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Co-ops, Consortiums, and Clusters
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Pros, Cons, and Cautions
For Hotel Owners

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by Ronald A. Nykiel and James C. Makens
February 2005

Introduction: 

Historically, when the hospitality industry is in a downturn such as in the early 1990s and after September 11, 2001, there is an accelerated interest in achieving efficiencies. For many years prior to the 1990s downturn and more so thereafter co-ops were one form of marketing efficiency used in advertising, promotions or sales. In addition to co-ops, consortiums emerged as yet another form of marketing efficiency. Consortiums were formed or joined by many hospitality organizations in areas such as reservations, travel intermediaries (i.e., agencies), airlines, (code sharing/capacity sharing), and also in areas outside of marketing. Another product of the pursuit of efficiencies was the concept of clusters. Clusters in the marketing area include lodging facilities in the same market area; commingling their sales activities, sharing leads and sales calls. After 9/11 clusters began to emerge not only for purposes of sales and marketing efficiencies but in other functional areas as well (such as security, loss prevention, and so forth. In this article we will define and examine these three concepts. We will look at the benefits, drawbacks, and potential pitfalls involved with each concept. 

Definitions and Common Practices:

Since these three terms are sometimes used interchangeably, let’s begin with a definition of each for clarification purposes. First, a co-op in marketing in the hospitality business is usually defined as "an agreement between two or more businesses providing funding for marketing (advertising) or other mutually advantageous objectives."1 An example would be an objective to increase business to Hawaii. The cooperative agreement might be structured between an airline, resort, and rental car company to jointly fund and advertise a package (two or more components of a trip)2 to Hawaii. Each could advertise only their respective brand, however, there are considerable efficiencies to be gained by advertising together. And, the consumer buying the Hawaii destination often looks for a package. Each member of the co-op if they went it alone, planned to spend $100,000 in select newspaper ads. By combining their ad and funds, they now have $300,000 available for advertising in the newspapers. In essence, three times as many ads (or space) than if they went it alone. This is an oversimplification, but makes the point about efficiencies and how a co-op works. Second, a consortium is defined as "a group (of companies or brands) formed to undertake an enterprise beyond the resources of any one member and/or for greater benefits and/or efficiencies than available by oneself."3 For example, two or more firms decide to form a consortium for purchasing to reap the benefits of economies of scale in buying products/services each of the firms use. These products/services could range from bars of soap to reservation services. A few variations of this concept include membership or partnership in an electronic e-procurement group to the actual formation of an independent company to perform services for all equity partners. An example of the latter, is Avendra. Avendra is an independent company formed early in 2001 by Marriott International, Hyatt Corporation, ClubCorp USA, InterContinental Hotels Group, and Fairmont Hotels and Resorts, all formidable entities in the hospitality industry.4 Avendra’s purpose is to leverage the buying power for these companies and help each gain greater efficiencies. Not only are there economies of scale, there are other benefits as well. For example, staff reductions, customized product, and lower prices top the list. The third concept to be defined is the cluster. In general, a cluster is "provision for a single point of control for management of similar brands, properties and/or functions within a given geographic area."5 For example, Hilton, with multiple products and brands has formed a Houston cluster. This cluster is directed by the general manager of the Houston Post Oak Doubletree (one of Hilton’s brands). The cluster consists of four managed properties including three Doubletree hotels and one Hilton. The cluster also enjoys the participation of ten franchised partners. This cluster covers the areas of loss prevention, security, human resources, engineering, and sales and marketing. Additionally, the clusters finance, food and beverage, front office, purchasing, and revenue management departments. All have been active in providing cost savings and adding value.6

Be it co-ops, consortiums, and/or clusters, Hilton is not alone in the hospitality industry in these practices. Marriott, Starwood, numerous airlines and others have all experimented or put into practice some or many elements of these efficiency concepts. A recent article in Hotel Online was headlined "Starwood Atlanta Cluster Converts 312% More Business with Cross Property Lead Sharing." The article states that leads are shared electronically in real time and that sales managers now close cross-property sales during the initial customer call. Starwood’s Atlanta cluster comprises seven hotels consisting of three different brands, Westin, Sheraton, and W Hotels.

Perspectives: 

Just as the headlines read many in the hotel industry see each of these three concepts as win win scenarios. There certainly are identifiable efficiencies and results that can be measured. There are also different perspectives on the concepts expressed by different constituencies. Each partner in a co-op advertisement, each member of a consortium, the flag management company, owners/partners, franchisees, customers, and vendors and suppliers all may have different perspectives. Let’s briefly look at the major pros, cons, and areas of concern about each concept. In doing so, we will point out not only the returns but also the risks. For purposes of this analysis, we are intentionally focusing on the application of these concepts in the marketing discipline.

Co-ops:

There are numerous benefits to co-oping in the hospitality industry. In fact, it is usually efficient and effective as a marketing tool. Benefits may include stretching your reach, frequency, buying power, and enhancing your product/service offer. This latter benefit can take the form of a more attractive offer, more convenient method of purchase, and even increased awareness and brand image. Certainly being part of an attractive package to a destination that lends itself to packaging, (such as Las Vegas, Hawaii, Florida, etc.) has its advantages. Having your brand available through the distribution and purchasing channels of your co-op partner(s) increases the odds of purchase and offers additional convenience to the consumer and perhaps even larger commissions to the intermediary. Increased awareness comes with increased frequency made possible by the co-operative buying power of the group in the co-op versus one individual entity. In addition, selecting the right co-op partner(s) can also enhance your brands, product or service image.

There are a few pitfalls to look for in co-operative endeavors. First, you may not always be in total control of the effort. A partner, agency, or intermediary may directly interface with your customers. Second, while you may have an equal position on the co-operative program, your reputation and image could suffer as a result of a partner mishandling a customer or just not living up to your level of service. Third, if you or your agency do not have the lead or control in the co-op, you may not receive your fair share of the endeavor. For example, actual media placement may favor the partner in control of the agency. Responses to calls and leads may be prioritized in favor of your partner, and so forth. Contributing funds to a co-operative program, be it program specific or within a large franchise system or chain can also lead to issues of fairness in how, when, and where funds are allocated, not to mention what the actual promotional message consists of with respect to the offer. Co-mingling of franchise and parent company funds as well as owners and chain management company funds needs to be fair and monitored closely. Not having written agreements, weighting allocated dollars unfairly, or not having complete agreement by all on the offers, terms, and conditions can lead to disgruntled partners or even legal action. There are also numerous ways your overall brand image can be hurt or damaged by non-participation of a franchisee(s) or by partial fulfillment of the co-op offer.

Overall, a well planned and executed co-op with good partners usually produces a positive experience. The risks are lower and the control greater than in a consortium or cluster marketing arrangement. Figure 1 summarizes the level of potential risk and the level of perceived benefits for co-ops.
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Consortiums: 

To some degree consortiums function like a co-op however tend to be more permanent in nature. Consortiums also function like a cluster, where efficiencies in manpower are one driving force. In fact, with consortiums entire functional departments or the majority thereof are replaced by the consortium. In marketing, individual properties as well as chains may opt to have their reservations, group sales, trade show representation, etc., performed by paying a fee or proportionate amount to the consortium. The advantages include reduced overhead, reduced capital expenditures and equipment, and most likely much greater operating efficiencies. These benefits apply to independent properties, groups of properties and to chains. Other benefits may include longer operating hours, substantially more reach (distribution), better training, and customer service.

The downsides for marketing related consortiums include third party interface with customers, not receiving fair treatment (especially smaller participating properties), and the need to feed, nourish and monitor the consortium. Strong oversight is needed with respect to rates/revenue generation, fees charged, and fair share issues. More pitfalls may include the stability of the consortium itself from both a financial and managerial perspective. In the case of a marketing consortium you are trusting a third party with an essential functional area of your business and with handling your up sell, down sell and customer interface at the point of purchase.

Consortiums may make considerable economic sense. In fact, they may be better, more professional and more efficient than either the independents or small chain’s own function in this area. An independent management company and flag (chain’s) management company may see the same advantages, however, the owner may view the arrangement as less competitive or even inadequate. Would you as an owner want your management company to "farm out" your customer interface and reservations activities? Obviously, not every consortium will live up to expectations. This is especially dangerous for a management company if the property is under performing. It is dangerous for a number of reasons. First, you do not have direct control. Second, it will likely take more time to fix than if it were your own departmental function. Third, the sense of urgency and motivational push is not as great. Fourth, if you decide to switch consortiums or go back and perform the function(s) yourself, more time and investment will be required. One must consider how much time or patience can be expected on the part of owners. If not enough, it is most likely the management contract will be terminated. And, in severe cases, independent hotels might be cash short.

A similar set of benefits and pitfalls exist in other types of consortiums. For example, in the purchasing area the economies of scale and efficiencies may be exceptionally favorable. On the other hand, if your goods do not arrive on time or at all you will really have to scramble to operate. Also, you may sacrifice product customization for quantity and efficiencies, not to mention lack of choice or dominance by major participants if you are the small player. Figure 2 summarizes the level of potential risks and the level of perceived benefits for consortiums. 
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Clusters: 

A small or large group of properties may for a cluster in any given market or state. The cluster may be made up of single brand or multiple brands of the same parent company. These properties may be owned, joint-ventures, managed or franchised. Clusters may be formed in a variety of functional areas (i.e., marketing, security, housekeeping, etc.). The common thread is usually the perceived efficiencies and effectiveness of the cluster versus one property. For purposes of this article, we are focusing on marketing clusters.

Cluster marketing is when multiple lodging facilities in a given or like market share their group business leads and inquiries (and sometimes personnel). The decision as to which lodging facility receives a piece of group business may be made by a superimposed "cluster market sales director." This individual is an employee of the chain management company or independent management company.

Let’s look closer at how cluster marketing may be organized and function. For this purpose, we will simply designate the "management company" as the XYZ management company. The XYZ management company may have no equity in any of the managed properties or it may hold a percentage equity in one or more properties and even ownership of another in the same "cluster market." The management company may have contracts with several different flag (brands) properties within the common geographical market. In some situations franchise properties may also be included or participate. These properties may not all be of the same quality levels but they all are under managerial direction of the XYZ management company. The XYZ Company believes that these properties can best be served with an organized "cluster concept" sales and marketing effort. Each property may have its own sales director and various sub-sales managers, but in essence all are part of the XYZ management company. In the simplest form of example, the XYZ management company establishes an unofficial "super sales director" who has responsibility for making sure that business (group meetings, etc.) is "correctly allocated" to the various properties. Thus, the various property sales directors are required to share their leads, their near closings (about to be signed to a contract) business, rate quotes etc., with the super sales directors or cluster leader. The "etc." may include rates, forecasts, and REVPAR projections. This is usually handled through instant access to the computerized data from each cluster property. Weekly meetings are utilized to share more data, provide updates, and often to "direct" business to specific properties. For example, an individual property may have a "hot lead" and be about to "close" on the group when the super sales director may strongly suggest or even direct the specific business to another of the XYZ management companies properties or cluster members in the market that is deemed "more appropriate." Moreover, an individual property may be told not to call upon a specific prospect because this prospect is more appropriate to another property in the cluster. In some instances, the benefits of cluster marketing may involve cost savings by actually combining select sales functions between properties or consolidating functions at a "mother’ or the largest property to handle all others. Obviously, there can be numerous conceptual variations driven by cost efficiencies, elimination of duplicate functions, and overhead reductions. In some cases, the "super sales manager" is a "triad" or small office of three or revenue committee that makes the decisions. Irrespective of the organizational concept, the employees are usually all XYZ management company or the cluster dominated by the XYZ management company.

In an ideal world and assuming the "super sales director" is perceptive and objective there are likely to be a number of substantial benefits to the cluster marketing concept. We will discuss these under the owners and management company’s perspectives.

There are many common goals and objectives shared by the owner of a lodging facility and the company selected to manage that facility. Perhaps most important of all is the maximization of financial performance of the owner’s asset under the care of the management company. The owner seeks the best return of investment possible and the management company seeks the payment of maximum fees (base and incentive). However, there are occasions such as in times of industry downturns where the focus changes to retention of the asset and of the management contracts. Under this scenario there are pressures to both increase revenue and cash flow as well as to control and reduce expenses and costs. Efficiencies are demanded and often capital improvements deferred. Survival for both the owner and management company becomes preeminent. It is important to understand an owner’s perspective not only changes or is influenced by the lodging industry’s financial and economic cycles, but also can be influenced by numerous other business and/or personal factors.

Owners Perspective:

Cluster marketing and other like cooperative concepts should be of primary focus for any owner for the simple reason it can have a dramatic impact on the performance and value of the lodging asset. When times are good the focus is usually on maximizing revenue and/or enhancing the value of the lodging asset through capital improvements. When times are bad, the focus shifts to minimizing cost. In this later circumstance an owner may look at cluster marketing (as delineated by the management company) as a potential savior. Based on our interviews of both owners and executives in major flag/chain management companies, we identified some of the major pros perceived to support the cluster concept. These pros provide the owner the positive rationale for cluster participation. They are:

  • reduced overhead expenses for sales personnel
  • increased lead and group sales generation
  • potential movement of business to the owner’s property
  • potential increased REVPAR by "matching" (higher rated) groups to the owner’s property
  • larger pool of business (potential)
  • "super sales director" expertise and contacts
Bottom line to the owner is cluster marketing has the potential to reduce costs and generate more business and/or a better mix of business. Sounds like a win-win scenario on the surface and it may well be a winner.

However, the owner’s perspective should take into consideration a few more things. For example, how many other lodging facilities will be part of the cluster and where will the owner’s property fall in terms of priority? What controls are in place to assure a fair allocation of business to the owner’s property? Why would the management company place the owner’s property as a top priority if the management has no financial interest in the asset or if the management company has substantially more equity in other cluster market facilities? Who will monitor the efforts and how will fairness be achieved?

The answer to many of these questions may well satisfy the owner. Also, the cost savings and potential for incremental revenue may outweigh the concerns. Or, the owner may conclude there are potentially too many risks, and unknowns to go along with the concept. Some simple questions the owner should ask the management company desirous of utilizing cluster marketing include, but are not limited to:

  • Will complete access to all data and decisions be readily available to the owner or owner’s representative?
  • Will there be true cost savings or simply a reallocation of personnel and resources to help all cluster properties with no net savings to the owner’s property?
  • What fail safe(s) will be put in place to guarantee business (and leads) will not be disproportionately shifted to other properties in which the management company has greater equity?
  • Will the owner have input or say on the selection and appointment of the "super sales director" as well as the workings of the marketing cluster?
  • What happens to leads, future business, personnel, computer programs, etc., should the XYZ company management contract be terminated?
  • What impact will being part of a cluster marketing group of properties have on the image and resultant real estate value of the owner’s asset? How will the owner’s lodging facility be positioned (rate, facility, service, etc.) in relationship to other cluster lodging facilities?
  • Is the management company (especially chain management company) willing to share all sales data and performance on an equitable basis for all properties in the cluster (including the chain management company’s owned properties)? Are other owners of other properties willing to also share the data?
We have presented many of the potential pros and cons from the owner’s perspective with the understanding that ultimately it comes down to both a business decision which involves a considerable amount of trust, ethics, and potential legal implications. In the next section of this article we will focus on the management company’s perspective.

Management Perspective:

Independent and flag (chain) hotel management companies perspectives on cluster marketing are largely premised upon two overriding factors. First, the economies of scale favor a group of hotels from the same competitive set and/or market when employing data base marketing as well as a combined group sales effort. Second, the costs incurred in developing and/or acquiring a qualified list of prospective customers (particularly groups) can be spread overall members of the cluster. Also, research efforts may be combined, sales blitzes coordinated, and the general sales effort may be partially consolidated. The net result is substantial savings. More positive benefits include helping properties to avoid oversells and guest walking and a better match of customer needs to specific properties and resultant customer satisfaction. Other benefits of a cluster include the synergy of common training programs and sales procedures. The benefits of a cluster for an independent or flag (chain) management company are very strong on their own merits.

However, while the initial perspective on cluster marketing is positive and sounds good, there are a number of pitfalls and concerns. First, the cluster will need to be fair and balanced with respect allocating leads and/or booking business. This means the cluster leader and all related systems must focus on equal treatment for each participant. This can create a natural conflict for the cluster leader as well as others. It raises the question of who or which property receives a profitable piece of business. Assume three properties can all accommodate a highly profitable group with respect to space, availability and rate. The lead/call comes into the "cluster leader" who happens to be the director of sales for a flag/chain owned and managed property. The other properties in the cluster that can handle the business include a chain management contract property and a franchise. Which property receives the business? What mechanism is in place to assure all properties are aware of and have an equal chance to receive the business?

Another pitfall is group business being filtered through a cluster can be a negative experience. In this instance, let’s say the only property available for a major customer of the hotels in the cluster is a franchise that also happens to be the lowest ranking in service. The company/group is locked into the franchise property and has a totally unsatisfactory experience. The unsatisfactory experience with the brand (franchise) leads to negative word of mouth about the brand and market. This poor group/guest experience may have a negative effect on the entire cluster and/or brand.

Perhaps the two greatest cautions voiced about cluster marketing relate to the issues surrounding control and pricing. With respect to control, it is simply difficult to give control of your group revenue and large portion of your revenue management to someone else. In the case of a management contract property, this may be particularly sensitive to the owner(s), especially if the hotel is not performing well. With respect to pricing, the cluster concept must be structured and monitored very carefully to assure no laws are broken.

Another focal point often overlooked in cluster marketing is the loyalty, motivation, and incentives related to individual sales personnel. Is one penalized or rewarded for referring business to another property? Is the employee loyal to the cluster, or property to which they were assigned? Many other managerial questions and considerations need to be addressed before joining a cluster or forming a cluster. Figure 3 summarizes the potential level of risk and the level of perceived benefits related to clusters. 
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Conclusion:

During the process of working on this article, we spoke with the management of managed hotels (both independent management company and flag/chain managed hotels) and corporate level management.8 During these interviews, we found a wide array of opinions, practices and knowledge with respect to the three focal areas of this article. In particular, the most awareness appeared to be of co-ops and purchasing consortiums, and the least awareness and knowledge of cluster marketing. Most respondents we spoke with were cautious and preferred anonymity. In fact, one executive of a major chain stated he "preferred not to discuss the concept for possible legal reasons."

There were some common threads among all groups interviewed. First, most all understood the need and economies of scale associated with all three concepts. Most saw no major problems with co-ops consortium participation and cluster marketing with respect to flag/chain owned properties. And, most felt all three concepts enjoyed much greater participation and popularity since the downturn at the end of 2001. Second, most felt there were potential problems with cluster marketing if the participants were a group of competitive properties carrying different flags with different owners being managed by an independent or chain management company. The third often mentioned point had to do with the issue of control. Most expressed concern about not having control, especially at the property level. Even at the corporate level an executive stated: "under no circumstances would we participate in any way in a cluster program in which we did not have total control."

From the interview process and related research we were able to clearly see that most understood and favored co-ops in the marketing area with other travel/hospitality industry partners. A little over half stated they do and/or would participate in a consortium related to purchasing. Most all felt participation in a marketing/reservations consortium was okay if it produced business, but preferred to view this participation as an additional marketing effort and not as a functional substitute or replacement. And, finally, of those who were aware of cluster marketing, most understood the economies and benefits, but also saw substantially more problems and risks in cluster participation than in a co-op or consortium.

Endnotes

  1. Ronald Nykiel, Marketing in the Hospitality Industry, 4th Edition (MI: AH&LA Educational Institute, 2003), p.112.
  2. Ibid.
  3. Ronald Nykiel, Hospitality Management Strategies (New Jersey: Prentice Hall, 2004), p. 440.
  4. Ibid p. 278.
  5. Hospitality Management Strategies p. 440.
  6. "Cluster Spotlights," Brands@ Hilton, Vol. 2 (Summer 2004), p. 18.
  7. "Starwood Atlanta Cluster Converts 312% More Business With Cross-Property Lead Sharing Solution," Hotel Online Special Report, June 14, 2004, http://hotel-online.com/News/PR2004_2nd/June04_ClusterLeads.html (accessed August 9, 2004).
  8. Note: The authors conducted interviews at the corporate level and at the individual brand level with Hilton, Hyatt, Marriott and Starwood during the last few months of 2003 and the first half of 2004.

About the Authors

Dr. Ronald Nykiel has over thirty years of industry experience. He has served as Director of Strategic and Operational Planning for Marriott, and as a senior office of Holiday Inns Worldwide, Ramada International, and Nestle’s Stouffer Hotel Company. Dr. Nykiel has served on the Boards of industry associations, corporations, and universities. He has consulted with two United States Presidential Commissions, various federal and state agencies, and numerous corporations. Dr. Nykiel has authored twelve books and over 200 articles and proprietary studies. He has lectured at the Harvard Graduate School of Business and numerous other universities and colleges. He is a Certified Hotel Administrator (CHA) and Certified Hospitality Educator (CHE). Dr. Nykiel is currently the Conrad N. Hilton Distinguished Chair at the University of Houston, Chairman of the Hospitality Industry Hall of Honor and publisher of the Hospitality Business Review.

James C. Makens is actively involved in the travel industry. He has conducted executive programs and marketing seminars at major lodging chains, associations and tourism ministries. He co-authored The Travel Industry and Hotel Sales and Marketing Planbook, the leading text Marketing for Hospitality and Tourism, and has written extensively in leading academic journals. Dr. Makens has served as Associate Dean in the School of Travel Industry Management of the University of Hawaii and as Associate Dean of INCAE, an affiliate of Harvard Business School in Latin America. He was a faculty member of Babcock Graduate School of Management at Wake Forest University for 21 years. He now serves as an industry consultant and visiting professor at the University of Dallas and Arizona State University-East.

 
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Contact:
Dr. Ronald Nykiel
Conrad N. Hilton College of
Hotel and Restaurant Management
Phone: (713) 743-2432
email: RNykiel@uh.edu
Also See: Starwood Atlanta Cluster Converts 312% More Business With Cross-Property Lead Sharing Solution; Achieves 42% Revenue Gain, 18-Month ROI on Technology Investment / June 2004
Theraldson Development Planning Three of Five Motels at a Rancho Cucamonga, California 'Cluster' / August 2003
Bass Hotels & Resorts Creates Hotel Clusters for Cross Selling Utilizing Delphi MPE / May 2000


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