The bed bank sector has become very crowded very quickly – raising questions over the survival of so many players. Evolution, consolidation and failures, some argue, are all on the cards in the coming months. Linda Fox finds out more
I wouldn’t like to be in the bed-bank-only scenario,” a leading accommodation supplier tells Travolution. This figure clearly feels insulated from what has become an increasingly competitive marketplace, where margins are thinning and questions are being raised over the survival of so many players.
The sector is squaring itself up for evolution in terms of new territories as well as new products, consumers going direct to the properties, price wars, mergers and acquisitions and the possibility of some falling by the wayside in the next year.
A quick glance at a system such as Traveltek’s reveals more than 35 accommodation suppliers in the ring, admittedly not all cover the same territory, but there are many overlaps.
Khilan Dodhia, a director at Barclays Ventures, which is a financial backer of YouTravel.com, says: “There are more competitors than a few years ago but the key players are still the quality ones. The market is rewarding those that have invested in good people and good systems. Scale is more important than it ever has been in terms of hotels and end customers.”
What remains to be seen is how all these players will fare with the likelihood of a recession hanging over the UK. Already the big two operators have cut capacity, meaning less access to seat capacity and forcing dynamic packages on to scheduled air.
There are two schools of thought, with many thinking consumers will return to the brands they know and trust. Others believe the economic climate makes people even more cautious with their discretionary spend and therefore more willing to shop around.
Dodhia says: “If anything, people become more value conscious. The costs embedded in a package holiday become more difficult to sustain in a tougher environment.”
Volumes of business and competitive pricing will help the larger accommodation players through any economic downturn, and in a short space of time many suppliers have built up a substantial business.
In addition, the top tier seem fairly well insulated with either strong backing in terms of their parent companies, such as lastminute.com with Med Hotels and Cosmos with somewhere2stay, or private investment backing such as Close Group’s involvement in lowcostbeds.com and Barclays Ventures with youtravel.com.
“Look at the ones that have proper backing, a rock solid shareholder group. It gives you the power to acquire,” says Paul Evans, chief executive of the Lowcost Travel Group.
Then there are others, such as On Holiday Group’s Holiday Brokers, that have built up scale through strategic third-party deals. Chief executive Steve Endacott argues that strong financial backing only allows you to lose money for longer.
He says: “The big will get bigger and the others will go away. The market is rapidly maturing and economies of scale dictate that you have to be doing about 500,000 passengers or more to have price competitiveness.”
Hotels4u.com sales and marketing director John Harding agrees casualties are inevitable and that unless the suppliers can deliver volumes of business back to the hoteliers, they will be unable to compete in the market on price.
Meanwhile, the sector is still growing, with Hays Beds the latest to come on stream. Others in this second tier include Medlife Hotels and bedswithease.com.
With so many players, consolidation is the most likely scenario and already this year there has been some activity with Thomas Cook paying £21.8 million for Hotels4u.com in February.
The money paid is recognition of the business built up by Hotels4u.com, but it also demonstrates the perceived value in accommodation-only. Many believe similar deals could be on the cards.
“There will be acquisition of some of the bigger bed banks by some of the bigger tour operating companies, simply because the model the tour operators have is to take commitment on hotels, and that restricts their ability to offer a wide variety of product,” says Harding.
Dodhia adds: “There is natural convergence in the travel agency and supplier business models. As the internet becomes more prevalent and front-of-mind for consumers, they don’t necessarily need intermediaries, so there will be convergence over the next 24 months and that will cause mergers and acquisitions to happen.”
Others don’t see the value in an acquisition from a tour operator, airline or other large travel retailer and think players may consolidate among each other.
Somewhere2stay managing director Stuart Jackson says: “If it is purely a Mediterranean-based offering then it is easy to replicate. I can’t see an airline or another retailer wanting to buy one. All Expedia or someone would have to do is a joint venture, white label or other commercial relationship.”
These sorts of commercial third-party deals are one potential area of growth being eyed by the sector.
Evans says: “There will be strategic tie-ins with big online travel agents who are good at some things but not others.
“Also, with airlines saying they are charging for everything, will they take a strategic investment? I think that is coming in a year or two.”
That leaves consolidation among the existing players with players down the list circling round each other in the future.
Jackson says: “The business-to-business market is much tougher and there will be a reduction in the number of players based on a number of factors.”
He sees differentiation as playing a key role in the battle for survival and believes participants cannot continue to trade by just acting as agents selling the same accommodation for the same price.
However, the costs involved in acquiring principal status and the health and safety requirements would mean these players could be forced to seek a foothold in the business-to-consumer market to make it sustainable.
Differentiation could also come through the amount of product you offer and territories you cover worldwide or evolving into new product sectors.
Harding says: “There is massive opportunity in terms of long haul, as well as tremendous opportunity with local airports, with people using airports closer to home and airports closer to their destination. The all-inclusive market is becoming more important too.”
Dodhia sees growth opportunities for youtravel.com through targeting new markets in Europe such as France and Germany. At the end of the day, larger players in the sector are confident there is still all to play for and it’s about seeing the bigger picture.
Evans says: “If you have 87 million people going on holiday, it’s a huge market. We keep going back to the small retail world in which we work where only one in 1,000 consumers has heard of these brands. That’s the market.”
And says Dodhia that market is not diminishing and there will continue to be growth away from the traditional package holiday sector as consumers demand a wider choice of product and more flexible durations.
Moves from the big companies into the accommodation-only sector are further evidence of the changing behaviour – hotelbeds.com, hotelopia.com and laterooms.com are all part of TUI.
Evans adds: “The market in dynamic packaging is growing faster than any economic slowdown. Don’t believe the hype that the package market is holding up. More aircraft are going seat-only. We are all becoming a bit of everything, which is why there is no such thing as bed banks.”
Endacott agrees and says companies like his will become a single point for all of the holiday elements for the trade, bar the flight. “On business-to-consumer you add the flight to complete the shopping basket. You use your bed bank strength to form partnerships with third parties that have seat access or seat control in order to build new-age tour operators.”
‘Fitness’ is key to survival in bed bank sector – John Kent, founder and chief executive, Youtravel.com
John Kent created Med Hotels in 2002 – the accommodation-only site that was later sold to lastminute.com. At World Travel Market in November 2007, he predicted consolidation in the bed bank sector would see up to three players taken out in within 12 months.
He also said deals would come from companies outside the accommodation sector, who would swoop on existing players or an operator looking to add resort accommodation to its inventory.
“The accommodation-only sector has been one of the fastest-changing and fastest-growing in the travel industry in the past six years.
“Takeovers, failures, launches and mergers have all taken place in this still-embryonic sector. However, its youth should not be mistaken for immaturity. At the pace the accommodation-only marketplace is moving, it could take just a few years for it to get past its growth-spurt adolescence into mature adulthood.
“First, we must be clear that we are talking about resort bed banks, not those who specialise in city-based properties. And not only is this a crowded marketplace, it’s also one in which others think they can do it better themselves.
“So then you see agents moving to become bed banks, taking on direct contracts with hotels, as such bed banks react by targeting consumers directly, and at the same time there are handling agents who are selling direct to UK agents, therefore cutting out the bed banks.
“All of this, plus credit crunch fears, mean margins have been squeezed. The marketplace is price-sensitive and the advances in technology as part of the selling process mean there is little loyalty from the end consumer, whether they are trade or retail. Even those accommodation providers courting the consumer directly are facing low margins as these sites are usually ranked via a price-comparison aggregator.
“This means that having strong relationships, exclusive deals, exceptional technology, a solid customer service proposition and a widespread international business model is the only true way to success in the resort accommodation sector.
“So what next? In the short term I believe that there will be far fewer players in the arena at the end of this summer. Not only will bed banks consolidate between themselves, there will also be deals struck between airlines and accommodation firms and agents and bed banks.
“In the medium to long term, big hotel chains or management companies will sell direct to consumers and have their own DIY websites adding flights or consolidating with airlines, adding increased pressure and competition.
“Never before in this sector has the idea of the ‘survival of the fittest’ been so appropriate.”