Like consumers of all kinds, guests of Hilton Hotels Corp. are getting in the habit of shopping on the Web. More than 20% of the hotel company's bookings come online. That should be cause for celebration at such online distributors as Travelocity, Expedia, and Priceline.com.

But for the distributors, the news is decidedly mixed. Most of Hilton's online business is arriving through the company's own proprietary Web sites — such as Hilton.com and Embassysuites.com — and the homegrown sites are enjoying explosive growth.

Hilton expected to generate $2.5 billion in revenues in 2006 from proprietary sites, up from $709 million in 2002 — a whopping 252% increase. That is an annual growth rate of more than 30%. Less than one-fifth of the company's online bookings come from outside online distributors, and the distributors' share of total reservations has been flat in recent years.

Payoff worth the price

Hilton is hardly alone in its success. At a time when the hotel industry is enjoying strong demand, chains are working hard to generate business through their own sites. Major owners and operators, including Marriott International and Starwood Hotels & Resorts Worldwide, are beefing up their Web sites. “It is more profitable for us to deal directly with customers, instead of paying commissions to third-party sellers,” says John Wolf, senior director of media relations for Marriott.

For hotels of all kinds, it is vital to build a proprietary online reservation system. About one-third of all reservations come through proprietary Web sites, double the figure from 2002, says Bjorn Hanson, a hospitality consultant with PricewaterhouseCoopers LLP. Another 7% of reservations come from third-party distributors. Major hotel brands, such as Hilton and Marriott, have been spending millions of dollars developing their online systems, Hanson says. “The computer programming can be costly, but the investment is worthwhile.”

An effective online system can cut costs and boost occupancy rates. “It is a whole lot cheaper to make reservations electronically, than it is to have a person with a headset on,” says Morris Lasky, CEO of Lodging Unlimited, a hotel owner and management consultant in Chicago. “The person sitting at a desk can make 20 reservations an hour. The Web site can easily book 200 an hour.”

Consumer convenience

To increase efficiency, hotels have been upgrading their Web sites in order to store detailed information on customers. That way, frequent guests avoid having to list their names each and every time they book a room. Hilton guests can check in 36 hours ahead of arrival. Once at the hotel, guests need not fill out any forms; they simply pick up their keys and head for their rooms.

Guests can also check out online and receive a list of their expenses electronically. Frequent guests at some chains can earn points that can be used to win free rooms. “An effective reservation system is the key to a hotel's success,” says Scott Normali, senior vice president of Web site development and marketing for Hilton Hotels. “We need to offer extras that our competitors don't provide.”

At Hilton, groups can book via their own customized Web pages. Suppose the Smith family wants to hold a reunion. The family establishes its own personalized Smith page. Family members book through the site, picking rooms from a block that has been reserved. If the group wants to host a dinner or use a conference room, that can also be reserved at the site.

At Marriott.com, a shopper can screen for a hotel at a precise location, such as near Buckingham Palace in London or Atlanta's Hartsfield-Jackson Airport. “The idea is to speed up the search and let people find what they want easily,” says Wolf of Marriott.

Desperate measures

The emphasis on developing proprietary sites represents a turnaround from the dark days after Sept. 11, 2001. At the time, travelers by and large stayed home, and the hotel industry fell into a deep slump. The hotel occupancy rate nationally dropped from 63.3% in 2000 to 59% in 2002, according to PricewaterhouseCoopers.

Desperate for any sales, the chains cut generous deals with the young online services, such as Expedia.com. In a typical arrangement, a hotel might charge the online distributor $67 for a room. The distributor could then resell the room at the normal price of $100, and pocket the difference. If it chose, the distributor could offer a deep discount, a better price than a guest could get by making a reservation directly through the hotel.

As the economy revived, occupancy rates climbed. By 2005, occupancy nudged just above 63%, nearly matching the figure of 2000, and in 2006 it climbed to 63.8%. With demand growing, the hotel industry began battling back, negotiating tougher contracts with online services. Instead of selling rooms to distributors at a 33% discount, the chains are now typically offering a 25% discount. And more importantly, the major companies are insisting on controlling all prices.

To keep a firm grip on room rates, chains use what they call an accreditation process. Under the rules, the online distributors may only sell rooms if they agree to a series of limits. Foremost is that distributors must not undersell hotels on price. If Expedia offers a room for $100, then someone calling a hotel switchboard will be charged the same price or less — if they qualify for frequent traveler discounts. “We try to keep pricing consistent across all channels,” says Karen Hughes, vice president of global leisure sales and distribution for Starwood Hotels.

When the next recession arrives, hotels will face more pressure to lower room rates and cut deals with online distributors. But analysts expect the proprietary sites to retain their dominant role. “The proprietary sites will continue adding more features and drawing more customers,” says Hanson, the consultant with PricewaterhouseCoopers.

To reinforce the policy, all the major chains have best-rate guarantees; if a customer or travel agent finds a lower price via an online distributor, the hotel will match it and give an additional discount or cash gift. So far the guarantees have proved effective. Hotels have had to offer additional discounts or gifts on 0.5% of all reservations made, says Hanson.

While chains have tried to rein in the online distributors, the hotels are not about to dispense with outsiders altogether. Hilton Hotels maintains a long list of accredited booking channels, including Expedia.com, Hotels.com, Orbitz.com, Lodging.com, Travelocity, and Priceline.com. “We still value the relationships we have with the Expedias of the world,” says Normali of Hilton Hotels. “They help us distribute rooms in lean times.”

Distributors' changing role

Even if a customer doesn't book a room through Expedia, the online service may still play a key role. Customers searching for a room often start with an online distributor, such as Expedia or Travelocity. They narrow the search down to three or four hotels. Then they look at the sites of individual hotels, examining amenities and special deals. At the end of the process, the guest may book directly through the hotel. But some return to Expedia, reserving a room along with an airplane and rental car.

Many hotels are becoming less reliant on outside distributors. The hotels seek to only offer rooms to the distributors during hard times. On busy days, the hotels refuse to supply the distributors with rooms. But the online services have not been giving up without a fight. Some refuse to distribute rooms on soft days, unless they are also given inventory during strong periods.

“The online distributors say, ‘If I'm going to scratch your back when you're empty, then you must scratch my back when you are full,’” says Scott van Hartesvelt, president of gCommerce Solutions, a hotel marketing consultant in Park City, Utah.

When van Hartesvelt takes on a new boutique hotel as a client, his long-term goal frequently is to eliminate use of the outside distributors altogether. But first he must acquaint customers with the property through the use of many sources. To jump-start business, van Hartesvelt seeks to have the client featured prominently by online distributors. The consultant accomplishes this by horse trading with the online distributor's local manager, offering to provide plenty of rooms in return for a top placement.

Once the guest arrives for his stay, the hotel begins working to steer the client away from using online distributors. “The customers that buy through Expedia are not loyal to anything — including Expedia,” van Hartesvelt says. “They are loyal to price. It is our job to convert the guests to be loyal to the hotel.”

Brand loyalty is end game

To win over guests, boutiques must offer something unique. A hotel in Dallas might provide tickets for a Cowboys football game at a discount, says Hartesvelt. “The next time the guest is in Dallas, he will only look at your hotel,” he says. “The guest who got football tickets no longer cares much about his room rate.”

The Mosaic Hotel in Beverly Hills, a van Hartesvelt client, has completely stopped using online distributors. An upscale boutique with 49 rooms, the Mosaic offers expensively designed rooms that look out on a heated pool. “The hotel has so many loyal fans, it doesn't need help to fill the rooms,” says van Hartesvelt.

Though the boutiques may win customers on their own, Expedia still enjoys an advantage over many Web sites: customer reviews of hotels. Many shoppers have learned to trust the ratings offered by fellow consumers. In the future, more hotel Web sites will be forced to adopt consumer reviews and other interactive techniques.

“As consumers become more comfortable with the Internet, they become more demanding,” says Hanson of PricewaterhouseCoopers. “To keep their rooms filled, hotels will have to continue improving their Web sites.”

Stan Luxenberg is a New York-based writer.

Marketing savvy online

The Sheraton hotel brand, owned by Starwood Hotels & Resorts, is widely considered to be an Internet pioneer in the hospitality industry. Besides making it easy to reserve a room, the hotel Web site is experimenting with reviews by consumers, a technique that has become a staple of Expedia and other shopping sites.

For example, amateur-looking photographs greet a consumer who visits the Sheraton.com Web site. By clicking on a photo, the visitor can read a few idiosyncratic paragraphs about a guest's stay.

An Atlanta college student writes that he was home on summer vacation and bored silly. He spotted a deal at the Sheraton Buckhead, and took mass transit to the hotel located across the street from a shopping mall. Another guest comments on how the Sheraton Seattle is located near the city's picturesque waterfront.

The House of Blues, a Chicago boutique, discovered how guest reviews can drive traffic to the hotel's Web site in unexpected ways. After staying at the hotel, a young woman posted a video of her room on the site YouTube, which is drawing millions of viewers with homemade videos.

The video showed her jumping up and down on the bed and yelling about how excited she was to see her favorite band make an appearance across the street from the hotel.

The video attracted 20,000 viewers. Impressed with the guest's star appeal, the hotel offered her free rooms if she agreed to make more videos.

Such novel techniques could flourish in the future. As proprietary hotel Web sites become more sophisticated and easier to use, they are likely to continue gaining traffic.

But don't expect the old standbys to vanish, says Morris Lasky, CEO of Lodging Unlimited, a hotel management consultant. “For the rest of our lives, telephone operators will be taking reservations, because there are always customers that have special questions.”
— Stan Luxenberg