With margins being squeezed at every point of the supply chain, the future for traditional outbound tour operators is apparently in destination management and to own Long Tail supply.
Hans Lerch, vice chairman of the Migros Group of Switzerland, which owns Hotelplan, who was recently appointed caretaker global CEO of Hotelplan, says this is a logical step.
“Just look at yourself when you buy something – you may not buy at the cheapest price, what you want is the best value for money. And when you go to a destination, it does not matter if you spend $20 or $30 for a meal – what you want is the experience. People, when they are in-destination, will not bargain as hard and tend to spend more.”
Lerch reckons disintermediation has taken out the margins in all parts of the value chain, adding:
“Tour operators give less margin to the travel agent, and you are earning less and less as you bring the product to the client.”
This was why tour operating groups like Hotelplan are looking at buying suppliers of in-destination products such as ski operators or dive companies.
Lerch says:
“These kind of services add to the experience of a destination and customers will pay on the ground for these services.”
Owning such Long Tail supply also means more control over destination services given stricter legislation makes tour operators like Hotelplan liable for accidents that happen to customers when using sub-contracted suppliers.
It’s a model that has been tried before, with tour operators starting up their own hotel operations. But Lerch says this is difficult, claiming that running a hotel "is a different business" from running a tour operator.
But niche, specialty products and services are different, he says, and these cannot be copied by online travel agencies, adding: “Virtuality stops somewhere.”
As caretaker CEO, Lerch aims to reposition Hotelplan. He says: “In 1965, it [Hotelplan] was substantially bigger than Kuoni, but Kuoni is now two-and-half times bigger.”
Indeed, it was Lerch who was responsible for building up Kuoni’s global operations.
Asked if he intends to do with Hotelplan what he did with Kuoni, Lerch says: "That took over 40 years to build. That train has left the station.”
Instead, Lerch sees four ways traditional tour operator can grow in the new marketplace:
- Continuing to grow the legacy model “which still pays the salaries”.
- Invest in the online channel. Every tour operator has to take part in this. “The good news is that Expedia did not knock out the legacy tour operators within two years like they said they would and was feared. Many legacy tour operators have made good investments in the online channel and have built good businesses."
- Through companies that cannot be copied in their content and brand or the way it is packaged. For example, Abercrombie & Kent in UK or Intrepid Travel in Australia. “These continue to enjoy good organic growth."
- Expansion by geographic markets. “Where is business going to grow quicker and how can you attack these markets?”