Online bargain hunters push hotel room rates below 2000 levels

By Kathy Bergen
Chicago Tribune

CHICAGO — Sales representative Marta McNair heads out of town at least once a week on business and at least twice a quarter to visit family. And she always books her hotel rooms online.

McNair is among a rapidly growing legion of Americans who delight in mining the Web for dirt-cheap hotel rooms.

"I can get rates in New York in great hotels for under $200 that I couldn't get on the phone," she said.

But what's been a gold mine for travelers these past couple of years has been something of a sinkhole for the hotel industry. Online bookings have become the latest salt in the wounds of an industry hurt by the terrorist attacks of Sept. 11, 2001, the languishing economy and edginess about the prospect of war with Iraq.

Observers say the burgeoning corps of online bargain hunters has helped keep room rates below 2000 levels, and industry profits down 28 percent from that peak year.

And hotel companies, in many cases, made it easy for them to do so.

In their early forays into cyberspace, many hotel companies handed over too much control of inventory and pricing to third-party online travel agencies, observers say. And now they are in the unenviable position of trying to take back the reins after early shopping patterns have been established.

"Hotels pretty much didn't take charge, didn't look at the Web strategically, and that allowed middlemen, third parties, to come up with some very profitable schemes," said Bruce Mainzer, senior vice president for marketing with TravelClick, a hotel industry consultant.

Wholesale rates

The most common arrangement is known as the merchant model. It involves hotels making rooms available to online travel agents at wholesale rates, and the agents marking up those rates by 15 percent to 30 percent before peddling them to the public, according to Lorraine Sileo, an analyst with PhoCusWright Inc., an online travel consulting firm.

Early on, many hotels also agreed to turn over fixed allotments of rooms, at fixed prices, for fixed periods of time to online travel agents such as Hotels.com. Essentially they ceded control of a slice of their inventory and pricing, which started to rankle pretty quickly.

Many stumbled in viewing the Internet in a limited way, as a place where they would pick up additional business by selling distressed inventory. They did not foresee the day when their bread-and-butter clientele would demand Web prices.

That day arrived swiftly.

"Everyone is getting price-conscious, even corporate travelers," said John Mattesich, lodging analyst with Bear Stearns. "We're seeing corporate travelers doing their own booking on the Web."

Tough environment

Given the tough environment, there has been a lack of discipline regarding how much inventory is made available at steep discount on the Web.

Hotels "are using it as a dumping spot in the short term for excess inventory," said Ted Mandigo, owner of T.R. Mandigo, a hotel consulting firm.

And there can be a ripple effect into the hotel's existing trade, he said. Customers who pay full prices for reservations may later see the Web prices, become chagrined and end up negotiating for the lower rate when they arrive for check-in.

The pressure to move inventory on the Web will not let up anytime soon, according to Sileo.

"If you have empty rooms, you need to do what you have to do to fill them," she said. "I don't see that changing anytime soon."

But hotels are making changes in their Internet strategies, striving to get a better grip on the emerging sales channel, which accounted for 9 percent of hotel room sales in 2002, up from 2 percent in 1999.

For one thing, a number of hotel chains are taking steps to drive more business to their own branded Web sites, eliminating the middleman and keeping his cut for themselves.

Hotel sites already attract 51 percent of the $6.3 billion in online bookings made in 2002, according to PhoCusWright estimates. The remaining 49 percent goes to online travel agents, led by Hotels.com and Expedia Inc.

Six Continents PLC, whose brands include Holiday Inn and Inter-Continental, and Starwood Hotels & Resorts Worldwide Inc., whose brands include Sheraton, Westin and W, each rolled out programs last May guaranteeing the prices on their Web sites will be the best available.

"If a customer is able to find a better rate on another site within 24 hours of booking, we'll not only match it, but we'll beat it by 10 percent," said Eric Pearson, vice president of e-commerce for Six Continents. Starwood's program is very similar, and both companies report significant increases in booking on their branded sites.

Rival launched

In another vein, five major hotel companies — Hilton Hotels Corp., Hyatt Corp., Marriott International, Six Continents and Starwood — a year ago launched Travelweb LLC, their own rival to Hotels.com, Expedia, Travelocity and other online booking sites.

Travelweb's hotel-booking service is available on a private-label basis on Orbitz LLC, the airlines-owned travel site. In the next month or two, it also will be used, on a private-label basis, by Continental Airlines and Pleasant Holidays, said Joe Humphry, its chief executive officer. It will launch as a branded site this spring.