What Does Marriott’s Commission Reduction Say About How the Industry is Changing?

Marriott’s decision to reduce commission payouts to third parties raises bigger questions about how the events industry defines and assigns value.

Gregg Talley

As news of Marriott International’s decision to reduce payouts to third-party planning groups spread across the industry in late January, some business-events industry veterans voiced their shock at the 3-percent cut to the long-established 10-percent commission structure. However, Gregg Talley, FASAE, CAE, president and CEO of Talley Management Group, saw the news coming years ago.

“It’s not a huge surprise,” Talley told Convene. “Many people are pointing to the Marriott-Starwood merger as the reason, but this is something we’ve been talking about for years. It was always a question of which hotel brand would make the first move. I would be surprised if the other major chains don’t follow suit. They’re all facing the same issue.”

That issue is controlling costs. In 2017, the hotel analytics firm Kalibri Labs estimated that hotels earned approximately $30 billion in group room revenue, and that payouts to third parties, e-channel advertising, and other technology costs cut their earnings from between $3.4 billion and $4 billion.

Tammy Routh, senior vice president, global sales, Marriott International, told Convene that the hotelier is committed to becoming “the go-to for meetings and events.” That goal carries the need for significant investments in new digital tools, cutting-edge meeting facilities, heightened food and beverage experiences, and technology for ease of doing business, she said. “In today’s world, customers have higher expectations of their business partners. Both Marriott and our hotel owners want to exceed our customer’s expectations.”

As Marriott looks ahead to that work, it was natural to take a closer look at the bottom line. “For the last several years, we’ve been monitoring both the demand from our customers and our ability to properly invest in innovation, hotel product, and other services,” Routh told Convene. We realize our recent announcement regarding group commissions is disrupting the industry, and any change of this magnitude is hard. We hope to start a conversation to change and improve the existing model for the long-term benefit of the industry.”

Additionally, the ease of submitting electronic RFPs has created a mountain of additional work — and costs — for hotels. “With increased lead spamming came the need for hotels to respond with lead catchers and call centers simply to manage the volume,” Kemp Gallineau, CEO of Nashville-based third-party company Groups360, wrote in a blog post, “Marriott’s Commission Cut: A Good Thing?” “The cost of managing a high volume of unqualified or mismatched leads across the hotel brands has exploded, and Marriott is trying to regain some cost control.”

Dave Lutz

Cost-control measures like the cut to commissions benefit a segment that is key to future of group business: hotel owners. Hotel brands own very few of their properties. In fact, Marriott and Starwood own or lease less than two percent of their combined North American room inventory. “The fact that hotel ownership is so fragmented means that Marriott must be beholden to their owners,” said Dave Lutz, CMP, the managing director of Velvet Chainsaw Consulting. “Decisions like this will ultimately need to meet the litmus test of the buyers in the marketplace and the owners of the properties.”

Ownership is not exclusive to certain brands, either. For example, consider Tishman, a real-estate company that oversees properties in the U.S. that are managed by Starwood, Hilton, IHG, and Fairmont. Asset managers of companies like Tishman will be scrutinizing Marriott’s move, Lutz points out. If it works for the bottom line, expect additional pressure from owners to make similar changes at other properties — regardless of the brand attached to it.

For Marriott, the move is a business decision. For the events industry, it could be a wake-up call. “Some might say that Marriott’s decision will put certain companies out of business,” Talley said. “But those companies have been built on business models with uncontrollable inputs. Now, they are going to have to take control and sell the value of what they do.”

The Perception of Free to the Reality of Fee

There are going to be very difficult conversations ahead.

Other industries, including the music industry, have been forced to confront the challenges of technological disruption and a changing revenue model. In the music industry, digital platforms including YouTube and Spotify offer what appears to be no-cost listening experiences to consumers. The reality, though, is that such services have cut deeply into to profits for musicians and record labels. Now, the events industry finds itself in a similar position of assigning value to something that, for organizations who have used third parties to source and contract hotels for their groups, has appeared be cost-free. “There are going to be some very difficult conversations ahead [for some third-party services],” Talley said. “It’s not easy to go to clients who were getting a service for free and tell them that they now have to pay for it.”

Some organizations will resist the change. “There will be some clients that will put their relationships with third parties ahead of any hotel chain,” Lutz told Convene. “There will be certain CEOs of associations and corporations who will say that they are happy with the commission structure and the fact that they don’t have to hire an employee for the work. They’ll do what they can to preserve the business model.”

Looking Ahead

For now, Marriott’s decision only impacts the U.S. and Canada, but similar changes may be in store for the rest of the world in the long-term outlook for the industry. “I doubt [commission reductions] will happen quickly on an international scale,” Talley said. “But hotels will look at this market by market, and sooner or later, there will probably be more changes.”

The future may feel uncertain, but Marriott’s move presents an opportunity to reposition the group-booking process for greater success in the future. “We operate in an incredibly clunky and inefficient marketplace,” Gallineau wrote. “We need to introduce better information to all constituents involved in the process. Let’s follow the lead of the residential housing market, where innovative companies like Zillow and Redfin have positively impacted their industry by providing better information to the buyer, seller, and the broker, making everyone smarter and more efficient.

It’s a time of significant change in the meetings industry.

“It’s a time of significant change in the meetings industry,” he wrote. “Marriott has fired the first shot in the battle to reduce group-bookings costs. We should take this time to reflect on our jobs as intermediaries and look to add value to our supplier partners.”

For a different take on Marriott’s commission change, read our companion op-ed piece, “Point of View” by Bruce Harris.

David McMillin

David McMillin is staff writer at PCMA.