Loyalty Traveler – June, 17 2010

Loyalty Traveler – June, 17 2010

The New Norm–Big Box Hotels and Big Rebates

Are big rebates the new norm for big chain hotel loyalty programs? Free nights, bonus points and miles have become commonplace incentives across the hotel loyalty world. The frequency of free night promotions in 2009 and 2010 translates into the biggest hotel room discount sale for consumers this past decade.

How long can major chains like Hilton, Starwood, Best Western, Marriott and Carlson offer guests deals like two, three, or four stays to earn a free night at any or most hotels in the chain? The answer is revealed with Hyatt Gold Passport where a free night after two stays has been a perennial repeat over the past decade.

Evolution of hotel chains

My perspective of the hotel industry is the viewpoint of a consumer. There was a shift in consumer purchasing power over the past 25 years from Main Street stores to big box retailers like Costco and Wal-Mart who now dominate the retail and food industry in the USA. The evolution of big box hotel chains appears to parallel big box retailers in the dynamics of supersize (number of hotels), large volume (number of guests and loyalty members) and deep discounts (in the form of loyalty benefits and rebates). Hotel chains with 500 to 5,000 hotels around the world have the ability to undercut independent hotels and smaller chain competition through high volume and lower prices, although the lower price is often disguised in a value-added loyalty program rebate.

The big rebate model probably is the sustainable new norm for big box hotels branded in big chains with sizeable member loyalty programs and a highly profitable bank partner supporting the hotel brand through credit card loyalty points purchases. The major hotel chains continue to consolidate and grow. The top hotel loyalty programs around the world have 10 million to 50 million members. Hotel loyalty programs are vital to the pricing power of the hotel.

Lower rates and better promotions

The hotel industry has a convoluted business model where an individual hotel undercuts its own published room rates with excess inventory offloaded through online travel agencies and opaque purchase sites like Priceline and Hotwire. While hotel room rates in 2010 are substantially lower than the boom year of 2007, the hotel loyalty promotions for the frequent guest are much better in 2010. Hotel chains are seeking market share and loyalty competition is high among the big chains for the profitable frequent guests.

The nature of consumers is to seek the highest quality at the most affordable price point. Value added hotel stay benefits and rebate credit toward a free hotel night or airline ticket in the form of points or miles are driving forces for many hotel loyalty program members. But not every loyalty program member is a savvy shopper. Not every guest is going to have a high loyalty program rebate on every hotel stay, similar to how every diner in a restaurant does not use two-for-one coupons nor does every grocery shopper buy only the weekly discount items. There will be guests who maximize value and guests who stay at hotels even when prices are high due to familiarity, loyalty, convenience or necessity.

Tight budgets limit excessive consumption

The period of retrenchment is upon consumers. The heyday years of excessive consumption are past and possibly gone for a long time coming. The $300 average room price is an economic market segment that won’t attract the traveling general public for some time to come. Many of the frequent guests who spent $300 per hotel night in the boom years are now working with tighter budgets. Business travel may return, but business travel can’t keep up with the growth of big box hotels.

Leisure travelers are the growth market

Leisure travelers today have the opportunity to pay $200 per night rates for upper upscale hotels that were formerly $300 per night. The consumer spending $200 per night with the potential for a free room every three stays can buy four nights for $600 compared to just two nights in 2007. Seasonal loyalty promotions generate a high volume buzz and still drive hotel traffic.

Hotel loyalty programs may have difficulty pulling back from promotional free nights, megamiles and member bonus point giveaways for hotel stays. The big brand hotel chains may be moving irreversibly to the “big box” retail concept of bulk volume and lower profit margin to out-compete each other and prevent a loss of market share to opaque sites and character driven boutique hotels.

Wall Street will undoubtedly still drive high profit margin business to hotels, but the average consumer economically exiled from Main Street to big box stores portends a future where the average hotel traveler seeks economic relief through hotel loyalty programs to keep up a frequent traveler lifestyle in big box hotel chains.

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