HOSPITALITY DISTRIBUTION IN THE NEW ECONOMY
THE VALUE CHAIN
The value chain is being shortened. Customers will benefit. All others need to analyse where they fit in - or be pushed out unceremoniously from the loop. TravelAsia extracts from Arthur Andersen's latest quarterly Hospitality and Leisure Executive Report, which describes the various issues succinctly. There is now an extraordinary increase in competitive pressure by each player in the value chain to "own" the customer.
The Internet is reshaping the concept of the value chain and how goods and services are distributed to customers. The redefined value chain has both positive and negative implications for each player in the chain.
Generally speaking, suppliers benefit from lower distribution costs, better product image control, enhanced brand value and a better relationship with the customer. Intermediaries are likely to experience the greatest short-term turbulence, as each scrambles to assess the value they create and how to sustain it in the value chain. The consumer is most likely to gain, given the opportunity for better service, lower prices, tailored marketing and more options.
Owning the Customer
There is now an extraordinary increase in competitive pressure by each player in the value chain to "own" the customer. Owning, or at least significantly influencing the channel, is a key component of managing customer loyalty. Numerous supplier limitations have allowed nimble start-ups to take an early lead in the race to influence the consumer purchase decision. Who would have suspected that initially expedia.com would sell more inventory than the websites of some of its suppliers? Customer relationship management (CRM) systems remain largely in an infancy stage - only the top few per cent of frequent hotel guests, for example, receive consistent customised service. Indeed, the vast majority of website screens do not mimic how consumers buy hospitality and travel products and services. To secure a hotel booking online, for example, the customer typically enters an arrival date and length of stay. In reality, these variables are often influenced by price, but this symbiotic relationship is not well represented at websites. Websites will clearly need to provide more information and suggestions for customised and packaged travel if they are truly to serve the interests of travellers. Consider the major issues for each of the key suppliers:
Airlines
The airlines have continued to be leaders in a shortening value chain by eliminating activities that do not add value, while developing items such as electronic ticketing and last-minute fares at low prices. Recently, five major airlines have announced plans to create a megasite for eDistribution, a move which responds to the threat of online travel agencies as they attempt to re-intermediate themselves with customers. The new economy is requiring them to collaborate with their historical competitors with strategies to own the customer.
Hotel Companies
Channel conflict continues to be a significant issue among hotel companies. The price of a physical hotel room often varies widely depending on the source of booking (eg call centre, Internet travel site, retail travel agency, corporate agent or direct contact with the property). Even though "single-image" inventory is widely favoured in the industry, displaying the same image to all potential buyers is largely unfulfilled. Legacy reservation systems were not designed for true single image inventory. With available technology moving the industry towards price transparency, companies will feel intense pressure to compete on brand and differentiation, rather than price alone. Hotels must also manage additional customer touch points, an activity that is not always successful in the physical world. Guest recognition and tailored service are hallmarks of excellent properties. Customer relationship management is powered by good data, which however remains a rarity within the hotel community.
Travel Agents
An area where travel agents do continue to add tremendous value is in advising travellers of destinations, tailoring travel to individual preferences, and saving time and money for the travellers before and during the trip. The new role for this group is that of a knowledge manager. As the ease of use and customised offerings improve under the banner of powerful brands, the superiority of eBusiness applications for the hospitality and leisure industry will eventually become the norm.
Tour Operators
Tour operators in Europe own a much larger portion of the leisure travel market than in North America, with several large players dominating about half of the market. In the US and Canada, the tour business is extremely fragmented, with few well-known brands and thin profit margins. Suppliers connected with consumer groups have the potential to mimic and exceed the purchasing power of individual tour operators. What prevents well-branded airline, hotel, and car rental companies from agreeing to share inventory and creating their own packages? Nothing - as is the case with many packages offered today by airlines and hotel companies. Furthermore, customer loyalty is often stronger with the travel agent that sells packages in North America. Currently, call centres create an artificial demand regulator, limiting the amount of product available on a free-sale basis by the number of agents answering calls. If the same model and IT systems are opened to web traffic, an unlimited amount of demand could overwhelm current free-sale and price-yielding techniques. To compete, tour operators will need to use networking tools and offer complete excursions that are priced in real-time and tailored to their customers.
GDS and Switches
Internet connectivity could ultimately eliminate the need of the GDS. GDS providers are now demonstrating that intermediaries can still play an effective role by delivering reservation capabilities faster and cheaper than individual suppliers on their own. The fact that the GDS and switching organisations such as THISCO and Wizcom are still used for booking online travel indicates that new entrants have eliminated only a part of the traditional hospitality and travel value chain.
New dot.com Intermediaries
Virtual travel agents represent a new form of intermediary, with some estimates placing the number of websites with travel booking capabilities at close to 1,000. Virtual travel agents charge a commission from suppliers (about five percent for hotels), but typically offer a lower flat fee for airlines. Many of these companies will clearly have to revisit their Internet strategies, as hotels, airlines and other suppliers become more aggressive in offering consumers direct access to inventory. Many of these new dot.com companies are running out of time and money to gain enough market share to offset high costs of technology and payroll. New intermediaries such as priceline.com have used the Internet to create a demand collection system. worldres.com has amassed a central inventory of more than 11,000 properties, of which many are bed and breakfasts and vacation rentals that could not conform to the GDS listing requirements. A large number of additional entrants are expected in this arena in the next 12 months, particularly in the B2B arena, allowing corporations of all sizes to more effectively buy travel products.
Consumers
The purchase experience will only improve as broadband access and multimedia content are married with product availability and one-to-one marketing activities. Distribution costs are eliminated when a value chain is shortened, and many of these savings are passed on to consumers. The superiority of eBusiness applications for the hospitality and leisure industry will eventually become the norm. At that point, the new economy will no longer be "new", and the value chain will reflect the power of the Internet and its global networking capabilities.