Lead Analyst - Luke Bujarski
The smartphone will eventually wipe Europe's mom-and-pop travel stores out of existence, so goes the story. Technology is a shopkiller without a doubt, but some brands including TUI are still attempting to reinvent the in-store experience. Why?
Trends suggest that most stores will likely fold, but some could survive. For those that make it, what business functions will they serve? What value (if any) can online travel brands harvest from this brick-and-mortar transformation?
Imagine this scenario:
Sally wants to take a special trip with her husband for their anniversary. On her walk home, she spots the Expedia cafe. Stopping in for an espresso she brainstorms on destination, transport, accommodation type, and the various fun activities that she and Jon would be doing upon their arrival. The barista helps her with exclusive in-store resources, discounts, and other perks. She leaves the store without booking anything, but walks away feeling inspired. One week later, Sally goes on Expedia.com where she books her flights, hotels, and perhaps a tour with a local guide. How much is that customer interaction worth?
There are approximately 37,000 physical retail stores dotting Europe's five largest travel markets. This footprint will shrink dramatically, akin to what happened to the bookstore. But this existing infrastructure could have residual value beyond the basic transaction or sale. With an expanding array of accommodation types, destinations, and motivations for travel, there could be a new role for the high street, focused more on brand building, consultative sales, and customer interaction rather than point-of-sale.
Location, location, location
Quantifying roi for offline advertising can be a challenge, especially compared to the precise metrics and techniques used by digital marketers. But with the rising cost of online advertising and digital marketing, catching people in physical space and time could have its advantages.
Walkable streets have likely kept Europe's traditional travel shop alive longer than its U.S. counterpart. Tighter urban fabric and walkable cities feed more foot traffic along its busy city centers. Real estate brands in Europe and in the U.S. still invest window fronts along streets with enough traffic to justify the costs.
Travel shops are disappearing but many have held on through the digital transformation. Those that survived likely have certain location advantages.
The below figure highlights the number of brick-and-mortar offices in each country.
Number of Brick-and-Mortar Travel Agent Offices (thousands)
Technology and the do-it-yourself model obviated the need to book simple trips with agents. The global financial crisis also expedited the decline. The clearest example of this was in Spain where a property bubble lead to a series of defaults, which lead to skyrocketing unemployment rates, joblessness, consumer apathy, and the vaporization of discretionary spend for travel.
Battered but still standing, bigger more successful travel agent chains and networks weathered the storm. The small-to-mid sized fronts had a more difficult time holding on. In 2008 before the economic crisis, there were 13,000 travel agent offices throughout Spain. A wave of travel agency closures ensued after the economy took a turn for the worst, taking with it 5,000 travel agencies out of business. In the following figure we see that Spain still has the highest concentration of physical travel agent offices, while France has the lowest concentration.
Number of Inhabitants per Brick-and-Mortar Store
In France, 4,000 agencies serve over 66 million inhabitants, averaging 16,500 people per office. In Germany, 10,000 agencies cover a population of 80,00 million - 8,000 inhabitants per agency. Meanwhile, in the UK 6,500 agencies service 64 million people, each office up to 9,800 people. The only country that is close to the Spanish market indicators is Italy, with 60 million inhabitants and about 9,000 agencies, up to 6,500 people per office. These figures reinforce a more widely held notion that Mediterranean countries have held on to the traditional travel agent model longer than Northern markets.
There are 37,000 physical locations still in existence. Many (if not most) of these brick-and-mortar shops will eventually fold - but not all of them. Some will survive and evolve. The question is how.
Brick-and-mortar marketing - Globally, online travel brands spend billions on advertising. A bigger trend toward offline marketing in other industries could also inspire travel brands to follow suit. The Apple Store, the Microsoft Store, and other branded store fronts in New York serve as interactive billboards rather than revenue generators. Leveraging an existing infrastructure of physical travel agent store fronts could be a cost effective way for travel brands to connect with large and more targeted audiences.
Financially burdened mom-and-pop travel stores are eager for an exit strategy. They also hold a valuable asset: Community awareness. Europe's aging population has grown up peering through shop windows at vacation brochures. It's an institution. Shop owners would likely embrace the opportunity to connect with their core clientele in new ways. Rather than commissions on bookings, the new revenue model would center on marketing ROI. How many walk-ins, how many emails collected, how many loyalty members signed, etc. These will be the new metrics for storefronts.
The concept store - TUI Group is already pushing this approach on its European stores. Essentially, this is a new spin and a design refresh focused on improving the shopper experience, making the travel agency a place to go for inspiration as much as information on the various options available. Nearly all of the 450 TUI-owned travel agencies in Germany are to be converted into concept stores.
The apparel industry still sees the value in the physical storefront because people like to try on their clothes before making the final purchase. Also because it's a cultural experience and (for some) a fun thing to do. The same could apply to travel. The sharing economy, in-destination activities, bleisure travel, group travel, wellness travel, and other travel experiences are coming online. Travel agents now have more ways to customize trips around every customer.
When airlines and hotels went online this eliminated the need for physical agents. Now technology has given us the ability to plan and customize the entire travel experience lifecycle well beyond transport and accommodations. In short, travel is getting complicated again. Former Kayak executives Paul English and Bill O’Donnel seem to think there will still be a future need for mobility consultants. They are working on Lola, a new technology platform for traditional agencies that aim to facilitate interactions between agent and customer.
The question here is whether the big online brands would find equal value in providing a similar, brick-and-mortar experience to their customers. An Expedia or Priceline concept store, for instance.
One storefront in every town - Europe is a densely populated and highly urbanized society. Contrary to many U.S. towns and small cities, Europe's urban centers continue to thrive and remain the center of public life. With foot traffic come eyeballs and brand exposure. It's partly the reason that has allowed Europe's traditional travel agent to hold on for as long as it has. In the U.S., visiting a travel agent required car ownership and a drive to the local strip mall, rather than a stroll up high street.
Whether this new model, focused on marketing and consultative sales, will be capable of sustaining the same number of travel agencies as we saw in the past is doubtful. One example is the bookstore industry. Many towns in the United States now have only one major bookstore chain. Demand is there to support one, but only one. This could be an opportunity for the big online brands to take some of that online marketing spend and apply it to offline interactions through the traditional storefront. Early movers that identify those physical stores that command the largest level of traffic and customer exposure will gain the advantage.
The shift from a commission-based model to a marketing ROI model for physical store fronts is occurring simultaneously with travel brand consolidation. OTAs are acquiring other OTAs but also brands outside of their core offering. Case in point, Expedia's recent acquisition of HomeAway. The big brands are also expanding and consolidating globally. The number of channels through which we purchase travel and the brands that we interact with will eventually decline. These fewer yet bigger full-service mobility companies would find more value in physical customer interaction, as the full suite of services offered grows more diverse. In this scenario, the value of having a branded physical store front could also grow.
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