by Loren G. Edelstein | March 27, 2018
Commission cuts don't make good business sense, according to Michael Dominguez, chief sales officer for MGM Resorts International. Groups are the most profitable revenue stream for hotels, and third-party commissions -- which only apply to sleeping rooms -- are part of the cost of doing business, he said this week. "I'm looking at the math. If you're paying more in commissions, it's because you made more revenue, and the commission is a percentage of the revenue."
After Hilton followed Marriott's lead last week, reducing commissions paid to third parties from 10 to 7 percent, Dominguez shared his views on this hot topic with M&C.
Were you surprised that Marriott, and now Hilton, decided to reduce third-party commissions?
I understand the chains are trying to show value to owners, and they're looking for increases in profit margins. It doesn't surprise me that Marriott went there, and that Hilton was going to go there.
I'm not saying it doesn't make sense; I understand their rationale. But I don't understand the timing. When GDP is growing, and overall revenue has grown for five consecutive years, and this doesn't even represent the majority of our business -- the data doesn't connect to all those dots.
MGM is not planning to reduce commissions. Why not?
Over the years, we've lived with this model, and that's baked into our rates as a cost of doing business. It is important to look at a more holistic view of business vs. a narrow snapshot. We consider all the revenue related to group business -- F&B, A/V, etc. -- which, comparatively, far exceeds the profitability of other channels of business.
I sat with our senior management, and we looked at our total revenue and our patterns, and we asked ourselves, "What does 3 percent represent? Is it material to our success? Does it matter in the greater scheme of things?" And the answer was no.
Why are meetings more profitable than other business?
A report released last week by Kalibri Labs found that meetings in the U.S. represent $300 billion in total spend, with $140 billion coming from room revenue. This means that more than half of group revenue comes from noncommissionable business.
The other channels will carry a larger cost margin with less overall revenue contribution. Revenue for group business far outweighs transient. I think it's interesting that [Marriott and Hilton] keep talking about the cost of getting the business, yet they're not talking about the value of that business.
If room revenue is about 40 percent group spend, what are you really paying in commissions?
If I do the math, I'm probably paying 5.5 or 6 percent of total group revenue in commissions. If 60 percent of your revenue for groups is non-rooms -- and therefore noncommissionable -- then the actual commission you're paying on revenue is about 5.5 or 6 percent. Meanwhile, if you look at transient business, you're paying well north of 10 percent to the OTAs [online travel agencies like Expedia and Orbitz].
How will this affect corporate customers?
If you look at the big corporations, their budgets are not increasing dramatically, and commissions have been a factor in offsetting costs. I would expect that clients, especially those with SMMP [strategic meetings management program] models, will look at cost and will be reducing in other areas.
And you can't tell me it's not going to give somewhere else. It's literally a shell game at some point; we're just moving the revenue around.
Do you mean hotels will offer other forms of rebates, like a free reception or a credit to the master account?
Sure. It's accounting. It's a big bucket of concessions and discussions.
Do you think other hotel chains will follow?
In certain companies, yes, where there is more of a management model. But companies like Omni and MGM, which own their hotels -- so they're not paying fees to a management company -- are in a different position. There are enough independent hotels that the independents will act very differently, I think, as well.
Are Marriott and Hilton doing damage to relationships and goodwill?
Without a doubt. What happens when we have a major downturn? If we were to approach this as an industry, it probably deserves more dialog and more warning.
These are interesting times. It would be premature to make any predictions about how this all pans out. But you have to remember, it's still a relationship businesses. I think that's important. I think communication is important. I'm a firm believer that it's not only important to do the right thing, it's important to do the right thing in the right way.
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