EUROMONITOR INTERNATIONAL January 22nd, 2016
The past year has seen a lot of acquisitions by global hotel chains, increasing sales through online travel agencies (OTAs), and a continuation of the strong rise of peer-to-peer (P2P) rentals facilitated by platforms like Airbnb and HomeAway. Euromonitor International is pleased to provide the first in a 4-part series of interviews about the fate of independent hotels in this swiftly changing lodging landscape.
Kicking off the series is Thomas Magnuson, co-founder and CEO of Magnuson Hotels. Magnuson Hotels consists of over 1,000 independently owned hotels, either using one of the three Magnuson brands or keeping their own name but benefiting from the economies of scale and expertise Magnuson can offer. In the interview, Mr Magnuson discusses his, potentially contrarian, view of OTAs and his interest in collaborating with Airbnb.
My wife, Melissa, and I started the company over 12 years ago out of our house in an area of Washington State in the US. I’d been working in the industry since I was eight years old in a few different roles. In the 1990s, Melissa and I were involved in the operation of a Best Western hotel and an independent hotel in Idaho, and we saw that the struggle for the hotelier was not getting any easier. Early 2000s saw the emergence of the internet, and we used to wonder how the independent hotelier was going to cope with this onslaught of technology. Also, how was the independent hotelier going to cope with the biggest expansion of franchising ever in the 1990s in the US? Lodging supply grew by 65% in the 1990s, driven exclusively by large-scale franchising of brands like the Wyndham umbrella and Choice Hotels. So when Melissa and I started up the company in late 2002, we had produced a reservation system for a smallchain, but that fell through. So we had this massive infrastructure but nothing to put in it, so that’s when it was time to hit the road and see friends, family and other hoteliers with the idea of a low-cost alternative to hotel franchising.
Out of our 1,000 hotels, about 850 have their own name, but they’ve got the strength and the technology of a major chain behind them. We are an invisible support platform, so that they have got a full-scale-chain-level reservation system with direct connections to all distribution systems and online travel agencies (OTAs). To the consumer, however, they are seen as independent.
On the other side, a few years ago, we launched our three hotel brands; they are in the economy, mid-scale and upper mid-scale segments, and each of these has our own name on them. To the consumer, they do look like they’re the representation of a chain, which is important in a very brand-centric country like the US. Consumers have come to embrace brands as a symbol of consistency, and when people travel long distances on highways in the US, they gravitate to the comfort of a sign that they recognize, whether it’s a hotel, a petrol station or a restaurant.
I’m going to take the contrarian view to the industry in that I think that OTAs saved the industry after 9/11. OTAs have made it possible for the smallest hotel in the most obscure location of the world to get business, and we’ve had some serious downturns: it took seven years to recover from 9/11, and then as soon as we did there was the crash of 2008. OTAs are the modern day equivalent of bringing electricity or power and water to areas and helping them come alive. But, it should be considered that, in 2001, OTAs represented 1.5% of total US hotel sales; today, it’s over 50%. I think that bookings on Tripadvisor and Book on Google will continue to increase OTA’s share even more. For independents, it is projected that direct bookings’ share might drop to 10% in the next three years. In the US, I think 90% of all OTA traffic is through Expedia, Booking.com and Priceline. That kind of strength cannot be stopped and you’ve got to figure out a way to cope with it, because it’s not realistic to think that you can go against that.
Today, when you do a hotel search on Google, everything above the fold is sponsored, with Expedia, Priceline or Booking.com buying billions of dollars of keywords. “Pay per click” is the biggest black hole there is, and no independent hotel anywhere can compete with an annual combined marketing spend of US$3.8 billion between Expedia and Booking.com. So I think that hoteliers need to find a way to work with OTAs and say “can I ride this instead of fight it”. I think what’s good for independent hotels is access to markets, combined with more available and cheaper technology, so independents are able to get a slightly bigger sliver of the market pie that they usually got by working with OTAs.
There’s a prevalence of technology firms that are feeding on digital fear. There is this constant nagging feeling: “Will I fail as a hotelier if I don’t use Facebook, Twitter, and Instagram?” I think that’s turned into a real emotional struggle for many hoteliers. If you focus 90% of your efforts on the fundamentals of service, rates, and good reviews – you have to focus on your reviews! – and basic marketing, you’ll be okay.
There is always a lot of focus on a player like Airbnb when it comes onto the market. The black taxi world has said that Uber is unsafe, and hotel associations say Airbnb is unsafe and you don’t know what you get. From our company’s point of view, however, it is amazing. Airbnb started with private rentals, and now it’s got scale and scope, and can leverage that platform. Importantly, it takes good care of its hosts and their guests, and we would welcome the chance to work with it, and I’m sure we will.
Airbnb has been very successful at marketing the inconsistency of the product. Inconsistency was promoted as a negative thing by hotel chains, while Airbnb has done a massive job of turning that upside down. I think that it could bring a lot of excitement and romance back to travelling, because travelling, for many people, has just turned into a chore, with the additional security and sometimes being treated badly by airlines. To be able to turn it back into an adventure with surprises is a really good thing for people and independent hotels can offer this just like Airbnb can.
It’s going to be continuously better for independent hotels, because it’s all about bringing your product to market, and the cost of bringing your product to market is vastly different from what it was 15 years ago. Back then, independent hoteliers could not fight against the big chains. Now, they have access to the same distribution platforms, and get free reviews, so they go head to head with the big guys. Hotels used to target customers in a maximum 300-mile radius. Now, you’re not restricted by that at all, so the future is bright as more people can be reached.
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