Forecasting the growth of an industry is a messy business, especially one expanding at the rate of online travel. Steve Jones speaks to Euromonitor about the rise of dynamic packaging and the resilience of online tour operators and direct suppliers.
It’s been described as a fad, of being invented by the industry rather than demanded by customers and derided as simply a hip term for tailor-made holidays.
Whatever your take on dynamic packaging, the market is set to explode in the UK and beyond in the next five years, according to new research.
Data being collated by market analysts Euromonitor International says while the UK and US are way out in front as the early adopters, dozens of other countries are also tapping into the demand for DIY holidays.
Provisional research – Euromonitor is collating figures for its 2006 global travel and tourism study during the next few months – suggests consumers in 52 countries are taking to online dynamic packaging.
Euromonitor head of travel and tourism research, Caroline Bremner, says she has been taken aback by how far and wide the market has spread.
“It’s really surprising and impressive how so many countries have already adapted to dynamic packaging,” she explains. “It’s not just the US and UK where it has taken off. Emerging countries which are developing an online presence are offering it in increasing volume.
What’s emerging is that dynamic packaging is more of a global phenomenon than we thought.”
Eastern Europe and Croatia in particular are showing strong demand, Bremner adds, although precise figures have yet to be confirmed.
As healthy as the growth is, the UK and US still lead the way by some considerable distance.
In research to be released next month by Euromonitor, the dynamic market in the UK is expected to have hit almost £740 million last year.
By 2010, it will forecast the market to have grown six-fold and will rake in more than £4.4 billion.
“And this doesn’t include dynamic packages booked through the likes of EasyJet, Ryanair and British Airways,” Bremner says.
Even more eye-catching, she suggests, is that the 2005 UK market is only six times smaller than the $8.3 billion US dynamic market.
“That is quite remarkable,” Bremner explains. “As a rule, markets in the US are 10 times bigger than the UK which demonstrates how we have completely embraced dynamic packaging.”
The third-largest market in the dynamic arena, somewhat surprisingly, is China. Euromonitor puts some of the growth down to Elong.com, now part of Expedia, which launched in 1999 and has become a strong player in the Far East.
Expedia acquired 30% of the online retailer in 2004 before upping its stake to a controlling 52% in January 2005. Although the bulk of dynamic sales are for travel within China, a growing percentage – reckoned to be around 20% to 30% – is overseas trips.
“It is a powerful player in a growing tourism market,” says Bremner.
Provisional data shows the market was worth £226 million in 2005, still way off that of the UK and US but expanding at a fair pace. Forecasts will be included in the figures released next month.
Meanwhile, the picture continues to look rosy for both online travel agencies and direct suppliers. While a trend still pervades of direct suppliers clawing back share from online travel agencies, the fight back will level out by 2007 with online agencies launching a comeback of their own, says Bremner.
“As an aggregate we estimate that online agencies and direct suppliers last year accounted for almost 16% of the total travel retail market (online and offline and not including air or hotels) and that will increase to almost 30% in 2010. That’s very strong growth,” Bremner believes.
Currently, intermediaries have a 12.5% share compared to 3.3% of direct suppliers, such as Thomson.co.uk and Thomascook.co.uk. Come 2010, says Euromonitor, intermediaries’ share will grow to a little under 23% with direct accounting for 4.6%.
“The likes of Expedia, Lastminute.com and Travelocity will continue to account for the lion’s share of the travel retail online market,” Bremner explains.
“Direct suppliers have very much come from nothing and have grown at a faster rate over the past five years.
“However, intermediaries will continue to take a larger share. Even though we’ve seen direct suppliers fighting back, getting a stronger online presence and share, it’s still going to be intermediaries leading the market, partly because they are the ones driving technology.”
The UK figures are in sharp contrast with the key European markets of Germany and France. In the latter in particular direct suppliers overwhelmingly dominate, taking 7.7% of the total travel retail market last year compared to the intermediaries’ 0.2%.
The picture is unlikely to change in 2010 with the split reaching 30% and 0.4% respectively. France’s traditionally strong travel retail brands, which attract a high degree of loyalty coupled with limited growth of online agencies, are behind the trend.
Meanwhile, in Germany the position is far more even. Online takes 8.3% of the total retail travel market with 3.5% going direct and 4.8% through intermediaries.
Euromonitor forecasts direct suppliers’ share will rise to 15.2% in five years’ time with intermediaries growing to 18.6%.
“It’s more evenly split in Germany because TUI, a traditional retailer, is a strong brand and jumped on the online bandwagon early,” says Bremner.
Interestingly, the figures show the online retail market in France and Germany will take a greater share of the total market than the UK by 2010 – the complete reverse of last year.
The US outlook more mirrors the UK, with intermediaries in a commanding position.
“That’s not very surprising,” Bremner suggests. “Our market is very much following the US in terms of travel retail because many of our intermediaries – Expedia, and Sabre through Travelocity – are US companies who have a sizeable UK presence,” she explains.
While intermediaries dominate travel retail, the picture is very different in air travel, where in all key markets direct suppliers rule.
More than 38% of sales in the UK were online in 2005, with airline websites contributing 22.3% and agencies 15.8%. In 2010, almost six out of every 10 air tickets will be bought over the Internet, according to Euromonitor’s research, 35.1% direct from carriers and 23.5% from intermediaries.
Bremner says: “The UK is strong because of the presence of so many low-cost carriers and the predominance of short-break holidays to Europe. One drives the other.”
In Germany, where 26.8% of air sales were online, 23% were direct and only 3.6% through agencies. That will climb to just below 44% in 2010 with the bulk – 36.3% – direct.
It is similar story in France with the online share forecast to rise rapidly from 15.5% last year to almost 56% in 2010. Direct and intermediaries share will increase from 12.6% and 2.9% to 45.6% and 10.1% respectively.
Surprisingly, hotel penetration on the web is far lower, despite the relative ease of booking a room online. In the UK less than 8% of the total market is booked on the Internet, the bulk through intermediaries. It is expected to double by 2010 to 14.4%.
Bremner says: “It is a surprisingly low figure but it’s partly because the size of the market is so huge. And while the larger groups, such as Hilton and InterContinental, can be booked through their websites and have marketing money, many of the independent companies may have a web presence but not always a way of transacting online.”
Nevertheless, Germany’s online share of the hotel market is expected to rise from 12.4% to 42.1%, France from 5.7% to 10.5% and the US from 2.8% to 32%.
Bremner believes the overall picture shows a bullish online marketplace.
“The figures for the growth of online are a lot more optimistic than they were last year,” she says. “Most countries were saying the forecast for 2009 was that everything would level off.
“But the forecasts coming in now seem a lot more optimistic. The online market is continuing to be dynamic and there will be opportunities for growth for both direct suppliers and intermediaries.”
The Expedia View
As dynamic packaging gathers pace, the permanent challenge of attracting customers to your online offering is becoming increasingly tricky to overcome in an effective manner. And nowhere more so than in pay-per-click, the space dominated by Google in Europe with something like a 70% share.
Bearing in mind this is a fast-evolving area, it’s useful to review the state of play. The traditional way to manage PPC is by sheer manpower, but across the pond, algorithmic bidding, or fully automated bidding, is gathering pace. Companies such as Efficient Frontier are leading the way there, persuading customers to put their faith in the machines.
There are also large companies such as Amazon, which consider PPC a largely technical, rather than marketing, issue. Hence you will see it bidding on pretty much any conceivable term that can be constructed out of its product inventory.
In Europe, there are several so-called auto bid tools on the market – Dart Search, Atlas and Falk for example. But they largely address the management and reporting of large campaigns rather than fully automated bid management.
The potential advantages of taking the machine route are obvious; less need for warm bodies, and efficiency gains. However, the challenges involved in making the systems work are significant and not to be undertaken with less than 100% commitment. You need to have a crystal-clear understanding of your profitability by product line and destination in order to set up the parameters correctly. Even then, there is no replacement for expert management of the tools, either via an agency or in-house.
Aware of the importance of PPC to travel marketers, Google is trying very hard to display a new openness. It hasn’t exactly opened its kimono, but by Google measures it’s a significant leap forward. Overall, this is a very good thing, and should lead to a more efficient paid-search marketplace and more opportunity to drive travel volumes.
It’s a pity Google’s openness is marred by the less-than-transparent changes in its agency commissions across Europe. Historically, PPC-buying agencies have received variable commission rates of up to 15% from Google, depending on country, something not available for clients buying direct.
Depending on the agency, a proportion of this has been shared with the clients as a rebate. Google’s idea is to remove this imbalance, creating a level playing field, which is sound. But it turns out it’s more level for some than others. With grumblings in the UK agency ranks gathering strength, we probably haven’t heard the last of this.
The start to the year for Hotels.com in terms of PPC has been very pleasing. Armchair reasoning would suggest the viciously competitive January period would prove a marketing budget bloodbath. Numerous online players, mostly small, materialise and start occupying the top positions in paid search.
These players have obscure bidding strategies, making bid levels volatile and pushing, for example ‘London Hotels’ to unrealistic levels. But, in fact, our experience at Hotels.com shows that a structurally sound campaign, closely managed 24/7, can work well. Even more encouraging, we are able to leverage our pan-European scale to great effect, producing good results. This is great news for our hotel partners, as we are able to deliver improved booking volumes in a competitive market.
Patrik öqvist, director of marketing, Hotels.com
A different view
US market research company PhoCusWright has predicted a “cooler pace” is on the horizon in the US as critical mass gives way to online saturation.
And it painted a far from rosy picture for the big four online players – Expedia, Travelocity, Orbitz and Priceline – who between them control 96% of the online travel agency market.
While appearing almost invincible, PhoCusWright said they are coming under intense pressure, at least in the US, from direct supplier sites, shrinking margins and the general effects of online saturation.
The lack of opportunity is fuelling the agencies to look overseas, particularly Europe, and to seek efficiencies in scale.
“The consolidation of the online travel agency market in the US is nearly complete and higher margins alone cannot sustain growth for them,” says analyst Michael Cannizzaro, one of the author’s of PhoCusWright’s latest US online report. “In a market share battle with suppliers, victory over those that supply their inventory could only be pyrrhic at best. This has led to the internationalisation of the online travel agency market.”
But the report says the biggest impact in the future could be from portals. Results returned by Google on a flight request between two US cities now include two simple field boxes for departure and return dates. After inserting the required dates, users can deep link into Expedia, Hotwire, Orbitz or Priceline.
“The agency-friendliness of this enhancement is belied by the fact it could prove useful for just about any travel provider,” the report says.
Despite the outlook, Cannizzaro predicts overall steady growth for the next two years, although growth that will slow as the “effects of the approaching saturation of the online market take hold”.
The US leisure/unmanaged business travel market was expected to pass the $65 billion in 2005, which represents nearly 30% of the entire travel market.
By 2007, PhoCusWright predicts “well over half” of the leisure/unmanaged sector will be booked online.
But during that period, online agency growth will slow from 20% last year to 14% in 2007. Supplier site growth will also diminish from 31% to 23%.
Writing in the report, Cannizzaro says the slowdown in growth has not only sent companies overseas in search of new opportunities but made them look at the actual content and the experience offered by their sites.
“They are bent on becoming full-range travel experience sites, leveraging their traffic and inventory to draw loyal shoppers with destination-orientated content such as user reviews, rich media property descriptions and other tools to shape the travel experience,” he adds.