New Study from Kalibri Labs Shows Direct Bookings Push Is Working[i]
The War Is Over, And the OTAs Have Won[ii]
For Hotels, the Airbnb Threat Could Be Receding[iii]
Hotel Investors May be Ignoring Airbnb Threat[iv]
Believe it or not, these are all headlines from just the last few months. The oldest of them was published four months ago, the most recent in November. Conflicting data is spreading like wildfire. How are you supposed to sign off on the 2018 marketing plan or revenue strategy when ambiguity seems to be the prevailing trend.
Independent hotels and vacation rentals are more vulnerable in these scenarios. Why? Because most of the reports focus on flagged hotels. A survey of 27,000 often encompasses mostly (or all) larger, branded hotels. There is far less research available to independents, and vacation rentals can’t yet get useful competitive data.
Here’s what independent hotels and vacation rentals need to know to move into 2018 feeling sure-footed and ready to sign off on the strategy for 2018.
Independents & Vacation Rentals Have Two Ways to Succeed in 2018
In an interview with Jan Freitag, SVP of STR’s Lodging Insights, he said, “Independents have an opportunity to grow occupancy and rate in a way that the big brands do not. The branded hotels have been achieving 70% occupancy; their only solution is to increase RevPAR. Independents, on the other hand, have had an average occupancy of 64.5%, so there is still room to grow.”[v] Of course, this doesn’t mean growing occupancy all at costs (i.e., don’t rely on OTAs). Instead, independents must be cautious about maintaining profitable bookings while increasing occupancy. This means focusing on revenue management strategies via reliable competitive and historical data, nurturing reservations leads from the very first call to bring in the highest revenue direct bookings, and improving operational efficiencies wherever possible.
The vacation rental market is projected to see significant increases in revenue in the coming years. By the end of 2018, reports Forbes, the industry is expected to be worth $36.6 billion, “twice the growth rate of the entire travel sector.[vi]
Though growth will slow, vacation rentals still have new market penetration on their side—some travelers still aren’t aware of or have not yet booked a vacation rental—and naturally built-in efficiencies (fewer staff and services). A (fewer staff and services). A focus on increased occupancy during the offseason as well as increasing RevPAR during a continued growth cycle are essential.
Guest Acquisition Costs Affect the Asset
The cost of guest acquisition has become so substantial that hotels are evaluating it as an asset loss. Cindy Estis Green, CEO of Kalibri Labs, notes that “a change of -0.3 percent year-over-year was a loss of $500 million for hotels and an asset value decrease of nearly $5 billion.”[vii] The financial health of a property hinges on reining in guest acquisition costs.
Additionally, STR’s Freitag says that it’s not clear yet if the U.S. lodging industry is at a peak or plateau. “Since 2011, we’ve seen tremendous run-ups in room demand with very limited supply growth. Next year is the first time we will see supply growth hit 2%. Though occupancy in 2016 was the strongest we’ve ever recorded, we’ll start to see a decline. The most important thing hotels can focus on is that RevPAR growth number; it encapsulates everything.”
The first line of defense: reining in guest acquisition costs to increase net revenue. Not only are OTA costs 6.5% higher than direct costs but direct ADR is also 9% higher than an OTA.
Call centers have the second lowest acquisition costs next to online booking; however, call centers bring in more profitable revenues and have higher conversion rates. According to Michelle Marquis, NAVIS VP of Sales, “All the data still supports that voice produces the highest revenue. This is especially good news right now because mobile search has surpassed desktop, but mobile bookings have only increased marginally. Always be asking where those searches are going? What hotels are finding is that their guests are using click-to-call from mobile devices when it comes to finalizing the reservation, especially for high consideration stays, which includes independents and vacation rentals.”
About the Direct Bookings Campaigns
The direct bookings push by several major chains, also known as “Stop Clicking Around,” has worked… for the major chains. A Kalibri Labs report from November said that from May through December of 2016 room nights were up 7.8% and net revenue growth was 9.3%. What you need to know, however, is that the survey included 25,000 hotels, but the majority were flags, and the focus was on Brand.com bookings, excluding direct bookings via voice channel.
So does the data still apply? According to Jeff Robertson, NAVIS VP of Marketing, “Absolutely, but there are interesting exceptions for independents and vacation rentals. The first is that the big brands are receiving approximately 7% of their business via voice channel. Independents get around 34% via voice channel, so it’s not an apples-to-apples comparison. However, that’s okay because the point Kalibri makes is that the big benefit of the direct bookings campaigns is in the long-term decrease in guest acquisition costs due to loyalty. Independents and vacation rentals have this in the bag in a way that the flagged hotels do not yet.”
The Kalibri report notes, “The success of the book-direct effort—and all future campaigns to drive direct bookings—will hinge on how well hotels can cater to the guest experience.” For these categories of properties, experience and loyalty are inextricably tied together. Robertson notes, “Experience comes in not just the singularity of the product but also in the human interaction. This is why we see websites with 2-4% conversion rates while reservation agents have a 40% conversion rate. In the end, this bodes very well for independents and vacation rentals. To capitalize on these trends, they will need to shore up their marketing tracking efforts and begin to think more holistically about online and offline booking channels, but after that the experience and loyalty are built-in.”
The Online vs. Offline Reality
Phocuswright’s 15th Edition U.S. Online Travel Overview shows that offline bookings still outpace online with 60% offline and 40% online, but when it comes to those online reservations, OTAs are edging out hotels.
For private accommodations in the U.S., 34% called the homeowner or the vacation rental company, while 32% booked via rental or vacation rental company website.
The bottom line is that both online and offline channels matter to achieving the most profitable mix of bookings.
Does The Sharing Economy Have a Hold on Hotels? Yes.
Barron’s reports that 25% of travelers used Airbnb last year, up from 14% just two years prior, but that Morgan Stanley believes the company has “tapped out the easy growth.”[viii] While hotels may be grateful for a slow down on “easy” growth, it doesn’t mean the impact subsides. The truth is that there’s a lot we don’t know yet about the impact of the sharing sites because there’s so much gray area. Airbnb, for instance, caters as much to whole-home vacation rentals as it does home sharing. (In New York City, AirDna reports that 51% of rentals are entire home rentals.) We know that these appeal to two very different travelers, and with the consolidation of OTAs, listing sites, and sharing sites, it’s still really unclear what the impact on hotels is, but we know there is an impact. In fact, Morgan Stanley, in a separate article, reports, “the home-sharing start-up [Airbnb] poses more of a threat to the hotel industry than to online travel agencies... Hotels would do well to absorb some of the lessons from [Airbnb’s] business as they adapt to a changing market.”[ix]
All that said, Airbnb and VRBO have been making moves to substantially decrease the contact that owners and management companies have with the guest. Not only is it reducing phone calls, it’s also making the guest experience with their sites more challenging. Questions must be answered one-by-one via email, and some of the listing sites are going so far as to black out details in email correspondence when there is any reference to competitors. Vacation rentals that rely too heavily on sharing sites may find that in addition to their guest acquisition costs, their guest experience also may suffer.
According to Marquis, “For every 5% of call volume a vacation rental gets from VRBO or HomeAway, they will need to increase inbound call resolution (with the same demand) by 2%. Let’s say that 15% of inquiries won’t be coming in via phone anymore. That means you have to increase your call resolution by 6%. It’s a tall order. Vacation rentals will need to shore up their agent performance as well as use tools to manage and consolidate their listing site leads to capitalize on existing call volume.”
The Short Version
Supply is increasing, competition is increasing, demand will start to taper off, OTAs are thriving, and guest acquisition costs are still far too high. It sounds dismal, but it’s not. The hospitality industry is still at an all-time peak, and the travelers are out there ready to spend. They simply have all the options in the world for where and what they book. Independents and vacations rentals have the most opportunity. Focus on (carefully) growing occupancy and RevPAR, as well as total profitability, going into 2018 and stay centered on driving the direct channel, which means online and offline