Last year marked the beginning of the most important period of structural change in the leisure travel business for at least 25 years.
First, 1998’s record trading, numbers and margins proved beyond any doubt unless you were Holiday Which? that the basic outbound product is now a long-term, stable industry. It also has a long-term, committed customer base.
But 1998 was also the year in which it became clear that the product side of the business was reaching a peak. If business was to grow and, more importantly, if margins were to rise, then the focus had to shift to distribution, to raise both share and revenue and to lower costs.
The Monopolies and Mergers Commission’s decision to give the industry a clean bill of health, as it removed any doubt that corporate size was not only important, but could now be practiced openly among consenting adults.
Most importantly, two of the four majors, Thomas Cook and Thomson, acquired new owners, ones that were much more committed to aggressive and profitable growth. One, First Choice, finally persuaded its parent company that it could really produce shareholder value.
Meanwhile, the hyper activity around Airtours pushed up City expectations about what it should be achieving in future to new levels.
Crucially, 1998 saw the arrival of new management structures in all of the major businesses – a powerful combination of excellent younger professional managers, together with very experienced, successful older hands who have been at the centre of industry development over the past decade.
Gerry Reilly, perhaps, represents the older hands, with successful senior roles at Lunn Poly and Airtours before joining First Choice for a second time as managing director of its new retail division.
Paul Evans of Going Places and Andrew Windsor of Thomas Cook are newer kids on the block.
So what’s happening?
Prospects for 1999
After a reasonable pre-Christmas, summer ’99 bookings started slowly in the New Year. As Andrew Windsor explained: “We expected industry volumes to be at best flat by the end of January, and perhaps a couple of per cent down by the end of the summer.”
Going Places is doing marginally better on volumes than the others, and Thomas Cook is also a fraction ahead. Lunn Poly was probably down a point or two, but Carlson and one or two of the Co-ops are finding it particularly tough. Good independents are clearly doing well, which is good news for the First Choice stable.
All agreed, however, that net income is up. “Retailers are discounting less and people are also trading up,” said Evans. Brochure prices are stronger, although Sunworld, which was perhaps the best post-Christmas performer, clearly has given itself a price advantage.
Reilly does not have a previous year to compare with but, like the others, sees this summer turning out relatively well. “Current load factors are in good shape, and there is no real evidence that people won’t book. Nor do I think we will see major late price wars,” he said. For Reilly, any downturn in volumes could well be balanced by those better margins.
The losers are the small to medium-size operators trying to sell through agents, but who offer little that is different from the rest. These companies need to add something to the retail product range if they are to be accepted by the multiples.
Distribution
Before the MMC report, the multiples sold their major competitors’ products, broadly in line with their respective market shares. There was some deracking from time to time, usually to get a week or two’s sales advantage or a bit more commission, but there was a general agreement that, give or take, they all needed each other.
All that has gone. The smaller operators, who had hoped that the MMC would provide them with greater access to the marketplace, now find that it has given all agents the absolute right to sell and, more importantly, not sell whichever operators they want.
Going Places has less than 5% of its sales with Thomson. Thomas Cook sells well below market-share levels for both Airtours and Thomson and has refused to be a Preferred Agent for the market leader.
The only winner is the, as yet, unaligned First Choice, which seems to be everybody’s number-two choice. But won’t its launch into retail change all that?
“We got into retail to secure, to defend our tour operator,” said Reilly. “But we don’t aspire to 800 shops like the others.”
First Choice needs to have good relationships with the others as an operator and certainly cannot afford to change the successful trading policies of the various agencies it has bought, or bought into – most of whom, for instance, are Thomson Preferred Agents.
Airtours got into retail to defend its business too, but now retail is an equal partner in the group, with real profit objectives. It is not just there to service Airtours Holidays’ sales and is looking to be much bigger.
But the prime target is to maximise group assets, and that means selling more and more group product.
Going Places also has to sell better. In the past, the perception has been that Going Places’ sales disciplines, so crucial to being able to deliver what it has promised suppliers, are not as good as those at Lunn Poly, which everybody agrees sets the standards.
“People forget that Going Places is only about five years old,” said Evans. “But we are working hard at it and getting there rapidly. What I really want to introduce is the regional understanding that companies like Bakers Dolphin have. We have to know individual regional markets better – and we will.”
Thomas Cook, the premier retail brand, is also coming to terms with the new need to sell its own products. It bought tour operators Sunworld and Flying Colours because in this modern travel world, being a large retailer without a comparably large in-house tour operator is just as potentially disastrous as First Choice not having in-house retail.
This is key to understanding the industry restructuring. Today, you simply can’t be a large travel company without being integrated and having a real balance between operator and agent size, as Carlson found out.
Windsor explains: “We started as a retailer; we bought operators to balance the structure. We are now growing both in tandem.
“Do I need to sell lots of TC product so that my group makes enough money? Yes, I do. But, just like Paul (Evans), we are not there as some loss-making servicing arm. It is a relationship of equals. We must be profitable, and that means good trading relationships with a wide range of suppliers.”
Commissions and the independent
All agreed that commission levels for non-productive agents would continue to fall and, worse still, they simply won’t be allowed to sell some products.
“Ten per cent across the board has gone,” said Windsor. “All operators are going to be much more selective, and rightly so.”
It’s not just about income. It is the cost of being in business, especially rents, and the charges for the new technologies which operators are not going to pay for as they did with viewdata.
Above all, staff costs are going up and the big four companies will be out to poach the best from a pool that is already too thin.
Technology is likely to be a real problem for poorer producers. Evans believes the bigger tour operators, which will fund the major changes that are about to happen, may not make their systems available to everybody as a matter of course.
“Funding technology will probably be judged in the same way as commission levels. If you don’t perform, you won’t get access,” he said.
So is the independent finished? The very good ones, which are increasingly among those that specialise, and know and ‘own’ their customers, will survive. None of the integrated strategies can survive without a strong third-party selling capacity and strong third-party operators too for that matter.
But Reilly now thinks real change is afoot. “There seems to have been about 7,000 agencies ever since I joined the industry, and every year people say there will be far fewer next year, and every year there are about 7,000,” he said.
“But change is upon us. People want out because they can see what is going to happen.” Everybody agreed that a sensible route for independents was to join a consortium or grouping.
Summary
All three retailers also gave their views on the following:
lDiscounting: there was consensus that on a major scale it is becoming a thing of the past. The groups are now too close to each other in strength and shareholders won’t want to fund long discount wars, especially now that linking insurance is banned.
lDirect-sell travel agencies: Thomas Cook will have 1,500 people working in call centres by this time next year (equivalent to over 300 shops), and Lunn Poly and Going Places are about to get into them in a big way. This will be an increasingly important sector for experienced travellers.
lThe Internet and home TV: this was still seen to be peripheral for selling purposes, although with huge potential for getting product information out. It does not figure large in the plans of any of the major retailers.
lThe future of travel agents:Evans could see a potential decline in business done through bricks and mortar, but that was 10 years or more away, which explains why it is investing in high streets more than ever.
Increasingly, the customer will see the retailer as the prime brand, the actual product owner. As Windsor pointed out, Heinz is a great brand but it is Sainsbury’s that attracts us to the business. Ask your friends now who they went on holiday with and the answer is often Going Places or Lunn Poly.
One thing is clear. Distribution is about to become a dominant force in determining the shape of our industry over the next five or 10 years. It is distribution that will shape winners and losers, not product or operators. It is the distributor whom the customer will increasingly see as the travel industry. We have come full circle, because that’s how it was when Thomas Cook first went into the business 150 years ago, and how it stayed for the next 120 years.