The money is in owning longtail supply, says Lerch.
By Yeoh Siew Hoon
Saturday, 29th May 2010
With margins being squeezed at every point of the supply chain, the future for traditional outbound tour operators is in destination management and to own longtail supply.

Hans Lerch, vice chairman of the Migros Group of Switzerland, which owns Hotelplan, and recently appointed "caretaker global CEO" of Hotelplan a month ago, said, "This is logical. You don't need an elderly gentleman like me to tell you that."

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 said disintermediation has taken out the margins in all parts of the value chain. "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 were looking at buying suppliers of in-destination products such as ski operators or dive companies. "These kind of services add to the experience of a destination and customers will pay on the ground for these services."

Owning such longtail supply also means more control over destination services given stricter legislation that makes tour operators like Hotelplan liable for accidents that happen to customers when using sub-contracted suppliers.

It's a model that's been tried before in the past with tour operators starting up their own hotel operations but Lerch said this was difficult. "Running hotels is a different business from running a tour operator."

But niche and specialty products and services were different, he said, and these cannot be copied by the Online Travel Agencies. "Virtuality stops somewhere."

As the caretaker CEO, Lerch aims to reposition Hotelplan. "In 1965, it was substantially bigger than Kuoni but Kuoni is now two-and-half times bigger than Hotelplan."

Indeed, it was Lerch who was responsible for building up Kuoni's global operations.

Asked if he intended to do with Hotelplan what he did with Kuoni, Lerch said, "That took over 40 years to build. That train has left the station."

Lerch sees four facets to how the traditional tour operator could grow in the new marketplace.

One, continuing to grow the legacy model "which still pays the salaries".

Two, invest in the online channel – every tour operator has to take part in this, however he does it. "The good news is that Expedia did not knock out the legacy tour operators within two years like they said they would and as had been feared. Many legacy tour operators have made good investments in the online channel and have built good businesses," said Lerch.

Three, 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," he said.

Four, expansion by geographic markets. "Where is business going to grow quicker and how can you attack these markets?" said Lerch.

Yeoh Siew Hoon, one of Asia's most respected travel editors and commentators, writes a regular column on news, trends and issues in the hospitality industry for 4Hoteliers.com.

Siew Hoon, who has covered the tourism industry in Asia/Pacific for the past 20 years, runs SHY Ventures Pte Ltd. Her other writings can be found at www.thetransitcafe.com. Get your weekly cuppa of news, gossip, humour and opinion at the cafe for travel insiders.

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