By David Lund
You cannot go a day online in the hotel community without seeing a ton of OTA related discussion. Hoteliers are like scared kittens when it comes to how they have been treated by the evil empire that the “On-Line Travel Agencies” has created. There is no doubt that the OTAs have dramatically changed the landscape in the last 20 years since Expedia bounced into the world under the strict parenting of Microsoft.
In this piece, I want to offer a different perspective—one based on a different view of the OTA revenue creation and resulting costs. I also want to look at and analyze some black and white revenue and profit facts from industry leading organizations that I researched for this article. Hoteliers complain that the OTAs are greedy and they take too much commission. They especially feel the pinch when the commission hits their room P&L statement in the form of a commission. With the merchant model all but on life support, hotels in most cases need to record the gross revenue paid by the guest to the OTA on their income statement. In turn, the hotel needs to pay their room reservation commission expense which is recorded in the rooms department as an expense. On top of this, the hotel needs to pay the credit card commissions and all the other brand-related fees that ramp up on total room revenue or gross hotel revenue, etc., as dictated by the franchise or management agreement.
For many hotel owners and operators, this is a bitter pill to swallow. But why so bitter and hard to swallow?
My perspective is different
The hotel just got a room night or several and, in exchange, they pay a fee—the dreaded commission—and additional ancillary fees. I believe we need to be fair and look at the transaction just made. In the old days, hoteliers were happy as could be to pay the travel agency commissions to the tune of 10 percent of room revenue. This was largely a manual process with a fax or phone call to the reservations office. No one ever complained about this other than perhaps the person who had to manage all those pesky $12 payments and the reams of TA commission inquiries the hotel received and had to research.
The comparison to today is hotels allow distribution channels to manage and accept reservations, payments are electronically processed, and they pay roughly double the commission, to the tune of approximately 20 percent. They have, in effect, traded the additional commission—the plus 10 percent—for additional distribution and shear advertising horsepower that the OTA delivers. We can argue all day about the amounts, the pluses and the minuses and how much more we are paying in commission expense. That’s not my point or the intention of this piece, so stay with me.
Rather than do that let’s take a radical approach and disrupt the jailer. Much like the story of the prisoner who needs to pull rather than push his cell door to escape, hoteliers are held prisoner by the expenses they see pumping through their P&L. They are prisoners simply because they look at the cell door and how it works the wrong way.
Let’s look at another aspect of the business to get a clue for how to operate the cell door—to look at it through a different lens: banquets. When a banquet customer comes knocking, we don’t try to kick him in the knee because we will have to record the “cost of sales” from the event she just proposed for the hotel. We welcome them in and service their needs all the while knowing we just added a 20-30 percent food and beverage cost of sales to our operating statement, plus the direct payroll and other expenses. So why then do we scoff at the OTA who brings us business and in turn gets a fee? I say it is because we simply look at it, “the commission,” differently.
We want our cake (the room revenue) and we detest the commission. But we can’t have one without the other and maximize room revenue capture in today’s world. We would like all our business to be commission free but that is not the way the game is played. We all know that to maximize RevPAR we need more rooms distribution horsepower than we can ever create by ourselves.
Let’s look at this scenario with some fresh eyes
What if we looked at the OTA transaction and the resulting commission as a cost of sales? In F&B the whole profitability deal is built on volume. Get the F&B machine pumping at a good rate and we are profitable. But wait a minute. For every dollar we let in the front door we automatically need to recognize the cost of sales (20 to 30 percent). We never have a problem with this so why is the commission to the OTA any different? We know without the volume cranked way up high in rooms operation we will not hit the desired profitability.
I say it is simply because we are pushing rather than pulling. Bring me another 1,000 room nights this month through OTA that I cannot and will never have the distribution to generate and let’s both have a good look at the financial result. We all know there are many days and months in the year when we cannot fill rooms with only direct sales tactics and brand efforts. The way we can look at the cell door most effectively is to not get hung up on the percentages.
Financial facts boiled down into profit dollars
I am going to use data from the 10-year period 2006-2015. According to CBRE hotel rooms department, profit went from a high in 2006 of just over 76 percent to a figure of just under 75 percent in 2015—down 1.25 percent. This, on one hand, is alarming. But I believe this is where we are pushing rather than pulling.
According to a Cushman and Wakefield report, RevPAR in the US has increased over 35 percent in the same time frame as the falling rooms department margin. This room revenue growth is on top of the additional supply growth of more than a half million rooms. Who in their right mind would not like that deal? The adage that we do not take percentages to the bank is our industry “pushing the rooms profit percentage myth” and it is completely misleading. Profit margins are down but the growth on top is a trade anyone in their right mind would jump at. We have enjoyed record growth in RevPAR in the last decade which has been in no small part because of the OTAs investment in computing and marketing that our industry, if left to its own devices, would never have accomplished.
I cannot prove the statement I just made about the revenue impact the OTAs have had, but think about it for a moment and imagine the hotel world without the OTAs in the last decade. A decade led by brands continuing to exit the ownership piece. A decade where hotel companies continue their quest to become management companies. Not a decade of bold hotel innovation and distribution investment that was led by who? That is the pedigree of hotels and why OTAs emerged because there was a need and an opportunity not being delivered by the hotel industry because the investment fundamentals are always backward. OTAs made the investment and they created a huge hotel industry windfall. Thank you very much.
Now for some facts, I can prove
According to my math, using a RevPAR of $57 dollars in 2006 and $78 dollars in 2015, that is a 35 percent increase and when I apply that to the 5 million guest rooms (AHLA 2015) in the US I get a whopping $38 billion increase in room revenue. Let’s back out the additional supply over the same period (500,000) and I still get an additional $35 billion in room revenue. Apply that figure to the 1.25 percent decrease in rooms profit margin, I get a $26 billion increase in rooms profit over the same period. When it comes to rooms flow thru on that additional income, it is just north of 74 percent. I ask again, who in their right mind would not take that deal? Especially when someone else (AKA the OTA) is laying out the capital expenditures to create the RevPAR universe.
My question after all of this is: How much of this increased RevPAR in the last 10 years is due to the OTA effect? And what effect has that had on hotel profits that left to our own devices would not have materialized without the OTAs? That answer is beyond my calculator, but I know a very good portion is due to their continuous innovation and our industry’s use of their service. I put my stake in the ground and say there is no way our industry—without the OTAs—could have had the same proliferation of global RevPAR impact, travel growth, and sheer distribution might. It is time hotels stop their bellyaching.