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After Doing the Math, Some Hotel Franchisees Consider
 Going Independent; Full Utilization of Travel Web Sites
 an Alternative to Brand Franchise Fees

By Jon Chavez, The Blade, Toledo, Ohio
Knight Ridder/Tribune Business News

May 30, 2004 - About four months ago when Scott Robinson "did the math," his calculations changed not only the name of the downtown Ramada Inn & Suites hotel, but also its business model.

As general manager of the 19-story hotel at Jefferson Avenue and Summit Street, Mr. Robinson figured the property could do as much business, yet save thousands of dollars, by severing ties with Ramada and selling rooms through the Internet.

That means having its own Web site as well as renting rooms at discount rates through Internet travel sites such as Expedia.com and Hotels.com.

Hotel Seagate, as it now known, isn't a maverick.

Other hotel and motel owners and franchisees nationwide have pursued similar strategies, leading to a small civil war within the lodging industry between large hotel chains, such as Marriott International, Hilton Hotels Corp., and Starwood Hotels & Resorts, and their franchisees or affiliated hotels.

The lodging chains don't like their affiliates selling blocks of rooms cheaply to Expedia, Travelocity.com, Orbitz.com, and others who then resell those to the public often at rates substantially below the lowest rate offered by the chain.

"You've got hotel operators asking, 'What are we paying that (brand name) flag for? We can go do this on the Internet,'" said Brad Garner, a spokesman for Smith Travel Research, a trade group agency in Hendersonville, Tenn.

The Internet competition comes as the hotel chains have experienced an erosion of their brand names with more travelers shopping on the basis of price.

Brand name chains use to exert near-total control of the inventory of their franchisees and affiliates, who had to rely on the chain's reservation system and marketing efforts, and pay a commission if a room was booked through those systems.

But now, Mr. Garner said, franchisees and affiliates sell an increasing amount of their inventory to the travel Web sites, who don't pay the chains. Also, the chains use to set the room rate structure with their reservation system. Now, the travel Web sites buy rooms at wholesale costs, then mark up the rate of 10 to 20 percent over that cost, Mr. Garner added.

As a result, the chains find they no longer can set minimum rates and expect them to be followed, and a customer could call a Marriott hotel, for example, and be quoted one rate, then find a significantly cheaper rate for room at the same hotel through Expedia.com.

Of the $81 billion in revenue the U.S. hotel industry had last year, about $1 billion, and 6 percent of profits, went to third-party Web-based travel services such as Expedia, Travelocity, and Orbitz, Smith Travel estimates. That compares with Web revenues of just $296 million in 2001.

"One of the problems we have is the excessive profits they're making that we're not getting," said Ken MacLaren, managing partner of the Clarion Westgate in Toledo and five other hotels in Ohio and Florida.

"We have got the investment in the hotels and third-party Web sites don't have a dime invested in them. If they don't make a sale it doesn't cost them anything. If a room sits empty it costs me," he said.

The Internet sites made inroads into the industry after the Sept. 11, 2001 terrorist attacks, experts said. At that time, with a weakened economy and fear of travel, the hotel chains were willing to work with the Internet travel sites to try to generate some business, said Keith Stephenson, executive vice president of the Ohio Hotel & Lodging Association.

The chains, he said, asked themselves: "I know I'm not going to make a lot of money necessarily, but am I going to get left in the dust if I don't join the party?"

Still, the popularity of the Web sales caught some chains off guard, as they found the rooms rented online went from a fourth or third to half or more, said Mr. Garner of Smith Travel.

That has led to a backlash. At a convention last month, a top executive of the company that operates Holiday Inn and Crowne Plaza hotels demanded franchisees choose between doing business with the chain and with Web travel agencies, BusinessWeek reported this month. Starwood Hotels, which owns Westin, Sheraton, St. Regis, and other brands, fines an affiliated hotel owner $75 if it catches him or her discounting through a Web travel site, the magazine said.

Mr. MacLaren, the Clarion owner in Toledo who also owns a Holiday Inn in Naples, Fla., said he and other Holiday Inn affiliates recently were told by the hotel chain: stop selling your rooms independently to Expedia, Travelocity and other third-party Web sites, or Holiday Inn will pull its affiliation.

Holiday Inn, he said, wants to negotiate with the Web sites on behalf of all its affiliates and establish one room resale rate for all Holiday Inns.

The individual hotel owners are caught in the middle of the battle between the chains and the Web sites, he said.

As a result, some hotel owners and managers, like Mr. Robinson, wonder whether they are better off without the chains.

Cutting ties with Ramada saved Hotel Seagate $212,000 a year in franchise and marketing fees. Mr. Robinson said business has increased slightly in the four months since the chain affiliation was canceled. When a customer searches for "Toledo" on the most popular Web travel sites, the Hotel Seagate usually pops up among the first five properties listed.

The hotel, adjacent to the SeaGate Convention Centre, relies on convention business, so a franchise fee doesn't bring in much business on its own, Mr. Robinson said.

Mr. MacLaren, the Clarion owner, said that in the case of the newly renamed Hotel Seagate, a brand name -- known in the industry as a "flag" -- may not be as important because the Seagate's location next to the convention center provides them with an unusual situation and likely a steady stream of customers.

"But I think it's critical to have a flag," he said. "By and large people, when they're looking to stay over night, they're looking for a brand name. If you pulled up a Web site of Toledo and it listed Holiday Inn, Ramada, Clarion, and a place called the Eastshore Hotel,' the Eastshore could be the most luxurious hotel in Toledo, but you won't know that. It has no identity if you're from out of town.

"Holiday Inn, on the other hand, has brand consistency. Of course, even with brands names not all are as consistent. With Best Western, you can get anything from soup to nuts," Mr. MacLaren added.

Still, other Ohio hotels are considering doing what the former Ramada in Toledo did.

"There's a lot of talk of it in the industry," Mr. Stephenson said. "People are generating pro forma reports, looking at what they are and how much they're spending on brand affiliation and what they could do if they put that money into marketing."

However, as yet not many have pulled the plug.

Conversions to Web marketing-only are not rampant, agreed Spencer Rascoff, vice president of lodging for Expedia.com.

"We do not see this type of conversion rapidly occurring but we have seen others drop their flags and proceed on an independent strategy," he said. Customers, though, might be swayed by the brand names, he added.

Chains have responded, with Marriott, Best Western, and others launching rate guarantees. Marriott, for example, promises if a consumer books a room with the chain and finds a lower price at the same hotel within 24 hours, the chain will match the price and give another 25 percent off.

Also, the hotel chains are trying to reach a compromise with the Internet travel sites.

"These (Web-based) brand marketers have so much money to market, more than the hotel chains have, that they're not going away," said Mr. Stephenson, of the Ohio hotel association.

-----To see more of The Blade, or to subscribe to the newspaper, go to http://www.toledoblade.com

(c) 2004, The Blade, Toledo, Ohio. Distributed by Knight Ridder/Tribune Business News. For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com. CD, IACI, ROOM, TSG, ORBZ, IHG, HOT,

 
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