Until the details are finalized, the jury’s still out on the impact of a Marriott-Expedia agreement. But suffice it to say, these frenemies still depend on one another.
The contract negotiations between a more-powerful Marriott International, the world’s largest hotel company, and online travel company Expedia Group could have a substantial impact on both entities’ businesses and the wider hospitality industry as a whole.
Chad Crandell, managing director and CEO of CHMWarnick, a hotel-asset-management and owner-advisory-services company that represents more than 70 hotels, said he was under the impression that both companies have reached a tentative agreement on Thursday, “but were still sorting through the details.” He added, “My guess is the holidays may have also gotten in the way. Our presumption is the business terms for Marriott have improved, given the leverage they now possess, post-Starwood merger.”
A new Marriott-Expedia pact, if it produces reduced 10 percent commissions for Marriott, could potentially put pressure on Expedia to make concessions to other brands such as Hilton, Hyatt, and InterContinental, for example, although Marriott is the largest hotel brand.
Michael Bellisario, senior research analyst with RW Baird, said he’d last heard two weeks go that the Expedia-Marriott contract that expired in November had been extended during the ongoing negotiations process.
Both Marriott and Expedia declined Skift’s requests for comment on the negotiations, or to confirm if they had reached a settlement.
Marriott CEO Arne Sorenson put online travel players such as Expedia and Booking Holdings on notice in April when he said he’d look to negotiate lower commissions from them — especially since Marriott now has the added muscle of all of Starwood Hotels & Resorts’ brands following Marriott’s $13 billion acquisition of Starwood in 2016.
According to several published reports, under their current multiyear agreement, Marriott pays Expedia a commission of approximately 12 percent and is seeking to lower it to the 10 percent range. There are undoubtedly numerous other issues at play, including Marriott’s direct booking push, its presence — or lack thereof — on Expedia Group sites, and Marriott’s loyalty program.
For example, said Flo Lugli, principal at Navesink Advisory Group, Expedia might be seeking to have its customers gain loyalty points or status when booking a Marriott property on Expedia, and might be willing to trade commission concessions for advertising dollars, or preferred rates and inventory.
“It’s not just about the commission, but the total value being driven to either party,” Lugli said.
Bellisario said he’d heard that on nights with high occupancy, Marriott wanted to negotiate a way for operators to reduce or turn off the online travel agency channel, for example.
Dan Wasiolek, senior equity analyst with Morningstar, said he presumes that the commission rates that hotel brands pay to the online travel agencies is already lower than 12 to 14 percent.
Expedia currently powers dynamic packages on Marriott Vacations, and is likely looking to extend its partnership.
Anthony DiClemente, a senior managing director of internet research at Evercore ISI, said that agreeing to the lower commission, or take rate, could potentially be a headwind for Expedia.
Expedia is already feeling pressure on its revenue per available room numbers, according to a research note from Brian McGill, an analyst at Telsey Advisory Group, who said the online travel agency saw those numbers fall “in the low single-digit range” in 2018.
“Our concern with Expedia is that if ADR [average daily rate] growth slows in the U.S. combined with ongoing take rate declines, this will negatively influence the revenue per room even further,” McGill wrote.
Separately, DiClemente of Evercore said there could be several factors that would mitigate the possibly negative impact on Expedia from a new agreement with Marriott at lower commission rates. If the economic growth slows, then it could be disadvantageous for Marriott to have a lower profile on Expedia’s platform.
According to published reports, Marriott attracts around 10 percent of its bookings from Expedia, and that mark is higher than it was a few years ago because Starwood was more dependent on online travel agencies as a distribution channel than was Marriott.
At a global investor day in March 2017, Marriott Global Chief Commercial Officer Stephanie Linnartz said Marriott “uses OTAs less often than a typical hotel industry company,” and that only 10 percent of Marriott and Starwood combined room nights in 2016 were sold through a booking site. Linnartz said 30 percent of Marriott and 18 percent of Starwood’s rooms last year were booked through its proprietary digital channels, and those platforms generated $17.5 billion in gross bookings. She also noted that Marriott’s commission levels in online travel agency contracts were historically more advantageous (240 basis points lower on average), than Starwood’s.
On the other hand, Expedia claims to be less dependent on the major hotel chains than it was years ago, and claims that it has replaced the big brands with smaller independent hotels that have not been pushing direct bookings to the extent that the chains have.
DiClemente, however, said this mix shift of inventory appears to be a defensive move from Expedia.
Morningstar’s Wasiolek, however, said he estimates that “Marriott and Expedia probably get the same percentage of bookings from one another so they need each other, and Marriott is the largest hotelier. If other brands can negotiate lower take rates, it will be a bigger challenge, since they get more bookings from the online travel agency channels.”
He noted, for instance, that Wyndham Hotels get 25 percent of its bookings from online travel agencies.
Wasliolek said that while Marriott’s website sees some 35 million unique visitors per month, Expedia attracts about 600 million unique visitors monthly. “Hoteliers want to continue to drive more direct traffic, but the aggregated platforms that these online travel agencies have has given them a sustainable network advantage over the hotels.”
Wasiolek said that even if Marriott negotiates a new rate at 9 percent or even 8 percent, and if Marriott does represent roughly 10 percent of Expedia’s total hotel bookings, that represents a 10 basis points impact to the take rate. “The take rates for Expedia have been pretty resilient.”
Marriott is likewise reportedly negotiating a new contract with Booking Holdings, as well, although Marriott would seemingly have more leverage with Expedia than Booking, which sees most of its hotel revenue generated from outside the U.S. where Marriott is weaker and independent hotels hold sway.
Expedia’s margins are already considerably lower than Booking’s, which is better-positioned to bargain with Marriott because of Booking’s non-U.S. focus.
DiClemente of Evercore said Expedia is on track to notch adjusted operating margins of around 10.9 percent in 2018, around the same as 2017. On the other hand, he said Booking’s margins are expected to rise to around 36.4 percent in 2018, up from 35.7 percent the previous year.
Whatever specific details are being ironed out between Expedia and Marriott — and eventually Booking and Marriott — Wasiolek said he doesn’t see that big of an impact on how hotel brands and online travel agencies do business with one another.
“I don’t dispute that the scale of a combined Marriott and Starwood allows for stronger negotiation power,” Wasiolek said. “But I question whether it will have any material impact, given the network advantages that both Expedia and Booking Holdings have.”
RW Baird’s Bellisario said that this could become a familiar negotiation narrative for Marriott and the online travel agencies. “It’s fair to assume that Marriott is now bigger and if they continue to grow every time they renegotiate these contracts every 24 to 36 months, and they continue to grow faster than industry, they should have more bargaining power when they renegotiate with Expedia and booking and others.”
He also noted the importance of another party to consider in the case of these negotiations: hotel owners and operators.
“There’s a delicate balance between both the online travel agencies and hotels. At some point, operators may look to online travel agencies instead,” Bellisario noted, which is something Skift explored last year: the possibility that more hotel owners and operators would prefer to work with the online travel agencies versus the hotel management companies.
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Photo credit: Marriott's contract negotiations with Expedia may have a ripple effect on the relationship between online travel agencies and the greater hotel industry. Andrew Kelly / Reuters