European Hotels: Managing Hospitality Distribution August 2005

Published by PhoCusWright Inc. European Hotels: Managing Hospitality Distribution

Preview

Written by Bill Carroll and Peter O'Connor

Edited by Lorraine Sileo

European Hotels: Managing Hospitality Distribution is published PhoCusWright Inc. by PhoCusWright Inc. The information contained herein 1 Route 37 East, Suite 200 is derived from a variety of sources. While every effort has Sherman, CT 06784-1430 been made to verify the information, the publisher assumes neither responsibility for inconsistencies or inaccuracies in USA the data nor liability for any damages of any type arising +1 860 350-4084 from errors or omissions. +1 860 354-3112 fax www.phocuswright.com All PhoCusWright Inc. publications are protected by copy- right. It is illegal under U.S. federal law (17USC101 et seq.) to copy, fax or electronically distribute copyrighted mate- rial beyond the parameters of the License or outside of your organization without explicit permission.

European Hotels: Managing Hospitality Distribution PreviewCorporate Travel Overview

Introduction This preview assesses the objectives, strategies and key alliances of the pri- he increasing use of the Internet for mary players in this rapidly changing Tresearching and buying hotel rooms European marketplace. A forthcoming in Europe is revolutionizing the way hote- PhoCusWright report, European Hotels: liers distribute their services. While the Managing Hospitality Distribution, will major European chains are actively help- provide more detailed forecasts, predic- ing their properties manuever and capital- tions and recommendations for hoteliers ize on the Internet, the vast majority of looking to successfully navigate these independent properties and small chains waters. The report’s goal is to explain and are coping with, and trying to understand predict future trends in European hos- the impact of, a bewildering array of dis- pitality distribution and to suggest key tribution options. considerations for independent properties and small chains. This preview sets As a result, the hospitality distribution the groundwork for that comprehensive landscape will change. The larger chains report. will drive more bookings through direct online branded channels. Properties in Methodology locations previously served by tour whole- salers with pre-packaged programs will PhoCusWright interviewed executives generate more bookings through dynamic from major international and European packages assembled by consumers them- hotel chains, online travel agencies, selves. This will require new ways of man- travel technology companies, destina- aging inventory and price. Properties will tion management companies and global also be challenged to decide with whom distribution systems (GDSs). Over 40 to align and at what price, in terms of interviews were conducted in fall 2004 brand and distribution expense. Online and winter 2004/2005. PhoCusWright intermediaries will step up the pressure also studied trends and data from public on small chains to partner with them documents as well as other PhoCusWright to open up non-local markets. These research reports, including From Property intermediaries will become “the brand” to Screen: Managing Online Hotel & Lodging beyond the regional market. Distribution, which focuses on the U.S. market.

Key Findings independents. Examples include the Amadeus acquisitions of Optims and ■ The Internet is increasingly being used majority stake in Opodo, and Sabre’s for researching and buying travel in purchase of SynXis. Europe. PhoCusWright estimates that currently one in 10 hotel bookings ■ Pan-European chains have taken for larger properties are made online, an aggressive stand against online with these major chains also reporting intermediaries by growing direct, the highest year-over-year growth of brand-based bookings and establish- 60–70%. Some small regional chains ing the conditions under which they and independent properties that have will supply merchant inventory. All successfully embraced the Internet are chains interviewed by PhoCusWright seeing 15% of their bookings com- have developed detailed strategies to ing from online channels. Due to drive more online business to their the high proportion of properties in branded Web sites; for example, Europe that are small, local and inde- InterContinental Hotels Group (IHG) pendent (and not actively online), has pulled inventory from Expedia to PhoCusWright estimates that in 2004, increase direct sales. 6% of European hotel bookings were made online. ■ Dynamic packaging, whereby the consumer combines individual travel ■ U.S.-based intermediaries’ share of components online to create a custom- online travel bookings has eclipsed ized package, is quickly replacing both their European counterparts, with online and offline purchases of tradi- Expedia, Sabre (via Travelocity Europe tional vacation packages. The flexibil- and its recent acquisition lastminute. ity, ease and appeal of creating custom- com); and Cendant (via ebookers) ized, flexible vacations are challenging holding a combined share of nearly major tour operators to change the 60% of the European online travel way they do business or risk becoming agency market. obsolete.

■ Leading online travel agencies view ■ Priceline has increased the availabil- hotels as the prime target for book- ity of opaque inventory options for ings and net revenue (contribution) hotels in the European market through growth, thanks to the successful U.S. its 2004 acquisition of Active Hotels, experience with the merchant model, a hotel reservations provider. Active the relatively high percentage of net Hotels currently serves the distribution income generated from hotel bookings needs of 6,000 mostly independent and the fragmented European hospital- European properties. ity market. ■ Europe’s highly fragmented and pri- ■ GDSs are increasing their share of marily local hotel market has attracted online hotel bookings by acquiring U.S.-based distribution management distribution and channel manage- solution providers such as Pegasus and ment solution providers and targeting TravelCLICK/iHotelier. These compa- their service set to small chains and nies see growth opportunities in sup- planting chains and traditional rep-

resentation companies’ services with U.K. carriers Ryanair and easyJet claim middleware and distribution products that over 95% of bookings are gener- that meet the needs of independent ated online. These carriers frequently properties and small chains on an á la offer hotel rooms on their Web sites in carte service and fee basis. virtual partnerships with third party companies that have their origins in the Europe Primed for tour operator segment. Online Travel Growth ■ Actions by the national carriers to achieve similar levels of cost savings The European online travel market is still by shifting some of their distribution largely driven by airline sales due to sev- online. eral factors, including: ■ A lack of suitable hotel inventory in ■ The continued growth of low-cost carri- locations outside major cities, which is ers that rely on the Internet as their pri- clearly limiting online hotel sales. mary distribution channel. For example,

Table 1 European Online Travel Market (Leisure, Unmanaged Business) 2002-2006 (€M)

2002 7.7

2003 12.7 +65%

2004 19.2 +51%

28.6 2005 +49%

41.6 +46% 2006

0 10 20 30 40 50

Note: 2005-2006 figures are projections Source: PhoCusWright Inc.

Table 2 European Online Travel Market (Leisure, Unmanaged Business) by Region 2002-2006 (€M)

15,000 2002

2003 12,000 2004

9,000 2005 2006 6.000

3,000

0 UK France Germany Spain Scandinavia Other

Note: 2005-2006 figures are projections Source: PhoCusWright Inc.

However, online hotel sales are devel- IHG, Hilton International, Sol Meliá and oping rapidly in Europe, especially in Marriott International. Properties located the Western countries and among the in large cities, including London, Paris, larger chains. The U.K., Germany and Rome, Barcelona, Brussels, Amsterdam, France lead in terms of online hotel Venice, Lisbon, Madrid, Berlin and sales, although Scandinavia, Spain, Italy, Dublin, account for the most hotel rooms The Netherlands and the Benelux coun- sold online. But the European hotel mar- tries are not far behind. New European ket is largely represented by small, inde- Union countries such as Estonia, Latvia, pendent properties, which are unlikely to Lithuania and the Czech Republic lag have effective, transactional Web sites of considerably. These trends are illustrated their own. As a result, online hotel sales, in PhoCusWright’s forecast of online trav- representing an estimated 6% of total el distribution among European countries European hotel revenues, significantly through 2006 (see Tables 1 and 2). under-represent market potential.

The hotel inventory available online is In the future, the mix of European hotel primarily provided by the major interna- properties available online will change. To tional chains, such as Accor, Best Western, meet consumer needs, online intermediar-

Table 3 Leading Online Travel Agency Market Share, Europe, 2004

lastminute.com (1) 22% Expedia 36% Ebookers

17% Opodo 6% Travelocity/ Europe 6% 13% All Others

(1) Travel products only Source: PhoCusWright Inc.

ies will continue to expand their efforts Online hotel sales in the European market outside primary and secondary cities. will also be impacted by the following: Currently, the U.S.-owned online travel agencies Expedia, Travelocity and ebook- ■ Increased use of dynamic packaging by ers hold a combined 36% share of the both online travel agencies and suppliers European online travel agency market (see as a substitute for pre-packaged offerings, Table 3). Sabre's lasminute.com acquisi- giving consumers greater control over tion will boost that number closer to 60%. trip options, including hotel choice.

In some situations, as has been the case ■ Leadership by European chains to man- with Priceline, intermediaries will use age online distribution in an effort to acquisitions to quickly gain online hotel avoid the adverse net revenue effects of inventory, resulting in wider distribution online merchant programs experienced in and more sales. Mergers and acquisitions the U.S. According to PhoCusWright esti- of traditional tour operators are also likely mates, less than 20% of European chain to accelerate as online intermediaries online bookings are generated by online strive to get better access to leisure-ori- travel agencies, with an even smaller per- ented hotel-room stock. centage as merchant bookings.

■ Mergers, acquisitions and organic agencies are already targeting Europe as a growth among an increasingly smaller major source of growth and net revenue. set of pan-European online agencies, The European online travel market – par- which are gaining increased market ticularly hotel inventory – is untapped power and recognizing that hotel book- compared to the U.S., providing outstand- ings represent a significant contribution ing expansion opportunities. In fact, to profit margins. less than 30% of three-star hotel rooms are associated with major international ■ Growth of small, regionally focused chains. This inventory is underrepresent- intermediaries, such as the U.K.’s ed and, for the most part, not available LondonTown and Germany’s HRS, online. Therefore, the potential to provide which represent an important contribu- distribution services and produce high tion to online sales for hotels within merchant margins is significant. their catchment region. However, the presence of so many smaller operators Expedia (known as IAC Travel until its will make reservations management recent spin off from IAC), Sabre and very complex, in terms of choosing a Cendant are the most active U.S.-based portfolio of online intermediaries. players in Europe. Over the past three years, each company has been on an ■ Fragmentation of the European hotel acquisition and expansion binge that is market, with branded properties repre- likely to continue (see Table 4). Sabre is senting less than 20% of the market. in the process of acquiring lastminute. com, the last major independent online ■ Stronger, more powerful regional chains, travel agency in Europe, and its online whose financial and organizational travel agency Travelocity recently re- structure will give them the incentive energized its earlier European expan- and capacity to effectively negotiate sion efforts. In 2004 Travelocity pur- more favorable relationships with mer- chased the remaining share it did not chant-based online intermediaries. already own in the non-German assets of its Travelocity Europe joint venture ■ Language and localization issues that with German retailer Otto Group. It limit the growth of European online also bought the French tour operator travel. This will increase the impor- Boomerang, and launched its first con- tance of visual media content, reduce sumer-direct online presence in France the richness of textual content and fur- under the name Odysia. Expedia bought ther concentrate market share among Anyway.com in 2003, and in 2004 distribution intermediaries, including added two corporate travel companies, major chains, which have the finan- France’s Egencia and the U.K.’s World cial resources to make investments in Travel Management. Cendant, mean- geographically broad and culturally rel- while, picked up ebookers in December evant content. 2004 and, two weeks later, Gullivers Travel Associates, instantly upgrading its European position. U.S. Players Target Europe In addition, Priceline increased its pres- As a result of the market’s future poten- ence in Europe through the acquisition tial, the leading U.S.-based online travel of Active Hotels. Most of Active Hotels’

Table 4 Selected European Online Travel Acquisitions, 2003-2005

Company/Year Acquired Country Amadeus 2004-2005 Opodo (74%) Europe 2005 Eviaggi (via Opodo) Italy 2005 Quest Travel (via Opodo) U.K. 2005 Karavel (via Opodo) France 2005 Travellink (via Opodo) Sweden 2005 Optims Europe/Asia Cendant 2004 ebookers Europe 2005 Gullivers Travel Associates Europe/Asia CNG Travel Group 2004 PlacesToStay.com Europe IAC 2003 Anyway.com France 2003 Interval International U.S. /Int’l 2004 Egencia France 2004 World Travel Management U.K. lastminute.com 2003 Holiday Autos U.K. 2003 Med Hotels U.K. 2003 lastminute.com Spain Spain 2004 Gemstone U.K. 2004 First Option U.K. 2004 Online Travel Corporation U.K. 2004 lastminute.de Germany Priceline 2004 Active Hotels Europe Sabre 2004 Travelchannel.de (via Travelocity) Germany 2004 Flug.de (via Travelocity) Germany 2004 Boomerang (via Travelocity) France 2004 Travelocity Europe (non-German assets) Europe 2005 lastminute.com (expected to close 7/05) Europe TUI 2004 Ferien.de Germany

Source: PhoCusWright Inc.

properties are in the U.K. (40%) and to attract them. The growth in online France (25%). travel and the evolution of intermediaries across Europe and North America Most European companies, including potentially provide them with access Accor, Hilton International and IHG, as to international guests. In effect, major well as smaller regional chains like Sol online travel agencies could serve as Meliá, Thistle, Jurys Doyles and Rezidor their brands outside of their regional SAS, have reacted quickly to the chal- markets, thus driving business to these lenges from U.S.-based intermediaries. small operators. Amadeus, the largest European-based GDS, and lastminute.com, the soon to be former leading independent European European Intermediaries online travel agency, have sought to shore up market positions through acqui- Utilize Acquisitions sitions. Lastminute.com continues to struggle with profitability, a contributing Amadeus, whose airline owners recently factor that allowed Sabre to offer a 47% agreed to sell controlling interest to the premium over its battered stock price. private equity firms Cinven Group and BC Partners, will still be partially owned PhoCusWright’s interviews with leading by national carriers Iberia Airlines, Air chain executives found they are invest- France, and Lufthansa (which will collec- ing heavily in their branded Web sites to tively retain something close to their pre- drive more direct bookings. These chains transaction stake of 47%). The public-to- are working closely with their properties private transaction has cleared European to better manage distribution and inter- regulators and a tender offer is pending. mediary agreements, as well as negotiat- ing directly at a corporate level with the Its European online businesses include online travel agencies to establish more e-Travel, a supplier of corporate travel acceptable terms and conditions, such as technology products; Amadeus Germany rate levels/rate parity, display positioning (formerly START), Germany’s leading lei- and search engine marketing practices. sure package and travel distributor; and While IHG has taken a global public Optims, the leading European supplier position on these distribution issues and, of IT services to the hospitality industry. as a result, has pulled out of Expedia, Amadeus also has a controlling stake in other European chains have been more Opodo, the European counterpart of U.S.- subtle in their dealings with intermediar- based Orbitz, which recently acquired ies, choosing to work out issues privately Karavel. In February 2004, Amadeus for now. announced plans to sell its interest in the U.S.-based online travel agency For smaller chains and independent OneTravel.com to RCG Companies. properties, there is an opportunity to work with intermediaries to expand their Lastminute.com, which enjoys the greatest online businesses. In many cases, these geographic market reach among European companies could benefit from access online travel agencies, has grown both to potential guests beyond their local organically and through acquisitions. It markets, but lack the brand recogni- has purchased major online players in tion, marketing and distribution reach most major European countries, including

online portals, hotel discounters and tour ■ offering customers the opportunity to operators (see Table 3). From the hotel per- design their own trips using dynamic- spective, lastminute.com offered a viable packaging technology. and willing substitute for U.S.-based travel intermediaries. However, its acquisition Dynamic packages are particularly advan- by Sabre will reduce the number of such tageous to hotels that want to keep their options by one. room rates “opaque” within the total bun- dled package price. These types of pack- Established in 1995, WorldRes offers a ages also give hotels an alternative to tour modern technological platform to sup- operators’ fixed net pricing and inventory port Internet hotel reservations, as well schemes. as online distribution of hotel inventory Several major European markets also have to multiple consumer-focused travel Web very active destination marketing orga- sites. Initially established to serve smaller nizations (DMOs) with an online pres- independent properties, IHG, Hilton ence. In many cases, these organizations International and Accor invested heavily are government sponsored to promote in developing the company as both an tourism, although the more successful alternative to the major online interme- DMOs have significant private sector diaries and a switch technology for Web- involvement or control, such as Tiscover. based channels. Originally developed by the Tyrolean tourist board, Tiscover is now a commer- Despite this investment, WorldRes has cial company offering both travel reserva- struggled in Europe. In 2004, it sold its tion and technology services. stake in PlacesToStay.com to CNG Travel Group and has seen declining book- DMOs are well positioned to provide rep- ings, layoffs and management changes. resentation and online booking capabili- In March 2005, WorldRes assets and ties to regional independent and small businesses were acquired by World chain properties, thanks to the fragment- Reservations International (WRI), a bud- ed nature of the European hotel market. get accommodations online retailer and By acting as a consumer brand, DMOs can distributor. WorldRes will retain its brand provide these properties with a less expen- name (as a separate division under WRI) sive way to promote and secure reserva- and serve the affiliate distribution market. tions. More importantly, DMOs can play a major role in improving hotel search engine marketing. Tour Operators, Destination Marketers Seek Roles Conclusion The tour operator market, led by TUI, The way that Europeans shop for and Thomas Cook, Kuoni, MyTravel and Rewe purchase travel is dramatically chang- Touristik, is being directly challenged by ing. For large sections of the population, major online intermediaries that are: the Internet has become a convenient, inexpensive way to buy travel products. ■ acquiring tour operators; Dynamic packaging, involving more ■ developing their own travel packages; direct consumer involvement and choice, and

is replacing pre-packaged, tour operator tion providers that give independent programs. and small-chain properties access to advice and distribution management The growth and evolution of the systems. International companies like European online travel market is creating Pegasus, TravelCLICK/iHotelier, Sabre’s both a challenge and an opportunity for SynXis, Cendant’s Trust International and hotel properties, particularly indepen- Amadeus’ Optims, are focusing on this dents and small local/regional chains, market. All of these companies offer tech- which are finding advantages in develop- nology and service, rather than branding, ing and using their own Web sites to pro- and they relate their fees to the service duce direct bookings. level provided. They are also linking distribution management systems and tech- At the same time, distribution has become nology to existing property management, more complex as various intermediaries, yield management and/or decision sup- such as U.S.-based Expedia, Cendant and port systems at the unit level. Sabre, as well as European-based Amadeus and lastminute.com, connect directly to On the other hand, chains provide their the customer. properties with branding, direction, assistance, technology and systems to manage The complexity of distribution choices distribution. and opportunities can be bewildering to independent properties and small chains. Each of these issues is significant to the Not only do they need assistance deter- future of online hotel sales in Europe. The mining what to do, but also in selecting unique characteristics and structure of the and using systems and tools to manage hotel sector in Europe will lead to a new distribution and optimize occupancy and generation of technology providers devel- ADR. oped to help smaller chains and independent properties maintain their indepen- These needs are spawning the growth dent status, while at the same time, better and development of distribution solu- manage their electronic distribution.

About the Authors

Bill Carroll is a Senior Lecturer at Cornell’s School of Hotel Administration. He is the CEO of Marketing Economics, a private consulting company serving the travel industry in the areas of pricing, distribution, revenue management and strategic planning. Bill is also a contributing writer/analyst for PhoCusWright Inc. Bill holds a PhD in Economics from Penn State and has held senior management positions in the travel industry including Hertz where he was the Division Vice President for Global Marketing Planning with responsibility for marketing planning, pricing, revenue management, distribution and executive information systems.

Peter O’Connor is co-Director and Associate Professor of Information Systems at Institute de Management Hotelier International (IMHI), an MBA program in international hospitality management administered by ESSEC Business School, Paris. His research interests focus on information technology in hospitality (particularly on electronic channels of distribution) and he has authored two textbooks: “Using Computers in Hospitality” and “Electronic Information Distribution in Hospitality and Tourism“ 080805 as well as numerous articles in the trade and academic press. He is also a past winner of the prestigious Best Research Paper award at the ENTER Information Technology in Tourism conference.

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