RITZ RESTRUCTURES COMMISSIONS: WILL OTHERS FOLLOW SUIT? In a move competitors call "gutsy" and planners call "bold," Ritz-Carlton cut commission payments to third-party site-selection firms to 3 percent as of November 6.
The proliferation of intermediaries earning 10 percent commissions to bring meeting clients to properties prompted Ritz-Carlton to make the change in its commission structure. Ritz will keep paying 10 percent commissions to full-service meeting companies, which it defines as those who "conduct on-site inspections, event planning, on-site meeting management, and are responsible for ensuring payment."
JoAnn Kurtz-Ahlers, Ritz-Carlton's vice president, sales and business development, says, "We looked at all the areas and ways we pay commissions." The creation of two commission levels, she says, reflects Ritz-Carlton's judgment of the value of the services provided by different types of intermediaries. "We recognize that site selection companies have a value to the end user and to us," she adds. "If there wasn't value, we'd be saying we're not paying any commission."
Test Case? The move sparked speculation across the industry about whether others would follow suit and, particularly, if Marriott, which owns Ritz-Carlton, was sending the small, high-end brand as "the scout out to the battlefield and waiting to see if it comes back riddled with arrows," in the colorful analogy of one hotel company vice president.
"Ritz operates as a separate partner within the Marriott family," says Mark Sherwin, Marriott's vice president, segments, products, and promotions. "Their decisions do not necessarily reflect the thinking of Marriott as a whole." Marriott will continue to "look at the growing trend of third-party intermediaries and try to determine the value these firms create, who the value is created for, and who should compensate them for that value," he says. However, "Marriott will not make any bold moves like Ritz-Carlton. It would be difficult for us even to enforce compliance, and we will not implement any policy that we cannot enforce consistently." Marriott's 500 full-service hotels are 64 percent corporate-managed and 34 percent franchise-managed.
Four Seasons, a company closer in size and market positioning to Ritz-Carlton, "will pay up to 10 percent to all qualified third parties, including site selection companies, with full disclosure to the end user," says Tom Hubler, vice president of sales.
Creating the Monster Dave Scypinski, vice president, industry relations, at Starwood, takes the historical view. "In the late '80s and early '90s, when things looked bad for hotels, they created this precedent - giving 10 percent for leads - that plagues them now. We made our bed at that point," he says. "Now Ritz is trying to extricate itself from the problem." While it will be instructive to observe the impact of the Ritz-Carlton move, Scypinski notes, "it will not be suggestive of what would happen if Marriott or Starwood or Hilton did it. At Starwood, with such a diverse portfolio, we have to be much more cautious. For Ritz-Carlton, a select, high-end product with limited distribution, this move doesn't really hurt them that much."
Indeed, Roger Helms, CEO of major site source company HelmsBriscoe, says Ritz-Carlton represents "less than one percent" of the nearly 10,000 meetings HB associates booked in 2000. While stating that he has had "wonderful conversations" with Ritz, and that HB and Ritz "are finding ways to be strategic in how we work together," Helms stands by his company's initial value proposition: "How have we grown 30 to 40 percent a year?" he asks. "Clients love the service. Why? It makes up for inefficiencies in the industry. We respond, we're consistent, we're there for our clients. It's the way corporate America wants to buy. They want our procurement power."
Helms notes that even "full-service" companies may do only site selection when that's what a client wants. In those cases, the firms will get a 3 percent commission, says Kurtz-Ahlers, explaining that the policy is service-based, not company-based.
Among the newest players in the 10-percent field are Internet-based site-sourcing companies, which are affected by the Ritz-Carlton decision as well.
Value Judgments Steve Armitage, vice president/managing director at Hilton Hotels Corp., splits third parties into several categories: At one extreme are the "soup to nuts" planning firms; at the other are Web sites with hotel databases and e-RFPs. In between are at least two others: firms retained by clients for site selection and, and "pure site selection" firms that simply present meeting site options. A range of commissions might be allocated among the types, Armitage suggests. And even within a category, he adds, some firms may offer more value than others. For example, Hilton may value more highly business from a third party that is "established, has a big account base, knows our product, works with us on selling that product, and gets us market share."
At Hyatt, decisions are made at the property level. "We factor in all the costs and revenues involved and make the best business decision," says Ty Helms, vice president of sales. "It comes down to each one of our hotels and each piece of business."
Marriott's Sherwin sums up: "Ultimately, the people who continue to create value to both sides of the transaction don't have anything to worry about."