All rights reserved?

The growth of booking portals such as Booking.com and Expedia, also known as OTA (online travel agencies) has been truly impressive. The revenue of Expedia itself has increased almost threefold over the last ten years (to USD 5.76 bln in 2014) and the net profit of the company is now around USD 400 mln per year. Booking.com generates even higher turnover (USD 8.4 bln) while its sales have increased almost 30 pct per annum over the last five years. Hotel chains can only look enviously upon the dramatic growth of booking portals. Furthermore, these portals are the absolute monarchs of internet browsers, having taken virtually complete control of the online hotel offer. Rooms offered through these agencies are positioned much higher by Google and price comparison websites, giving the average customer a much greater chance of coming across the website than of accessing the hotel reservation site directly. “This is due to the fact that OTAs can invest most of their operating profits back into the technology. So this is a phenomenon that cannot be matched by any hotel chain, and even more so by individual hotels,” explains Alex Kloszewski, the managing partner of Warsaw-based consultancy Hotel Professionals.

As a result OTA and price comparison websites act as agents in as many as 70 pct reservations in Europe and app. 35–50 pct in the United States. Because OTAs’ commissions are not cheap, at around 15–25 pct, the majority of hoteliers believe that they are being exploited. Cases exist in which the investor and the operator of a hotel, who have put their money into its construction and operation, make less money than the booking portal. In response, hotels are now making strenuous efforts to strengthen their own reservation systems independent of OTAs in order to avoid the high commissions. The simplest way would be to lower the prices on their own websites so that customers are more interested in making direct bookings. This route is, however, forbidden by the price parity clauses included in contracts with OTAs. So a hotel cannot offer lower rates on their websites or on rival portals. Admittedly, the principles of such parity have been put under scrutiny by the anti-trust bodies of European countries over the last few years, as a result of which Booking.com and Expedia eventually removed them from their contracts. Nevertheless, the changes did not generate the desired results, as they turned out not to amount to a complete ban. “Now both are saying that they will allow rival OTAs to discount but not the hotels themselves. But ‘other OTAs’ essentially means each other as they have 70 pct of the online market between them. In effect, Booking.com is allowing Expedia to discount and Expedia is allowing Booking.com to discount, yet neither of them want to. The German hotel association (IHA) refers to this as ‘the familiar parity-grid’,” complains Dorian Harris, the owner of a local British OTA called Skoosh, the author of a blog and a well-known character in the UK hotel industry involved in the attempts to eliminate price parity.

Agnieszka Sapa, the director of the hotel cooperation department in Central Europe and Russia at HRS, a large German reservation portal, agrees with the diagnosis that the changes in contracts have brought little improvement. However, she believes that even their complete deletion from contracts (including allowing hotels to reduce prices on their own websites) will not have an impact on current market practices. “In my opinion, parity will survive even when it is necessary to remove such clauses in contracts,” she argues. She reminds us that at the beginning it was hotels themselves that introduced parity in order to simplify their price policy and streamline management. In the present situation, abandoning parity would be a very risky step. The hotels that would opt for that could lose some of the market in favour of those which stick with the parity.

Artur Lisowski, the head of marketing at HRS Polska, explains that the situation is by no means down to a retaliation of the portals but a clear business calculation. “It is the same when you operate a clothes store and you can see that a product you have in your shop window can be purchased much cheaper in a shop next door – you of course remove it from the display and move it to a less exposed place in the shop so that the customer does not think that your shop is expensive. You will display the most attractive things that sell best and goods that you can be competitive with on the market. This is why it will be the hotels that maintain the price parity and have a competitive offer that will naturally have an advantage on the booking portals,” explains Artur Lisowski, the marketing director of HRS Polska. The issue of exposure becomes even more significant because a customer can instantaneously compare the prices of individual portals thanks to increasingly popular browsers such as Trivago and Kayak. Also, ending cooperation with OTAs is practically out of the question. The Choice Hotels chain discovered that in 2009, when it was one of the first to dare to work without Expedia’s services. The sense of triumph apparently quickly gave way to one of grim realism, when franchisees flew into a rage having realised that they had just lost a solid source of delivering hotel guests. A few weeks later Choice signed another contract with Expedia. Now, when asked if they would like to offer lower prices on their websites compared to OTAs, the largest chains are not too eager to answer the question. “I was notified that we cannot respond to the questions you have asked,” we were told by a representative of the Marriott chain, while Hilton informed us that it “cannot discuss the details of their contracts with other entities”. Meanwhile, Best Western, in response to the question of whether they would like to offer rooms cheaper on their websites than OTAs, remains firmly attached to the idea of price parity. “OTAs are our partners and we should treat them fairly. I would not recommend such an approach towards them,” insists Gheorghe Cristescu, the director of the chain responsible for Poland and the Baltic States.

Fostering customer loyalty

It seems today that hoteliers are inclined towards less confrontational strategies. “Our strategy is a two-lane approach: firstly, we negotiate good conditions with the largest booking portals in order to provide hotels with this service but at a lower cost. Secondly, we try to obtain as many direct reservations for our hotels as possible through our distribution channels, which are in fact the cheapest. Our loyalty programme plays the main role in this respect,” explains Gheorghe Cristescu. According to principles that were agreed last year, only clients who use the chain’s distribution channels directly can receive the points that can be used to pay for future reservations. The development of such programmes is meant to help gain a significant foothold in the fight for customers. “On markets where loyalty programmes are better developed, such as in the USA, the costs related to acquiring a booking are the lowest and the OTA share is the lowest – app. 15–20 pct. In Europe their share amounts to 25–35 pct according to our statistics, whereas in Poland, where it is more difficult to access such data, it probably exceeds 40 pct. However, I believe that there are hotels that obtain more than 60 pct of reservations from OTAs,” adds Gheorghe Cristescu. In his opinion, OTAs’ share in bookings will gradually decrease in favour of direct reservations as loyalty programmes develop. “This represents a substantial benefit for hotels because for them the costs of reservations via the Best Western chain are around 2-5 pct instead of 15–25 pct,” he adds.

“This does not include marketing costs“, reply OTA representatives. “A hotel must also advertise in order to reach new customers. If a hotel wants to be sure that it pays 100 pct of its money spent on accessing potential clients, it should spend it on OTAs. Then it can be sure that it only pays commission for actual reservations made rather than investing in promotional activities with unpredictable results. In this situation the investment risk is carried by the OTAs and not the hotels,” explains Artur Lisowski. It should be noted that Expedia and Priceline (the owner of Booking.com) have together invested more than USD 4 bln on marketing last year. “If we look at the costs of online promotion a few years ago, we can see a curve that has since grown inexorably – and these are not small amounts” points out the head of marketing at HRS Polska.