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For Business, Corporate Travel & Meeting Buyers & Arrangers

Hotels: the cost of loyalty schemes

Loyalty card

Hotel loyalty schemes are a crucial element of the branded chains’ strategies, but they can come at a cost, says David Churchill

This time next summer Marriott International CEO Arne Sorenson will be hoping that a crucial element of last autumn’s US$13bn acquisition of rival Starwood Hotels – creating the world’s biggest hotelier in the process – will pay off in one key respect: the successful integration of the highly regarded Starwood Preferred Guest (SPG) loyalty scheme with Marriott’s own Rewards programme.

Adding SPG to Marriott Rewards will create a mega-loyalty scheme with 100 million members, Sorenson revealed in June at a New York investment conference. When integration takes place this will put Marriott on a par with Intercontinental Hotels Group (IHG), which claims to have the world’s biggest hotel loyalty scheme also with ‘around 100 million members’. The smart money is on Marriott taking pole position soon.

But it was not so much the scale of adding SPG’s members to its loyalty empire that appealed to Marriott, but the quality of its ‘elite’ frequent business travellers, especially in comparison to Marriott’s more mainstream guest base.

So much so, in fact, that Sorenson has not rushed into making significant changes in SPG – although Marriott and SPG members had their accounts ‘linked’ at an early stage following the corporate takeover, providing reciprocal equivalent status in both programmes.

Responsibility for integrating the two schemes will fall to David Flueck, a 13-year Starwood veteran, who was promoted earlier this year to oversee the full integration of the two programmes.

Apart from the sheer numbers of scheme members, Marriott – including Starwood – now embraces more than 6,000 hotels, spread across 122 countries and 30 different brands. And Sorenson believes there is more growth potential. “Even with so many brands, we are only a small percentage of the global hospitality industry, so there is definitely room for more growth,” he told the New York conference.

The complexities of the Marriott-SPG integration have been intensified, moreover, by Ritz-Carlton’s loyalty scheme being added to the mix next year. Ritz-Carlton was acquired by Marriott in the late-1990s, but its loyalty programme has previously been run separately from the main Marriott scheme.

Pressure on loyalty schemes
The delay in integrating all the schemes also reflects the changing times for loyalty programmes in the travel sector. Ever since American Airlines in 1981 launched the first serious loyalty scheme for regular airline passengers, most corporate travellers have traditionally found ‘free’ flights or upgrades more alluring than rather dull – and often over-complex – hotel loyalty schemes.

However, as flying has become more of a commodity-style experience for many – packed into ever-shrinking seats and forced to pay increasingly egregious fees for services previously included in the fare – so accumulating frequent-flyer miles has lost some of its lustre. The airlines’ pivot towards rewards based on spend rather than miles flown, has also diminished their attraction, since the potential rewards can be far less.

Yet the top hotel chains have also recognised that their traditional approach to earning the loyalty of frequent guests is losing traction. Rumbles of discontent about hotel programmes being both confusing and too demanding in their redemption rules have gathered pace over the past few years.

At the same time, guest demographics are changing and, unsurprisingly, it is the rising millennial cohort who are fuelling the remake. A recent survey of more than 25,000 people across 33 countries by consultancy firm Accenture, entitled Seeing Beyond the Loyalty Illusion, suggested that millennials were more demanding and less loyal than any other group, especially as part of the ‘always-connected’ generation. Marriott has estimated that millennials will be its key customer base in the next decade.

“Millennials were also more likely to have switched hotel providers in the previous six months,” points out Umar Riaz, a managing director in Accenture’s Travel Industry practice in the US, adding that hoteliers should urgently seek “to curb this switching behaviour”.

Chains up the game
Some of the big chains have recently been doing exactly that. Earlier this year Hilton revamped its long-standing loyalty scheme HHonors – dropping the clunky double-H and renaming it Hilton Honors. The hotelier, in case you missed it, also decided at the same time to rebrand itself as just Hilton rather than its previous nomenclature, Hilton Worldwide.

Hilton’s reboot of its Honors programme addressed one common criticism of such schemes – that it takes too long to actually gain any rewards – by allowing members to choose a combination of points and money for a stay or other reward in the programme. Helpfully, a new app on its website enables members to calculate what combination of both they will need to secure a room night or reward.

Among the other benefits of the revamped scheme are allowing members (in the US only at present) to use their points to purchase products on Amazon.com. The new programme also addresses the issue of a temporary change of circumstances – such as following the birth of a child, illness or job switch – and allows elite ‘Diamond’ members in the scheme to put on hold their special reward status for a year.

“By offering these new benefits, we’re unlocking 15 billion Honors points across the system,” says Mark Weinstein, a senior vice-president and global head of the loyalty programme.

Hilton’s rivals have also been revamping their own programmes this year. Choice Hotels, for example, has partly focused on giving its guests more immediate and frequent rewards, including discounts on petrol and credit with Amazon and Uber, for those in its Choice Privileges programme.

This recently won it a special ‘Freddie Award’ – named after aviation entrepreneur Sir Freddie Laker – from European frequent travellers for the best ‘up-and-coming’ hotel loyalty scheme in Europe and Africa.

‘Soft’ rewards
Hyatt, meanwhile, replaced its long-standing and award-winning Gold Passport loyalty scheme with ‘World of Hyatt’, unashamedly designed to appeal to sophisticated, high-end frequent travellers.

It is extending its previous two elite tiers to three, and naming these (in ascending order) ‘Discoverist, Explorist and Globalist’, reflecting a focus on rewards being based around high-end exclusive experiences. Millennials, in particular, are often more interested in redeeming their accumulated points for an exclusive or luxury experience, rather than future hotel stays.

This autumn, for example, World of Hyatt is offering a four-night cultural and gastronomic trip to Tokyo, staying at Hyatt’s luxury Andaz hotel, at a cost of 300,000 reward points for two, excluding airfares. The monetary cost of the ‘experience’ alone – excluding airfares and accommodation – would be US$3,900 per person.

But such extravagant rewards – rather than a ‘free’ night’s stay – highlight the inherent contradictions in the loyalty universe: should a business traveller who has notched up sufficient travel rewards at the expense of the company really expect to benefit from the growing vogue for ‘soft’ rewards, such as experiences (even if they are millennials) rather than rooms?

This brings into sharp focus one of the fundamental policy issues created by loyalty schemes – be they for flights, hotel rooms or even fuel – which are essentially paid for by the employers of those employees travelling: who owns them?

“Although the public sector is still very policy driven on this issue, many private sector corporate programmes allow their travellers to take part in reward schemes, so there is no clash between their interests,” points out Erica Livermore, chair of the Hotel Booking Agents Association’s business accommodation committee and managing director of Prestige Reservations, a travel and events management company.

“We encourage our clients to be flexible and make things clear within the travel programme’s rules,” she adds. “But meeting and event bookings are a different matter and the rules normally prevent reward points being claimed by individuals.”

Not surprisingly, perhaps, the tax policy implications of loyalty programmes appear intentionally vague, with the consensus view that such schemes effectively offer a rebate on fares already paid, rather than a monetary reward. Tax authorities on both sides of the Atlantic, it seems, lack the will for a fight over this – at least for the present.

Channel wars
But there are still plenty of players spoiling for a fight elsewhere in the hotel world – and loyalty schemes are the weapon of choice. Nearly 18 months ago, Hilton launched its biggest-ever marketing campaign under the banner ‘Stop Clicking Around’ – alerting potential hotel guests that the best deals on hotel rooms could only be found by booking directly through the chain’s own distribution channels rather than a third party.

Hilton’s ire was particularly directed at the two dominant OTAs (online travel agencies); Expedia (Hotels.com) and Priceline Group (Booking.com) – which, typically, can charge 10 to 15 per cent commission on chain hotel bookings made through their portals, and between 15 and 25 per cent for independent hotels, according to travel industry analysts.

To sweeten the deal, Hilton offered members of its loyalty programme special discounts when booked direct, a best available rate promise. Hilton’s move was soon followed by rival hoteliers, including Marriott, Hyatt, Choice Hotels International and IAG.

The push towards direct booking appears to be working: in the first quarter of the year, for example, Hilton’s loyalty membership had grown 19 per cent year on year to 63 million, and those members accounted for 57 per cent of the group’s occupancy.

Moreover, Hilton’s direct online bookings as a percentage of total bookings increased from 28 per cent the year before to 30 per cent in Q1 this year. Hilton CEO Chris Nassetta told financial analysts: “This was the highest level ever and it is now the fastest-growing distribution channel for us.”

OTA growth
But the overall picture is not so clear cut. US travel research group Phocuswright says OTA hotel bookings in the US are accelerating faster than the overall American hotel market. “And they’re growing even faster in the more fragmented hotel markets of Europe, Asia and elsewhere,” points out Phocuswright analyst Douglas Quinby.

Yet such growth figures can be misleading: OTAs in the US still only account for just over one-fifth (22 per cent) of hotels’ gross bookings through all channels (not just online) and even less if newcomers such as Airbnb are included, points out Phocuswright.

In Europe, a recent GBTA and Concur survey of business travellers in Germany, the UK and France, found that at least one-third of those questioned in each country had booked directly with a travel supplier despite 60 per cent having access to an online booking tool (OBT). One-quarter of respondents also used an OTA.

The policy implications of this are spelt out by Concur executive vice-president Mike Koetting: “Unmanaged direct bookings can undermine travel programme benefits, policy enforcement, duty-of-care obligations and supplier contracts,” he says.

Outgoing GTMC chief executive Paul Wait is also critical of the big hotel brands’ direct booking strategy by promoting their loyalty schemes. “Hoteliers need to have a keen sense of the benefits their loyalty schemes offer across each distribution channel and that these benefits are fair,” he says. “If not, they run the risk of alienating TMCs and the corporate buyer – which will be to their cost.”

Wait (who is leaving the organisation shortly to join Southall Travel Group) believes that the major hoteliers are “in danger of destroying their relationships with TMCs”, and urges them to consider alternative measures “such as reducing supply to the OTAs and taking a more specific and targeted action that does not affect the corporate buyer”.

He is supported by Adam Knights, UK managing director of travel management company ATPI Group, who argues that for hoteliers to operate effectively “they must consider the TMC’s value and expertise to deliver bookings and revenue – in short, a much more holistic approach to loyalty and rewards within the business travel community.”

Yet Knights also thinks the chain hotels are increasingly recognising the benefits of working with TMCs in order to make more effective use of loyalty scheme membership. “For example, if a traveller stores their loyalty number in their corporate profile, the TMC can access both the website rate and also capture the benefits of the scheme, such as the discounts which can be earned,” he says.

Buyers should also be aware that TMCs still carry considerable clout when negotiating hotel deals for clients, suggesting an ability to achieve similar benefits to those offered to loyalty scheme members who book direct.

“Not only should there be a percentage discount off rack and best-available rates, but whenever possible additional benefits such as free wifi, breakfast, and so on, should be included,” points out Sonja Hamman, director of global strategic partners at Wings Travel Management.

But she also acknowledges that loyalty schemes can “offer other benefits which are often not included in TMC rates, such as space-available room upgrades, free newspapers, welcome baskets, etc”.

Expedia joins the fray
Meanwhile, Expedia may resent the direct booking campaigns introduced by the leading hotel brands against it, but it is showing little sign of bearing a grudge.

Instead, it is fighting back with its own travel loyalty scheme called Expedia+, launched in the UK earlier this year after five years operating in the US. Reward points for individual members are earned from every hotel, flight or travel package booked through its websites, while rewards depend on the status obtained.

But that’s not all: Expedia is also targeting the global meetings and conference markets on the basis that it estimates two-thirds of all mice events also involve a hotel. So far it has tested the concept – under the meeting market label – mainly in Germany, initially with best western, but now with NH Hotels as well. The battle between the OTAs and the hotel chains is far from over.  

Hotel loyalty schemes – tips for buyers

• Embrace hotel loyalty schemes positively as they can help maintain compliance with corporate travel policies, especially when major hoteliers combine programmes across multiple brands (e.g. Marriott). Persuasion can often be more effective than coercion in achieving compliance.

• While airline loyalty schemes are formally included in most company travel policies, hotels have not always been given the same recognition as the rewards have been regarded as less significant. But now the increased benefits offered by many hotel chains raises their potential value to the corporate travel budget.

• Employee loyalty scheme profiles should be easily accessible to the travel buyer and TMC, so that the best rates can be automatically achieved along with the other benefits available. The data captured should be regularly assessed to ensure it meets policy targets.

• Be aware that some hotel chains are better than others at ensuring that special rates with loyalty benefits are available through negotiated managed programme channels. Problems, especially with compliance, can arise when these channels are ignored.

• Don’t be dazzled by the marketing clout of the big hotel brands: sometimes loyalty benefits obtained with a budget chain or independent hotel group (such as free wifi, parking, and breakfast) can be more useful, especially for SMEs.

Top loyalty rewards - what the hotel brands are offering

From rewarding members who book direct, to redeeming points in hotels involved...

Hilton is allowing up to 11 Hilton Honors loyalty scheme members travelling together to pool their points to help pay for their stay. Although aimed at groups of ‘family and friends’, members do not have to share the same surname – thus potentially allowing business colleagues (especially in SMEs where funds may be tight) to take advantage of the deal when going to a conference or other business trip together.

hiltonhonors.com

The Principal Hotel Company, the new name for Principal Hayley Group following a corporate revamp late last year, has launched a loyalty scheme – called Applause – covering its 40-plus UK portfolio. These hotels are split between city centre upscale properties,    such as the former George Hotel in Edinburgh and the Hotel Russell in central London (now called the Principal London) and ‘country estate’ properties under the De Vere banner. As with the larger chains, the loyalty programme rewards members who book direct with a 10 per cent discount on the best available rate, along with late check-outs and other soft benefits.

phcompany.com

Two of Asia’s leading luxury hoteliers Mumbai-based Taj Hotels Resorts and Palaces, and Shangri-La Hotels and Resorts, headquartered in Hong Kong – have linked their loyalty programmes under the ‘Warmer Welcomes’ brand. The near-five million members of Shangri-La’s Golden Circle programme and the one million or so in Taj’s InnerCircle loyalty scheme can now earn and redeem points at some 200 hotels in more than 130 cities spread across the region. The move gives both hotel groups the opportunity to expand their reach in the region, especially the fast-growing economies of India and China. Underlying the link-up of the two schemes is a focus on offering ‘value and experiences’ rather than the member discounts available for direct booking with the larger global chains.

warmerwelcomes.com

The popularity of the loyalty schemes offered by leading chain hotels has unsurprisingly led to efforts to provide a similar service for independent hoteliers and smaller chains. Wanup is a Barcelona-based loyalty club (rather than ‘programme’) created by a Spanish family involved in the hospitality industry with Catalonia Hotels and other ventures.

wanup.com

Its USP is that it focuses on ‘instant rewards’ for less frequent business travellers, with cash back and soft benefits (breakfast, free parking, etc) according to nights stayed. There are only 400 or so hotels in the scheme at present, with just 18 in the UK and most in Spain, although there are plans for European expansion under way. A similar scheme, called Voila, is operated from the US and covers over 600 hotels from 70 countries (although only two in the UK).

www.vhr.com

Comments

Something missing from this analysis is direct connects. If hotel chains want to keep a strong relationship with TMCs and yet continue to drive direct bookings and loyalty, they need to open up direct APIs in line with the approach airlines are taking with NDC. That keeps both sides of the partnership happy: TMCs can offer the hotel's direct content within their own booking tools, and the hotel is getting bookings through their own distribution channel.

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Matthew Steer (not verified)

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