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Wednesday, August 13, 2008

Channel Choice - Hotel Distribution 101

You are standing at a fork in the road. There are no clear signs telling you what to do. Your gut tells you to follow the road most traveled, but is that the right thing to do?

You are a manufacturer of soap - all kinds of soap. You have a choice in how to sell your soap. You can go the road most traveled and sell through Walmart or Target (the 800 lb gorillas), or the road that provides a little more margin for you, but where you sell less product, the grocery and drug store chains (the neighborhood channel).

Or you can go against all odds and open a store of your own (consumer direct). Your brands are strong. They can stand on their own. But is it worth it in the end???

And price and margin are one thing, the cost of opening and operating your own store is yet another. People may not walk in on their own. Or if they do, it may be inconvenient. After all, they have to shop for bread and milk or their cosmetics and perscriptions somewhere else. Is it compelling enough to make another stop for soap?

And what if the neighborhood channel didn't cost you a thing unless they sold your product? No delivery costs, no inventory, nothing. What choice would you make if you had a truly variable cost channel?

Somewhere inside, there is a voice arguing that you need to get the customer all to yourself, to insulate you from competition. But then there is the cost of building, staffing and maintaining the store and there is the advertising to attract consumers.

In another corner of your mind, is the voice that reminds you that for years and years, being merchandised at eye level in the neighborhood store (at full price mind you with no coupons) has served you really well. People chose you because of who you were, of the consistent quality of your product.

The 800lb gorillas are all about price and all about the product being on sale, all day, every day. If your price is low enough, you will be at "eye level" online (e.g. first screen). So I sell more..... but for way less. And I still have to pay for that distribution and whoa... at a pretty hefty price because of their market power.

So getting them to my store is still the best, isn't it???

The travel ecosystem is a complex series of distribution channels and it extends from the individual suppliers with products such as airline seats, hotel beds, cars, cruise cabins, tours, train seats, theatre tickets, theme park entry, etc., down to the consumer, who needs transportation, accommodations, respite, excitement.

As suppliers choose how they will sell their products, the closer that they can get to the motivation of the customer, the better. More on that later in my next blog on Higher Order Marketing™.

As you are presented with choices of how to market your product, it stands to reason that the higher the profits from a channel, the more inventory you would want to push through that channel. Right?

Well, not if you observe the conventional wisdom of the travel industry.

Witness the 1Q08 statistics from my friends at TravelClick about the hotel sector.

The average ADR (average daily room rate) for the travel agent channel is $176.83. The online component is $117.85.

Let's do the math.

$176.83 gross ADR
- 17.63 commission
- 10.00 GDS and Pegasus booking fees/transactions (being generous)
$149.20 net ADR

$117.85 gross online ADR

$31.35 deficit in selling online


So, through the GDS/Agency channel I have to pay a booking fee (which varies depending on participation level) and I have to pay for the switch cost through Pegasus (or develop my own connections to each of the GDS companies), but if they don't sell anything, I don't pay anything incrementally. And the travel agent deals with people who want to travel, all day long, every day. Variable cost at its finest for highly qualified demand aggregation.

But if I sell for $117.85 on average online, with a $31.35 deficit out of the gate, if this is sold through an online 3rd party agent, I have either a commission or the merchant model margin cost. Ouch. So I do need to pay attention to how much I'm devoting of my inventory to those lower margin channels.

If I sell direct, I have the customer in my grasp and don't have the booking fees or the switch costs or the commissions, but I still start with a lower net ADR and still have the cost of maintaining my web site, the call center, driving qualified traffic, advertising, etc. Even if I don't sell a single room through that channel. Whew. I see the fixed cost issue now.

So now, let's look at the channel shift trends. If logic holds true, hoteliers should be doing everything possible to sell through the variable cost travel agency channel (the neighborhood channel), right?

Wrong.

Click on the graphic at the right to see the stats for the major chains in living color.


The picture is clear. Hoteliers are moving headlong toward internet distribution of their products. Whether this is driven by consumer choice or their overt efforts is another story, which I'll talk about another day.

But think about it. If a hotelier has a choice to drive consumers to their own brand sites or to the neighborhood distribution channel (the travel agent), what should they be doing?

Can you make up $31.35 per room night in volume????

I welcome opposing arguments from chains and independents alike. Write to me at chicke@solutionz.com or post your comment here.

Chicke Fitzgerald


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