Hyatt Plays Hardball With Expedia Over Contract Negotiations

What would happen if consumers couldn’t book a Hyatt hotel on Expedia anymore?

That’s a possibility, if reports hold true regarding Hyatt’s current contract negotiations with Expedia Inc. According to Hotels Magazine, Hyatt hotel owners recently received a notification from the company of its intent to terminate its Corporate Lodging Agreement with Expedia if the two companies don’t reach an agreement by July 31.

What’s unclear, however, is whether this agreement impacts all of Hyatt’s distribution for both leisure and corporate managed travel, or solely its corporate travel contracts.

Skift spoke to the author of the Hotels Magazine article, Kristie Dickinson, EVP of business development and marketing for CHMWarnick, an independent hotel asset management company. Dickinson, some of whose clients have received the note from Hyatt, “In the letter our owners received from Hyatt, it was clear that the termination of the Corporate Lodging Agreement meant that Expedia would no longer be an approved distribution channel.”

Instead of having Hyatt properties being distributed on Expedia’s channels, which include Hotels.com, Travelocity, Orbitz, and Hotwire, among others, Hyatt reportedly informed its hotel owners that it would engage in an “aggressive sales and marketing plan” to drive more direct bookings, as well as promote its newly relaunched loyalty program, World of Hyatt.

A Hyatt spokesperson said, “Hyatt is in constant dialogue with Expedia and all our OTA partners around the world, but we will not get in to the details of those discussions. Our focus remains on growing the value proposition for booking directly with Hyatt so we can build strong relationships with our guests, as well as working with third-party distributors in line with our efforts to improve hotel profitability.”

A spokesperson for Expedia said in a statement that the company stands by the value is delivers to “several hundred thousand hoteliers” worldwide.

“We bring partners brand agnostic, incremental consumers (only a tiny percentage of our regular consumers book the same hotel brand consistently) from across the globe, and that’s a clear indication of the value we bring to partners, like Hyatt,” the statement said. “We appreciate and respect our relationship with Hyatt Hotels, but we can’t comment on contract specifics.”

Hyatt, like many of its peers, wants to negotiate better, lower commission rates and more flexibility from Expedia. Typical commission rates paid by hotels to OTAs for bookings made on OTA sites range anywhere from 10 to 20 percent. In April 2016, Hyatt debuted discounted member rates for guests who book direct.

This March, the company debuted its revamped loyalty program, World of Hyatt, which was designed to appeal to loyalty members in the upscale and luxury category. Reception to that program has been lukewarm among frequent travelers, and Jeff Zidell, Hyatt’s head of loyalty, left the company this May.

Hyatt’s Options

But does Hyatt have the negotiating power to actually get lower rates, and what will happen if Expedia call its bluff?

For one, Hyatt, compared to its peers such as Hilton or Marriott, is relatively much smaller in scale. Among the major global hotel chains, it is ranked 18th in the number of properties. In its most recent quarterly report filed with the U.S. Securities and Exchange Commission, Hyatt reported having a total of 673 hotel properties worldwide as of March 31. By comparison, Marriott has more than 5,700 hotels worldwide, and Hilton has more than 4,600 hotels.

The typical branded hotel company, by Skift Research estimates, generates 13 percent of its bookings via OTA channels such as Expedia or Priceline, while an estimated 60 percent comes through direct channels.

With a company as relatively small as Hyatt, however, those percentages could be much different. And with regard to Expedia’s business, Hyatt no doubt represents a much smaller portion of its listings than say a Marriott or a Hilton. Estimates are that Expedia’s share of Hyatt’s revenue ranges from the high single digits to low double digits.

Last summer, during Hyatt’s second quarter earnings call, CEO Mark Hoplamazian said the company’s member rates are leading to bookings, and that 70 percent of revenue from member-rate bookings was coming from either new or previously inactive loyalty members.

Earlier this year, Hoplamazian told Skift the following about its current direct booking strategy:

“About 40 percent of the bookings that we’ve seen through the [member rates] channel have been made by previously inactive members, so we’re attracting people back into the Hyatt family. Then the remainder are bookings that are made by existing members, so first we’re extending and expanding the number of people that we have regular contact with, which I think is really essential to us. Then the second element to this is to make sure that, as an owner of brands and a manager of hotels, that this is actually productive and constructive for our hotels themselves and for the hotel owners, and we’ve also found that because we’ve maintained expansion of RevPAR [revenue per available room] index and expansion of our rate index in the hotels that have been participating in the member discount program. So, a majority of hotels are expanding their share.”

While Hyatt has seen early promising signs of attracting new loyalty members and giving owners more share, it’s not clear if those trends will carry over to negotiations with Expedia.

Citing a notice to hotel owners, the news reports said that funding for Hyatt’s new proposed direct booking campaign would come from the reallocation of “existing budgets, as well as reinvesting money hotels would have otherwise paid to Expedia for its commissions and marketing fund.”

That same note also said that, beginning July 1, the fees that owners of North American full-service hotels and global select-service hotels pay to Hyatt will be increasing by 7 percent, from $1,435 to $1,535 per room annually for North America full-service hotels, and from 3.5 percent to 3.75 percent of rooms revenue monthly for select-service hotels globally, according to the reports. Full-service Hyatt hotels outside of North America are an exception.

Another distinction Hyatt has is that it uses an “asset-recycling” strategy whereby the company buys and sells properties to expand into new regions. This is a marked difference from its peers, such as Marriott and Hilton, which pursue an “asset-light” strategy whereby they try not to own any of the hotel properties they manage or franchise. So, in some cases, Hyatt is the actual hotel owner.

Expedia, traditionally, hasn’t been one to cave to direct booking challenges from hotel companies, including two of the biggest — Marriott and Hilton — who, like Hyatt, have also debuted their own loyalty member rates and direct booking campaign pushes. Hilton actually launched its biggest campaign to date in February 2016, called “Stop Clicking Around” to educate consumers about the benefits of booking direct.

It’s not uncommon for hotels to attempt to use a variety of negotiation tactics to try to get better commission rates and more attractive contract agreements with online travel agencies. None of these major hotel companies, however, has completely terminated their agreements with a major booking site such as Expedia or Priceline.

Expedia CEO Dara Khosrowshahi has said previously that hotels can fall to lower positions in Expedia’s sort order and their conversions can decline when properties or brands don’t aggressively engage on Expedia sites. This practice, called “dimming,” however, was stopped in September of last year.

At the same time, the industry organization that represents the hotel industry in the U.S., the American Hotel & Lodging Association, is also doubling down on its efforts to lobby both Congress and the general traveling public about the monopoly that Expedia and Priceline have in online travel. The association’s consumer campaign, called “Search Smarter,” warns consumers against “digital middle men” like Expedia and Priceline who, together, own 95 percent of the world’s online travel agencies.

Until July 31, both Hyatt and Expedia have time to work out their contract negotiations, and it remains to be seen whether Hyatt will prove successful in getting what it wants. Whatever Hyatt ultimately decides to do, it could, however, set a precedent for how other hotel companies choose to negotiate with the online travel agencies.