October 2018, Las Vegas
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Smoke and mirrors: why group commissions cuts don’t stack up
Concerns that a controversial move by a big chain threesome – Marriott, Hilton and IHG – would prompt other hotels to follow have not materialised. Pamela Whitby reports
In April, Marriott International, which now has Starwood in its fold, was the first to announce that it would cut commissions on group hotel bookings in the US and Canada from 10% to 7% and Hilton and IHG were quick to follow. But is the move by these gorilla hotel chains just smoke and mirrors?
Adam Hayashi, VP of Revenue Management & Analytics at AccorHotels thinks it might be. “There has been a huge amount of PR and Marriott got a lot of attention for doing this, which bolstered the opinion of the ownership community [into believing] that they are doing this to their reduce costs.” However, he admits to being “a little surprised to see the other brands jump on board” so quickly.
But it seems the move that began with Marriott seems to have ended with IHG. Tim Hentschel, CEO of HotelPlanner, who back in May told EyeforTravel that the move was shortsighted, puts it like this: “It appears that the current trend to cut commissions on group travel has settled with the three largest chains of full service convention hotels pushing to 7%, leaving all other hotel chains and independents holding their commissions at the industry standard 10%.”
At first glance, this makes sense and is in line with the chains’ revenue mix. Says Hentschel: “Group bookings make up 35% of revenues in a full service conference hotel versus around15% in standard hotels. So, if you look just at these numbers, the commission cuts look most promising in full service hotels.”
However, he stresses that many hotels don’t just consider booked room nights as the only significant revenue source. On average 25% of hotel revenue is from food and beverage (F&B), while a further 10% comes from services like parking, meeting space rentals, audio-visual hire as well as hotel shops and spas. That leaves commissionable sleeping room revenue making up the remaining 65%.
According to HotelPlanner data, groups spend two to four times more on F&B and other hotel services than transient travellers. So, commission cuts to room booking revenue becomes insignificant compared to the overall group revenue generated on a TRevPAR (total revenue per available room) basis.
Michael Dominguez, chief sales officer for MGM Resorts International agrees. “It is important to look at a more holistic view of business versus a narrow snapshot. We consider all the revenue related to group business -- F&B, A/V, etc - which, comparatively, far exceeds the profitability of other channels of business,” he said in an interview with Meetings and Conventions.
As the recent report from Kalibri Labs finds, meetings in the US represent $300 billion in total spend, with $140 billion coming from room revenue, which indicates that more than half of group revenue comes from non-commissionable business.
Look after the pennies
HotelPlanner has very strong hotel chain partnerships and has been working overtime on tools to automate this traditional request for proposal system, so that the new policy can be enforced fairly and equally throughout the entire industry. “So far we have seen a very smooth transition to 7%, so we have pushed these cost saving programmes out globally to our 100,000 hotel membership network with great success,” says Hentschel. But he is quick to stress: “On a TRevPAR basis the commission cut savings account for less than 1% of overall group revenues, (exactly one cent saved to every dollar spent).”
For this reason, many hotels have been happy to stay at the 10% level, with about 20% of HotelPlanner’s 100,000 hotels offering to go higher than the industry standard 10% to win more group business. “One hotel GM that raised their commissions told our team that they would rather concentrate on making more dollars than saving more pennies,” he adds.
Groups that have publicly agreed to hold commissions steady include heavyweight Wyndham Hotel Group, Accor, Eden Roc Miami Beach and Nobu Hotel Los Cabos, while the Dream Hotel Group is offering 12% commissions on qualified groups and meetings.
One hotel GM that raised their commissions told our team that they would rather concentrate on making more dollars than saving more pennies
Tim Hentschel, CEO, HotelPlanner
Accor’s Hayashi acknowledges that groups do spend more on site. And for the French chain, which is focused on total hotel profit optimisation, this is not a revenue stream it is willing to jeopardise - yet.
“If you have power like Marriott has in the North American region, then I think you should go for it. But if you look at the make up of a Marriott hotel globally and its’ size and demographic versus Accor Hotels, we are not there yet,” he says.
Since its acquisition of Canada’s FHRI Hotels and Resorts, Accor is now a leader in the North American luxury group space. Elsewhere, it has recently acquired Mövenpick and the Mantis Collection in South Africa to move into the group space globally. But that is not enough to justify cutting commissions.
“If we were to make that change immediately, we’d be talking about a very small amount of revenue comparatively affecting a couple of key regions in the Middle East, North and Central America and little bit in Asia. Beyond that we have 1,500 plus hotels in France, with an average size of 100 rooms and I would say 90% of those don’t have meeting space at all,” he says.
However, while Accor has no plans to follow Marriott, Hilton and IHG, that’s not to say that the group’s global and regional heads of sales are not having a conversation about it. But Hayashi is clear that it would “need to be really well thought through”.
Tom Magnuson, the CEO of Magnuson hotels, believes the move by the big three creates bad karma. He says: “Cutting commissions for the thousands of already struggling travel agents around the world is creating negative energy. Many float their existence waiting for commissions, especially when groups have a long lead-time. Is this the way we treat loyal people who have helped to build these companies?”
Magnuson also believes it could backfire by fuelling consolidation in the larger travel agent sector as well as the group segments of the OTAs. “This could result in larger and more formidable merchants for the chains to engage with,” he says.
Want to hear more from Adam Hayashi, VP of Revenue Management & Analytics at AccorHotels, Tom Magnuson, CEO of Magnuson Hotels, and Tim Hentschel, CEO, HotelPlanner join us in Las Vegas on October 18-19 this year