A year has passed since Marriott and other hotel companies began to reduce third-party commissions from 10 to 7 percent. But for the big third parties, the change only started to take effect this January. Already, the fallout has effectively shifted market share, driving meetings business to properties and destinations that still pay the higher rate.
In fact, in 2018, for the first time in a decade, Las Vegas has bested Orlando as the city with the highest volume of group business from ConferenceDirect based on room nights. The global company manages nearly 15,000 meetings and events annually for 4,400 clients.
How have commission cuts affected third-party bookings, and how will this chapter play out? We asked ConferenceDirect's CEO Brian Stevens for his insights, opinions and expectations.
How do commission cuts impact third parties and their clients?
First of all, your readers should know that we are biased, because this cut is a huge hit to our bottom line. As a third party, you earn X percent or X dollars based on the service you provide, and it's going to come from somewhere. If it's not coming from the hotel that the client chooses, then the client is making up that difference.
One third of our customers are, for whatever reason -- actually for many reasons -- going to go to a hotel or a city regardless of the commission structure. Maybe they're not concerned about costs, or they were founded 25 years ago at the Beverly Hilton and they're going to go to the Beverly Hilton no matter what.
Another third of clients absolutely, positively, under no circumstances can afford to not have the commission involved in the mix. Their organizations do not have the capacity to finance the services that are being rendered. It's these types of clients who are saying, "Give me my choices for where we can go, and only give me choices where the commission is going to be 10 percent."
For the remaining third, a 10 percent commission is a nice-to-have situation. For example, the customer says, "Let's see, it's either Anaheim or Las Vegas. The labor in Las Vegas is arguably a little higher -- it's all union. But the hotels are offering 7 percent commission in Anaheim, and they're offering 10 percent in Las Vegas." So, somebody has to sit down with a pencil and paper and say, "What is it going to cost our association or company, and what is it going to cost our members?"
What other key factors come into play?
The decision could be based on a million things. It could be, "We really like our Hilton rep," or "We really like our Hyatt rep." It could be something as innocuous as the daughter of the association's president works at the hotel.
Then there's the whole image issue. Some people don't like the image of gaming, other people don't care and other groups love it. Some people won't go to a union hotel, and others will only go to a union hotel. You have to know the customer. It's not black and white. Some of our customers come from the commissionable business model, and they do not like hearing that someone is reducing our commission.
ConferenceDirect is now booking more business in Las Vegas than Orlando. Are commission cuts responsible for that shift?
Sure. Orlando was number one for about 10 years. But as long as the Marriotts and the Hiltons and the Hyatts, which dominate that market, are at 7 percent, some customers are going to favor Las Vegas. We've seen that. One-third of the business right now is only seeking the higher-commission brands.
How much business has shifted from Orlando to Las Vegas?
In 2016, ConferenceDirect booked 297,495 room nights in Orlando and 239,201 in Vegas. Last year, 231,497 rooms went to Orlando, while business in Vegas skyrocketed to 353,440 guest rooms.
Do you think the move to 7 percent was a good business decision?
Let me be very blunt here: The cost of sale is something that smart people tend to look at. When I was with Hilton, I tried to cut commissions. It was very hard because of the lost business in need times.
So, no, it doesn't always make business sense. In the case of a gaming hotel, for example, how much does an average brain surgeon earn in a year? And what is their propensity to gamble in Las Vegas? Chances are, if you're a brain surgeon, you take risks every day and you make a lot of money.
I don't want to pick on the brain surgeons, but when they go to Las Vegas, they're going to drop $200 to $300 a day, on the average, at the gaming tables. Let's say the room rate is $300, and the commission on that room at 10 percent is $30 a day. Those guests are going to spend $200 on food and drinks at the hotel, so now it's $800 in spend and $30 in commissions -- so the cost of sale is 3.75 percent.
Let's take the $300 out for a meeting at a nongaming hotel. We are now $500 in spend with a $30 commission, or 6 percent cost of sale. So, it's really not 10 percent.
Take out a dollar, and take out a dime. Are you willing to give up the dollar over the dime? Of course not.
Are other cities also seeing a boost in business as a result of commissions?
Sure, other places are benefitting from it. Maybe they don't have so many 7 percent hotels , or most of their properties are still at 10 percent. I see an uptick in business going to Omni hotels and Fairmont hotels, and other brands that are giving us a 10 percent commission. But it's really too early to tell, because for most of the big third-party brands, the change didn't apply until 2019 -- and that really ticked off the mom-and-pop shops. The real impact will be revealed later on, I would say by August 2019.
Do you see this as a permanent change, or a step toward zero commissions?
The story on this is going to unfold when the economy dips; let's see what transpires. I don't think that 7 percent commission -- across an entire brand, across an entire city, across 365 days of the year -- is a sustainable strategy. I think it was a bold move on Marriott's part to start it. It certainly is a seller's-market situation.
I mean, how many times have we seen resort fees go in and out of Las Vegas -- with very little fanfare, by the way -- but we are able to negotiate no resort fees at times. If you've got a big enough piece of business and they really want it in the summer, they will waive the fee, but if they've got three pieces of business that want the same dates, why would they get rid of the resort fees? It doesn't make any sense. The same thing is true with the commissions.
This was a decision at the corporate level. How does it affect the individual properties?
I don't think this is sustainable for the owners. The chains are claiming it's owner-driven, but I would think that in a recession an owner would rather have 90 percent of a piece of business than 10 percent of nothing.
What else might we see as a result of one company having almost 7,000 hotels?
Negotiating power affects everything. Let's say when you were just the Marriott brand -- in 1990, you were paying 25 cents for a Pepsi. Then you take on Renaissance and Ritz-Carlton, and you say, "You know what, I'm doubling the amount of sodas I'm selling. I want to pay 15 cents a Pepsi." Then you take on Gaylord and say, "I'm going to give you another boatload of business. I want to pay 10 cents." Then you do the Starwood deal, and now you want to pay 5 cents a Pepsi.
If I were Pepsi and I can sell a million Pepsis a week to Marriott, maybe it's worth the cash flow to give them the nickel price. The same goes for whoever's selling them sheets, whoever's selling them towels, equipment, technology. Isn't that the way the world goes? The bigger you get, the more you can squeeze the vendors?
Can the chains enforce reduced commissions at the property level?
They are not allowed legally to determine prices for franchises, but somehow they seem to consider commissions as a "brand standard." These are smart people with large law firms behind them, so I am sure they checked this out before they made the policy.
Will the hotel companies that reduced commissions be happy with the results?
Time will tell. We are still seeing a strong booking pace this year. We are seeing a lot of short-term business and strong corporate bookings. So, we really think they are happy now, but I believe they will start to get pressure for need periods to do things to attract every event, not just the ones willing to accept 7 percent.
My take on this is that the story hasn't been finished yet.
To what extent do you see pricing for meetings and events becoming an automated process?
I don't think that it's prudent to have a central point of pricing. Suppose the catering people start getting into artificial intelligence and yield management -- and my suspicion is maybe they will -- and all of a sudden the big hotel brands will dictate how much a birthday cake costs from New York to Baltimore.
Should the catering manager be pricing a wedding, or should it be a computer out of Bethesda, Maryland, or McLean, Virginia? Look, I think it's great if a hotel chain can buy wine at 75 percent off by purchasing it by the trainload -- mazel tov, great, that's wonderful. But what I'm questioning is, if the computers are smart enough to figure out how to price every single group in every single hotel, and every single hotel around the world does it, does the computer factor in the commission? Is that a group that absolutely has to have a commission, or is that a group that likes to have the commission, or a group that doesn't care?
There are so many variables. A convention is not an airline seat.