by Loren G. Edelstein | January 29, 2018

Many in the meeting-planning world have been in a state of agitation since Jan. 24, when Marriott International sent a letter to third-parties to inform them that their commissions for group business will be reduced from the industry standard of 10 percent to 7 percent in the U.S. and Canada, effective for new contracts for meetings that take place on or after March 31, 2018. Those weighing in with strong opinions, as reported by M&C, include corporate meeting professionals and the large community of small independent planning firms that have initiated efforts to unite in resistance to this change.
 
Among prevailing concerns is that the drop to 7 percent is just a step on the way to eliminating commissions altogether. But that's not the case, Brian King, Marriott's global officer of digital, distribution, revenue management and global sales, assured M&C. "We did not consider a zero-commission strategy. We believe the group intermediaries play a valuable role. However, we do believe that the fundamental business model, processes and trends in the hotel segment need to be debated and reconsidered. The norms that have existed over the past decade are not sustainable for the next decade. We look forward to the continued conversations our decision may have sparked about how we can innovate meetings and events in our industry for the long term."
 
In a strong seller's market, though, some industry leaders find Marriott's reasoning "insincere" at best. Said one independent, "I can't say for certain, but I suspect a key phrase in the last paragraph of Marriott's letter -- about 'changing economics' leading to higher group-distribution costs -- is a clue. What changing economics are they talking about? Higher commission payouts? If commission rates are unchanged, then higher amounts should parallel higher revenues."
 
Reasonable pricing models should be based on business conditions, according to Michael Dominguez, chief sales officer for MGM Resorts International. "If I am driving pricing and revenue, cost stays in line. If revenues start to fall, then cost becomes the major focus." As for his company's take on the issue, he told M&C, "MGM Resorts will not be changing our approach to our intermediary partners. We have been successfully working with our partners over the last few years to truly work together in building our group business in a very successful way to both parties. This education has helped in an understanding of pricing and cost where we have been able to grow revenues and profits consistently with our partners."
 
Seller's market will continue
"The hotel industry has experienced all-time record years over the past four years in occupancy, average rate -- where our profit comes from -- and overall profit," said Dominguez. "As the forecast shows that we will continue to grow at 3 percent this year again, and you have a global economy for the first time that is all growing together, the landscape looks very healthy for us all. This doesn't even consider the incredible amount of tax savings that all companies are enjoying. You are already reading about wage increases, bonus contributions, 401K contributions and -- most importantly -- capital investment that we haven't seen in quite some time… It all lends for really great times ahead."
 
What is necessary to help all industry segments continue to be successful, regardless of market conditions, is "appropriate pricing and understanding of price increases year-over-year," said Dominguez. "In all reality, we have grown $4 in average rate in the U.S. each year. Group has been a little stronger, but if all of this was commissionable, we would be paying 40 cents in commission on the $4 increase. If we can continue to grow rate, it is positive for all; only when rate is shrinking or flat does this become a challenge."
 
Will other chains follow suit?
Airlines successfully migrated to a zero-commission structure because they were finite in number and all followed suit, noted Kevin Iwamoto, an M&C contributor and senior consultant for GoldSpring Consulting LLC. However, the hotel sector is a very different market due to its sheer size, he said. "Unless the vast majority of hotels move to a reduced or zero-based commission structure, an industrywide zero standard will not hold. The challenge the hotels have is that they have such a diversified ownership structure that getting all of the various ownership groups, individuals, chains, LLCs and everyone else to agree to an industrywide zero-commission standard will be extremely challenging and time consuming. I feel they are now large enough to hold their own for maybe a year, but if others don't follow suit and they see leakage to competitors they will have to rethink their strategy."
 
"There will always be pockets of holdouts who will still offer commissions as an enticement to lure share and business to their properties," Dominguez continued. "If the industry wants full transparency, they will need standardization in revenue and incentive models. But given the various intermediaries and third parties they deal with, that will take a very long time and a ton of renegotiations. It won't happen overnight, and it all depends on all hotels matching the reduced commission levels."
 
With supply limited and demand high, however, Marriott's move could hold for several years, even if competitors don't match it. "The current growth state of the domestic corporate and global business-travel/meetings marketplace, plus the new tax cuts, solidifies a supplier's marketplace advantage," said Iwamoto. "It won't be a buyer's market again for years, and that allows for robust growth for the hotel sector."
 
What corporate planners should do now
Most major companies do work with intermediaries, at least for sourcing, and they typically do not pay for those services, as hotel commissions serve as compensation. With third parties receiving 30 percent less from Marriott properties, many companies will be forced to change how their meetings departments are funded, said Iwamoto. "The majority of our clients -- 90 percent-plus -- use commission-based funding to support their meetings-management programs. This has sent them scrambling, even though folks like me have been saying they should have a plan B and C ready to go if commissions go away." (See Iwamoto's recent M&C article for his advice for corporate meeting planners.)
 
"Very few have fee-based contracts for third-party services, but some SMM leaders have always reported the total amount of commission funded offset to their programs, so that their management was made aware of the actual costs for the program," Iwamoto said. "Now they will need to prepare their management to start budgeting for the offset gap, or eventually move to either a fully funded and budgeted program, or a partially subsidized program minus any commissions earned.
 
Independents stage a resistance
Among the most vocal critics of Marriott's action is David Bruce, managing partner of CMP Meeting Services LP, who created the Meeting Planners Unite LinkedIn group with a corresponding Facebook presence. The group's purpose: To show to the hospitality industry the power of the independent planner and the unity we have as an industry to change the way the true independent is portrayed."
 
Bruce's ultimate hope is that small independents will unite and steer business away from Marriott -- and that the big third-parties will join in that effort and effectively reverse the reduction in commissions.
 

"I can't even imagine the damage that Marriott could do if we allow this to happen," Bruce told M&C. "Thirty-two years ago, I was one of the first companies to get commission from anybody. And to see the growth since then… Why do you think Marriott has grown? It's because of people like us who have given them millions and billions of dollars in meetings throughout the years."

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