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THE HOTEL INDUSTRY VS. ONLINE TRAVEL AGENCIES: FOREVER FOE?
The hotel industry vs. online travel agencies: forever foe?
The rise of Online Travel Agency (OTA) conglomerates such as Expedia and Priceline has forced the hotel industry to find ways of working with, or avoiding, an increasingly powerful channel for room distribution, and an increasingly relevant set of brands for consumers (Zhang, Denizci Guillet, & Kucukusta, 2015; Lee, Denizci Guillet, & Law, 2013). Although strategizing how to work with different electronic distribution channels has been studied, very few of them have addressed hoteliers‘ perceptions of OTAs, and how OTAs are affecting the industry. In this exploratory research, we sought to investigate the state of current and possible future relationships between OTAs and the hotel industry, from the perspective of diverse hoteliers in the U.S. Using a grounded theory method (Charmaz, 2014; Corbin, Strauss, & Strauss, 2014) that advises to maximize variety to increase the chances of finding new distinctions through a method of ‗constant comparison‘ between data sources, we interviewed eight highly accomplished hotel industry professionals in the U.S., mostly executives, across a variety of roles. Two of our informants were owners/operators of a large hotel management group (Interviewees 1 and 2), one was a former C-level executive at a major hotel brand (Interviewee 3), one was a senior executive at a midlevel regional hotel brand (Interviewee 4), one was the owner/operator to two family-run independent hotels (Interviewee 5), one was the owner of an independent, luxury hotel online services provider (Interviewee 6), one was the manager of a mid-level major brand hotel (Interviewee 7), and one was the owner of a hotel real estate investment company (Interviewee 8). The interviews were semi-structured on: the influence of OTAs on their business, and the hotel industry in general and current strategies for working with, or competing against, OTAs. The interviewees were guaranteed full anonymity, and the resulting 60-75 minute conversations were fully transcribed. Based on the grounded theory design, we followed gradual phases of data analysis: a preliminary open coding phase where concepts are associated with a line-by-line reading of transcripts; a focused coding phase where a limited number of concepts are chosen for further analysis; and an ‗axial‘ coding phase where concepts are systematically related to each other. During the open coding phase, this study‘s authors individually did initial code generation. They then came together to select the primary themes that emerged during focused coding, and worked together to relate the chosen themes to each other, and to key contextual variables such as industry role, hotel size, and hotel category.
The impact of OTAs
The first consistent perception of OTAs from every corner of the hotel industry is that they ―are not going away‖ (Interviewees 1, 2, 3, 4, 5, 7, 8). The interviewees noted that OTAs first came into the picture post 9-11 when the market was down. Back then, hoteliers ―signed up for OTAs without thinking about any future impacts‖ (Interviewee 5), and ―did not anticipate how disruptive they were going to be, because the original OTA model was to sell distressed or unusable inventory‖ (Interviewee 1). The negative perceptions of OTAs were widespread, with the use of terms such as ―necessary evils‖, ―evil empires‖, and ―Frankenstein‖ (Interviewees 4 and 5). The hotel industry ―sold its soul‖ to OTAs (Interviewee 1), we [hoteliers] are idiots‖ (Interviewee 8) and ―we hate them all.‖ (Interviewee 5). The interviewees expressed that OTAs have had an unexpectedly significant and negative impact on the hotel industry and their business, ―dramatically changing the landscape of hotel business‖ (Interviewee 8). With a marketing budget far larger than that of many hotels, OTAs have successfully convinced consumers to book on their websites for speed, convenience, choice, and loyalty points, and made them believe – incorrectly, according to the interviewees – that they can get the cheapest rates there. The negative view of OTAs has led to a predominantly zero-sum view of the hotel- OTA relationship. OTAs have consolidated to develop a large network of suppliers, and they have been taking more direct business away from hotels, according to the interviewees. As such, the main impact of OTAs on the interviewees‘ hotel bookings was increasing costs due to commission fees to the OTAs, which ―drive up the customer acquisition cost, [which is why] profit hasn‘t gone up in proportion to the revenue increase‖ over the years (Interviewee 6). All but one interviewee mentioned the term ―rate parity,‖ whereby hotels and OTAs have to offer the same room rates on their respective websites. Nonetheless, one interviewee expressed discontent about OTAs‘ practices of rate parity, because hoteliers have ―no clue what they‘re selling [my inventory] for, especially when hotels are packaged with other travel products‖ (Interviewee 5). To minimize this negative financial impact, hotels try to increase direct bookings as much as possible from their members by offering extra features such as mobile check-in, or better rates available only to them. This ‗closed group‘ offering is also practiced by OTAs through which their loyalty program members can also be offered more favorable pricing or terms. The interviewees mentioned that the impact of OTAs is larger for independent than for chain hotels because independent hotels have no ―big distribution channel, and it‘s a way for [them] to be visible‖ (Interviewee 8). However, OTAs are more expensive for independent than for chain hotels, as the latter can leverage their large size to negotiate better terms with OTAs. The OTA commission rates at the interviewees‘ hotels ranged between 6% and 28%, with the highest rate being for independent hotels. Four interviewees pointed out that hotel location and service/price level influence the degree to which OTAs are utilized. That is, OTAs‘ booking volume is higher at resorts, and at hotels at or near airports with a high guest turnover. OTAs‘ booking volume is also higher for hotels with limited service (economy or budget hotels) than those with higher levels of service/price (luxury or upper scale hotels). The former, as compared to the latter, are akin to ―soap on a shelf‖ (Interviewee 8) because they are not distinctive in the consumer‘s mind, and consumers who choose to stay at the former are typically price-elastic. Although the majority of bookings at major chain hotels are still generated by direct bookings, what concerns the hoteliers most is that the percentage of bookings by OTAs has been ―growing at a double-digit rate for many years‖ (Interviewee 3). This makes the interviewees feel that ―OTAs take customers away‖ from their hotels (Interviewee 8).
Strategic response of the hotel industry
Although all the interviewees acknowledged and worried about the negative financial impact of OTAs, the only consistent strategy for coping with OTAs was to divert bookings to more cost-effective channels such as direct booking, or ―limit visibility over premium dates as much as possible‖ (Interviewee 8). They responded that they use or have to use most or all major OTAs (e.g., Expedia, Priceline), simply because these are prevalent and most familiar to consumers today. The response to the perceived OTA threat varied, depending on the respondent‘s role in the hotel industry. The REIT investor (Interviewee 8) and the major brand executive (Interviewee 3) displayed the purest zero-sum view of the relationship. The REIT investor believed the best response is to strengthen the bargaining position of hotels and win back lost revenue, expressing that hotels are ―letting other people take all this money…we‘re stupid.‖ From the major brand perspective, the best response was consolidation (getting bigger) to have better leverage in complex OTA negotiations, and to have more capital for marketing campaigns and technology development. For the more ―independent‖ respondents there was more scope to react by working with OTAs at some level. The single hotel manager and the independent hotel owner both used the metaphor of ―playing the game‖ to survive in the new era: ―You‘d better play ball with them if you want a presence online‖ (Interviewee 5). For an independent hotel, ―Expedia is my franchise website‖ (Interviewee 7) because OTAs are ―doing things that I could never do as an independent‖ (Interviewee 5). In particular, they emphasized the necessity to understand and master the digital marketing landscape of social media, review sites, search engine optimization, daily deal sites, and a good online presence on their own websites, expressing ―You gotta fish where the fish are‖ (Interviewee 4). Independent and small hotels do suffer from higher OTA commissions, but can also work in their favor in terms of preferred placement in hotel searches and referrals from OTAs. The technology service company‘s, (Interviewee 6) key strategic response was to gain control over customer data, because customer email addresses are particularly important for ―retargeting and email marketing to get guests back for zero costs‖ but is difficult to obtain when receiving bookings from OTAs. Some interviewees were able to see other potential strategic responses that were promising, but not yet pursued widely. One example was ‗bundling‘ products and services along with hotel rooms in new ways (Interviewees 1, 2, 4, 5, 6), similar to Airbnb‘s recent pivoting of offerings. Recognizing that part of the success of OTAs comes from customer convenience, some interviewees thought that innovations such as eliminating check-in (Interviewee 4) would help hotels cope with the new pressures. The regional hotel chain executive and the hotel management company owners perceived that changes to the physical product offered by hotels were needed to compete with Internet providers, especially Airbnb, saying that hotels need to ―rethink the long hallway‖ and the ―300 square-foot rooms‖ (Interviewee 4). This same executive saw significant barriers to innovation in the hotel industry. ―We [hotel industry] are definitely trying…but we are capital heavy, labor heavy, slow to innovate‖ (Interviewee 4).
Discussion
Our exploratory findings suggest that hoteliers, across a variety of hotel industry roles, had an almost uniformly profoundly negative, zero-sum view of the OTA relationship. While not dismissing the very real concerns and profitability pressures of the hotel industry, we are concerned that these perceptions may lead hotel industry players to not pursue or develop the relationship between them and OTAs in more mutually beneficial ways. The strategy of choice right now is to simply compete directly with OTAs, which is not a strategy that has necessarily worked for other traditional industries when digital intermediaries have entered their space, especially highly fragmented ones with many service providers such as the media and retail industries (Grossman, 2016). This view of the relationship does explain the relative lack of innovation about how to maximize the benefits of this relationship for both sides. In contrast to the zero-sum view, we would point to an alternative theory such as coopetition (Brandenburger & Nalebuff, 2011). The theory of co-opetition points to two simultaneous processes: the cooperation required to ‗create the pie‘, or create value for all parties; and the competition to ‗divide up the pie‘ or capture the value created. Success in co-opetition comes from ‗changing the game‘ by developing new partnerships with four related parties: customers, suppliers, competitors, and complementors that offer ancillary services. In our data, we saw some tentative recognition of co-opetition possibilities in each of these four categories. For new customer relationships, we saw some desire by hoteliers to improve customer convenience and value, beyond simply increasing loyalty rewards. Some hoteliers recognized that OTAs have succeeded in part because of the consumer convenience and value proposition is a superior one. For new supplier relationships, there is limited recognition that new kinds of hotel products might be needed, supplied by non-traditional sources as in the Airbnb case, or by construction partners when building new hotels. Hotels have traditionally worked with complementors by bundling rooms with various travel services such as gaming or meals, but OTAs and Airbnb now offer similar services, making it difficult for hoteliers to differentiate themselves. Thus, there is an opportunity for hoteliers to creatively rethink their relationship with complementors, which none of our respondents mentioned. Despite the negative perceptions, our respondents reported some possibilities for new relationships with their OTA competitors, by using digital marketing techniques to their own advantage. To take an example, instead of having a booking war against OTAs, Red Lion Hotels strategically decided it would partner with Expedia in 2016. When customers see Red Lion hotel rates on Expedia sites, they see both a loyalty member rate, which is lower, and a non-member rate. Even if they are not part of Red Lion‘s loyalty program, customers can still book the loyalty rate and are then automatically enrolled as Red Lion members – thus enjoying member benefits while at the same time also earning points with Expedia. To complete the enrollment, the customer‘s email address is then sent to Red Lion ―which is a big deal because the online travel agencies don‘t normally share such information with partners‖ (Schaal, 2016b, p. 1). Looking across all four categories of new co-opetition relationships, however, we see little evidence of coordinated, systematic strategies for pursuing them in the hotel industry. For the hotel industry to respond to the rise of today‘s OTAs, and the other technology companies that might enter the industry in the future, we suggest that hotels will need to transcend their negative, zero-sum views of the OTA relationship and actively experiment with new co-opetition relationships. In addition, the hotel industry should also continue to improve the effectiveness of its traditional responses to OTAs, including their loyalty programs and brand loyalty initiatives. Several interviewees acknowledged that consumer behavior is changing and consumers today are not as brand loyal at they used to be. Research results echo the same phenomenon. For example, Wollan, Davis, De Angelis, and Quiring (2017) found that 71% of 25,426 respondents in 33 countries said ‗loyalty programs do not engender loyalty‘; 77% ‗retract their loyalty more quickly than they did three years ago‘; and 61% said they ‗switched one brand to another in the last year.‘ Decreasing brand loyalty is also apparent for hotels. MBLM (2017) found that consumers have the least ‗brand intimacy‘ (emotional bond with a brand) with hotel brands compared to those of other industries such as automotive and retail. Similarly, Oracle Hospitality (2017) found that 58.7% of survey participants (8,000 in Australia, Brazil, Mexico, France, Germany, Japan, U.K. and U.S.) stated that they do not belong to any hotel program. The Global Traveler Study (2014) also found the diminishing meaning of ‗loyalty to one hotel,‘ as 66% of their 4,618 respondents in the U.S., U.K., Germany and China are members of 1-4 hotel loyalty programs, while 15% are members of 5 or more programs. Despite the decreasing numbers and the questioned value of such programs, hoteliers are still trying to make consumers loyal to their own brand by enticing them to join their loyalty program. This effort is to increase direct bookings and compete with OTAs by offering ‗member-only‘ incentives such as member discounts, or additional perks such as free late check-outs, free meals, or free upgrades. However, these incentives may exacerbate the already increasing costs for hoteliers, particularly if they are attracting consumers who are price sensitive and would not book directly unless they get something back. While the interviewees mentioned their efforts to increase direct bookings through loyalty programs, none referred to the cost of those programs. Given the changing consumer behavior toward becoming less loyal to brands, it stands to reason for hoteliers to re-consider their loyalty programs.
Conclusion
Hoteliers are fighting intermediation and trying to push direct bookings. This is nothing new for them since they have been doing it with traditional travel agencies for years. Yet, bookings with traditional agencies remain strong, and OTA bookings continue to grow. It seems that it might be time for hoteliers to quit fighting intermediation, and embrace the ―good‖ that it can bring by adopting a co-opetition mindset, while also creatively thinking about brand loyalty programs and what they might bring to that mindset – if anything. In the zero-sum perception of OTAs, however, we found little space for innovative thinking about how to create new offerings through new partnerships, or loyalty programs. While existing OTAs, and emerging OTAs such as Airbnb, are personalizing services for customers, offering new services that are bundled with rooms, and new products with a new population of room suppliers, the hotel industry‘s response is to simply copy what the OTAs are doing and apply it to their own online bookings. We urge the hotel industry to move beyond this response, and be equally creative in finding new co-opetition opportunities that speak to the traditional strengths of the hospitality industry and its experienced professionals.
