Chapter 8 Distributing the offer

Lecture objectives Define the role of distribution in the hospitality and tourism industries Explain the functions of travel and tourism intermediaries from a hospitality perspective Understand the role of traditional distribution channels in hospitality markets Understand the role of online distribution channels in hospitality markets Explain how Internet technology, computer reservation systems (CRS), global distribution systems (GDS) and mobile technology impact on hospitality distribution Evaluate channel relationships between principals and intermediaries

Introduction The concept of distribution is simple; management of distribution is complex Hospitality products are perishable; it is crucial to generate advance bookings Major hotel companies use distribution channels to reach target customers Distribution provides two benefits to customers: hospitality products are made available when and where customers want them Online and traditional intermediaries (travel agents and tour operators) help customers to find and choose hospitality and travel products These intermediaries (also called channel partners) are paid by commission or merchant model Relationships between hospitality organizations and channel partners are complex The Internet has enabled organizations to perform both distribution and marketing communication activities online

Channels of distribution Distribution channels link customers, tourism intermediaries and hospitality principals (see figure) Channel 1: Direct-to-customer Direct marketing – hospitality organizations and customers communicate directly with no intermediaries No intermediaries – no commission = most cost-effective and profitable distribution strategy Channel 2: Referral network Hospitality chains market other properties in the network No intermediaries so ‘referral network’ cost-effective distribution channel Channel 3: Travel agent as intermediary Travel agents stock range hospitality products online and brochures Travel agent makes bookings, collects payment, provide tickets and are paid by commission

Channels of distribution Channel 4: Tour operator as intermediary Tour operators are wholesalers. Tour operator buys allocation accommodation from hotels, develop packaged products and sell to consumers Tour operator agrees discounted prices with hotels and makes profit by charging the customer an inclusive price Channel 5: Tour operator and travel agent as intermediaries Similar Channel 4, with one major exception: tour operators also use travel agents to promote and sell their all-inclusive products Tour operator pays travel agent commission for booking More intermediaries in the distribution channel; each intermediary needs profit so greater pressure on hotels to keep prices low and less profit for hotel

Figure 8.1 Traditional hospitality and tourism distribution channels

Benefits/disadvantages distribution channels Benefits of distribution channels: convenient global/local access points for customers away from hospitality location provision of relevant information to customers by knowledgeable travel experts bundling of hospitality products into combined travel packages advance reservation and payments system opportunity to work with specialist intermediaries who understand markets Disadvantages of distribution channels: loss of margin paid to agents through commission loss of margin caused by adopting the merchant model of distribution losing control of inventory at low rates losing control of a key element in the marketing mix (distribution) unhealthy dependence on intermediaries lack of trust between hospitality units and distributors intermediaries taking ‘ownership of the customer’ away from hospitality organization

Intermediaries Intermediaries can be categorized under the following broad headings: search engine travel agent tour operator conference and meeting planner corporate business travel agent incentive travel house representative agent specialist online travel retailer affiliate marketing agency tourist board airline Distinct categories of tourism intermediaries help define roles of different of distributors, but boundaries between the categories are not precise

GDS and extranets Origins of electronic distribution airlines’ inventory systems developed in the 1950s and 1960s 1970s airlines developed Global Distribution System (GDS) for travel agents to book travel products Hospitality and tourism GDS network large computer reservation systems (CRS), linking hotels and travel agents GDS is a ‘global travel supermarket’ with closed networks; information only available to airlines, hotels and travel agents Extranets use Internet technology to communicate between suppliers and customers Hotel chains provide corporate customers access to website via extranet links Allows hotel group to give key account clients the opportunity to book online using privately negotiated, confidential prices Increasingly, hospitality distribution is conducted via mobile networks and applications that do not use GDS

Online distribution Consumers have access to information 24 hours a day, 7 days a week and every week of the year Consumers have fast, mobile interconnectivity to access online data either at home, in the office or on the move Speed of search and multiple sources of hospitality and tourism information from principals and intermediaries give consumers instantaneous choices Real-time product/price transparency between competing hospitality offers Transparency of prices and comparative shopping sites makes the online competitive environment more intense Potential to create confusion for consumers when same hospitality offer has different prices on hotel’s site and distributors’ websites From hospitality perspective, the online environment creates difficulties in maintaining product/rate hurdles to protect margins and yield Fast, relatively safe booking and payment transactions facilitate online channel bookings Hospitality operators sell distressed inventory quickly via specialist online distributors

Online distribution channels Proliferation online travel channels Multiple online networks linking customers, intermediaries and principals in distribution system is complex Figure captures picture of fragmented online distribution system in hospitality and tourism using well-known brands Most cost-effective distribution channel is always direct from the customer to the hotel

Figure 8.2 Selected online hospitality distribution channels

Disintermediation/reintermediation Originally, hospitality companies thought emergence of Internet would eliminate intermediaries – end-user customers would book directly with hotels via their websites This process is called disintermediation and eliminates high commissions paid to intermediaries and other distribution costs Internet created opportunities for new travel e-intermediaries to emerge (Expedia and Lastminute.com ) and existing players (Thomas Cook and TUI) adopted new technologies Process intermediaries re-establishing influence in the online environment is called reintermediation Intermediaries dominate hospitality and tourism distribution channels Both principals and distributors continually manage their cost structures better Process of disintermediation and reintermediation is constantly evolving

Search engine marketing Effective online marketing based on understanding how search engines work – specialist marketing subject: search engine marketing Important factors include destination links, accessible easy-to- use websites and mobile applications, effective booking engines, controlling BAR Consumers depend on search engines when looking for information on the Internet To capture online audience, a site needs to ensure domain name, destination, text copy, page titles, description tag and Meta tags are designed to ensure search engines find web pages Location is a primary search item for potential customers, links to destination sites, local and national tourist organizations, and local attractions are important Search engine optimization (SEO) helps website to achieve higher rankings on search engines

Costs of distribution Typical distribution channel for hotel includes one or more: search engine affiliate booking agent travel agent tour operator travel search site GDS switch company hotel chain CRS credit card company (reservations are confirmed using credit cards) Hotels strive to drive down distribution costs Online distribution system is evolving and hotels must constantly monitor the costs, volume and effectiveness of bookings generated through each channel

Conclusion ICT Innovations continue to drive the development of distribution channels in hospitality and tourism Continual evolution in the online world – including social networking sites – creates new distribution channels Accommodation providers need to use intermediaries to obtain advance bookings to generate occupancy High cost of distribution forces hospitality companies to look for alternatives Online environment is an important facilitator of hospitality distribution; can help hotels reduce distribution costs via direct booking Online search engines and intermediaries, well-known travel agents, and popular tour operators are key intermediaries for most hotel brands

References and further reading Buhalis, D. and Law, R. (2008). ‘Progress in information technology and tourism management: 20 years on and 10 years after the Internet – the state of eTourism research’. Tourism Management, 29 (4), pp. 609–623. Buhalis, D. and Laws, E. (2001). Tourism Distribution Channels: Practices, Issues and Transformations. Continuum. Chaffey, D., Ellis-Chadwick, F., Johnston, K. and Mayer, R. ( 2006 ). Internet Marketing, Strategy, Implementation and Practice (3rd ed.). Financial Times/Prentice Hall. Cunill, O. M. (2006). The Growth Strategies of Hotel Chains: Best Business Practices by Leading Companies. Haworth Hospitality Press. Daniele, R. and Frew, A. (2004). ‘From intermediaries to market-makers: an analysis of the evolution of e-mediaries’. In A. J. Frew (ed.) Proceedings of the Information and Communication Technologies in Tourism (pp. 546–557). Springer Wien. Duffy, D. L. (2005). ‘Affiliate marketing and its impact on e-commerce’. Journal of Consumer Marketing, 22, pp. 161–613. O’Connor, P. and Frew, A. J. (2002). ‘The future of hotel e-distribution: expert and industry perspectives’. Cornell Hotel & Restaurant Administration Quarterly, 43, pp. 33–45. O’Connor, P. and Galvin, E. (2001). Marketing in the Digital Age. Financial Times/Prentice Hall. Porter, M. E. (2001). ‘Strategy and the Internet’. Harvard Business Review, 79, pp. 62–79. Reichheld, F. F. and Schefer, P. (2000). ‘E-loyalty: your secret weapon on the web’. Harvard Business Review, 78, pp. 105–113. Ryan, D. and Jones, C. (2009). Understanding Digital Marketing: Marketing Strategies for Engaging the Digital Generation. Kogan Page. Strauss, J., El-Ansary, A. J. and Frost, R. (2003). E-Marketing (3rd ed.). Financial Times/Prentice Hall.