Loyalty programmes were an unproven expense for owners, Thomas Magnuson, CEO, Magnuson Hotels, told us.
The comments came as it was estimated that the large global operators would raise at least $10bn using points during the crisis, following Hilton’s pre-sale of loyalty points to its co-brand credit card partner, American Express.
Thomas Magnuson, CEO, Magnuson Hotels, told us: “One third of US franchise revenues come directly from the loyalty programmes and the traditional brands have always pushed these. As the GRR (gross room revenues) percentages are high, they can’t be raised any higher, especially in this new world situation.
“The brands have created book direct campaigns to convince owners that they need to invest in loyalty programmes, but if you have, say, a 100-room Holiday Inn, you’re going to spend $300,000 on franchise fees and another third of that would be for loyalty. If you compare that to OTAs, it’s a very expensive form of distribution. For the hotel there is 15% GRR on top of that.
“Loyalty programmes are not proven, they’re often viewed with scepticism by the public. It’s profitable for the companies who built these new revenue streams, but it’s ultimately an expense to owners.”
James Bland, BVA BDRC, added: “There’s two sides to every transaction. The benefit of cash in hand is clear for Hilton, but for every billion-quid we have to expect a billion-quo and doubtless one of those would have been a very favourable exchange rate on the transaction.
“As an individual, I can turn $1,600 into $1,260 in the blink of an eye by buying points directly from Hilton for half a cent each and redeeming them at a DoubleTree in London for nought-point-four. (Mind you, hit the Hampton Inn in Dallas and I think I’m $300 up on the deal). Without the ability to spend a billion dollars, I’ll probably never know what sort of rate AMEX achieved, but I can imagine it would have been at a sizeable discount. How good is this deal for Hilton? To even get close to assessing that, we’d need a few other players to start selling points at this sort of scale too. Is it wrong to be vaguely excited by the prospect?
“What will be interesting as time goes on will be to track if, when and the extent to which that cash-to-point exchange rate evolves. Hotel brand owners are somewhat between a rock and a hard place where this is concerned and Chris Nassetta will probably find himself with some juggling to do. Owners may look enviously at that billion dollar pot of cash and expect a larger share of the spoils while loyal customers would be very resentful of any devaluation in points. (They may even expect them to increase in value, either in purchase power or shelf life). These are mutually exclusive goals unless Hilton itself bridges the gap, so he’ll have to navigate those waters while keeping his crew of shareholders onside.
“But that’s a problem for ‘Future Chris’. ‘Today’s Chris’ had a cash gap to bridge, and he was able to do that thanks to the strength of the programme he and his team had built over the years. If anyone ever wondered why hotels chains invested so heavily in loyalty, now they know.”
The schemes have proved a cost to the brands. In February Marriott International used its full-year results to look at the impact of its relaunched loyalty programme, where there had been “meaningfully higher” redemptions than the previous year, coming at a cost to the group.
CFO Leeny Oberg said: “In 2018 we saw the loyalty programme be net cash positive, this year it was several hundred million of a net cash user, as a result of the introduction of Bonvoy. There was some pent up demand from our customers, there were also some marketing expense. You saw a fairly unusual pattern for the programme, we are confident it will be much less of a cash user in 2020. Introducing peak and off peak will help manage the programme and get it to where it behaves more like it has in the past.”
The programme had 141 million members at the end of January, which Sorenson described as a “key competitive advantage”. Member share of occupied rooms was 52% in 2019, 58% in North America, with, the CEO said, “solid growth from co-branded credit cards. More of our guests booked direct” with, he said, worldwide sales accounting for three quarters of room nights and direct digital bookings accounting for one third.
Sorenson added: “There’s not reason the loyalty programme won’t get back to being a positive cashflow generator. As we grow our portfolio we will issue more points than are redeemed. We are more pleased than disappointed. Penetration is higher in North America and higher in select service hotels but we are seeing higher penetration in full service and resort hotels.”
Insight: The problems for Future Chris are, as Bland pointed out, many indeed, although one suspects that he is sleeping a little easier having banked $1bn.
There are, of course, various demands on that $1bn and not just that it is needed to keep things ticking over at Hilton towers. Owners are going to be facing some nasty reopening costs, not least those around cleaning. Future Chris needs to keep his pipeline perky or his shareholders will like him less. Oh it’s trying to be Future Chris.
One way to keep this all moving for him would be to commit some of that $1bn to helping with those reopening costs, as well as participating in a real and cash-like way in deals. This may slow the pipeline a little, but ultimately make it stronger as owners look to real support - and remember who gave it to them when they needed it.
As for Future Chris and Future Arne, one problem best not to raise now is whether future guests will even want to participate in the credit card market. Fintech is knocking at the door of the traditional credit cards and a dwindling number of people (already concentrated in the US) are likely to participate, particularly as people look to save cash coming out of the downturn. Best milk this cash cow now.