Simon says….

You will become glorified cleaning companies!

This was a very telling one-liner from Simon Lehman (CEO and Co-Founder at AJL Consulting GmbH) last week at the 2018 VRWS, on Lake Como. It was aimed at the managers in the audience of over 370 people. A sharp warning to pay attention to the power of the OTAs.

With a rich corporate history in the rental world and ex-President of Phocuswright Inc. this statement at the “fireside chat” with Tammi Sims of Properly should raise some alarm bells! The OTA impact is being felt across nations and is seeing irrevocable changes to the industry.

Is this Fact or Fantasy?

Let’s look at the reasons why many managers are beginning to see this materializing and is a cause for concern.

a) We see increasing market share by the OTAs. The US has greater OTA penetration but the general consensus is that 40% of the Eurozone rental market is now booked via the big OTAs. There are no rock solid statistics to determine this by business, country, urban or regional inventory. Certainly, cities see high OTA penetration but regional destinations, especially countries like the UK, see much less power. It is increasing however as the consumer becomes brand aware.

b) 20 years ago, the world was a different place:-

• People traveled less
• Revisits to the same destinations were higher
• Guest expectations were lower
• There was less technology in the research and booking process

We have seen an acceleration that has reversed all the above trends.  All generations want new experiences, not just millennials, and will travel more widely to new destinations.  As an example, the UK sees 50% more visitors than 20 years ago (37m). Technology has facilitated a more frictionless experience through hardware and software. We are all mobile and information is available 24/7 almost anywhere on the planet. This means more choice, bookings are made closer to departure and payments are all online with immediate confirmations.

c) Full-service managers have traditionally undertaken a number of core services for owners:-

• Marketing and booking using their own websites and listings
• Photography, social media and direct marketing campaigns
• Dealing with inquiries, phone calls, and guest issues
• Property management: Turnarounds, linen, repairs, and renovations
• Meet and greets and secondary concierge-type services
• Owner liaison and contracting and marketing to grow inventory
• Financial management and accounting

Actual “property management” (i.e. cleaning, linen and repairs etc) is a hard job when a great deal of the effort needs concentrating into a few hours on turnaround days. Owners will gauge costs against what is the perceived effort i.e. the time taken at minimum wage plus washing of linen. This cost is one that is within an owners sphere of understanding, to a degree!

It is unfathomably hard miles to schedule and transport cleaning staff, gain reliable part-time employees, insure and administrate the business, run an industrial scale linen delivery service to multiple destinations and more. A rental manager will offer a full-service package to attract owners and maintain controls. They often expect to make no money from the actual management however.

Where is the money?

Ignoring the management aspect, the 10-30% commissions on bookings that these businesses have enjoyed, allowed the operation to run and make small profits but has been hammered by OTA commissions, and increased competition. With more companies fighting for the quality inventory and an urban explosion of short-term rentals, this has seen reduced commission offerings to new owners in order to scale inventory but has the effect of reducing overall margins for managers.

Owners are more aware of big brand marketing channels and expect to see their properties marketed there too. Combined with the increasing OTA search dominance, managers are utilizing a multichannel approach, even if it is with raised prices and blocked peak seasons on some channels. OTAs will no doubt outsmart these tactics and offer properties that comply with their guest demands and the OTAs margins. There is a service and quality balance to be managed still and this may well slow OTA market development.

The fight for guest eyeballs will become even more fierce and expensive and only those managers with deeper pockets will survive. OTAs will offer, best property, best price, shorter stay options (read fewer margins, more work for managers).

With the OTAs probable need to hit 25-30% booking commissions to expand and pay shareholder dividends, and align with hotel commission, there are only two places to extract this margin: owners/managers and guests. Technology allows guests to compare direct prices and now metasearch is now entering the commission game but at a lower price, presumably until they gain more traction. So to avoid leakage by the OTA and guests seeking direct booking, the big concern for managers now is that all the fees will be unloaded at the supply chain end. If you are a manager with a high dependency on OTAs who charge guest fees, this could the proverbial “straw that broke the camels back”.

If you add in channel fees, credit card fees, PMS feeds and the plethora of other monthly costs that can be added, there is no margin left to run a business unless it’s at a significant scale.

It is quite possible to add a further 10% cost to every booking using some popular technology suppliers (no names mentioned). Quite simply whatever the OTAs and their senior directors ever thought, there is much less margin available than they ever predicted in regional rentals. It would only take a small interest rate rise to make urban rentals less attractive too as owners will need a higher income to cover this.

Acquisitions Galore

This new eco-system is part of the reason for the flood of acquisitions of smaller businesses who are looking to escape the pressure vessel. Just this last week we have seen Cottages.com acquire Mulberry Cottages  and Vacasa acquire Oasis Collection. The alternative is managers increasing costs significantly to their owners which simply results in losing inventory to bigger companies.

What if?

What if an OTA could provide all of a managers bookings for 20% commission. What if this meant no phone calls or email correspondence, bookings were automated, money appeared in the bank account, all information was automated to the guest? Wouldn’t that be great?

Simply put the answer is NO for several reasons:

For many, this would leave absolutely nothing as they are already at 20% or less commission per booking themselves. It would only leave the income from cleaning to run a complex owner/guest relationship business:-

• Dealing with guest issues, complaints, and onsite problems 24/7
• Recruiting new owners and dealing with them daily
• Running finance systems to account for owners money
• Doing property checks, inventory checks
• Doing updated photography
• Staff, office and local taxes

No one in their right mind would run a management business like this (it may work for owners direct with an OTA) and would revert to physical management only on behalf of other managers and their owners. There has been a trend to add higher and higher booking fees to moderate the increasing drop in margins. Large managers are now offering fixed damage and cancellation waivers as another income stream, but small managers cannot adopt these processes easily with their poorer cash flow and relatively higher risks.

Simon was correct, in this situation managers would close or just be cleaning companies!

It’s already here!

Consider the evolution of the countless Airbnb managers who sprang up. They relied and rely on Airbnb exclusively for bookings. As these are city properties the access to labor is easier and the companies could grow by simple property accruals and use of basic technology.

The businesses at first glance appear scalable, but as this happens, the problems with guests, with cleaning, with linen, with technology, with communication and with owners also grows. Unless the business runs lean, is smart and begins to spread its marketing, it is simply a cleaning and key delivery process. This is especially true as many are set up using individual owners Airbnb accounts. Many now realize the money is in the booking margin and are endlessly trying to intercept the OTA journey they actually helped to create.

There are large companies who have focussed on subsets of inventory such as OneFineStay, who saw an Accor acquisition and then a right off of EU249m. These companies also rely on the OTAs to service their marketing as building a city-centric brand on the third party owned properties leaves a little margin and a lot of moving parts as Accor has found out!

Not only this, the Airbnb manager with all the eggs are in one basket is at risk of cost/commission increases, there is no room for error. This stops the more historic managers from adopting a single channel approach and we also now see the new urban managers balking at the OTA costs on which their original business model was based.

This means a manager still has to have a visible and if possible direct booking opportunity, which brings the whole equation back to square one and needing scale to survive.

The net effect is, that if OTAs represent 100% of your business unless you have this significant scaling opportunity, it’s not going to be easy.

At what point does the booking % threshold make small businesses untenable as full-service managers? Is it 20%, 40%, 70%?

Are the OTAs listening?

We saw from the exclusive BCOM and Airbnb presentations at the VRWS that they are building more administrative controls for managers and owners. These new features align the owner and managers property demands and business models with the OTAs bookable inventory.

This is not just a gesture of kindness, it will help onboard more inventory, reduce guest complaints and increase their brand quality. It also does not detract from their guest’s demands and expectations for hotel standards and quality, with shorter breaks at cheaper prices, which was also made clear!

The next few years

• We will see traditional managers survive but less of them and those that do compete will need to be lean, intelligent and tech-centric with quality properties and a niche focus.
• We will see a lot more acquisitions of current managers as supermanagers appear. These may be like cottages.com (ex Wyndham) or like Vacasa or Turnkey as a whole service model, leased urban models such as Stay Alfred all of which are equity plays and have relatively deep pockets.
• We will see more actual property management and cleaning companies appear with new models based on the gig economy and non-contract staff roles paid directly by the owners.

However, as a small manager, unless you are prepared to put in the very hard marketing miles, use the latest technology then Simon is probably correct. You could end being just cleaners.

Personal Note

Having been in this position and recognizing the challenges of growing a lifestyle business in a competitive region of the world, it became clear that the best decision was to sell the management company. The above commentary is based on these experiences and 15 years of rental management, supported by our deep involvement in the rental tech sector, conversations with many managers and larger corporations. A single statement such as the first line of this post explains the results of this cascade of events and the impending management challenges.

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