Now that the booking numbers have been counted for the critical six week post-Christmas period, we have seen for the first time the immense power of the vertically integrated companies and just how prepared they are to use that power to support not just sales, but the whole vertically integrated system itself.
If you weren’t an integrated product, you did not get sold. And if you weren’t an integrated agent, through ownership or preference, you found it hard to get their product to sell anyway.
Many independent companies that had reached Christmas in really quite good shape saw all their increased business, and more, vanish vertically as the majors scooped in all the business they could lay their discounts on.
And if you weren’t quite sure just how determined the majors were to get the business, you only had to tune in to ITV, as I did one wet January night, to see that thought-provoking Thomson advert extolling the virtues of paying more for a Big T, (or was it a curry?), followed almost immediately by a Lunn Poly advert offering big discounts off the price of – yes, the very same Thomson Holidays.
And it was not just independent product in direct competition to the majors’ own thatsuffered.
So how do non-aligned product producers see the intensifying integration strategies?
And what is happening in the wide world outside Helmshore and Crawley, Peterborough and Greater London House?
Our guests at lunch this week represent a wide cross section, not only of product types, but also of status within their sectors and relationships with the big four.
Tony Seaman is the UK managing director of Holiday Autos, the market leader in leisure car rental – not a business that has much competition from the integrated chains.
Patrick Ryan is managing director, European sales and marketing at Royal Caribbean International/Celebrity Cruises and might be watching the growing invasion of the short-haul cruise market by the majors with some concern, but so far it has hardly touched his core Caribbean cruise business.
And finally, Nigel Wright, a very experienced and successful tour operator who has just taken on perhaps the hottest seat of all as the new managing director at the very mainstream, but off-the-pace operator, Cosmos. His seat is deliberately made hot by the Big Four.
The Business Sectors
Ryan’s cruise sector seems to be, from the UK at least, in something of a flux. Widely seen to be the next major growth product, it appears to have stalled recently with talk of overcapacity and flat demand.
“Without doubt, 1999 is softer, but ’97 and ’98 saw artificial demand driven in part by all the extra money in people’s pockets from the windfall taxes and building society privatisations,” said Ryan.
“But overall the UK market is maturing faster than might be hoped, particularly in the Mediterranean.
“The Airtours/Thomson type operation is still very price sensitive.”
Royal Caribbean and its sister brand Celebrity has only about 8% of its product ex-Europe and Ryan sees most new growth coming from mainland Europe rather than from the UK, which has grown 21% compound in the past six years.
“If we are to grow the product in the UK we need to shift the consumer understanding of the product away from some sort of upmarket on-board gorging, into one that says floating all-inclusive holidays,” said Ryan.
Its brand recognition is not yet as high as P&O Cruises and fewer customers might go in to an agent and ask for Royal Caribbean by name.
The operator also needs the agent to switch people into thinking cruising in the first place.
Seaman has similar issues as Holiday Autos looks at growth everywhere in the world, but especially in its key UK home market.
“We have had 50% growth year on year, and if we are planning only 30% this year it’s on a much, much bigger base than ever before,” said Seaman.
Holiday Autos’ post-Christmas bookings were very strong despite one or two internal communication difficulties.
“Pre-booked is growing as agents get more switched on, but it is in resort where we are seeing considerable growth, even though the brand is not well known yet to the consumer,” said Seaman.
Most of those resort sales could have been made by the agent before departure. Here is a product, and indeed a company, which has no way saturated its potential market.
But car rental companies need the agent to think about selling the product in the first place. It has always astounded me that agents do not sell more. Travel Weekly editor Jeremy Skidmore and I have both tested the market recently to see if we get offered a car with holiday bookings where a car would seem perfectly appropriate – neither of us were.
So, two products which do not yet have great consumer brand awareness, both needing the agent to think of selling the product type first as well as the brand itself – classically distribution dependent.
Cosmos is another issue; its consumer recognition is out of all proportion to its actual size and every agent sells its type of product. But Cosmos hasn’t been doing at all well.
Before Intasun and Airtours, it was the country’s number two operator. Now it’s a distant number five, with about 500,000 passengers a year.
It had a good pre-Christmas increase in sales but, when Wright arrived at Cosmos in February, it had lost all of that and possibly more.
“Cosmos was very slow off the mark in working with the post-Christmas flow,” he said.
That “flow” was taking up the retail offers that would have cost it money but would have kept its sales up, profitably.
“We lost our pre-Christmas gains which was a big disappointment and should not have happened.”
And if Cosmos is widely thought to be a major brand with the public, it is certainly not with agents. Unlike Holiday Autos and Royal Caribbean, Cosmos needs to build agent awareness of its brand.
Working with agents
How do these companies go about getting more agents to sell them and their products?
Cosmos’ new strategy, which Wright will unveil in May for 2000, will still be through agents, but the consumer will be the target of a campaign which will offer specialist level service on mainstream operating.
“Cosmos has carried on as if it were bigger than it really is, and treated suppliers and retailers that way,” said Wright.
“A small company like Cosmos should be able to offer much better service than the big boys; at the moment we aren’t, but we will. Customer satisfaction is the next big battle ground.”
Wright’s Cosmos will perhaps be the largest specialist rather than the weakest mainstream operator.
There is undoubtedly a place for strong middle-market players and interestingly Wright still sees that place as largely through-agent, even if the multiples feature less strongly in future.
Ryan wants to be a tour operator, or at least wants to position his company and its products that way.
“The main UK holiday marketplace is two weeks. We have to offer an integrated two-week product if we are to make in-roads into it,” he said.
“We also need the customer and the agent to think of us as one of its main holiday choices alongside a land-based package.”
Ryan wants 100,000 passengers a year out of the UK within 10 years, but that will inevitably mean going for three-star passengers. Can the rather superior cruise companies really stomach the inevitable down-marketing of their customer base, and of the product too?
“We want a mass market at premium prices,” he said.
He has reversed his sales split from 60% multiple and 40% independent, to 60:40 the other way.
But he needs all those agents. Cruising is a complex sell, and whilst direct routes are good for information, he is not yet confident that they will be good for the actual selling process.
Seaman is wedded to the agent. Direct-sell has to be covered as more people booking flights, the natural add-on for car rental, do so through the Internet and Teletext.
“We have to be in resort because so much business goes unbooked before departure,” said Seaman.
“And we are in the fortunate position that the product has in no way been fully exploited with the public.”
But his dilemma is that Holiday Autos does need other peoples’ product to be sold first – holidays and flights – before it can get to the customer. And most of those products will continue to be sold through the agent.
Summary
So, here are three big independent products, each at a different stage of development, and each with different sales strategies and needs.
Two of them need better brand awareness from the public. One, Cosmos, needs a different sort of awareness.
They all need, or want, much more business.
They can all go direct, but its nobody’s first or even second choice. It still comes down to better agency penetration, at better cost. This is hard to get from the multiples.
They all recognise that distribution, especially distribution through agents, will be a dominant force over the foreseeable future.
And much as they work with and court the independent, the multiple is still central, or at least the multiple and its associated agencies – the so-called horizontally integrated.
Will product suppliers have to start dealing with one group of horizontally-integrated agents as opposed to another?
Ryan said: “I cannot see one group barring you from working with another group, but I can see a sort of unchoosing of distribution partners by the suppliers becoming an interesting discussion over the next one to three years.”
But can he see cruise companies gradually doing more business with or preferring to do more business with one group or another?
“In theory, yes. We do it already with our Royal Achievers Group of independents. If we get a structure of reward linked to performance, then people will be preferred,” said Ryan.
Seaman is already seeing his business edging that way, but not through choice.
“We work with Thomson/Lunn Poly and Thomas Cook. The other multiples might find it difficult to want to work with us in those circumstances. It is not our choice,” he said.
“I can see smaller independents committing most of their product to one or the other. There is a certain inevitability about it.”
Cosmos wants to work with more independents, but 500,000 holidays needs some strong multiple support.
“It is not where we are at at present. If one of the big four made us its guaranteed number two, we would need to consider alignment of that sort inevitably,” said Wright.
“In five to 10 years it might be the norm”
For me, that norm will come quicker than five years, let alone 10.
Holiday Autos and Royal Caribbean are strong global businesses with a long-term place in the travel industry. Cosmos should be there too; we need strong middle market players.
But they are not alone in their sectors, and it seems inevitable that if the majors don’t buy or set up their own, they will put increasing pressure on these better suppliers. They will demand more money – not for more sales per se, but for special trading rights.
Unique access to product, or some parts of the whole of a supplier’s product range, is common in just about all other industries. It will come to leisure travel.