Egencia Consulting Services Mid-Year Hotel Review

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1 The Impact and Importance of Hotel Ratings and Sort Order in an Online Booking Tool An Egencia customer - a global consumer packaged goods company - reports that 67% of its hotel bookings occur on the first page. Therefore, it is critical to have the hotels with the best value to a corporation and its travelers at the top of the list. This approach gives visibility and priority to higher valued properties, while helping to ensure travelers book them. Negotiated Hotel Rates are Denying Savings for Corporate Travel Programs Executive Summary Hotel sourcing has historically been one of the hardest travel categories for corporate travel managers to manage. Companies strive to save money by negotiating hotel rates, while at the same time trying to maximize traveler satisfaction. The goal is to secure rates at choice hotels where travelers would want to stay while on business. This challenge can be even greater in an environment, where the booking process is shifting from travel agent, assisted bookings to self-serve, online bookings. In fact, Egencia, the business travel company of Expedia, Inc., reports a 92% online adoption rate with its customers. When it comes to online booking, companies that have negotiated rates naturally want these properties at the top of the sort order in the booking tool so travelers will select them first. This approach, however, can push hotels with better rates, better business traveler reviews, and ones with amenities that matter to the corporation and their travelers off the first page and onto the second or even third page of the booking tool making them less visible and less likely to be chosen. Additionally, savings are missed due to dynamic market conditions as better rates often are available at other hotels that are not being surfaced or rising high enough in the sort order to travelers. Secondly, this approach promotes leakage. Thanks to technology, business travelers are more knowledgeable about hotels and rates than ever before. Consider how people book their own leisure travel. Consumers conduct online and mobile searches, visiting multiple travel sites or apps, to find the best deal. If travelers find that their companies negotiated rates are uncompetitive, businesses run the risk of having travelers book hotels outside the managed travel program. This creates challenges for accurate reporting and duty of care. Travel managers also have a vested interest in ensuring any negotiated rates offered to their travelers are competitive throughout the year. However, sourcing traditionally occurs once a year, and often months before the first traveler ever stays in a hotel. Hotels, on the other hand, are constantly adjusting room rates to find the optimal mix of supply and demand. This means a company s savings from negotiated rates can vary significantly throughout the course of the year. Page 1

2 The Recommendation: Focus Negotiations in Key Markets, and Rank Hotels Based on What Matters Most to the Business and its Travelers Travel managers need to embrace a modern philosophy that a company s hotel program is consistently evolving and not static. An annual review is no longer enough. Travel managers need to be proactive and keep a close watch on negotiated rates, and take action when they rise above market averages. Additionally, they should focus in the few markets where they can realize the most savings, and turn to their TMC to augment their current hotel program and where they have less of a presence. Additionally, travel managers should consider a new look at hotel sorting. Consider the attributes that matter most to the company and its travelers. Price is one, business traveler reviews are another. Amenities like Wi-Fi, a fitness room, and breakfast may be additional motivators that keep employees more productive and happier while traveling for business. If you would like to engage with the Egencia Consulting Services group or need more information, please contact our team at consult@egencia.com or call toll-free Page 2

3 Negotiated Rate Mix by Hotel Type: 2nd Half 2012 vs. 2nd Half 2013 All three categories of hotels are seeing a significant shift to negotiated rate bookings Large Hotel Chains 51.5% Regional Hotel Chains 29.9% 21.7% 34% Independent Hotels 24.7% % Sample size is less than 8% of Egencia s historical 2nd half bookings (based on 2012 data). Actionable Advice on Negotiated Hotel Rates Abbreviated Summary Egencia, the business travel company of Expedia, Inc., conducted a mid-year hotel review in July 2013 looking at rooms booked in the first half of 2013 (January 1 through June its North America customer base using a sample size that is less than 8% of Egencia s historical 2nd half bookings (based on 2012 data). Egencia found that a fundamental shift has occurred in the relationship between corporate clients and hotels: Seeing a shift to corporate negotiated rates Negotiated rates rising higher than expected, rising higher than published rates The spread between negotiated and published rates is getting smaller The Takeaway: Companies today must be vigilant with their hotel program throughout the year by conducting a continual review of the negotiated hotel rates and focusing negotiations in the few markets where they can realize the most savings. Negotiated rate increases have accelerated at a much faster pace than nonnegotiated rates in the ten largest corporate markets in the United States, including Atlanta, Boston, Chicago, Dallas, Los Angeles, New York, Philadelphia, Phoenix, Pittsburgh, and Seattle. These are likely being driven by an increase in chain-wide discounts, which typically add a significant number of hotels in large cities as preferred for a very small discount. In large cities, companies that have chain-wide discounts can potentially add more than 100 hotels as preferred, which does not allow for other hotels to compete for your travelers business via price and artificially promotes hotels with limited savings to the top of travelers consideration set in an online booking tool. Key Takeaways for Corporate Travel Programs & Professionals How competitive are your rates? You should be comparing your rates to market averages on a regular basis. Signing the contract between your company and a hotel is the very beginning of the procurement process. This is because market conditions have likely changed significantly in the 6-9 months since you negotiated your 2013 hotel rates. Actions Monitor your negotiated rates and take action when they rise above market averages Negotiate smartly, and as often as you need to be impactful Drive savings in your company s hotel spend on an ongoing basis vs. annually Page 3

4 YoY Change Negotiated Rate Percentage by City: 2nd Half 2012 vs. 2nd Half 2013 Seeing overall increase; spike in negotiated rates Chicago New York Dallas Los Angeles Seattle -3.1% Philadelphia Atlanta -.1% Phoenix Pittsburgh Boston 6.7% 4.5% 8.1% 3.8% 4.5% 24.6% 12.2% 7.2% Sample size is less than 8% of Egencia s historical 2nd half bookings (based on 2012 data). If your program has large amounts of travel to the Top 10 US Cities (see report), identify opportunities to increase savings, particularly in cities where negotiated rates are exceeding non-negotiated rates. Are your rates still available? Most hotels have their highest periods of occupancy during the 3rd and 4th quarters of the year. Ensuring your rates are still loaded accurately and available for use will ensure your program is seeing the maximum usage. Even hotels that are providing your negotiated rates may be costing your company money. Actions Ensure that your preferred hotels provide a significant discount over the market rates Ensure your negotiated rates 51.5% are loaded accurately and available for use Remove hotels that are not performing Are you influencing your travelers to spend more money? Placing a hotel into a preferred rate program puts a large positive halo on a property. Any property with a preferred status should truly be the best possible option for your travelers in a city. Actions Conduct a full analysis of chain discounts to identify actual savings vs. missed savings lost by not showing all hotel options on a level playing field Consider rating and sorting hotels by what matters most to the company and its travelers (amenities, business traveler reviews, and price) vs. leading with negotiated rates in online booking tools This will help ensure travelers continue to book hotels in a managed environment, are productive and happier while on the road, and a company s anticipated hotel savings are actualized Identify hotels and markets with spend under a threshold Consolidate demand to ensure each hotel will receive a minimum of 500 room nights Now, think about what you can do differently to maximize the dollars your company and travelers spend with hotels in the second half of 2013 and beyond, and go do it! If you would like to engage with the Egencia Consulting Services group or need more information, please contact our team at consult@egencia.com or call toll-free Page 4

5 By actively managing the hotel program throughout the year, travel managers can expect: Incremental savings throughout the year, based on market conditions Better and more accurate availability from preferred hotels Improved program buy-in from travelers and lower leakage Enhanced negotiation leverage during sourcing periods More effective demand management Hotel Sourcing How can a negotiation be worthless the day after it is signed? In the world of procurement, a contract is negotiated between a company and a supplier for goods or services. A price is agreed upon and terms are set, which means the procurement team can finally take a breath and be assured that they were able to negotiate the best possible terms for that product. However, in the travel space, particularly for hotel sourcing, signing the contract between a company and a hotel has become the very beginning of the procurement process. Hotels are in the business of selling a highly perishable product. A hotel cannot sell yesterday s available hotel room today, so they have become laser focused on maximizing the balance between supply and demand, so that they can sell the most rooms possible at the highest price customers will pay. Because of this, negotiated rates are only as good as the demand companies are able to provide to an individual property. If a company is able to provide a significant amount of demand to a property, hotels have less empty rooms to sell, which means the negotiated rate will be a much larger savings to the company. If a hotel has a large number of rooms to sell on a particular date, they will traditionally discount the remaining rooms to stimulate demand. In this case, the discounted rates can be cheaper than your negotiated rate, which leads to distrust amongst the traveler groups and potentially leakage outside of your program. In addition, hotels are investing heavily into sophisticated revenue management systems, as well as increasing the number of professional revenue managers in order to maximize profitability. The systems and practices have been designed to minimize the impact of negotiated discounts during high demand periods, while ensuring preferred placement amongst hotel offerings for a company. By more effectively managing demand through yield management and room type maintenance, hotels have been able to gain preferred status in a negotiated rate program, they have gained exposure and demand, while only sacrificing yield in lower demand periods. Travel managers and procurement professionals can gain significant incremental savings through active management of a hotel program. Understanding how a hotel manages a negotiated rate through revenue management throughout the year is critical, particularly during the middle of a contract year. By staying ahead of the curve, discounts will continue to be meaningful and savings will continue to be accrued throughout the year. Page 5

6 How Competitive Are Your Rates? In the past 20 years, the airline industry has made huge strides in inventory management in order to increase revenue and profitability. Based on the success of these programs and the similar nature of their products, the hotel industry has jumped aggressively into revenue management. Once operating with a static rate structure, hotels have now become extremely nimble in their pricing. As such, we have seen a fundamental shift in how hotels are managing their negotiated rate programs. In 2013, companies are increasingly shifting their business towards negotiated rate bookings with the goal of maximizing savings opportunities. These shifts in negotiated rate bookings are most pronounced in the Global Hotel Chains, which currently accounts for more than 80% of negotiated rate bookings. Figure 1: Negotiated Rate Bookings by Hotel Type: H vs.h All three categories of hotels are seeing a significant shift to negotiated rate bookings. 51.5% 58.2% % 34% 21.7% 24.7% Large Hotel Chains Regional Hotel Chains Independent Hotels Sample Page 6

7 Figure 2: % of Total Negotiated Rooms by Hotel Type: H vs. H Despite the large shift towards negotiated rate bookings, yearover-year average daily rates for negotiated bookings have increased for large and regional hotel chains, while declining for independent hotels. Nearly 88% of negotiated rates are booked at large hotel chains. 4.9% 7.5% Large Hotel Chains Regional Hotel Chains Independent Hotels 87.6% Sample Despite the large shift towards negotiated rate bookings, year-over-year average daily rates for negotiated bookings have increased for large and regional hotel chains, while declining for independent hotels. Figure 3: YOY Change Average Daily Rate by Hotel Type: H vs. H On average rates are flat; but savings to be found more with non-negotiated rates..2% 5.1% 4.5% 6.6% -5.1% -22.2% Large Hotel Chains Regional Hotel Chains Independent Hotels Non-Negotiated Negotiated Sample Page 7

8 Figure 4: YOY Change Negotiated Rate Percentage by City: H vs. H Seeing overall increase; spike in negotiated rates Chicago New York Dallas Los Angeles Seattle -3.1% Philadelphia Atlanta -.1% Phoenix Pittsburgh Boston 6.7% 4.5% 3.8% 4.5% 8.1% 24.6% 12.2% 7.2% Sample size is less than 8% of Egencia s historical 2nd half bookings (based on 2012 data). The move towards negotiated rates is much more pronounced in the 10 largest corporate markets in the United States. On average, companies have shifted 770 bps (basis points) of demand from non-negotiated rates to negotiated rates in the Top 10 cities. This is likely driven by anticipated ADR increases in top cities, where corporate demand is rebounded from the level and limited supply increases have not kept up with demand. However, negotiated rate increases have accelerated at a much faster pace than non-negotiated rates in these top cities. These are likely being driven by an increase in chain-wide discounts, which typically add a significant number of hotels in large cities as preferred for a very small discount. In large cities, companies that have chain-wide discounts can potentially add more than 100 hotels as preferred, which does not allow for hotels to compete for your travelers business via price and artificially promotes hotels with limited savings to the top of travelers consideration set. Figure 5: YOY Change Average Daily Rate by City: H vs. H Negotiated rates are up across the board in most Top Cities in the United States. -3.7% Chicago 11.8% 1% New York 6.2% 11.8% Dallas 6.6% -7.4% Los Angeles 11.8% -6.6% Seattle 14.2% -10.8% Philadelphia -3.9% 16% Atlanta 3.1% -12% Phoenix.1% 11.5% Pittsburgh 9.1% -16.7% Boston -10% Non-Negotiated Negotiated Sample Companies have traditionally used negotiated rate programs as the primary savings vehicle in their hotel spend. However, as negotiated rates continue to rise, while non-negotiated rate bookings stay flat or decline, the gap between rates continues to shrink. Therefore, it is critical that any preferred hotels are providing a significant discount over the market rates. Page 8

9 This is most pronounced in the regional hotel chains, where customers are paying more for negotiated rates than they are for non-negotiated rates. For these properties, we would recommend immediate re-negotiation or removal from the preferred rate program. Figure 6: Negotiated vs. Non-Negotiated Rate Spread by Hotel Type: 2nd Half 2013 and YOY change The gap between negotiated and non-negotiated rates is shrinking, particularly in large and regional chains. $44 $26 $23 -$7 -$ YoY -$60 Large Hotel Chains Regional Hotel Chains Independent Hotels Sample When looking at rates across hotel star ratings, we have not seen a significant tradeup or trade-down in quality on a year-over-year basis. Over 70% of hotel bookings continue to be in 3-4 star hotels. These types of properties traditionally have full service amenities, such as on-site restaurants, spa/fitness center and meeting facilities. Figure 7: Hotel Bookings % by Star Rating: H vs. H % 71.3% % 19.7% 9.3% 9% Budget Hotels (1-2.5 Stars) Midscale Hotels (3-4 Stars) Luxury Hotels (4.5-5 Stars) Sample Page 9

10 However, we are seeing a large percentage increase for negotiated bookings in the Budget and Luxury segments, likely being driven by chain discounts. In a chain discounts, hotels will attempt to include all of their various brands, which have varying degrees of quality and pricing. If a company traditionally allows travelers to stay in the Midscale Hotel category, including Luxury brands may encourage your travelers to trade up to a higher quality (and associated rate) than in the past. Figure 8: Negotiated Rate Booking % by Quality Rating: H vs. H % 49% 53% 46% 55% 34% Budget Hotels (1-2.5 Stars) Midscale Hotels (3-4 Stars) Luxury Hotels (4.5-5 Stars) Sample When looking at the rate increases by hotel quality rating, we have seen a significant increase in ADR for Budget and Midscale Hotels. These rate increases, particularly in the Budget segment, are likely being driven by chain discounts. When a company agrees to a chain discount, content for those chains is automatically sorted to the top of the search results in online booking tools. Hotels can then price rates higher, because the discount is typically a small percentage of the best available rate and move to the top of the sort order. In the Budget segment, all chains have very similar offerings and products, so travelers will select the preferred rate, despite that rate possibly being uncompetitive in the market. Ensuring you are not promoting more expensive products, particularly in the Budget segment, is critical to your success in negotiating hotel savings. Page 10

11 Figure 9: YoY Change Average Daily Rate by Quality Rating: H vs. H % 4.2% 4.1% 1.6% -3.9% -5.3% Budget Hotels (1-2.5 Stars) Midscale Hotels (3-4 Stars) Luxury Hotels (4.5-5 Stars) Non-Negotiated Negotiated Sample In the Top 10 North American hotel markets, the spread between negotiated and non-negotiated rates are much more pronounced. In eight of the Top 10 cities, this metric has decreased by greater than $10 US, with four of these cities exceeding $20 US. If your program has large amounts of travel to these markets, it is very important to identify opportunities to increase savings, particularly in cities where negotiated rates are exceeding non-negotiated rates. Page 11

12 Figure 10: Negotiated vs. Non-Negotiated Rate Spread for Top Cities: H vs. H The spread between negotiated and non-negotiated rates has shrunk in most of the top ten US cities. Chicago New York Dallas Los Angeles Seattle Philadelphia Atlanta Phoenix Pittsburgh Boston -$26 -$14 -$28 -$36 -$15 -$16 -$23 -$6 $29 $25 $31 $9 $13 $16 $20 $15 $8 $9 $49 $ YoY Sample Page 12

13 Are Your Rates Available to Your Travelers? Companies have always thought they were able to rely on a negotiated rate being available 365 days of the year, even during extreme demand periods. Last Room Availability has been the cornerstone of a negotiated rate program, with seasonal rates being accepted so that cost control can be managed more effectively. However, those days seem to be gone, as hotels are actively yield managing even their best customers to gain incremental revenue. This is particularly important to monitor as we get into the latter part of a sourcing year. One of the easiest ways a hotel can manage their negotiated demand is through the use of Last Room Availability contracts. Historically, companies have been willing to pay a premium for this clause, as it assured a company of the last room in the house. However, these contracts are traditionally valid only on the base room type. Hotels have been more actively differentiating their rooms into different room types, with only a few rooms assigned to the base room type applied to Last Room Availability clauses. If you are seeing rate increases at your preferred hotels, you should be actively working with your hotel partners to ensure you are actually receiving all available rooms, not just the few base level rooms at the property. As stated earlier, the hotels that are providing your negotiated rates may be costing your company money. As hotels continue to increase the amount of room types, some are offering these upgraded rooms at a small premium over the base negotiated rate. These upgrades may still fall under your company s hotel per diem, so employees may be motivated to book these rates, either for additional comfort or extra hotel rewards points. Companies can mitigate these hidden rate increases by conducting regular analysis on hotel spend by city and ensuring per diems match expected spend for negotiated rates. Another strategy that hotels are using to revenue manage negotiated rate programs is through the use of blackout dates. Blackout dates are traditionally negotiated during the annual negotiations, based on forecasted high demand periods. However, hotels do have additional high demand periods that may not be included in the negotiated blackout periods and could be added to your program. Conducting regular audits to ensure only the negotiated blackout dates is critical, as travelers will either book alternative accommodations or leak out of your program. However, all of these challenges are solvable, even in the middle of a sourcing period. Corporate business is extremely valuable to hotels, particularly because of the high incidental spend (internet, room service, etc) that business travelers incur during their stays. Because of this, hotels rely on this business as a key profitability metric, especially if they have a large amount of volume from a company. With this reliance, companies have the ability to re-negotiate throughout the year with hotels that are providing unfavorable terms or restrictions. If hotels are unwilling to provide the agreed terms, identify new hotels or remove hotels from the program. Page 13

14 Are You Influencing Your Travelers to Spend More Money? Hotels understand the power of preferred hotel programs. Ultimately, travelers want to do what is in the best interest of their company and follow the directives they are given. Therefore, it is extremely important for hotels to be included in a company s preferred rate program, particularly in cities where a large amount of hotel volume is being sent. To ensure every hotel is providing the absolute best rate possible in the market, companies should constantly be monitoring the hotels included in the preferred rate program. One strategy hotels (particularly large chains) are using to increase reach to corporate travelers is through chain discounts. In a chain discount, a large chain will typically offer a small discount (traditionally 5-10% off the Best Available Rate) in conjunction with offering individual property negotiated rates. While these discounts may sound like found money, these discounts may actually end up costing companies money. Because these negotiated properties are marked as preferred, travelers are encouraged to book these rates, regardless of the rate and comparable properties in the market. In addition, by adding a chain discount to your program, you may end up adding more than 100 preferred properties in large cities like New York or Los Angeles, which does not give travelers a true sense of the market rate being offered and could create confusion. It may also build significant loyalty to a particular brand. Travelers may choose what is best for their loyalty account rather than what is best for the company. Therefore, Egencia recommends a full analysis on chain discounts, to identify actual savings generated through these rates vs. the missed savings lost by not showing all hotel options on a level playing field. Another opportunity companies have to look at their program mid-year to identify hotels and markets with spend under a threshold. Hotels will traditionally offer negotiated rates based on anticipated demand. If a company s hotel program spreads demand over a large number of hotels each individual hotel will only provide a small discount. By removing hotels or re-negotiating with key hotels to further consolidate demand, companies have an opportunity to add incremental savings that will go immediately to the bottom line. Consider consolidating demand to ensure each hotel will receive a minimum of 500 room nights. This is typically the level that the discounts would be meaningful on an annual basis. If you would like to engage with the Egencia Consulting Services group or need more information, please contact our team at consult@egencia.com or call toll-free Page 14