percentage drop

Marriott Commission Cut: “Short Sighted” or Business Necessity?

Marriott International’s announcement this week that it is cutting commissions from 10 percent to 7 percent has third-party planning and sourcing companies disappointed and on alert. The decrease goes into effect on March 31, 2018, for all Marriott International properties in the U.S. and Canada.

The change, according to Marriott, is an effort to improve the bottom line for its hotel owners: “Meetings and events represent a critical part of our business as well as an opportunity to drive innovation and win with customers. The current business model and environment, however, present significant obstacles to making the investments needed to deliver a world-class experience for customers. While group intermediaries play an important role in the marketplace, costs for our North American hotels and owners are growing at a faster pace than group revenue, which impacts hotel profitability.” The commission change, says a Marriott spokesperson, is a way “to strike a balance and ensure the long-term health of our business.”

As a strategy, commission cuts are “short sighted,” says Kari Vrba, senior vice president of business development, MotivAction. “We are obviously disappointed to hear of the new commission strategy in place at Marriott. We understand the interest in maximizing room revenues, but we believe the strategy fails to recognize the total potential value that comes from a group travel program such as F&B revenue and ancillary charges.”

At Meetings & Incentives, co-CEO Jean Johnson, CMP, feels a lack of trust in the hotel giant. “We anticipated that with the Starwood acquisition … Marriott would leverage its positioning in a way that would capitalize on its size and strength. We were, however, disappointed by the timing and the way it was communicated, especially given our long-standing partnership. The lack of transparency was short-sighted and undermines our ability to continue to place our trust in their organization. It was pitched as a ‘new strategy’ when in actuality it is a cost cutting measure. Our immediate reaction is to pursue strategies specifically with Marriott to bring back the value that has been lost with the decision. This includes everything from enhanced concessions and discounts to streamlined processes and efficiency gains when we source their properties.”

For Mary Jo Kouch, director of sourcing at Meeting Alliance, Marriott’s decision is disillusioning. “We are not only shocked, we are terribly disappointed in our hotel ‘partners.’ We use that word so haphazardly in this industry and yet we do consider ourselves partners. From the moment Marriott acquired Starwood, they professed nothing would change and, if anything, things would improve. This is hardly an improvement for companies relying on commission as a major source of revenue.”

Marriott has some history with commission cuts. Its Ritz-Carlton brand lowered commissions for intermediaries in 2000, but eventually brought them back in line with the industry. The difference today, says David Peckinpaugh, president, Maritz Global Events, is scale. “What Marriott has done this time is make [the commission change] a brand standard, and I think they feel like that gives them the compliance and enforcement piece of the puzzle that perhaps they didn’t have back then. That and their centralized commission payment structure gives them more control over the environment than they had almost 20 years ago.”

“I’ve been waiting for this for some time,” says Frank McVeigh, noting that airlines’ move in 2002 to stop paying commissions to travel agents was an early warning signal. The largest third parties, those with contracts in place with Marriott, will be in good shape for a while, he says, “but this is going to hurt the little guy.”

Johnson notes that “there are many third-parties, large and small, that rely solely on commission without much, if any, transparency into their margins. There are also third-parties that depend on contractors whose efforts are funded by commissions. It will be much tougher on these types of organizations than on us simply because we don’t rely that heavily on commissions.”

Peckinpaugh agrees that it’s going to be “a wake-up call” for third parties that “haven’t been thinking about this eventuality. Some business models are more at risk than others. For companies that do site selection only, this has to be a concern.”

That said, “It’s not as if Marriott has every hotel room in the U.S. and Canada,” Peckinpaugh continues. “There are a lot of other choices, a lot of different ways of satisfying our clients’ needs, and I think our clients are going to be vociferous in their support of the services that intermediaries provide. So, I think we have to mitigate the sky-is-falling discussion … Marriott certainly has significant inventory, excellent convention hotels, but they’re not the only game in town. And our goal always is how do we find the right fit for our client that provides the best value for them, and that will continue to be our driver. If that means we use a Marriott, so be it, if it’s another brand, so be it. It’s a significant shift, but it’s not the end of the world.”

Kouch at Meeting Alliance agrees, but also voices the worry of many third parties: “We will continue to guide our clients with hotel recommendations that have their best interests at heart. Our concern is that we will see the other major chains following suit, making it even harder for companies like us to turn a profit.”

For Peckinpaugh, it’s too early to tell. “My personal opinion, and it’s only that, is that there are some companies that will follow suit, but I’m pretty confident that there are a number that will look at this as an opportunity to drive market share and to differentiate themselves from Marriott. It’s going to be a pretty fascinating next few months as we see how all of this plays out.”

Among Marriott’s 30 brands are Westin, The Ritz-Carlton, St. Regis, W, Gaylord Hotels, Renaissance Hotels, Edition, JW Marriott, The Luxury Collection, Marriott Hotels, Le Méridien, Sheraton, Autograph Collection Hotels, Tribute Portfolio, and Aloft.

 

 

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