A recent study polling individuals who travel more than 25 times a year showed that 73% of them would choose their hotel loyalty program benefits over their spouse if they could take only one on the road. The study went further and found 50% of the respondents claim their hotel loyalty program is more important than other rewards programs.
The importance of loyalty members
Hotel reward members mean as much to the hotels as the programs mean to the guests. Hyatt Hotels' (NYSE: H ) rewards members represented 30% of the total room bookings in 2011, and Marriott's (NYSE: MAR ) rewards members accounted for 50%. Starwood Hotels & Resorts (NYSE: HOT ) recently stated that just 2% of its customers account for 30% of its profits. That is hard to believe for a company that has over 315,000 hotel rooms in more than 100 countries and recently posted revenue of $5.6 billion. The company wants to keep these highly valued guests and attract a few of the 7 million active members Wyndham Worldwide (NYSE: WYN ) has participating in its rewards program.
For the past three years, Starwood has piloted a program designed to better service the top-tier rewards members. The company now offers 24-hour check-in and a highly customized customer service experience. Starwood is not stopping with the high-frequency travelers: Just days ago Starwood and Cirque du Soleil announced a partnership that will benefit every level of Starwood's loyalty program.
Starwood's partnership with Cirque du Soleil will give members the ability to go backstage and enjoy a behind-the-scenes experience. These kinds of redemption rewards are not a new thing to the hotel industry. Marriott offers exciting experiences such as a helicopter tour of London and a professional studio recording experience.
The downside of loyalty programs
While the loyalty programs drive volume and a large percentage of profits, they also bring heavy expenses. At the end of 2011 the liability from Starwood's program rang in at $724 million, an increase of $22 million from the previous year. Hyatt Hotels' loyalty program, The Hyatt Gold Passport, reported liabilities of $297 million for 2011. Marriott had a $15 million expense due to an adjustment related to its rewards program and carried $1.9 billion in liability. Host Hotels (NYSE: HST ) clusters together credit card commissions, bonus expenses, and loyalty rewards program expenses for a total of $1.2 billion for the year. Wyndham had reward points redeemed to book 17 million room nights in 2011. At an average daily room rate of $101.64, that cost the company $1.7 billion.
Foolish take
If you were led into an unidentified hotel room and asked what hotel you were in, would you be able to hazard a guess? Probably not. For most customers the switching cost from one hotel to the next is zero, but reward programs have apparently made switching hotel chains more costly than a divorce for those high-frequency travelers.
The liability associated with loyalty programs is a real thing. For investors, these are items that should be regularly monitored.
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