Fundamental changes to the digital landscape are giving rise to a new breed of travel distribution competitor. Here’s how hoteliers can combat them.
By Dan Kowalewski and Bruno Despujol
Hotel distribution companies face fundamental disruption as the industry shifts online, digital distribution rapidly evolves—particularly mobile device penetration—and new competitors seek to grab a share of the hotel industry’s margins.
We have been writing about the distribution landscape and challenges facing hotel companies for many years, and believe the next wave of challenges is imminent. The stakes are high and rising for hotels to get their digital distribution right.
How can a hotel company cope? By disrupting itself first and under more favorable terms than a new digital competitor would if in a position of strength.
Hotel companies should honestly assess their strengths and weaknesses to inform their future distribution strategies. In areas of weakness, where differentiation isn’t going to be easy to achieve, hoteliers should form partnerships to defend margins. Where a hotel is strong because of customer relationships, data or capabilities, the company might explore kingmaker opportunities with partners across the distribution landscape.
In mature markets such as the United States and Western Europe, online travel penetration, according to Phocuswright, is around 50%. Outside those regions, online travel penetration is around 20% to 30% but is shifting rapidly, with average growth rates in the last five years as high as 18%. Third-party online intermediaries deliver almost a quarter of all U.S. roomnights, according to an Oliver Wyman analysis, and each 1% shift from direct channels to commissionable intermediaries (such as online travel agents) will cost the hotel industry about $400 million.
Digital distribution is evolving quickly, with Internet penetration, smartphone subscriptions and social-network use projected to grow dramatically in the next decade. An Oliver Wyman analysis shows the majority of Internet users are in developing countries, where annual penetration growth of 10% to 20% is expected to continue. Mobile data traffic will increase more than tenfold in the next four years. One quarter of the global population already belongs to one or more social networks. There are 1.4 connected devices per person today, and that number is expected to reach 6.5 within five years.
A new breed
These fundamental changes to the digital landscape are giving rise to a new breed of travel distribution competitor. As hoteliers contend with their traditional competitors, new players are seeking roles at the top of the distribution funnel and along the entire customer journey. These include search and social media companies, such as Google and Facebook; device makers such as Apple, Google and Microsoft; emerging OTA-light models such as TripAdvisor’s Instant Booking product; and large-scale new entrants such as Amazon.
These new players will succeed for three reasons.
First, the scalability of Internet distribution now plays to the strength of the leaders, Amazon for example. These large-scale competitors can enter quickly and without warning, target low-hanging fruit by focusing on specific customer and hotel segments, and take a loss-leader position while building capability and scale.
Secondly, mobile and smart device penetration put device makers, such as Apple, squarely at a new entry point for travel decisions. Device makers are well positioned to understand and solve customer hassles along the travel journey using the data they collect from device usage.
Lastly, the rise of the Human Era favors these new players by placing greater value on brands that create human connections for customers rather than purely transactional relationships. For example, TripAdvisor makes interactive and collaborative relationships with customers and builds trust through reviews and travel transactions, through the launch of its Instant Booking product.
Hotel companies can compete more effectively in this new landscape if they embrace the digital trends, explore their own strengths and weaknesses, and become willing to abandon elements of their current strategies that are built on the narratives of the past.
Tips for hoteliers
Start by assessing how well your company is positioned for the next wave of digital disruptions in three categories: customer, channel and content. Hotel companies should squeeze all they can out of their special advantage: the customer ultimately stays in their hotels. Deciding which customer segments are the most valuable to control and how their booking preferences will shift in the digital world becomes critical. How well are you positioned to capture and steer each segment?
Identify the points of power in the value chain for each distribution channel and how this might evolve in a digital world. Consider how strong you are in each channel and which channels are most valuable to you. Consider which aspects of your content have intrinsic value and how that will change with digital trends. Do you control and capture value from your content? Are you providing access to your content when and where users want to get it?
Develop distribution strategies that harness the global penetration of Internet and smartphone usage, particularly in emerging markets. Anticipate evolving preferences for how consumers plan, shop, book and experience travel. Work on creating a favorable consumer perception that differentiates you from the disruptors by focusing on the little things that matter in the customer experience.
Understanding and addressing customer hassles along the entire guest journey is critical to success. Create a hassle map of the customer’s journey from beginning to end, so that executives can experience for themselves each step of the journey and truly understand what customers face.
Stake your claim in the distribution value chain by understanding your position of strength and focusing on it relentlessly. Seek partnerships that will enhance or strengthen your position in the landscape while building long-lasting customer relationships and generating incremental value.
Dan Kowalewski is a partner with Oliver Wyman’s travel and leisure practice, and he is based in New York. Bruno Despujol is a partner with Oliver Wyman’s retail and digital practices, and he is based in Paris.