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Considering the Future of Electronic Distribution

Hotel & Restaurant Technology UPDATE, Summer 1999.

    Despite having heard the phrase "the new Millennium" too many times, I find myself pausing frequently this year to reflect on changes in the field of hotel electronic distribution and how we as hoteliers should respond to those changes. Here are some of my observations.

    For the past decade and a half, centrally processed hotel reservations have originated at either a Central Reservation office (a CRO) or from one of the Global Distribution Systems (the GDSs). Toward the end of the nineties, those two channels were suddenly supplemented by the remarkable emergence of the Internet. A look at the broad trends in the CRO and GDS production (leaving the Internet aside) shows:

  • CRO booking numbers ranging from up a bit to slightly down
  • CRO calls still growing in numbers
  • CRO call-to-booking conversion rates falling
  • GDS bookings growing, although at a declining pace

These indications suggest that CRO bookings have reached a plateau. Significantly, I do not think the same is true for CRO calls. Indeed, I foresee CROs migrating during the coming decade from reservation centers to service centers. Without question, important pre-reservation shopping calls and pre-arrival question calls will need to be answered, but revenue per call – the justification for operating most call centers – will diminish. The rising expense-to-revenue ratio in call centers will pose a dilemma for those who must defend the cost of call center operations.

GDSs, which are producing (depending on the market tier) 15% to over 80% of centrally booked reservations for North American hotels chains, show every indication of becoming still more important delivery sources. It would be premature, however, to forget that the majority of GDS bookings are made by travel agents, who are themselves in a period of turbulent transition. The number of full service travel agency locations in the US has declined steadily over the past six years. According to ARC statistics, as of January 1, 1999, there were 28,807 open and operating full-service traditional travel agency locations in the US, compared to 32,336 in 1994. The number has declined every year since 1994.

I could, and have, argued that travel agents will survive, that the churning we see now is a winnowing process in which the big get bigger, the small specialize to deliver expert service to niche markets, and those in the middle (or not watching and swiftly reacting) disappear. But this is too simplistic.

Travel spending is growing. Leisure travel especially is growing and will continue to do so dramatically during the next decade.  Plog Research recently reported US leisure spending at $369 billion in 1997 will grow to $449 billion by 2002. Travel agents are consulted extensively in leisure travel planning (58% of all leisure travel is booked through travel agents according to Plog) and are increasingly becoming an integral component in corporate T&E management.

Travel agents will survive but in a much changed marketplace. One of the most profound changes, I predict based on expert opinions I have heard and read, is the forging of new, much closer affiliations between suppliers – hotels cruise lines, airlines, car rental companies and wholesalers -- and travel agents. These preferred supplier arrangements will result in a comparatively limited range of products -higher commission products - being offered to the traveler. As a consequence, the market will be less open. Of more immediate importance, the suppliers who lack the preferred arrangements with travel agencies – with the appropriate market-moving travel agencies – will be at serious risk.

This change in the supplier/distributor relationship – the hotelier/travel agency relationship - has significance for us in electronic distribution. As preferred supplier relationships proliferate and become stronger, electronic links between our reservation systems (and our inventory) and the sales systems of our agency partners will become a steadily higher priority. Real-time inventory access and instantaneous booking confirmation on both the retail and wholesale levels will become the business standard.

And it will be the Internet that facilitates the proliferation of these preferred relationships, that makes possible the seamless inventory access they require. A recent study by Forrester Research found that 85% of the commerce now conducted over the Internet is business-to-business. While we in the hotel industry have recognized the Internet as an important supplementary retail sales medium, I do not believe we have looked at its role in making possible these business-to-business links. Indeed, our industry’s key indicator of the importance of the Internet – the number of reservations it delivers – may prove to be a dangerously misleading sign. I would go so far as to suggest that booking numbers may well, in the end, be judged as a "trailing" rather than a "leading" indicator of the Internet’s overall importance to the travel industry.

One more thought on the changing electronic distribution environment. We as hoteliers follow a traditional retailing model. We place product on our shelves – offering pre-priced, prepacked accommodation - and wait for the buyer to accept our offer. This seller-driven model is about to be disrupted – some would say is already being disrupted – by the buyer–driven model embodied in Priceline.Com.

I do not believe most of us have paused to reflect on the potential enormity of the buying process change that is emerging. The buyer proposing the price they are willing to pay, and the market responding with offers, is dramatically different from the conventional hotel sales model. Interestingly, hotel accommodation has been one of the first areas where Priceline.com has focused. And it has apparently found success. I suggest we can expect more and bigger "Priceline.com"s. The challenge is ours, as electronic distribution leaders and specialists, to determine how we will link our systems, and administer our rules of sale, in this new buyer/seller relationship.

Bottomline, I believe the role of the electronic distribution team will become higher profile and their performance more time sensitive. Awareness of the changing marketplace, of "with whom" and "how" we do business, and the electronic tools necessary to conduct that business, must be a priority for us if we are to do our jobs responsibly and proficiently.