“Hotel Industry Requires Opportunity for Competition, Including Consolidation, Amidst Online Travel Agencies and Franchise Model”

Research commissioned by the American Hotel and Lodging Association and conducted by Morning Consult reveals that hotel bookings account for 15 percent of all U.S. e-commerce, with more than 500 bookings taking place every minute. This business model is highly profitable, generating billions of dollars annually for Online Travel Agencies (OTAs) such as Expedia and Bookings.

Hotels pay over $50 billion to OTAs each year. These OTAs control 90 percent of the online hotel marketplace. Despite research indicating that direct booking with hotels results in higher customer satisfaction, the prevalence and aggressive marketing of OTA sites suggest that their dominance is likely to increase. As these sites grow and hotels handle fewer of their own bookings, hotels lose bargaining power, allowing OTAs to demand more from hotel franchisees.

The fragmented nature of the hotel industry and the franchise model that many hotels operate under give OTAs a significant advantage. For instance, Hilton does not own any of its 7,000 properties, making it difficult for franchisees to resist OTA pricing.

However, Choice Hotels is attempting to counter this trend by acquiring Wyndham. The combined market capitalization of these two companies is $6.4 billion and $5.9 billion respectively, which is significantly less than hotel giants like Marriott ($59.7 billion) and Hilton ($40.8 billion). A merger between Choice and Wyndham could provide them with more leverage to negotiate lower commissions with OTAs. Booking commissions can be as high as 30%, so having more bargaining power could save franchisees significant money, which could then be invested in direct-to-consumer marketing and other areas.

The current market trend suggests that OTAs could become the dominant force in the hotel market, leading to decreased profits for hotel franchisees. By merging with Wyndham, Choice Hotels hopes to avoid this issue, expand their booking platform, and increase their bargaining power with OTAs. This move should be supported as it could lead to increased market competition, potentially resulting in lower prices and greater accessibility for customers.

Despite the potential for consolidation to increase competition, some find this concept difficult to grasp due to the multifaceted nature of businesses. This is especially true in the hotel industry. Even if Choice and Wyndham merge, they will still face competition from nine other brands, including well-funded giants. These brands see the value in the economy and midscale segments where Choice and Wyndham’s hotels are prevalent and are aggressively expanding into these areas.

Running a hotel has never been more challenging due to inflationary pressures, the lingering effects of the COVID-19 pandemic, and rising wages. The merger between Choice and Wyndham makes sense from a market perspective as it could increase customer acquisition through direct channels, reducing reliance on OTAs for hotel bookings.

In the current economy, hotels need every available tool to compete. A combined Choice-Wyndham entity could be a valuable player in this competitive landscape.

Source: realclearmarkets.com

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