Channels in Change ~~~

1. Channels in Change~~~ Distribution channel management: lodging’s next inflection point?

2. “In a time of rapid change distributors and distribution channels tend to change faster than anything else.”Peter Drucker, Management Challenges for the 21st Century

3. … a time of rapid change? • Consolidation • Brand proliferation • Globalization • Disintermediation

4. Disclaimer:This is not another talk about The Internet

5. Traditional Distribution Channels calls to Travel Agency @ 10% of rate @ $3 - $5 Global Distr. System Hotel Customer Switch Co. @ $2 - $3 Chain Res System @ $6 to $10/call. ( in Mktng. Fee ) #800 to hotel @ $4 to $8

6. Traditional Distribution Channels • Have grown expensive

7. The costs of acquiring a customer have been the fastest rising line item in US hotels over the last decade • cost of acquiring a customer: • Reservation expense + • Commissions + • Franchise and/or marketing fees • Overall costs of acquiring customers have grown at 5% crg since ‘90

8. Of the costs of acquiring a customer, reservations, fees, and commissions have risen fastest • US$ 6.06/occ. rm, ’90 US$ 10.47, ’99 • over 6% crg • = US$ 13.61 per stay (not incl. airline miles expense) • (base: US full service hotels; derived from PKF Trends reports, 1991 – 1999)

9. Traditional Distribution Channels • have grown expensive • and • 2. are now undergoing chaotic transformations

10. Let’s take a look … calls to Travel Agency @ 10% of rate @ $3 - $5 Global Distr. System Hotel Customer Switch Co. @ $2 - $3 Chain Res System @ $6 to $10/call. ( in Mktng. Fee ) #800 to hotel @ $4 to $8

11. Travel agencies have already reached their inflection point • Airline commission caps continue to squeeze revenues • In ’99, population of US travel agencies contracted • Business travel agencies have been consolidating, rebating commissions, & charging clients transaction fees • Consumer agencies are shifting from business to leisure travel • Hotels and resorts still commissioning @ 10% • Cruise lines @ 14% plus overrides • Internet agencies cutting into both leisure and commercial business • All survivors are moving to fee-for-services

12. On-line agencies are reaching their own inflection point … • Expedia and Travelocity have evolved from advertising media to bookers for commissions, to bookers for fees, and now to … • Consolidators and packagers • e.g., Expedia, offering 55,000 hotels, now has an inventory of over 5,000 trips, from none in early ‘00 • Again, forced by the airlines … • Commission caps • Airline web site ticketing, w/ price incentives • Orbitz

13. On-line agencies (w/o brick & mortar) fast growing and profitable • Expedia, Travelocity, and Priceline among the five most visited sites ’01 ytd. • The three among only four profitable publicly traded web operations, 6 mos. ytd.

14. Agency ownership and integration • Carlson Travel (nee’ AMF & Wagon Lits) owned by hospitality supplier Carlson Co. • Accor owns travel agencies and tour operators • Travelocity a subsidiary of GDS Sabre (AA) • AOL Avant a joint venture with Sol Melia • Expedia being purchased by cable programmer USA Networks • Owns Ticketmaster, Hotelres, Citysearch • Creating an integrated e-commerce travel vendor

15. Global Distribution Systems: also in transition: Sabre • Owns Travelocity – competing with Sabre users • Strategy is to polarize – service surviving agencies while pioneering disintermediation • GetThere – on line B2B corporate travel site • VirtuallyThere – consumer personalized trip planning and facilitating • Travelocity concierge services • Strategy to “own” the consumer • Foresees on-line services growing to 28% of bookings in ’04 from 6% in ‘99

16. Global Distribution Systems: also in transition • Galileo – now owned by Cendant • Being integrated into a comprehensive franchise agency and travel supplier company • WorldSpan – (Delta, Northwest) ? • Amadeus – (Lufthansa, Air France, Iberia) ?

17. Global Distribution Systems: also in transition • GDS’s are attractive … • Powerful • the backbones of any intermediary and direct system for inventory control, pricing, booking and confirming • Profitable • Sabre fees per trip = US$ 11.55 • Operating profit = US$ 3.04 per trip • … so long as single supplier direct sites do not capture the major share of traveler commerce

18. Traditional Distribution Channels calls to Travel Agency @ 10% of rate @ $3 - $5 Global Distr. System Hotel Customer Switch Co. @ $2 - $3 Chain Res System @ $6 to $10/call. ( in Mktng. Fee ) #800 to hotel @ $4 to $8

19. The Switch – key link between hotels and GDS’s • Only two • WhizCom – car rental focus, then hotels • Acquired by Cendant in ’99 • Now integrating with Galileo and with Cendant’s nine hotel brands, RCI vacation exchange, Avis rental car, and travel agencies • Thisco (The Hotel Independent Switch Co.) • Once non-profit, then for-profit, now publicly traded as Pegasus Solutions, Inc.

20. Pegasus – disintermediatoror re-intermediator – or what? • All • Travelweb – 4th largest consumer on-line travel site • Provides property res systems – voice and electronic • New ASP of PMS and RMS (HI) • Switch for Orbitz, Sabre, Apollo, WorldSpan, • and for on-lines like Expedia, Priceline… • Central commission processor for 1000’s of hotels • Divesting of representation services to focus on information and systems support? Summit gone; Utell? • They have a fist on the pulse of the industry!

21. And new distribution services that focus only on hotels • E.g., WorldRes and Inntopia, booking engines for those who need a res function on their property web site • E.g., Meeting planning RFP forums • ASP’s that provide both res and pms systems via the web

22. Hotel central reservation systems • Multi-brand consolidations of call centers • And central revenue mgmt. • Still carrying most reservation traffic • Account for 20% - 30% of res feed to typical chain property • Radissons usually enjoy 10% pts higher by virtue of Carlson Travel referrals • Contract rate clients use heavily • Chains’ on-line sites still < 3% of bookings • Look-to-book ratio is falling, i.e., more bookings • Independents enjoy higher % feed • B&B’s get as much as 30% through own web sites, in form of inquiries and requests

23. Lastly, the property res office is in rapid transition … • Skills and talents have been evolving • From reservation taking and confirming … • to inventory controlling and forecasting… • to selling … • to managing revenue. • Multiple channels must be synchronized • More inventory “buckets” increase complexity • Price consistency is confounded • Traditional tour & travel marketing obsolete

24. In sum, no other function in the hotel business is undergoing such rapid change and turmoil as is the distribution and reservation activity

25. So, what are the implications … • For the industry? • For property management teams? • For H&RA education?

26. What might be implications for the hotel industry? “ New distribution channels always do change what they distribute.” Peter Drucker Management Challenges for the 21st Century

27. What might be implications for the hotel industry? • Vertically integrated suppliers: emergence of travel management companies and sellers of “trips”? • Radisson, Cendent, Disney, Sol Melia, Accor • Vertically integrated distributors: shift to push marketing mix? • Leveled playing field for independents? • Centralized revenue management in name of cost control? • Which hotel and cruise companies will be first to cap commissions? • Tendency to commoditize hotels? • Who will own the consumer data?

28. What possible implications for individual hotel management teams? • Might net discounted prices account for larger share of transactions? • Will traditional tour & travel marketing have to be replaced by alliance marketing with channels? • Might promotional money displace consumer advertising in the marketing mix? • Might a “channel manager” join Exec Committee? • Might a new distribution paradigm emerge?

29. Current wisdom: Manage by ADR Seek price consistency Give all access to all inventory buckets Keep all channels open as long as possible Move from allocations to single image inventory New paradigm? Manage by contribution margins Price channels differentially Starve some channels and nourish others Close channels according to production and margins Cap commissions Use ASP’s to address complexity w/o direct access A new distribution paradigm?

30. What possible implications for H&RA educators? • Of top 12 US H&RA schools and programs, only two offer courses in channels of distribution • What kind of education needs to be added to H&RA? • What can be done to move metrics from ADR to contribution margin? • What kind of career development pathways can prepare managers, including GM’s, for dealing with channels and margin management?

31. Channels in Change …

32. Channels in Change … of … a force now transforming travel and hospitality even as we watch and ponder its implications