December 28th, 2018
From blue to red to blue
Back to blue oceans is our research theme for 2019. Size wins - for now. The hunt is on for fresh, uncontested market spaces.
It’s been 20 years since the birth of online travel, over ten years since the birth of mobile computing, 15 years of social media, ten years of personalization, over ten years of peer-to-peer rentals, and just under ten years for ridesharing.
Online bookings are now pervasive. Rentals are not really P2P any more, and ridesharing isn’t really ride sharing. Facebook monopolizes social media. Organic traffic is now paid traffic. It’s no longer the Wild West. The rules of the game are set.
It’s all about price competition, instead of value innovation. It’s all about new brands for the same products, and the same customers. It’s all about the competition instead of the customer.
Big holding companies are getting bigger by buying their way into new markets, instead of creating new ones. Startup money goes to those building components for better mouse traps, with sellout potential. It’s more about leverage than product innovation.
The waters are turning bloody from battle over existing market share. The smart companies will swim around rivals and navigate toward bluer waters, where competition is irrelevant. New demand will create new rules.
Change will come from the new. A bigger mousetrap isn’t necessarily better. Less will be more, again. The next big paradigm is palpable.
Blue Ocean Strategy
Blue Ocean Strategy is a landmark 2004 business book. Its core tenets are still spot-on accurate and more relevant for the travel industry than ever. Authors Renée Mauborgne and W. Chan Kim brilliantly laid out a framework for understanding the birth and evolution of market spaces.
Red oceans are the existing industries where the rules are well defined. Competitors move to out-perform each in order to gain market share. Growth and profits slow.
By contrast, blue oceans are the new market spaces where competition is irrelevant. The rules have yet to get established. Vast opportunity abound for new growth and big margins.
For all of you travel industry practitioners out there, which side looks more familiar?
Red Ocean Strategy vs. Blue Ocean Strategy
2018 an uneventful breakout year for travel
A lot happened and nothing happened in travel in 2018. It was a breakout year by all accounts. The big hotel chains got bigger and broke out of hospitality and into things like co-working, restaurant bookings, and bookable activities. The OTAs broke out of performance marketing and into brand building. Google broke out of search and into bookings for every type of travel service imaginable. Airbnb broke out of rentals and into boutique hotels, property and guest services, and even home building.
Arguably, none of these developments have created new value for the travel consumer. Think about how much the hotel booking has changed in the last ten years. Everyone is still fighting for the same booking, the same hotel, the same flight, the same attraction, the same inventory. Faster and cheaper bookings, perhaps. New products and new reasons to travel, not really.
The biggest shift in 2018 was the more official turn toward and acceptance of ‘amazonification’ as the new growth strategy. Suppliers are becoming intermediaries (hotel chains) and intermediaries are becoming suppliers (property management). Social media apps are becoming travel e-commerce sites (Facebook) and travel e-commerce sites are becoming social media apps (TripAdvisor). Marketplaces are becoming product managers (Airbnb) and product managers are becoming marketplaces (hotel chains).
Consolidation - both vertical and horizontal - is chapter one in today’s strategy playbook.
The innovation myth
Buyouts are typically prefaced with a take from the consumer perspective. Statements like ‘our mission is to provide consumers with more choice’, or ‘the travel consumer has asked for a more seamless trip booking experience’ is common lip service used to justify classic red ocean maneuvers aimed at gaining existing market share, negotiating leverage, or pricing power.
Travel superapps are at best a better mouse trap, but do nothing to create new and uncontested markets. Amazon’s move into groceries and health care is about scale. Personalization hasn’t created new demand, either. Personalization helps existing players compete for existing market share. In today’s context, personalization is gasoline for the fire. Better search results turn to better ads turn to better conversions - but not better product.
Life is easy enough
All of the big emerging technology paradigms now impacting travel - voice, virtual reality, augmented reality, blockchain, driverless cars, drones, and artificial intelligence - have been slow to catch on because they mostly improve on what’s already out there.
Voice is a novel interface, XR is an alternative reality, blockchain is a better network, autonomous vehicles will automate jobs, drone delivery is a faster parcel, and AI is mostly about doing things faster and cheaper.
These are all transformative and novel and cool and help existing players gain competitive advantage but in most cases do nothing to create new travel demand i.e. new reasons to travel. I will not travel more because a voice assistant can now book a trip for me. I do not select a hotel because an algorithm recommended it. I do not pay with bitcoin when I can pay with greenbacks.
Bigger mouse traps aren’t necessarily better mousetraps. Technology has allowed those that have embraced it to scale. There are still limits to economies of scale - namely diminishing returns, as inefficiencies creep in as competitors become holding companies pushing further outside of their core areas of expertise. Incompatible systems, different customers, different data sources, different values, different cultures. The Roman Empire fell apart because it spread itself out to thin and forgot about what made it great.
The latest tech may not be enough to perpetuate the same simultaneous build-up of scale and value-driven innovation that we’ve see over the last decade. Google, Facebook, and Amazon have evaded scrutiny from regulators (at least in the U.S.) because they’ve managed to create value for the user. But these companies are also peaking and scrambling over existing markets, in order to perpetuate existing business models.
Bloody competition inevitably leads to shrinking growth and margins. We’re seeing this everywhere particularly in hotel distribution. The hotel chains keep growing and leveraging their size to renegotiate rates with the OTAs. Google is driving a wedge between the chains and the OTAs. The OTAs in turn squeeze the smaller chains and independent properties to make up for the difference. This puts pressure on the smaller players to sell out or flag with one of the bigger chain. Owners become stymied managers.
A core issue is decoupling of ownership from product. Owner-run restaurants stay in business because owners care about the business. Employees care about paychecks. Consolidation strips ownership out of the product innovation equation.
Hotel REITs don’t talk to hotel guests. Hotel corporate no longer serves the customer, but rather the hotel owners that have yet to flag their properties. Franchise owners are left to execute on quality but are beholden and stymied by the brands to innovate on guest experience.
Product will inevitably suffer and customers will walk away - perhaps from travel all together. Undifferentiated product leaves less to explore. The same hotel the same flight the same city the same activity in a different place. Why travel? What is the fundamental objective? To capitalize on the movement of people? Or to inspire and reinvigorate that innate curiosity that has gotten us this far?
Less will be more, again.
Less tech, less data, less features, less ads, less inventory, less categories, less content, less scale. Less of everything will lead to better customer service, better user experience, better conversions, and better more loyal customers. Less focus on global market share and more focus on individuals will lead to new rules and new market spaces. Less focus on process and more focus on product will lead to new challengers. Less focus on big data and more focus on value will spark brand love. Less will be more again. Less will lead to blue oceans.
LUFT Group is a research-driven consulting firm focused on helping travel industry leaders and investors navigate change. Our primary brand color is red as a reminder. It keeps us hungry and hunting for new market spaces. Learn about how we’re using the power of inquiry to help clients discover fresh blue oceans.