… and That’s Not Good for the Hotel Industry.
Our MCI Thought Leader interviews have explored the group commission model from a variety of angles — from how it’s evolved, to why it’s broken, to what third-party intermediaries like the MCI Group need to do to demonstrate their value proposition. We wrap up our series with a conversation about where things go from here with Jodie Torriani, CRME, HMCC, MCI’s Head of Global Hotel Procurement and Strategic Sourcing.
Were you surprised when Marriott announced that it was reducing its group commission rate from 10 percent down to 7, and then several other hotel companies followed suit?
Well, it was logical that once one large hotel group made that decision that others would follow suit, so it was not surprising to watch Hilton and IHG do the same, to name two that made the decision as well.
Where does that leave the group housing model?
Let’s first refer to the law of conservation of energy, which states that the total energy of a closed system is constant; energy can be transformed from one form to another, but can be neither created nor destroyed. It’s going to be very similar in this context: You can’t change one important element of the business model and not expect an equal and opposite reaction in the system, with potentially increased costs of doing business for the hotels themselves. At 7-percent commission, it’s pretty clear that housing bureaus as we know them will cease to exist because the model is not sustainable for them.
For 10 years, consumers were trained to buy last-minute. Hotels were complicit with training those consumers to buy, because they allowed them to book with 24-hour or 48-hour cancellation by providing those conditions to the OTAs and by offering them through their own websites. A consumer really doesn’t have much upside to book early — maybe they’ll take a risk on a slightly higher rate later, but maybe the rate will actually decrease, and in the meantime, they won’t get dinged with cancellation charges in case their plans change. So consumers are making logical decisions based on a fully transparent and competitive marketplace when they book last-minute. Our data shows that even with large events, the peak booking window is already less than 20 days before arrival.
Do you see group bookings continuing to move in that direction?
Absolutely. Today, with current pricing systems, commission models, and contractual polices, groups are at a substantial disadvantage in the market because there is very little transparency. Instead of the traditional group model, what will happen is there will be no more housing bureaus because no one is willing to contract at the existing group conditions with only 7 percent. There are severe cancellation charges associated with those group contracts, so groups will have no choice — or at least they’ll have no incentive — to book inside a group block. Since there is no advantage to book through a group, consumers will be consumers and they will follow the path of least resistance, which is to book individually. Based on MCI’s analysis, 86 percent of delegates who do not book with the housing bureau book through an OTA and not with the hotels directly, so by extension the distribution costs of the hotel will actually increase substantially.
What does that mean for a third-party company like MCI?
This is where we need to establish those new business models, working together with the hotel industry to find solutions that are going to allow this group model to continue. We all lose out if all of the group business goes to individual bookings, because that’s going to be at a higher cost of distribution to the hotels.
What specifically might a new group model look like?
It’s linking back to Bob Gilbert’s answers in terms of defining the services that each of these types of third-party intermediaries is bringing to the table. Is it simply sourcing only and it ends there, or is it like what MCI does when we operate a housing bureau service? We take on the entire operational management of those contracts, so we do all of the modifications, we do all of the rooming lists, and we also do all of the credit card processing. All of that has time and costs associated with each of those tasks, and as a housing bureau our costs haven’t changed, but our commission is down 30 percent.
Does that change how MCI has to do business?
I think it’s going to change how the industry as a whole does business. If we talk about group business, groups will cease to exist the way that they do today, and more and more will just simply become individuals. We already see that behavior now at MCI — that for us, groups are simply collectives of individuals. They’re booking as an individual FIT [free independent traveler], and they’re booking last minute, so that booking window is shorter and shorter and shorter, and those are the purchasing decisions that the participants are making. They’re unwilling to commit early on.
Are you optimistic that we can create a new model moving forward?
We have to. Otherwise we’re going to find ourselves looking at the Blockbuster–Netflix scenario. When you ask most people what killed Blockbuster, they mention the internet, but in reality when they launched, Netflix’s business model was simply to send rental DVDs by mail. On the Blockbuster side, they made hundreds of millions of dollars with late fees, and the one simple innovation that Netflix brought to the market was to eliminate the late fees. They made it so that the consumers could get their movie, but instead of going directly to the shop, they waited to get that DVD in snail mail, but the upside was there were no late charges.
In the group case, the hotels have become addicted to their equivalent of these late charges, which is group cancellation conditions. In most cases, these fees are no longer justified based on risk mitigation due to the plethora of distribution channels as well as the consumer booking behaviors already in place in the market.
What might a new model look like that would make all the stakeholders in this debate happy?
Consumers and business will follow the path of least resistance, which means a very high percentage of bookings through OTAs. The group model is broken, with low commission and high cancellation charges coupled with very high service delivery costs from the housing companies, so it’s clear that with no fundamental change, housing bureaus who have a responsibility to their shareholders and employees will need to find alternatives. Of course, they can withdraw from the market altogether, and on an individual level many companies will do that.
Or, they can partner with the OTAs on a new distribution methodology. We know that Airbnb and the OTAs are heavily invested in developing products for the group and corporate market, so it’s no stretch to imagine that housing bureaus will simply work with the OTAs to develop a platform able to offer housing solutions to delegates using the OTA systems — with live pricing but also with very flexible booking conditions. In this situation, we then end up where we started, with distribution charges for hotels increasing from the projected 7 percent back up to, or even surpassing, the 10 percent the housing bureaus were receiving in the past.
Alternatively, we get together with the hotel industry and come up with a new model that conserves the group system but brings a new level of transparency and efficiency to the system. We need to reduce and eliminate cancellation charges as a distortion to the consumer market. We need housing and booking systems to communicate, so that hotels can see booking pace and both housing bureau and hotel can have mutual conversations on allotment or rate adjustments required to fully materialize. We need rate-parity-monitoring technology to ensure that hotels are not underselling, but more importantly to verify that the group rates and conditions continue to be viable in the specific market. We need a willingness to consider rate increases in instances where there are massive supply and demand imbalances. In essence, we need nothing less than a new mutually beneficial economic partnership with the industry, because the reality is that the group market and the individual market are on a path to convergence, and the speed of this convergence will only get faster.