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Hotel Crunch

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DQI Bureau
New Update

Jim Young had had enough. The senior vice-president for global distribution

at InterContinental Hotels Group had seen IHG's 3,300 franchisees flirt too

much with the Internet. Some locally owned hotels had allowed online travel

agents, such as InterActiveCorp.'s Expedia Inc. and Travelocity, to offer

lower rates than those charged by InterContinental. That gave the Web services a

bigger slice of revenues per room than they pay the InterContinental chain. On

Apr. 20, he threw down the gauntlet at TravelCom Expo, an annual confab of 1,200

hotel owners and other travel execs. Franchisees have to choose between doing

business on the Web travel agencies' terms or on InterContinental's.

"If a hotel chooses not to comply, it won't be a Holiday Inn or a Crowne

Plaza any longer," Young told a packed room.

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Hotels

Hunters



Expedia, Travelocity, Orbitz.




Hunted


Chains, including Hilton Hotels, Starwood Hotels & Resorts, and

InterContinental Hotels Group.




At
Stake
Pricing

and profits in the $80 billion US hotel biz.




Outlook


Hotel chains are trying to get

Expedia to pay more for the rooms it resells. But that will be

tough. Online agencies have legions of loyal customers that they can

direct to the most  cooperative hostelries.



By 2006, the online upstarts are expected to account for 17% of the
lodging market, up from 8% in 2003.

Of all the battles between Big Business and Web insurgents, the one raging

between hotel chains and online travel agencies may be the fiercest. At stake:

who sets hotel prices and who gets the biggest profits in an $80 billion

industry. Traditionally, franchisers such as Marriott International, Hilton

Hotels, and InterContinental chains have been the hotel industry's dominant

middlemen. Hotel owners pay the chains 8% to 10% of their revenues in exchange

for marketing and booking services and for the right to call themselves a

Marriott or Hilton. Now, Expedia, Travelocity, and Orbitz are horning in on the

chains. Using the power of the Net, the online agencies last year booked 35

million rooms worth $5.8 billion, 8% of the market. Consultant PhoCusWright Inc.

estimates they will hit $13.3 billion in rooms in 2006, for 17% market share.

With more people booking rooms online, Web travel agencies are changing the

hotel industry's fundamental economics. Because they can fill beds with a

fury, Net agents are getting a bigger cut of hotel owners' revenues than the

chains get for the same room. Expedia, for instance, gets a $106 nightly

wholesale rate from the Dana Inn and Marina in San Diego for a June Sunday

night, then charges the customer $132. Customers pay less than the $145 rate

they would receive if they booked over the phone, and Expedia pockets a 25%

markup, or $26.

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Losing Sleep



Why are hotel owners willing to give Internet travel agents more money? The

Web sites can move market share to the hotels that give the agencies the

discounts they want. That's crucial in an industry that's chronically

overbuilt. A hotel owner's choice often is to give Web agents discounted rooms

or let them sit empty. The Snow King Resort Hotel in Jackson Hole, Wyo., began

getting up to 100 reservations a week from Travelocity after the site started

promoting the 209-room hotel in January. "We're more than willing to

discount to them because they more than make up the difference," says

Kristine Myers, Snow King's marketing and development director.

Most threatened in this new world are the hotel chains. The danger is that

hotel owners who give a hefty slice of their revenues to Web agents to get

customers may begin to trim marketing expenses elsewhere. They could push the

chains to lower their 8% to 10% fees - or drop them altogether. "If we're

going to pay the Web sites, we're going to find someone else to cut out,"

says Chip Conley, CEO of Joie de Vivre Hospitality, which manages 25 California

hotels.

Chains are fighting to save their position. Every major chain has forced

franchisees to agree to a best-rate guarantee policy that prevents them from

selling rooms for less on Expedia, Orbitz, or Travelocity than they do through

the chain's Web site or over the phone. If Starwood Hotels & Resorts

Worldwide Inc. catches a hotelier discounting through a Web agency, it fines the

owner $75. That takes away Travelocity's ability to sell, say, a Sheraton room

for less than Sheraton does, and gives brand-loyal consumers more reason to use

the chain's own site. Starwood and Hilton lavish benefits on customers who

stay loyal, including upgrades and frequent-stay points. Starwood says the

changes have increased the share of Net bookings done through its Web site, but

won't say how much. "It's working. It's more than a dent," says

Steven M. Hankin, Starwood's chief marketing officer.

The strategy may not be a long-term solution, however. Hotel owners barred

from giving Web players discounts may discover the policy is hurting their

business. The Radisson Lexington in New York is sticking with the chain rate of

$199, while Expedia visitors can stay at the more upscale Hudson for $190

because the independent hotel gives the Web agent bigger discounts. With the Net

at their fingertips, travelers can easily figure which hotels are the most

hospitable.

By Timothy J. Mullaney in BusinessWeek. Copyright 2004 by The McGraw-Hill Companies, Inc

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