need of the hour. Besides operational costs, distribution accounts for a significant share of hotel expenditure.
On the flip side of culling out distribution costs today lies an unexpected opportunity – to regain lost ground from partners, and in particular the online travel agencies (OTAs).
The rise and rise of OTAs
According to Phocuswright, global hotel gross bookings amounted to $523.7 billion in 2019. Online sales represented 42% of the total, and the OTAs captured two thirds of that.
That said, OTA share of distribution varies widely by market; in markets where chain hotels are prominent, OTA share is typically capped up to half of all online sales, versus up to 80% wherever independent hotels prevail! As OTA commissions can scale up to 30%, they can be an expensive distribution channel.
But the OTAs’ rise to the top did not happen by chance. While technology and venture capital played a vital role in the proliferation of OTAs, landmark events such as 9/11, the global financial crisis, the SARS pandemic, etc. altered the hotel distribution landscape by obliterating the then reliable demand pockets for hotels.
During those testing times, hotels looked at OTAs as their get-out-of-jail-free card to rescue them from the dire demand and low occupancy rates. In the process, hotels ceded control of much of their distribution, and the leading OTAs enjoyed a remarkable increase in their market shares.
The knee-jerk reaction to rely almost exclusively on the OTAs certainly delivered a short-term windfall, but it also ended up costing the hotels dearly in the medium to long-term. Most importantly, it led to OTAs being the first port of call for many travelers looking to book hotels, versus the hotels’ own websites.
The tug-of-war continues…
Online hotel booking dynamics, however, have changed considerably in the last few years. Hotels have consciously spent millions to regain their lost turf. From digital marketing to investments in business analytics tools and direct-buying technologies – these initiatives brought in a whole range of benefits from increased brand bookings to guest loyalty.
Specific to the U.S. market, a higher presence of chain hotels, coupled with the hotels’ investments, resulted in online direct gross bookings share decreasing from 60% in 2009 to 48% in 2019 (see chart).
In 2018, an overwhelming 71% of U.S. travelers booked hotels online (see chart). Among them, 29% booked via supplier direct online channels such as hotel websites or apps, trumping the 21% who booked via OTAs.
The ongoing COVID-19 pandemic is another landmark event. Only this time, hotels have tech solutions that can prevent them from going back to where they were years ago. Thus, they should consider taking a strategic stance.
As much as the idea of quickly putting heads to beds at any cost may seem ideal, hotels now have an opportunity to consider alternative cost-effective distribution channels, including shoring up their direct strategies. But coming to terms with the new normal can be unnerving.
Inderpreet Banga, chief operating officer and co-founder of EPIC Revenue Consultants, observes: “Several chains are set in ‘cruise-control’ for the time being where the more reliance on the partners to assist in demand generation.
"Certain OTAs have stepped up their disparity to generate room nights in addition to onward distribution of those lower rates. Hotels who don’t keep an eye on their distribution in the short-term are at risk of losing significant share.”
Hotels unite! Take charge of your distribution
While the anxiety of demand bottoming out is justified, hotels should consider the 3 Rs: Reset, Revaluate or Rejuvenate their direct distribution channels.
From internet booking engines to integrations, UI/UX to mobile apps, localized content to search engine optimization and rate parity enforcements, hotels finally have tech at their disposal to address these crucial aspects of direct distribution until the market recovers.
Major hospitality brands such as Marriott and Hilton have invested heavily in technology and brand marketing to propagate the benefits of direct booking. Consider Hilton’s Stop Clicking Around campaign to understand the opportunity of direct bookings.
Mark Weinstein, global head of customer engagement, loyalty and partnerships at Hilton Worldwide, remarks: "(In 2015), 57 billion Hilton HHonors Points – or more than 1.6 million free nights – went unearned because guests booked their stay through a third party.
"There is a huge misconception that third parties always offer lower prices for our hotel rooms, which is simply not true.”
A strong brand presence is required to boost hotels’ direct distribution platforms as shoppers are usually more willing to circumvent typical booking channels for top branded hotels.
Notwithstanding budgets, all hotels can take a cue from the larger brands to enhance their direct booking proposition by offering best-rate guarantees, in-stay or loyalty benefits, rate parity, and luring guests to book directly, thus minimizing their dependency on OTAs.
Doros Theodorou, chief commercial officer, Meininger Hotels, agrees: "We introduced a very flexible re-booking policy that we hope will help us though the tough times. Customers seem to be understanding and are accommodating in their majority. We have also introduced many post-COVID-19 hygiene measures to help us."
At the same time, hotels must closely monitor their performance (using business intelligence (BI) tools), their distribution health (to identify price leakages and enforce parity) and their marketing ROI (deploying programmatic campaigns with dynamic rates and retargeting to achieve higher conversion).
Surviving through the crisis
The current climate has created opportunities that hotels can convert directly, to regain some of the lost ground against OTAs:
1. Local markets
The COVID-19 pandemic has compressed the reach of most businesses and paused globalization. In order to buckle the trend, local is the mantra. With shelter-in-place or lockdowns enacted in several parts of the world, along with airports and borders closed, micro-markets need to be prioritized the most. Hotels need to reinforce their contribution to the local communities, and play its part to support them in times like this.
Hotels ranging from the Four Seasons, St. Regis, Hilton, OYO and Marriott opened their doors to the “frontline army” of first responders – emergency medical technicians, doctors, nurses, and other medical personnel.
Even though many hotels have furloughed thousands across marketing and sales functions, they can maintain a small taskforce to initiate direct sales efforts with local hospitals and government authorities. The taskforce can then leverage the hotel's sound digital presence to enable prompt conversions.
Staycations have also emerged as a major local opportunity, especially among those who had to cancel their holiday plans due to the airport or destination closures. Drive markets of two-three hours can also be a catchment opportunity for hotels.
Theodorou remarks: “Leisure travelers such as city explorers and families want a more economical offering due to the financial crisis that the pandemic has brought. We are already seeing a significant amount of families booking with us and taking advantage of our multi-bed rooms.”
2. Target niche guest demographics and profiles
Traditionally, hotels have relied on leisure and corporate travelers, along with MICE activities. The pandemic has forced millions to stay indoors and work remotely, and the emergence of social distancing has further crushed revenue lines from the hotels’ core segments.
The rise of international “travel bubbles” or “air bridges” is another opportunity for hotels to capture the incoming demand. Hotels are realigning their focus to convert rooms for non-critical patients, and those who need to be quarantined as a preventive measure. In Singapore, the government booked entire blocks of hotels since late-March to house returning travelers from the U.S. and the U.K., to make sure they serve out their mandatory stay-home notice. On a related note, traditional inns in Japan are offering a place to stay and work in isolation, so as to maintain social distancing.
The unfortunate reality of stranded tourists has also emerged as a target category for hotels. With shut borders, limited or no flight services, and vigilant quarantine mechanisms in place, governments are granting visa extensions to tourists to “sit this out”.
3. Explore non-guest opportunities
A sizable share of hotels’ revenue is tied to non-room sales, and F&B is a critical component of it. It is imperative that revenue managers take a broader view of the business and give prominence to non-room revenue streams in the interim.
For instance, with no in-stay guest meals or banqueting sales in sight due to the pandemic, hotels can utilize their kitchens as cloud kitchens. Food deliveries have been classified as essential service in many cities across countries.
Hotels can explore this opportunity by partnering with food-delivery players such as Deliveroo, Uber Eats, DoorDash, Go-Jek, etc. These initiatives can be further enhanced by leveraging BI solutions that can breakdown data silos across departments and legacy systems to offer relevant insights.
What lies ahead?
Under the present circumstances, it is extremely challenging to paint the road to recovery for many destinations. In China though, the epicenter of coronavirus, is beginning to show early signs of recovery – six months since the first cases were reported. STR data reveals early signs of recovery in China with occupancy reaching 52.6% in the week of June 13, 2020, significantly up from 31.8% on March 28, 2020.
The recovery is also visible in Marriott’s reopening in the market – it claims to have reopened all its 350 hotels and trending at a 40% occupancy in early-June 2020. In the case of the U.S., occupancy stood at 39.3% for the week ending June 6, 2020, down 45% while RevPAR was down 65% during the same period.
As normalcy returns in due course, low occupancy rates and need to keep the prices competitive to capture demand won’t let hotels shore up the rates significantly in the immediate future.
OTAs are expected to remain valuable partners during the resurgence by driving demand in the post-coronavirus world. Still, it is critical for hotels to not let their guards down or take distribution decisions for short-term benefits over long-term ones.
Hotels must double-down on their efforts to monitor and improve their distribution health, and ensure that intermediary share and affiliated costs – ranging from OTAs to wholesalers – are kept in check. Moreover, hotels must also ensure hygiene of their direct channels – reviewing fare caching issues, review existing promotions, visibility of different room types and above all ensuring that the best prices, value and offers are available on the direct channels.
Banga emphasizes: “Hotels have a big opportunity right now. Switching up the spend allocation mix is a recipe for success in the post-COVID era. Since leisure is expected to pick up first, reallocating budget towards metasearch and even to the extent brand marketing definitely make sense.”
The ability of hotels to stand on their own two feet during the pandemic, as well as after it is contained will give them leverage to strike win-win deals with OTAs.
As and when recovery happens, the most important thing for hotels would be to not completely fall back on their pre-coronavirus distribution strategies. Those moves will only end up relinquishing distribution to the OTAs, and throwing away all the new ideas and hard work they put in to boost direct bookings.
If hotels can keep their focus on direct channels and persevere, in time, not only will they recover, but also they will have a clear strategy to maintain control of their distribution.
A balanced distribution and marketing strategy, enabled by BI tools, can deliver the winning formula for hotels to achieve better return on investment (ROI) and conversion from their digital marketing spend.
The mix and results may vary from hotel-to-hotel, but these will instill further confidence within the revenue management teams to bring in the maximum possible income for the hotels.
CORRECTION: The first chart and explanation above were replaced to indicate an error that previously stated online direct gross bookings increased from 60% in 2009 to 62% in 2019.