Just as the taxi industry responded to new competition by trying to manipulate governments in their favor, hotel chains are ganging up on travel industry innovators such as Airbnb and online travel agencies.
Sadly, just as cab owners ultimately paid the price for their sector’s refusal to innovate, owners of chain hotels will ultimately pay the price for their brands’ ongoing and increasingly expensive fight against progress.
The death of an industry
Do you remember traveling to a new city before Uber and Lyft? Most of us would rather forget!
Getting around usually involved attempting to hail a taxi, hoping the driver would agree to take you to your desired destination and wondering if he would be kind enough to take the most direct route.
And, of course, you had absolutely zero control over any of these outcomes.
As a result, it’s no wonder that transportation industry disrupters like Uber and Lyft have been so wildly successful.
History shows us that the companies that prioritize the customer, not those that simply tried to protect their traditional marketplace, won the battle over the taxi industry.
Peter O'Connor
Uber and Lyft took a rigid, non-customer-centric product and made it cheaper, customizable and more convenient. Instead of endlessly waiting for a taxi, your phone now tells you exactly when your car will arrive.
Instead of wondering whether the driver will agree to your destination, customers are guaranteed to go wherever they want, and instead of speculating how much the fare might potentially be, customers now know in advance exactly how much they will pay
a-nd it’s usually less than the cost of a "normal" taxi.
In the face of strong competition, savvy companies choose to innovate.
How did taxi companies respond to the advent of rideshare apps? By suing Uber and Lyft while continuing to offer the same inferior service experience to customers.
Instead of adapting and evolving to match new consumer expectations, they instead chose to focus their energy on fighting the disruptors with legal action and lobbyists.
Some taxi lawsuits alleged "predatory pricing"; others claimed that taxi companies have "exclusive rights" to pick up passengers in certain areas.
But, as we know, nearly all the taxi sector’s efforts to stem the growth of rides-hare companies have failed because their allegations stand on thin ground: No marketplace is exempt from competitors that offer a better product.
Unfortunately, it’s the drivers that paid dearly for the taxi companies' misguided response to competition.
To operate a taxi, most cities require drivers to pay up to $1 million for a medallion.
By purchasing a medallion, taxi drivers are, in effect, stuck.
Paying back medallion loans used to take years, but with the advent of Uber and Lyft, competition has increased, revenues are down and drivers are defaulting on their loans in droves.
Because of their failure to innovate, taxi drivers are now shackled to a product that consumers don’t want, and the taxi companies to which they’ve pledged their support have left them high and dry.
Chain hotels - the new "taxi medallion"
The parallels between what happened in the taxi sector and in today’s hotel industry are astounding.
Owners that brand their hotels with one of the major international hotel brands are essentially purchasing their own version of taxi medallions: multi-decade franchise or management contracts.
Gone are the days where hotel brands owned their real estate assets: Nearly 99% of branded hotels in the United States today are either franchises or management contracts, and these contracts come with stiff terms.
Franchise agreements can last 30 years while management contracts can last up to 40 years, apparently even longer than one Marriott leader thinks it’s safe to speculate about the hotel industry.
Just as taxi drivers are locked into their medallions, so too are the owners of branded hotels hog-tied to their franchise or management contracts.
Owners, can you pick up the check?
To ward off the threat from OTAs like Booking.com, Ctrip and Expedia Group, hotel brands are currently waging an expensive direct booking war.
Over the past two years, big brands like Marriott and Hilton have aired television commercials and commissioned extensive print and online marketing campaigns asking consumers to book directly instead of using intermediaries like OTAs.
While there’s nothing wrong with trying to drive more direct bookings, many hotel owners find it increasingly unfair that brands are using owners’ marketing dollars to foot the bill for these campaigns.
Sadly, just as cab owners ultimately paid the price for their sector’s refusal to innovate, owners of chain hotels will ultimately pay the price for their brands’ ongoing and increasingly expensive fight against progress.
Peter O'Connor
Between 2016 and 2017, owners of hotel brands saw anywhere from +12% to a whopping +81% increase in franchise fees.
These increases come as little surprise. Brands need to find some way to pay for the exorbitant campaigns they’re running to drive direct business, and they’re using their owners to supply the funding.
The big brands are also using their owners' coffers to grow their loyalty programs.
While there’s nothing wrong with reducing the cost of customer acquisition and driving repeat business, many owners are wondering why they are paying so much to fund programs that may not even be working.
Hotel owners typically pay a loyalty fee per reservation yet only receive average daily rate reimbursement from their brand if they hit extremely high occupancy thresholds of roughly 96%.
Yet, according to Phocuswright, 70% of hotel loyalty program members admitted to belonging to two or more loyalty programs.
If you can’t beat ‘em, sue ‘em!
Unfortunately for owners of branded hotels, the big brands have found a third way to squander their marketing dollars. Just like the taxi companies before them, hotel brands are increasingly using litigation to try to protect the status quo.
For example, the American Hotel & Lodging Association is a trade group that has dedicated significant resources towards taking down Airbnb in key markets across the U.S.
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Its chief executive, Katherine Lugar, is a former top lobbyist for the Retail Industry Leaders Associations, and the group itself has 24,000 members.
In 2016, the AHLA hatched a "multi-pronged, national campaign approach at the local, state and federal level" to stop Airbnb from spreading in its markets.
In fact, the AHLA spent $2.4 million on lobbying efforts in 2016, a 30% increase from the previous year.
And guess who funds the AHLA? Marriott, Hilton and Hyatt, amongst many other major hotel brands, are all members.
Don’t become a dinosaur
Are owners of branded hotels doomed to suffer the same fate as taxi drivers? No, but they’re fighting an uphill battle.
A few decades ago, independent hotels in the U.S. outnumbered branded hotels, but now the reverse is true. Most of the hotel inventory in the U.S. is now branded, and nearly 60% of all rooms under development in the U.S. are either Marriott or Hilton
properties.
The brands are more powerful than ever before, and with this power come tough contract terms.
How can hotel owners fight back?
1. Owners need to understand their costs.
They pay franchise fees and loyalty fees, among others, and these may be increasing significantly each year.
Owners need to understand exactly how much there are paying and how the brands are using these fees to actually drive business to their properties.
2. Owners need to know their rights.
If an owner decides to drop their brand flag, how much are early termination fees?
Is the brand honoring the conditions it promised in the contract?
3. Owners must understand their area of protection.
As Marriotts and Hiltons proliferate, the smaller the area of protection becomes (area of protection is the radial distance between one hotel and competitors typically under the same brand flag or brand family).
Are the brands holding up their end of the deal to protect owners from new competitors under the same brand umbrella?
Remember, Marriott now has 30 brands after its merger with Starwood, and it’s important to also consider soft brands in addition to the more obvious ones.
These brands often play in the same market and competitive segment, further blurring clear and distinguishing lines that were negotiated and designed to protect existing owners.
Warning from the past
History shows us that the companies that prioritize the customer, not those that simply tried to protect their traditional marketplace, won the battle over the taxi industry.
As George Santayana said: "Those who cannot learn from history are doomed to repeat it."
Not learning from the mistakes of the taxi industry would be a very serious mistake for hotel owners.