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Paying the Intermediaries: An Analysis of Hotel Commissions

Column: industry Tag: Intermediaries,hotel rooms,payment Published: 2017-05-18 15:39 Source: Author:

The increasing incidence of intermediaries selling hotel rooms and other services is a major topic of discussion among U.S. hotel owners and operators. From online travel agents to convention housing companies, third parties are placing themselves in between hotels and their guests during the sales process. Of course, these intermediaries want to get paid, and this has therefore become a rising expense for hoteliers.

As per the Uniform System of Accounts for the Lodging Industry(USALI), payments to intermediaries are classified as commissions. In recognition of the rise in intermediaries, the 11th edition of the?USALI?stipulates two commission expense categories within the rooms department: One is for commissions paid for booking transient business, and one is for commissions paid for booking group business. The commissions paid within the rooms department cover sales made not only for guest room rentals but also for any other ancillary revenue associated with those guests. If, however, an intermediary secures business solely for the benefit of the food and beverage department (i.e., local catering business without guest room rentals), the commission payment is recorded within the food and beverage department.

Not included in the rooms department commission expense category are payments made to agents for the rental of commercial space within a hotel. These commission payments are recorded as professional fees within the administrative and general department.

In recognition of the rise in intermediaries, CBRE Hotels’ Americas Research began to track commission payments within the rooms department starting in 2015. Our firm’s?Trends in the Hotel Industry?database captures the combined commissions paid for both transient and group business. The following summarizes the magnitude of rooms department commission payments in 2015 for U.S. hotels.

A Significant Expense

On average, commission payments are the second largest expense within the rooms department, behind labor costs. This ranking does vary by property type. At limited-service and extended-stay hotels, the cost of providing complimentary meals exceeds commission payments. At resort properties, more money is spent on the laundry, linen, and supplies provided in the guest rooms.

Measured as a percent of revenue, commission payments averaged three percent of total rooms revenue in 2015. Unfortunately, the metric we cannot access is the percentage of rooms revenue that is subject to a commission payment. Therefore, we are unable to calculate the average commission rate charged by travel agents and other intermediaries.

Commissions calculated as a percent of rooms revenue were greatest at convention hotels (4.5 percent). This confirms the increased use of housing companies and other agencies by meeting planners. Historically, hotels would deal directly with the meeting planner, and, for the most part, not need to pay a commission.

Commissions paid as a percent of rooms revenue were lowest at extended-stay properties (2.1 percent). In this segment, it appears that hotel sales managers are still able to deal directly with the corporate travel executives who book the long-term stays. Given recent trends in the convention segment, extended-stay hotel owners and operators should monitor intermediary activity in their segment going forward.

Because of the differences in room rates, the dollar value of the commission paid by a hotel is influenced by the average daily rate (ADR). Therefore, it is not surprising that commission payments measured on a $1 per occupied room (POR) basis tend to follow the ADRs achieved by the various property types and chainscales.

In 2015, convention hotels recorded the highest commission POR payments among all the property types ($8.14), followed by resort hotels ($6.22). When analyzing commissions POR by luxury chainscale, properties paid the most ($10.25). Not only do luxury hotels and resorts achieve high ADRs, their guests are most likely to use the services of a travel agent.

At the low end of commission POR payments are extended-stay ($2.13) and limited-service ($3.35) properties. These hotels achieve relatively low ADRs, and their guests may not be using intermediaries as much as other travelers.

Looking Forward

In an effort to measure the impact of intermediaries on the financial performance of hotels, the American Hotel and Lodging Association’s Consumer Innovation Forum is working with several hotel franchising, ownership, and management companies to establish metrics that measure the “total acquisition cost” of hotel revenue. Commissions are just one component of this equation. Other components include reservation fees, marketing costs, and other expenses incurred to secure revenue.

Going forward at CBRE, we will be able to monitor annual changes in the commissions paid to intermediaries. This will shed some light on the ability of hotels to control this cost by negotiating more favorable contracts with the intermediaries or increasing the frequency of guests booking directly with the hotel.

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