Merchant Model Impact on 2003 U.S. Hotel Profits Estimated To Be $1 Billion

- Smith Travel Research Reports

Third party merchant Internet websites will absorb an estimated one billion dollars or roughly 6 percent of overall U.S. hotel industry profits in 2003 according to Smith Travel Research (STR) estimates.

In an article to be published this month, STR attempts to quantify the impact of the so-called “Merchant Model” Internet retailers on U.S. lodging industry revenues and profits. Comments Bobby Bowers, “Internet sites utilizing the Merchant Model are a powerful force in the hotel industry today. While many hotel operators believe these sites have a beneficial effect on their occupancy, it is important to also identify the potential impact on revenues and profits. We’ve estimated the retailers impact on the industry’s bottom line which, hopefully, will provide added perspective to the current discussion.”

Based on the financial disclosures of publicly traded Internet retailers and total U.S. lodging industry room revenues, STR estimated the merchant model room revenue share of total online hotel sales. STR then extrapolated an industry-wide merchant revenue figure commonly referred to as “leakage” (i.e. revenue “leaked” from the hotel industry to third party sites).

In 2002, $642 million of industry profits (4.5 percent of total profits) were given up to third party sites according to STR estimates. In 2003, STR estimates profit leakage will increase to $962 million or roughly 6 percent of total estimated industry profits.

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Mark Lomanno, President of STR commented, “Third party players are a force in today’s lodging environment and their actions can impact hotel industry profitability. Hotel operators will benefit by balancing the positives of these sites against the costs associated with their use. The third party sites are here to stay. Using them to form a mutually rewarding relationship is a critical step for hotel operators and chain management. We hope that our research will aid hoteliers by allowing them to make more informed decisions.”
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