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The Impact of E-Commerce and Social Networking on the Hotel Industry by: Jonathan Jaeger

The impact of global economic recession is taking its toll on the hotel industry. Smith Travel Research has reported a national RevPAR decline of 18.1 percent for YTD September 2009 compared to the same period in 2008. The decline in RevPAR is a combination of occupancy and average rate declines. As the economic conditions begin to improve and capital markets stabilize, we foresee an improvement on the demand side of the equation, however negative room rate growth will continue to be an obstacle. While much of the continued decline in rates can be attributed to the lag-time between pricing and demand, one factor that enables lower room rates is the transparency of pricing that has been facilitated by the use of internet websites as a booking channel.

A recent article released by The Business Journal presents a study that surveyed how people currently make their travel reservations. The data is presented below:

The internet became a major distribution channel for the hotel industry in 2002. Reservations through third party internet booking companies exploded in the early 2000’s as the industry struggled with the effects of the September 11th downturn. These internet booking companies offered deeply discounted rates to fill rooms. Recognizing that they were losing control of their inventory and pricing, the major hotel companies worked to limit the amount of inventory available to these sites and altered marketing decisions to incentivize guests to book directly through the hotel website. Nathan Butcher, E-Commerce Manager for Colwen Management, said that “People are becoming more and more prudent while also becoming more knowledgeable about the internet; consumers are making intelligent decisions online for the best possible rate.” From our experience in the hotel industry, it is apparent that many hotel companies have increased efforts to bring guests directly to the hotel website to avoid the 15 to 25 percent commissions for reservations booked through third party websites.

Social Networking sites such as Facebook and Twitter are the latest phenomenon in the hotel industry. Similar to internet marketing, Social Networking sites have given hotel operators the opportunity to directly connect with a new generation of travelers. Many hotels are using the social networking sites to offer discounted rates in an effort to stimulate demand. However, studies have portrayed the negative effects of discounted rates on profitability. Hotel operators must beware of this, and realize the lingering effects on overall profitability. Before decisions are made, a breakeven analysis can be done to calculate the amount of incremental room nights generated to off-set the decline in rate. In addition to a top line analysis, the true metric will be derived from additional NOI generated, taking into consideration the operating costs on a per occupied room basis.

Websites such as Bing Travel (previously known as Farecast) now project future hotel and airline rates by pulling information directly from the third party booking sites. A simple search for hotel rooms in Boston for December 8, 2009 revealed many “discounted” options. The first listing featured a specific hotel for $99 per night (considered a “deal” by Bing Travel) from an independent booking company while a simple search on this hotel’s web site also revealed a special rate of $99. Many hotel consumers do not know that the “discounted” rates can also be found directly from the hotel. In fact, booking directly with the hotel is often considered an advantage because the hotel will guarantee room type and several other special requests. Many of the major hotel chains now offer “Best Rate Guarantees” and it is imperative for operators to emphasize these campaigns especially to the leisure segment. Other travel related websites such as yapta.com will tell the consumers when prices are at their lowest levels and when it is the ideal time to book. Orbitz has recently rolled out a promotion called the “price assurance” where if another customer books at the same hotel for a lower rate, they will automatically refund you the difference. With the new internet companies and information available on the web, it will become increasingly difficult for hotels to increase rates ahead of its competitors.

Internet marketing has had many positive effects on the hotel industry. Marketing over the internet has given hotel operators the opportunity to create a positive image and reach more potential customers at a lower price. One example is PPC (Pay per Click) advertising campaigns that are now widely used throughout the industry. The primary goal with PPC advertising is to appear in the “Sponsored Ads” section of the major search engines when a potential customer searches for hotels. PPC ads often cost hotels about $1 per click versus many other marketing campaigns that cost hotels thousands of dollars. Several hotel operators have cited returns of around 8:1 on average for branded properties from PPC advertising offsetting the influence of booking at lower rates with the additional induced demand as a result of the advertisement. PPC advertising links consumers directly to the hotel website eliminating the need for third party booking sites. The hotel may be offering rooms at a lower rate than previously desired, but they do not have to pay the high commissions when reservations are booked directly. TravelZoo is another online booking information source which allows hotel operators to sell vacant rooms last minute and at discounted rates. Industry experts have cited that TravelZoo can provide returns between 10 and 20:1 with downsides that include lower ADR and appealing to less desirable segments of demand.

Historic trends have proved that occupancy and average rate metrics will improve as the nation recovers from the current economic recession. Once demand begins to increase operators will find less resistance when attempting to increase rates. Hotels that have maintained rate while selectively marketing to the social networking demographic in addition to effective internet marketing should be poised for growth beginning in the second or third quarter of 2010. E-commerce and social networking sites will ultimately help the industry grow. However, operators must be careful when discounting rates to stimulate short-term demand because the further the rate is discounted today, the longer it will take to recover and grow.

Jonathan Jaeger is a consultant with Pinnacle Advisory Group, who specializes in appraisals and valuation services at the Boston office. Mr. Jaeger is a graduate of the School of Hospitality Administration at Boston University and has been with Pinnacle for two years.