Are hotels commodities? The changing dynamics of distribution

The Master Innholders' Annual Hotel General Managers’ Conference took place on 20 and 21 January at Park Plaza Westminster in London

The continued use of Online Travel Agencies (OTAs) is contributing to the increased commoditisation of certain areas of the hotel industry, with hoteliers now having to work harder to add a point of difference and focus on ‘value’ rather than price.

That was the overwhelming message from a panel discussion at The Master Innholders’ Hotel General Managers’ Conference earlier this week. Russell Kett, chairman of HVS London and moderator of the panel, explained that hotels have become an ‘asset class’ and are therefore open to being commoditised.

“Once you become an asset class, you have the capability of becoming a commodity and because you’re then put against all sorts of other real estate classes then you do become a commodity,” said Kett.

“But it really depends on the owner. If the owner is a financial investor of some nature then increasingly they are going to look at the sector as a commodity and they’re going to expect the performance of the sector to be in line with their expectations. They’re going to give far less of a deal about how that net income and EBITDA is produced, so long as it is produced.

“You see it in other walks of life – an obvious one at the moment is football clubs. You have absentee owners of football clubs who really don’t have any real concern other than for the trophies you win and the position you are in the table.”

Flirting with commoditisation

Among the four-strong panel was Stuart Johnson, general manager of the five-star Brown’s Hotel in London’s Mayfair, who claimed it is the reliance on OTAs that has created a high level of price transparency and rate parity strategies.

“We are all in a very competitive market place and therefore we do rely on reservation systems and OTAs to help fill our bedroom stock in low periods of time,” said Johnson. “That is when we are flirting with commoditisation, because you’re going into a marketplace that you actually can’t afford to market to such a wide collection of people and thus they are going to buy a package that is packed on the website through a medium of some sort.

“I think we need to be very protective to make sure the luxury end of the market doesn’t become commoditised. But there is no doubt that the three and four-star market is becoming a commodity. EasyHotel and a number of fast-moving hotel companies are now effectively selling a lock up for which you buy sheets, towels, soap, and service.”

'Value' not price

But Mark Lewis, managing director of Hotel Rez, believes ‘commoditisation isn’t necessarily a bad thing’.

“If you work in a secondary location where there is hyper competition, then you just need to add value and differentiate yourself in order to win that client’s business, rather than focussing on price.

“If you’re a consumer and you’re looking at a website and all of the hotels look pretty much the same, then on what basis are you selecting that hotel? It will be based on something else - a ‘value’ that the hotel is offering with the rates.

“Wherever your hotel is, there is something about the destination you can use in the way that you’re selling the property – whether it’s something included in the rates or something else that is unique. Owners and chains can ‘commoditise’ their own products in that way.”

Differentiation

Lewis’ opinion was echoed by David Taylor, sales director of Grass Roots HBI, who believes it’s this ‘point of difference’ that hotels must now focus on in a commoditised marketplace.

“It’s important to have a brand identity but the independent hotelier has to work a lot harder to get their differentiation out there,” said Taylor. “It’s really important that the independent hotel recognises its point of difference.

“Everyone knows that certain parts of the hotel market have been commoditised, a lot of the travel booking programmes are now commoditised in the way that people look at and buy rooms. But as a hotelier you should be looking at adding value instead of changing price.”

Supplier relationships

Speaking from the point of view of a ‘customer’, Imogen Furness, head of the supply chain for Morgan Stanley, concluded that it’s now all about ‘value-adds, terms and conditions and other components’.

“There is a lot of data out there that gives us an incredible amount of information about what is happening for when we go into negotiations,” she said. “There never has been so much focus internally on cost as there is now. Organisations such as my own are constantly evaluation what we’re doing and why we’re doing it. But it’s not about price all the time, it’s about the value that’s being added.

“I do concur that certain elements of the hotel industry have been commoditised but I don’t subscribe to the view that ‘hotels’ are commodities. This is a service industry and relationships will always be important. All sides just need to be as open as possible.”

The panel debate took place on Monday 20 January on the first day of the 21st Annual Hotel General Managers’ Conference. For more information, click here. 

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