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Taking on the OTAs ... industry in epic struggle to regain power

CREDIT:  Resort Brokers Australia, ‘Informer’ magazine, Issue #87 Sept 2017

In less than 20 years, online booking agents (OTAs) have morphed from friend to foe for many accommodation operators.  Now saddled with onerous contracts and climbing commission rates that weigh heavily on profit margins, the industry is fighting back. The battle is on to regain some control.

Remember when OTAs were seen as a useful new tool to deal with excess room inventory?  Great idea, a win for everyone: improved occupancy for accommodation providers, a good deal for consumers, a commission on supply for the OTA.

Now, providers have little or no control over their inventory, they and consumers are being screwed, and the OTAs are faceless foreign behemoths worth billions.

Microsoft launched Expedia Travel Services in the US in 1996, closely followed in 1997 by a European counterpart, Priceline.  Australia’s Wotif started in a Brisbane garage in 2000 with just 60 properties.  By 2003, it was thriving across Australia and NZ.  In 2006, it listed on the ASX, before expanding into Asia in 2008.

By 2013, travel sales generated by OTAs accounted for around 45% of all European travel sales revenue (Euromonitor 2013).  And 76% of that was generated by the two giants, as they swallowing up virtually all competitors in their path.

The Priceline Group gobbled up Booking.com, Agoda, Kayak and Cheapflights.  Expedia subsumed Travelocity, Orbitz, Hotels.com, Lastminute, Hotwire, Trivago, CheapTickets and eBookers.  Our own Wotif was acquired by Expedia in 2014 for $703 million.

Today, they form a virtual duopoly, two all-powerful global conglomerates the Accommodation Association of Australia (AAoA) says control around 80% of the online travel agency market in Australia.

Moreover, they’ve usurped billions in economic activity that used to contribute to Australia’s tax base.  The AAoA says, based on them commanding roughly $5 billion p.a. in gross spending here, at an average 15% commission, that’s $750 million the vast bulk of which is funnelled overseas so it doesn’t register as Australian income.

Partner of adversary?
With the OTAs massive growth, the dynamic shifted.  They became such a pervasive main-stream distribution channel, no operator could afford to forego their marketing might.

Every hotel and motel, regardless of size or brand affiliation, is faced with this imperative. OTAs give them a vastly wider audience than they can access themselves.  But it comes at a cost.  OTAs are a necessary, and increasingly expensive, evil.

While they’re supposed to be ‘agents’ for accommodation providers, many now question who is actually working for whom.  The relationship is both symbiotic and adversarial.  Critical complaints about OTAs relate to competition, control, cost and tax-avoidance.

Such were the concerns about anti-competitive behaviour, the Australian Competition & Consumer Commission (ACCC) investigated the online agency market, particularly in relation to the imposition of price parity conditions on operators.

But the outcome (Sept 2016) was a huge disappointment – a negotiated ‘arrangement’ with Expedia and Booking.com that would allow operators to offer lower rates to their customers but, and it’s a big ‘but’, only on the phone or face-to-face, not on their own websites.

How can you not be permitted to offer your own rooms on your own website whenever and at whatever price you see fit?

The AAoA, on behalf of members, was outraged, calling it a “back room deal” that ignored the fact more than 60% of accommodation bookings are made online.  They immediately called for the ACCC to re-examine the issue, and stepped up the campaign in December when the High Court ruled against Flight Centre for price-fixing. 

The court found Flight Centre had breached competition law when it asked airlines to stop issuing cheaper tickets directly to customers.  So, it’s price gouging when Flight Centre does it, but not when the giant global OTAs do it?

“If the High Court has the view that competition laws apply to relationships between operators and their agents in the aviation industry, then the same must apply in the accommodation industry,” insists AAoA CEO, Richard Munro.

Cost of losing control
That fight is ongoing. Meanwhile, operators also confront the twin problems of increasing commissions and diminishing control.

Back in 2011, Wotif boasted it didn’t force operators to “pay commissions at levels dictated by international behemoths.”  Within a fortnight of Wotif’s acquisition by Expedia, their commissions increased from 11% to at least 15%.

Operators naturally fear commission rates might follow the overseas trend to levels as high as 25%.  Many say fees can already be that high if you want premium position on an OTA website.  Buck the system, and you might find your property bumped into online oblivion.

High commission rates, while squeezing profit margins for operators, are ultimately driving up the cost of accommodation for consumers.  So much for the widespread belief that online booking gets you the best deal.

“Consumers will ultimately be the losers through higher prices, or worse still, less choice because smaller operators in regional areas could be forced out of business,” Munro said.

Generally, accommodation owners are reluctant to speak out publicly for fear of reprisals.  One operator told us the story of a motelier reduced to tears when discussing the issue.

“The OTA had been discounting his prices without his permission.  Guests were turning up expecting to pay $95 a night, less than it cost him to provide that room.  He and his wife were working horrendous hours doing their own cleaning and laundry because they couldn’t afford to pay cleaners.  He was utterly distraught.”

Control is wrested from operators in other ways too.  The inability to be selective about what bookings you accept.  Being compelled to sell through OTA channels even at peak times when you could easily fill all vacancies without paying commissions.  OTAs are even implementing their own customer loyalty programmes, competing with accommodation providers for the ‘customer relationship’.

Reclaim relationships
So how is the industry fighting back? Aside from the sterling advocacy war being waged by industry bodies like AAoA and Tourism Accommodation Australia (TAA), operators large and small are taking matters into their own hands.

Among the larger providers, loyalty programmes (offering benefits the OTAs cannot) have been the chief strategy.  The drive to build room inventory, marketing resources and market share to levels that can take on the OTAs at their own game has fuelled a record period of mergers, acquisitions and alliances.

The ultimate objective is to build direct bookings.  And you don’t have to be a major branded hotel company to join that push.  It simply takes persistence, training for front of house staff, and a little ingenuity to encourage direct reservations without jeopardising your OTA agreements.

On Queensland’s Sunshine Coast, Aqua Vista Resort operators Eric and Tanya Sealey, have well and truly turned the tide.  When they bought their management rights in 2013, direct bookings accounted for only about 27% of their trade.

“Now direct bookings are closer to 80 per cent of our business, with OTA-generated sales down to about 20 per cent,” Eric revealed.  He still begrudges every bit of that 20%, but acknowledges OTAs are useful for some customer segments, such as overseas bookings.

“OTAs do have their place, but their place is at 20 per cent, not 80 per cent,” he insists.  The key to Aqua Vista’s success has been relationship-building.  That, and working hard to change entrenched booking habits.

“Not a single guest who has booked through an OTA leaves our building without knowing they could have done better if they’d booked direct.  We have a flyer that makes the case for direct booking.”

Eric stresses that front office staff must be well trained to seize every opportunity to educate guests about the advantages.  “Guests also really appreciate that we get to know them, remember them, build a rapport and take an interest.”

Promote care and security
This supports the assertion by some analysts that the battle need not be fought on price.  In fact, research by J.D. Power suggests travellers who book through OTAs are more likely to experience problems and be less satisfied with their stays than those who book directly.

Maybe the messages should be less about discounts and more about booking security, guest care, preferred treatment, and the ability to communicate directly with the operator if the guest needs to make a change or raise a concern.  (Just try and get to an OTA complaint department through the many hidden layers guarding it!)

Travellers must know that hotels can see if a booking has come through an OTA, so it will probably be allocated an inferior room, retaining better rooms and views for direct bookers.

Another strategy may be to develop business in areas where the OTAs are not effective – group business, for example, although that does require dedicated direct sales and marketing efforts.

Regardless of which guest category you target, and whether you rely heavily on OTAs for business or not, one marketing tool that simply cannot be neglected is the property’s own website.  While the ACCC might still preclude operators from undercutting the OTAs online, operators can use their sites to ‘capture’ potential guests.

A classic hotel booking path begins with the guest searching on an OTA.  Then frequently, once prospective properties have been short-listed, the guest will check out each property’s website.

There is significant evidence that upwards of 20% of direct bookings occur after the guest has found the property through an OTA.  The crucial factor will be having an engaging, user-friendly website that facilitates easy direct booking.

If your would-be guest can’t find good room descriptions, great pictures, easy-to-read policies, and a convenient booking path, they’ll leave your site and head back to the OTA.

Budget decisions
There are many ways of looking at the whole OTA argument.  Some properties simply see the fees paid to OTAs as ‘the cost of acquisition’, a de facto ‘marketing budget’, a way to build exposure.

But when that budget approaches 20% (in commissions), plus it requires you to hand over all your inventory, that’s a lot of money to be leaving on the table.  Trent Fraser, Choice Hotels Asia-Pac CEO and AAoA board member, says joining a brand is worth considering.

“It is very difficult for independents.  They should look at the cost of joining a brand versus the cost of not.  I’ve known of examples where it used to be 30 per cent coming through OTAs and now it can be 70 per cent.  That’s a heavy reliance and a huge cost.”

The fight-back is also now inspiring more inventive and collaborative strategies to take on the OTAs.

Gorez, first profiled in the last edition of Informer (‘Collective movement to claw back OTA share’, Issue #86) is still in its pre-launch phase but is gathering strength.  The concept is for a commission-free website that allows independent and chain operators to band together to reinstate direct bookings as their primary source of reservations.

Organisers say preview events have drawn very positive feedback.  As well as enquiry from Tasmanian B&Bs to barramundi fishing lodges in the far north, Gorez has attracted the interest of major operators like Oaks Hotels & Resorts and Spicers Retreats.

Even regional tourism organisations have called, concerned that bookings made through some government websites actually direct guests via OTAs, incurring commissions.

In particular, it has resonated with regional motel properties who are among the most vulnerable.  The trick now will be getting all these properties to register with Gorez for its formal launch later this year.

Momentum is building
In the meantime, there are other reasons for optimism.  The ATO has moved on Google and Facebook, forcing them to bring their Australian income onshore.  They must be pushed to do the same with OTAs.

As Sydney University Adjunct Associate Professor Michael West concluded in a piece for The Conversation earlier this year, “Australian authorities have allowed predatory, secretive overseas businesses to plunder their tax base while penalising thousands of Australian accommodation operators.”

This is not just Australia’s fight.  France, Germany and other European countries have outlawed the practice of OTAs being able to dictate what hotels can and can’t do with their own room rates. (take note ACCC!)

The hotel industry in the US is going after the OTAs too.  The powerful American Hotel & Lodging Association, which counts Starwood/Marriott and Hyatt groups as members, is also lobbying against the OTAs for price gouging.

Financial analysts acknowledge the greatest threat to these listed giants is from the very people who own and provide the product they need to survive.  Hotel room bookings are a big driver of OTA revenue, and increasingly they are facing competition from the providers.

They have themselves to blame.  The OTAs modus operandi a disgrace, Richard Munro says.  They push the limits of competition law, hijack the intellectual property of hotels and motels on major search engines, and generally have poor, impersonal relationships with operators of accommodation businesses.

“It’s time for this sort of behaviour to stop.


Return

In less than 20 years, online booking agents (OTAs) have morphed from friend to foe for many accommodation operators.  Now saddled with onerous contracts and climbing commission rates that weigh heavily on profit margins, the industry is fighting back. The battle is on to regain some control.

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Date Posted: 28/11/2017
Number of Views: 1646
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