Wholesalers feel the squeeze

Cover Story IMGBy Steve Jones

On its website, the Council of Australian Tour Operators proclaims membership of the organisation to be a “hallmark of competence and integrity”.

It talks of the commitment of its independent wholesale members, describing them as experts in their field who provide specialist knowledge “in all aspects of travel”. 

No one who is familiar with CATO, or those companies who swell its ranks, would question the veracity of those statements. But it’s a third declaration on the website that is maybe starting to look just a little out of place, and out of date. “CATO members….work in conjunction with licensed travel agents to make the customers’ journey, no matter how big or small, a better and safer experience,” it observes.

It should be noted that it’s far from incorrect. Many wholesalers, most even, continue to enjoy solid relationships with travel agents, and for some, reliance on trade support is fundamental to the success, and very survival of their business.

Yet according to a survey of CATO members there is growing unease about the direction this relationship is heading. Wholesalers and agents are not filing for divorce just yet, but cracks are appearing – and it’s the retailers who appear to have the roving eye, casting their attention to better offers overseas, much to the chagrin of their wholesale industry partners.

The results of the study, the first of any real depth conducted by CATO (and one offering anonymity to respondents), revealed that seven out of 10 members are concerned about travel agents cutting them out of the distribution chain and booking direct with overseas suppliers. Furthermore, the majority list the issue as a “high priority”.

CATO chairman Rod Eather revealed he was surprised at the level of concern, and suggested those agents who do deal directly with overseas suppliers do so on a small scale. Furthermore, he questioned the ability of agents to understand the complexities involved.

“I thought it was strange to be honest,” he admitted. “I wouldn’t have thought it would be the number one worry but obviously there are many members out there who have a real problem with it.

“I imagine it is usually done on a small scale to a favourite destination that a travel agent has visited a number of times, or has ties with. And they have come to believe they are an expert on that destination. However, this unfortunately doesn’t make them experts on organising other people’s holidays to the destination.

“They may not know the best and most reliable ground handlers, the full range of accommodation, or who to turn to in the event of a problem.”

Nevertheless, whether on the small scale he suggests, or part of a more fundamental shift in industry dynamics, Eather recognised that if it’s a worry for members, then it’s an issue CATO needs to address.

Come the end of June, however, it won’t be his problem to tackle on account that Eather is relinquishing the chairmanship role he has held since 2010.

The decision to stand down was partly triggered by a desire to hand over the reins to “someone younger with different ideas” – and five years is a very respectable stint as chairman of any organisation – but also a result of the closure of Beachcomber Tours, a move forced upon Eather after losing 40 per cent of sales to the Internet, as customers booked direct.

It is, said Eather, this issue of customer’s taking control, more than agents’ cosying up to overseas suppliers that is the bigger threat to the viability of wholesalers. “I looked at the numbers for a long time but couldn’t make it work,” he says.

Dennis Bunnik, managing director of South Australia-based Bunnik Tours and a member of the seven-strong CATO committee, agreed with Eather that the rise of the DIY consumer was as big a challenge for the wholesale sector as agents going direct. But he likened the grim outlook for wholesalers to the similar crystal ball gazing of the early 2000s when the demise of the travel agent was presented as a foregone conclusion.

“Fifteen years later and the travel agency sector is still here and it’s as strong as ever,” Bunnik told Travel Bulletin. “Similarly the wholesale and tour operator sector of the market continues to thrive, despite the extra competition from the Internet and a small number of travel agents going direct. “The key really is providing value and remaining relevant. I think tour wholesalers will be around for a very long time.”

The caveat, however, is the ability to move and adapt with the times, something the more traditional elements of the travel industry has hardly been renowned for.

“I do think people and companies are more business savvy these days and there is an expectation that your business partners and suppliers grow and evolve with you,” Bunnik went on. “If they don’t, that’s when you see companies looking for new partners and suppliers.”

While Bunnik remained confident of a bright future – at least for those businesses able to demonstrate their worth – there is no doubt that all wholesalers find themselves under increasing pressure, which Eather, better than anyone, has recognised in light of recent developments with Beachcomber. He, like Bunnik, suggested undiluted service levels and added value were essential in retaining relevance in a splintered, fragmented market that has long shed any semblance of order. 

“How can wholesalers remain relevant? Service, service, service,” Eather said. “Get a deposit early on before giving out all of the detailed info and creating full itineraries. You must also make sure you have exceptional product knowledge and contacts on the ground. They must offer something different and unique that is not easily duplicated. It can’t just be a room and a transfer anymore.”

Wildlife Safari managing director Trevor Fernandes accepted that agents will attempt to stitch itineraries together themselves – just as consumers will attempt to go direct. But he adopted a philosophical approach, arguing the trend is an inescapable and inevitable consequence of a “food chain that is inside out and upside down”. 

“I see this happening all the time,” he said. “But we are living in a free market and I’ve always been a believer in a free market. It is the survival of the fittest and there is no substitute formula for service, quality and value, and that doesn’t mean the cheapest. It means providing the best value for money. Wholesalers need to sell more on the merits of service.”

Forging direct relationships with destination management companies is a “mantra” for some agents, Fernandes suggested, and it is up to wholesalers to convince them of their need to deal with Australia-based operators who have a proven history and, critically, proven quality. But he acknowledged that was sometimes hard to demonstrate to an agent, particularly those with the overriding aim of sourcing the cheapest price.

“We will not try to beat a price. It’s up to us to demonstrate why we are a bit more expensive, to show we have the ingredients that make us better, that we have the fruit and nut on the cake. If I get asked can you lower the price and do it for this much money I say ‘yes, but you get half the cake’. But convincing people you have superior quality can sometimes be difficult when all we have is printed material. Some agents you can convince but others you can’t and their clients do end up travelling with people who have sprung up on the Web claiming to be bigger than Ben Hur only to have an average experience.”

Bunnik says in many respects agents are faced with the same issue as wholesalers – persuading people of their worth. “There are many benefits for agents booking through Australian-based wholesalers just as there are many benefits for clients booking through agents. The challenge for both is to communicate these and prove they are adding value to the transaction,” he said.

“Just as there are clients who don’t want to book each element of their holiday themselves and prefer the ease, value and conveniences of dealing with a professional travel consultant, most travel agents want the convenience of dealing with a local tour operator who has the expertise and has done the ground work for them. It means the agent isn’t reinventing the wheel for every booking and they don’t have the risk of currency or stumbling across a dodgy operator.”

The risk of dealing with potentially unreliable, shonky overseas suppliers is an argument regularly advanced by wholesalers, but one that industry observers believe holds little water if an agent has a degree of nouse or professionalism about them.

“Traditionalists try to put the fear the God into people by peddling the line that it’s a huge gamble dealing with overseas suppliers,” one commentator said. “If retailers simply do business with the first supplier they come across on the Internet without an ounce of due diligence then, yes, that would be foolish. But that would suggest they are remarkably naïve and irresponsible. There are many high quality suppliers out there, with proven track records.”

That is also the belief of Simon Hills, a name which still has the ability to make CATO members bristle. It was Hills, a past CATO chairman, and former Kirra Holidays chief executive John Morley, who founded Maestro Travel, a company which acts as a conduit between agents and overseas suppliers. It has attracted 120 active consultants so far with medium term plans to work with up to 200 agencies.

Hills, who continues to operate his own wholesale business, Icon Holidays, alongside Maestro predictably suggested it was only the beginning for the direct agent-supplier collaboration. And there is a major reason for such a trend – increased margin for the retailer. Maestro, naturally, takes a cut but Hills is adamant agents’ earning potential is dramatically superior to that what they earn through traditional wholesale commissions.

“The travel agent margin for Maestro Travel members is consistently 18 to 30 per cent. One agent I know regularly makes 35 per cent against the 12 per cent through a wholesaler,” he said. “There is a hell of a potential in this and it will keep growing once more agents understand the financial rewards.”

Hills said members typically go through Maestro when dealing with a supplier for the first time, but as relationships develop, the retailer forges direct communication. Critically, while agent and supplier are free to correspond independently of Maestro, costing must be channeled through Maestro which then converts the price into Australian dollars. Such a system ensures Maestro itself is not cut out of the distribution chain and avoids the need for the agent to deal with foreign exchange. Hills conceded that dealing with suppliers does create more work for the agent.

“Wholesalers used to do everything and now it’s the travel agent who has to talk to the overseas supplier and draw up the itinerary. But the rewards are there,” he said, adding that the 39 suppliers with which it has deals are stringently vetted both by Maestro and a London-based broker which runs the rule over each potential partner.

He also countered the oft-cited argument that it is wholesalers who have built up knowledge over a number of years who are the destination experts.

“It’s true that they possess knowledge but no one knows a country or city better than the people who live and work in it,” he said. “They are on the ground and up to date with what’s happening. They know all the little things that make a difference; the great new restaurant that has opened, the building site that’s next to a particular hotel. That is information that may not be communicated through a wholesaler. Real boutique wholesalers may have great knowledge but you can’t beat an agent talking directly with a supplier who is living in the destination.”

He also rejected the notion that he has been disloyal to his former CATO colleagues, an accusation understandably thrown at him when Maestro launched in 2012.

“I wasn’t being disloyal and I wouldn’t want to see the death of wholesalers. I wasn’t trying to burn the industry. I could see what was happening and I guess we got in first. It’s the reality. It’s happening and will continue to grow.

“Travel agents need to be loyal to their clients and themselves. The industry has changed remarkably and yes, there is less loyalty than there ever used to be. I look at this as a business evolution and often there is no reward or money in loyalty. I can see why wholesalers feel they are under threat and it’s not surprising [agents going direct] is a concern. But I’d be more concerned about the major chains who are building their own in-house operations. Vertical integration is the biggest threat to wholesalers.”

Bunnik Tours MD, Dennis Bunnik, also dismissed the lack of loyalty argument. “Those companies left behind will always blame a lack of loyalty but in reality the truth is closer to home and often comes back to resistance to change or not putting enough time into building relationships,” he said.

Agents were reluctant to speak publicly about the practice of booking direct for fear of putting existing wholesale deals at risk.

But one Maestro number, talking to Travel Bulletin on condition of anonymity, said that between 30 per cent 40 per cent of their bookings are now made directly with overseas suppliers with no involvement from a traditional wholesaler.

“You get to know people who are on the ground in a destination, you develop a rapport and learn so much more than you would dealing with a third party,” the agent said.

Andrew Macfarlane, chief executive of Magellan Travel Group, admitted some members do go direct to suppliers but stressed it still represents a fraction of the network’s overall revenue. Members will usually bypass the wholesaler when a customer request is particularly unique, he explained.

“We had a builder travelling to Barcelona and he wanted a guide who was also an architect. Sometimes it’s difficult to find an Australian-based wholesaler who can find something that specialised,” he said.

“One or two members are particularly keen [to work directly with destination management companies] and I do get involved now and again to give negotiations an extra push but with my buying hat on it’s not something I drive.”

Macfarlane suggested wholesaler nervousness over retail-direct activity was more a reflection of their general unease as they battle vertical integration and the Web. It was imperative they prove their worth to the supply chain in order to continue to prosper, he said.

“It reflects the reality that they are under pressure,” he said. “They must find a way to add value. You can find the product elsewhere, they don’t have the sharpest pricing so what can they do? They need to be experts, have great service and offer back-up support. “To remain relevant they need to add value because they are no longer the only place you can get the product.”

Australian Federation of Travel Agents chief executive Jayson Westbury agreed that wholesalers should be less worried about AFTA’s members cutting them out of the loop and more concerned about threats from further afield – notably “giant US-based online travel agents” who, he argued, pose a particular threat to wholesalers who rely on hotel-based packages.

“Their biggest threat are online aggregators,” Westbury said, adding that those who simply “sell other people’s products” will be the ones to struggle while those who “genuinely add value” will flourish.

“You also have to remember that wholesalers have been selling direct to consumers for years,” he went on, in a thinly veiled reproach of wholesalers. “But I’m not actually sure it’s a huge issue anyway. Travel agents cannot be a specialist in every market in the world so most who are doing this are dealing in niche areas.”

According to Stuart Udy, Australia and New Zealand senior manager for Expedia’s Travel Agent Affiliate Program (TAAP), the behaviour of the agent is directly linked to that of an increasingly demanding, knowledgeable and tech savvy consumer who has access to product – and pricing – online. The challenge therefore is to match, and surpass the expectation of a consumer who is seeking experiences that traditional wholesalers simply cannot provide.

It is, said Udy, a rising issue for agents as “Aussies become more adventurous and head off the beaten track”. The fact that 3000 travel agencies work with TAAP is symptomatic of a need and desire for additional product, he said.

“Travel distribution dynamics are continually changing and driven by market demand,” Udy explained. ‘Where do customers want to go? Who can get them there and who can supply the inventory at a competitive price. These are questions travel agents are asked day in, day out. “Expedia TAAP has broadened the scope of travel agents by providing a world of product that traditional wholesalers just don’t have. 

“For a travel agent to survive they need to offer terrific service for their customers and source the most appropriate products and close the sale.”

But Udy reiterated what many have concluded – unless you add something to the equation, you’re on borrowed time.

“If a wholesale business sees its market share drifting away, there’s no point stamping your feet and shouting ‘damn internet’,” he said. “That’s simply where the market has gone. It’s time to look at your product and offering and see what you can do to remain unique and valuable.”

It would be quite wrong to suggest with any degree of certainty that the days of wholesalers are numbered, just as it was premature last decade to proclaim, as many did, that travel agents would be rendered redundant by the web.

And there is no argument in CATO’s assessment that its members possess competence and integrity in spades. What is equally clear however is that disruption to the travel supply chain will continue. And competence and integrity may no longer be enough.

 

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