Excerpt from Tnooz
While much media attention has focused on the issue of OTA cost, hotel owners have also seen franchise fees explode over the past decade, threatening profitability and potentially driving significant industry evolution.
Hotel chains have embarked on a series of extravagant marketing campaigns over the past 18 months, seemingly designed to support their direct booking and loyalty growth initiatives. Complete with extensive online advertising campaigns and flashy television ads, anyone interested in travel could not avoid being bombarded by repeated messages to visit brand websites and ‘book direct’!
Hilton for example, rolled out a “Stop Clicking Around” campaign in February of 2016 and touted it as their largest ever.
Complete with the Rolling Stones hit, “Satisfaction,” Hilton increased its media spend significantly in 2016, including a $25m television campaign. This leads to the question, where do hotel brands, with fewer and fewer owned properties, get the money to run such expensive television and media campaigns?
The majority of global hotel chains, including Hilton and Marriott, have been very vocal about their asset light strategies, making clear their business model is at its most profitable when they don’t own the bricks and mortar of the hotels they flag.
In effect these brands are metamorphosing into single brand OTAs driving business to their members. And by swooping up independents and aggressively growing the percentage of US properties that are branded, these two chains now ‘flag’ around a quarter of all bookable hotel rooms in the US.
And this is before their significant development pipeline is taken into account – currently almost 60% of all new rooms under development within the US market will be branded.
When the franchise and management contract fees from such operations are taken into account, that’s a lot of cash from a lot of hotel owners that can be used to foot the bill for these brand-focused booking campaigns.
Digging deeper into the Financial Disclosure Documents of seven major hotel brands’ from 2007 through 2017 revealed some startling figures.
In the past 10 years, hotel chains have been gradually increasing brand channel costs (as a % of ADR) by 34% on average – with the most extreme ‘performer’ increasing fees by 80%.
These increases include new fees to support online marketing efforts; to increases on existing royalty, loyalty, program, marketing, and reservation fees – but significantly they are charged on all revenues irrespective of whether it’s the hotel chain that secures the booking or not, something that seems unfair given that for most properties a decent proportion of hotel bookings originate through OTAs as well as at the property level.
And while the growth in fees varies by category and brand, a clear trend has emerged: To drive their direct booking campaigns and loyalty growth initiatives, asset light hotel chains are increasingly relying on owners’ pockets to keep their advertising coffers full.