Market consolidation and mutual learning

Part of the way the travel market has differentiated itself from other consumer sub-sectors is its method of integration. Typical travel companies will have market consolidation in their mind when going shopping [2], whereas more recently, businesses have used investments and acquisitions as a strategic learning opportunity – cross-pollinating a start-up’s culture with the operations of corporate HQs – a reverse learning technique now very popular among companies of this nature.

The last twelve months have seen significant activity in this vein, with corporates and PE-backed trade players acquiring service providers or vertically integrating with one another to ‘learn’. Deals such as FlightCentre’s acquisition of itinerary planning platform UnMapped demonstrated the broader view that these sector operators are taking – buying tools from each other, in particular where tech is concerned, is crucial to sustainable growth. The below chart below highlights this recent activity:

The result of this IP-sharing is that the market is consolidating into broader sub-sectors. With significant activity levels, we’re seeing the emergence of strong market players with full integration across their service offerings, now delivering one end-to-end solution for consumers.  Whilst many providers either stick with traditional services or purely leverage tech-based solutions, many travel operators are now morphing the traditional and tech-based services for a holistic and complete solution.

The buy and build phenomenon is not just focused on strategic learning. Investors are now targeting niche holiday providers who have strong customer relationships and are in growing markets both in terms of direct customer. This was recently demonstrated when LDC, who was advised by DC Advisory, acquired Neilson Active Holidays, the active and adventure sports holiday operator.

Consolidation has, however, slowed in Q1 2019, with the total number of transactions across both Europe and the UK, at its lowest since 2013 and down from the peak in 2016. This is unsurprising given Brexit uncertainties, consumer sentiment and macroeconomic challenges.

Growth of domestic travel

As travel corporates have become cautious in 2019, consumers have more recently demonstrated more conservative behaviours. With Brexit uncertainty, warmer summers and a frugal response to austerity, British and mainland European holidaymakers have driven the domestic tourism markets in their respective locations.

The trend to ‘holiday at home’ has driven investment in ‘staycation’ businesses, which have historically been more resilient assets. Domestic travel in the UK has grown with expenditure during 2018 increasing by 1.1% compared to 2017. Transactions such as the acquisitions of Wyndham’s European rental business by Platinum Private Equity, Forest Holidays by Phoenix Equity Partners, Lakelovers by LDC and more recently LDC’s sale of Away Resorts to Bregal Freshstream (advised by DC Advisory) have been on the rise – where the focal point for growth is the UK holidaymaker.

More specifically,  there has been growing consumer demand for domestic experiential holidays. A key ‘experiential’ example is Center Parcs, who saw a 5% year-on-year increase in guest numbers (2018 versus 2017) and both average daily rate and occupancy increased by 4.4% and 0.1% respectively, for the 36 weeks to January 2019 on the same period the year before. Another recent example of this growth is Hoseasons, one of the largest holiday park rental operators, who reported bookings of domestic short breaks which were up 27% year-on-year through the trade between Christmas and New Year [4] at the end of last year.

As one may expect, value for money, experience and location (in that order) are the three main considerations for Horeseasons’ customers when booking an outing or trip. Culture, accessibility catering, and family friendly are next on the list [5].

Conversely, international travel has been steadily declining since 2016, illustrated in the below chart. The upward trends in visits abroad in the last two years has slowed across major destinations with both North America and Europe experiencing headwinds, and holidays booked during the Brexit announcement period (highlighted in red in the below chart) were shortly followed by a further decline.

Is this slowdown expected to continue?

It is anticipated that a slowdown will become more extreme due to media stories concerning ‘Brexit chaos’, with many industry leaders citing a Sunday Times article from December 2018 as a key driver in the fall of pre-Christmas bookings. The GfK Consumer Confidence Index confirmed that up to December, companies enjoyed strong trading with summer bookings bookings up 10% year-on-year to the end of November and revenue up 11%. However, the strong run ended with senior client insight director David Hope stating that “Summer 2019 bookings were down 17% year on year in the week after The Sunday Times article, and about 19% down the following week [6].”

More recently, operators are experiencing major shifts after an increase in last minute bookings driven by heat waves in 2018 – a phenomenon which is disrupting the market’s transparency, capacity and consequently profit margins. It is crucial for operators to remain vigilant so as to avoid the impact of further disruption that come with significant financial ramifications.

‘One world’ – international activity

In the US, lodging and airline industries are continuing to hit new records despite its economic growth being revised down in the fourth quarter of last year to 2.2%. As wages continue to rise at a healthy pace and employment growth rebounded towards the end end of Q1 2019, there has been a trend of slowing consumer spending in the US as consumer confidence wavered. On a domestic basis, nearly 100 million US adults are planning on taking a family vacation during 2019, with 53% expected to take a road trip and make the most of the currently low cost of gas in the US – mirroring the European ‘staycation’ trend we’re seeing from across the North Atlantic.

The latest US Travel Barometer reported that Mexico has captured 3% of US resident searches in March, followed closely by the UK, Italy, France and Spain. Last year, a record 93 million Americans travelled internationally, an increase of 6% from 2017. The highest travel growth to international markets was seen in Europe, with neighbouring Mexico and Canada capturing 55% of US citizens. This trend is fuelled by a relatively strong dollar, tax reforms which gives both consumers and businesses more money to travel, faster wage growth, higher confidence and low unemployment.

In Spain, last year for the first time in ten years, the tourism industry’s growth waned, reaching a rate below GDP (2.0% vs. 2.5%). According to Excelltur (Alliance for Excellence in Tourism) the main cause of this slowdown includes the recovery of competing Mediterranean destinations attracting travellers (such as Tunisia, Egypt or Turkey), the economic slowdown of traditional markets across continental Europe (Germany, UK, Italy and France) and Brexit. For 2019, tourism is expected to maintain a rate below GDP, whilst maintaining positive prospects for the medium and long distance markets, encouraged by the increase in air connections and consumer accessibility.

With these geopolitical components in mind, what can operators expect to see for the remainder of 2019?

Short-term headwinds

While the broader travel sector has started to see the impact of Brexit, particularly in the UK, it has also suffered from adverse weather conditions with the ‘Beast from the East’ in March last year, followed by a heatwave and the FIFA World Cup in the summer. This is most clearly evidenced by the share price performance of tour operators with TUI Travel, Thomas Cook and Cox & Kings all posting share price declines over 45% in the past 12 months.

Thomas Cook in particular cited the prolonged summer heatwave across Europe as a key driver of their fall in last years profits, impacting mainland Europe in addition to the UK. There has been an uplift in performance following the Brexit delay announcement on the 10th of April, however this has only provided limited relief.

Conclusion

With short term headwinds challenging secular growth, M&A provides a significant opportunity for travel operators seeking to benefit from inorganic growth. To capitalise on these opportunities, industry operators should:

  • Be mindful of other sector operators where vertical integration could be beneficial
  • Be familiar with evolving product developments and sector trends, and understand how these can influence a company’s growth trajectory
  • Take advantage of any short-term opportunities, either via private operators or investors
  • Remain vigilant and maintain flexibility to react – customer booking patterns likely to change with the meteorological, economic and political climate

Should you have any questions regarding this content, DC Advisory’s Global Consumer, Leisure & Retail team would be delighted to discuss in more detail.

 

[1] Deloitte: Leisure spending boosted more confidence consumers, 2018
[2] Skift Travel Megatrends report, 2018
[3] ONS, Overseas Travel and Tourism Quarterly, 2019
[4] Travel Weekly: Bookings down in first week of Jan, 2019
[5] British Tourism and Travel Show, 2019
[6] Travel Weekly: Sales slow after Sunday Times ‘Brexit chaos’ story, 2019