Hospitality Distribution Dissected - Dr. Bill Carroll

Hospitality Distribution Dissected
Introduction
On the surface, year-to-year changes in the percent of revenue booked through
traditional hospitality distribution channels appear to be stable. This belies seismic
changes occurring among the major players in distribution - chains, online travel
agencies, metasearch sites, travel agencies, travel management companies, search
engines, tour operators. social media sites and new distribution related startups. We
need an alternate way to view the hospitality distribution system.

Reservation Revenue in the Channels of Distribution
For the past few years, the distribution of revenues among major players, reported by
Phocuswright, has remained relatively constant. Though recently, there has been an
uptick in the distribution percentage occurring through online travel agencies and
metasearch sites (see Figure 1). Similar trends are underway in the rest of the world.

There are several reasons for the uptick in OTA channel booked revenue. These
include their relative marketing and financial strength, as well as consolidation of
players in these channels, the demographic characteristics of hotel bookers, and loyalty
programs of OTAs.1

A more recent trend is growing cooperation between OTAs and several major hotel
chains relative to their respective roles in distribution. Red Lion agreed to allow Expedia
access to its loyalty program members'-only rates and to auto-enroll Expedia and
Hotels.com customers in their chain's Hello Rewards loyalty program. Marriott engaged
Expedia to power, via a white label application, its flight and hotel vacation packages
for Vacations by Marriott2 More telling is an associated quote for this agreement from
Marriott CEO Arne Sorenson:

"We believe there is considerable untapped opportunity between our two companies to
drive value to hotel owners and travelers alike …. We are thrilled to launch this new
product with Expedia's technology, and to explore new areas of partnership beyond our
existing distribution relationship."

These arrangements between distribution monoliths provide insight to potential
magnitude and direction of changes in hospitality distribution.

Examining Hospitality Distribution
Some current lodging publications still define distribution channels more in terms
of reservations plumbing instead of a dynamic marketing, communications, reservations
and service sales execution and satisfaction system. That definition misses the many
ways that the system supplies consumers with lodging service providers. 3 While
accurate, the definition over-simplifies the complexity of organizational activities within
these channels. As illustrated in Figure 2, hospitality distribution channels serve three
purposes: (1) communicationbetween consumers, intermediaries and suppliers;
(2) reservation(s) of services from intermediaries and suppliers; and (3) service
fulfillment execution by suppliers for consumers. The latter, while not an explicit channel
distribution activity (It's more of a hospitality supply operation), has become an integral
part of distribution.

Figure 2

Consumer expectations about operational service execution are formed in distribution
channels. Hotels must or should meet or exceed those expectations with operational
service delivery. The problem (or opportunity) for operational service providers is that
other players in the distribution channels influence expectations and make, in some
cases, reservations for their delivery. In large part, the effectiveness of hospitality
service providers to meet or exceed consumer expectations set by themselves and
intermediaries is determined by the control or relationship between them and
intermediaries.

Viewed this way, it is not surprising that some of the changes occurring between online
travel agencies like Expedia and major chains like Red Lion and Marriott involve an
increased sharing of information about guests and the use of lower cost (and more
efficient) technology. From the perspective of independent properties, the nature of
Expedia's Partner Central dashboardprovides insight to the direction that Expedia
appears to be going with the distribution services they may provide. Expedia's focus on
service provision to hotels, primarily independents, was seen in their acquisition of
Venere, a hotel reservation system, in 2008 and by the services provided in
their Affiliate Network. These demonstrate the potential direction for OTAs within the
communication, reservation and fulfillment areas of distribution.

Seismic Changes in Distribution

When distribution is dissected, we can better understand some of the seismic
undercurrents of change. At the consumer choice end of the distribution channel are a
large array of players. Some are sole communication entities like Pinterest (for now);
some are communication and reservations providers like Expedia, Priceline and
Facebook (through Bookassist); and some are communication, reservations and service
providers like traditional hotel chains. At the service fulfillment end are traditional hotel
properties served by chains like Marriott, Hilton and Accor. Increasingly, non-chain
related real estate lodging assets - rooms to buildings to everything in between - are
part of the sharing economy of private accommodations.4 These are being served by
distribution firms like Airbnb. Even some hotel chains like Accor are supporting
distribution for this market.

Several firms like Marriott and Hyatt already provide distribution services to independent
properties through their Autograph and Unbound Collections, respectively. More
recently, Accor purchased Fastbooking (2015) and Availpro(2016) to create a
European-based, digital services support organization to provide decision making for
channel management, among other things

More interestingly, Accor has been making investments in the sharing-economy lodging
space with the acquisition of Travel Keys, a U.S. based resort broker. (NOTE: Expected
to close 2017:Q2.) Together, with its 2016 acquisition of Onefinestay, plus investments
in Squarebreak and Oasis, Accor intends to use these to support the distribution needs
of the luxury private home rental market. Not surprisingly, an accompanying statement
by Accor's CEO Sebastien Bazin highlighted, in his words. the "…need for more
traditional hotel companies to expand into the alternative accommodations space."

It is worth noting that Marriott has been in this area for many years, though not in the
same fashion as Accor, through its Marriott Vacation Club.

All of this suggests that seismic changes are occurring at the boundaries between the
various components of hospitality distribution - communication, reservation and
fulfillment. At the consumer choice end, major players like Google, TripAdvisor and
Facebook are moving closer to and over the boundary between communication and
reservation. Google did so in 2015 with its Hotel Ads Commission program.TripAdvisor
crossed the boundary in 2014 when it introduced Instant Booking.5 Facebook is doing it
via Bookassist.

Large European tour wholesalers historically provided communications, reservations
and fulfillment services from the outset. Online travel agencies provided communication
and reservations services from the start. When and how (not if) they cross the boundary
line between reservations and service fulfillment is unclear.

It is getting increasingly hard to differentiate between the services provided by a
traditional hotel chain for its member property owners and an OTA providing them for
independent property owners. Acquisitions by the major OTAs like Priceline's Buuteeq,
a digital marketing platform for hotels, and Hotel Ninjas, a provider of hotel-

management software in 2014, suggest a potential change in business orientation. A
more telling directional change is suggested in Expedia's Partner Central dashboard
plus its hospitality services management acquisitions.

Even the boundary lines between communications, reservations and fulfillment are
becoming less clear for the private accommodations market. Expedia acquired
HomeAway in 2016. Airbnb provides a suite of services for individual property owners,
acting like a quasi-chain with communication, reservation and fulfillment services. Start-
ups like Sonder are providing all three functions, including the purchase and lease-back
of hospitality assets for owners.

The meaning of a reservation in hospitality distribution channels is also changing. A
reservation is ultimately an option to buy a hospitality service at some future date with a
set of associated conditions and consumer expectations. The players in the distribution
channel, plus some new entrants, are treating reservations as separate marketable
items. For example, chains, OTAs and properties implicitly include reservation prices in
their conditions - free cancellation, graduated penalties for cancellation and/or
rebooking, or no cancellation.

Consumers securing a reservation (or option) are increasingly able to trade it (i.e.,
cancel and rebook options) for comparable or more value to them, intermediaries and/or
the service provider reservations. Entire markets are forming around reservations in the
distribution channel; for example,Cancelon and Roomer, where even non-cancellable
rooms (by hotels) can be bought and sold.

So, What Does This All Mean?
To understand the nature and direction of hospitality distribution, focus more on the
relationships, financial or otherwise, between end consumers and hospitality asset
owners than what types of firms execute hotel bookings. Using astrophysics as a
metaphor, the distribution system is a constellation of firms (and/or economic
arrangements) positioned between two gravitational poles (see Figure 3). One pole is
hospitality asset owners focused (or oriented) on how well the system and its players,
effectively, individually and collectively, deliver sustained, profitable returns and meet
and/or exceed consumer expectations. The other pole is guests, individually and in
groups, who are oriented to how well the distribution constellation matches or exceeds
their needs and wants relative to the prices they pay. This is related to both reservations
and fulfillmentservices.

Figure 3

Between the two gravitational poles is a constellation of firms that are in a constant
state of dynamic change. Larger existing firms - chains, OTAs, meta-search, search
engines and others - are constantly changing their form, structure and orbits of
economic influence with one another and the gravitational poles. Smaller start-ups
enter, change and disappear within the distribution constellation. These change the
nature of the distribution system; are oriented toward one gravitational pole or the other;
and typically find themselves in the financial orbits (through agreements, partnerships or
ownership) with the larger surviving and evolving entities.

Viewed this way, the basis of understanding the current and future structure of
hospitality distribution should not be, "Where was the reservation booked?" Rather, the
questions should be: (1) "where do consumers go to secure reservations and/or
fulfillment that effectively meets their wants and needs?" and (2) "where do owners go
to get sustained optimized profitability from distribution?" Comparing the answers to the
last two questions might provide interesting insights of changes in the dynamic
constellation of hospitality distribution, including the dynamically changing roles of
OTAs, meta-search and chains.