Thomas Cook: a strategic analysis

Introduction

The package holiday industry is worth millions of pounds and it is common for every country to have a few dominant tour package service providers. In the UK alone there are four large companies namely Thomsons, First Choice, Air tours and Thomas Cook which manage the chunk of the business.

The package tour industry was first perceived by Thomas Cook in UK when he started a rail service from Leicester in 1841 (Discover the key dates from the journey of Thomas Cook). This has now grown into a full fledged industry where the tour operator or the package holiday provider gathers all tourism services and provides them to the final customer either directly or through a distribution channel such as a travel agent.  The three services that a package tour provider integrates into his one service are the transport, tourist and accommodation services. He sells them through his intermediaries which are either travel agents, direct selling or through a virtual travelling agency to the direct customer. (Page, 2009 )

The company analyzed is Thomas Cook which is amongst the pioneers of package holiday industry and is based in the UK.

Background

In the year 2007 the merger of My travel and the Thomas Cook travel group placed Thomas Cook at the 2^nd position in the UK travel industry (Page, 2009 ). With revenues of 6971 million pounds in sales and the27% UK market share (euromonitor, 2010) it is the leading travel services provider. It uses the reliable brand name of Thomas Cook and My travel was still operating in small towns with one retailer. The merger was a competitive move in order to reduce debts and cut costs. At that time the total market share of the two companies was 21%. Thomas Cook travel services retained their market position of No 2 for the next three years with the main competitor being TUI AG. This also greatly shocked first choice and the announcement caused its shares to drop.

It was an attempt to make the vertically integration model of package providing successful by eliminating competition and using economies of scale by capturing a wider consumer base.  Manny Fontela at that time said: “The big four can only handle the future as they are with difficulty. The vertically integrated model is still hugely profitable; everyone’s talking about the death of the package holiday but it remains profitable.” (Thomas Cook MyTravel merger suprises travel industry – 12 Feb 2007, 2007)

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Year 2010 saw another merger of Thomas Cook with the Cooperative group and the joint effort is predicted to raise up to £35 million. It is a part of Thomas Cook’s bid to become the biggest tour operator in the United Kingdom. By this move they intend to cut costs and streamline their business and deliver synergies. In the words of Manny Fontela the proposed chairman of the new group the purpose of the merger is “By consolidating the high street in tandem with delivering on our existing e-commerce targets, we are realising our strategic aim to increase in-house distribution and strengthening our proposition to consumers.” (Thomas Cook share price up on FTSE 250 after news of merger with The Co-operative Group, 2010) This is again another move to eliminate competition and and expand horizontally. It caused the companies’  share to rise and the stock market position to improve despite a weak UK economy.

Currently Thomas Cook UK and Ireland is the second largest travel group with 19000 employees and 800 stores. It owns some of the most popular travelling brands in the world including Airtours, Cresta, Direct holidays, Sunset, Sunworld and of course Thomas Cook, Thomas Cook essentials, Thomas Cook Tours and Thomas Cook sports.

It believes in expanding by both horizontal and vertical integration and thus along with mergers it is also the owner of 44 aircrafts exclusive to its fleet. Besides having its own travel plan Thomas Cook has its own range of financial services. These include foreign exchange, cash Passport (prepaid currency, the Thomas Cook credit card its own travel insurance policies. These policies are regulated by its own insurance division named the White House Insurance Ireland.  The current rating shows that Thomas Cook is the world’s largest retailer of prepaid currency or cash passport.

Thomas Cook is also the official supporter of the London 2012 Olympic and Paralympics games. The package deals it offers provide accommodation, transport and event tickets. It has its own publication division which as published 300 travel guides to date which cover 150 destinations worldwide.

Thomas Cook also is a market leader in waiving Air Passenger duty ( APD) on bookings from 1^st November to 15^th December. The new campaign is called “Beat the Taxman” and allows passengers to save up to 75 per person. This is only being done to voice its disapprovement of the new increase in tax. Manny Fontenla-Novoa, Group CEO, Thomas Cook Group says in this regard that ““Through our ‘Beat the Taxman’ promotion we hope to support holidaymakers’ disapproval of these new charges that they will now incur alongside reiterating our commitment to offering our customers the very best value money.” (Thomas Cook waives APD on long haul holidays, 2010)

Market standing of Thomas Cook, its macro and micro environment

Thomas Cook has a consistent market ranking of number 2. It faces stiff competition from TUI travel pic which was generally perceived to be market no 1. The critical success factors in the marketing environment include the number of sales, revenue generated, profit generated and the market share. A company evaluates itself on the percentage of travelers who have used its services and the total profit for the financial year. Success will also be based the number of new assets the company has acquired.

The package tourism industry was once a very profitable industry. Limited knowledge of travelers allowed tour operators to dominate the market and block buying allowed them cheaper rates. Market for package holidays is falling. According to a news release the popularity of the package industry has fallen to an all time low since 1970 and families are choosing to arrange their own holidays. This is the result of the advent of a more internet savvy traveler who has easy access to knowledge. Thanks to the internet and cheap flights the lure of pre booking holidays at cheaper rates is fading. This is happening as more and more travelers believe that they can custom make their own packages at a much cheaper rate.

It was once a very profitable industry but now more and more tour operators work with stringent budgets and low profits. Therefore it is a common perception that the package tour industry is no longer as profitable as it used to be.

This is in contrast to the very recent developments in the travel and the package tour services. Only recently have the unreliability of travelling independently opened new arenas for service providers. The benefit came as a result of travelers viewing how package operators can provide insurance and security in the case of an airline failure or climatic hazards. This was very clearly observed when Thomas Cook provided meals and accommodation for its stranded clients as a result of the 2009 Iceland volcanic eruption. Though the company lost 81.9 million pounds the customers were satisfied from their services.

SWOT analysis

Strengths

The re-bounce of the industry is synchronous with Thomas Cook’s new merger with Cooperative and therefore the company emerges as the leader of the tourism industry. Thomas Cook occupies a No 1 or No 2 position in all areas of its core competencies.

Thomas Cook is also very reliable from the customer’s point of view, not only because it has reputation and it is an old brand but the trust also comes from the fact that Thomas Cook was trusted by 22 million passengers in the year 2009. (thomascookgroup, 2010) Its high income of 9.3 billion pounds also adds to the trust that it will not go into bankruptcy, a fear that all potential customers face from their travel service providers.

The general market in which Thomas Cook is working is the UK travel market known for its strict rules and regulations. Along with ATOL (Air travel organizers license), the tour operator must also sell a package approved by a DTI approved body. Then there are airline rules, a framework of legal laws and insurance that one must cover. Sale promotion and advertisement is another department that the service provider must cover. Promotion comes at a much greater price as competitors like Expedia which are quickly garnering market share are spending a lot on promotions. Activities to provide services should be maintained side by side with activities to sell efficiently to the customer. This involves managing and maintaining outlets and an efficient staff to solve all travel related problems of travelers. This acquisition and supply is to be maintained within a budget as e-savvy travelers can easily find out the real costs from the internet and not buy the package.

The real strengths of Thomas Cook travel come from the fact that the company has eliminated competition by horizontal integration over the years. The two mergers and several acquisitions in the past several years have ensured that currently it is left with one major competitor the TUI travel pic.

The current market share of around 30% which the company holds in the package selling industry is also commendable. This symbolizes customer trust and satisfaction in the company. Another great strength which Thomas Cook has is its brand name. The brand was a forerunner in package holiday provision and it is associated with greater experience thus better service. The reputation that Thomas Cook has and the respect associated with it comes from the founding father of the company and is a strong asset of the company.

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The financial strength of the company is another asset. Not only the travelers have a guarantee of travelling with a company which won’t leave them stranded specially after the 2010 Ireland volcanic eruptions where Thomas Cook stayed true to its customers, the company is strong to buy and pay in case of an emergency. It has significant buying power and the company employs a proactive stance in its risk management. Thomas Cook is targeting merger synergies of £215m compared to the previous estimate of £155m. (Mtetwa, 2010).

Another strong point is the company’s international presence. Though the main market if Europe and the Western world, the company owns subsidiaries in eastern companies like Egypt and India. It has access to 21 world markets. Besides international access the company also owns about 1200 distribution channels. Since the company owns them, the cost of the middleman is eliminated, leading to lower costs and competitive prices.

Last but not the least Thomas Cook is the market champion because of its one stop travel need services. With its own fleet of airplanes and up to 1200 outlets the company has a very strong market position. The company does not have to worry about airline regulations like small tour operators as they have their own fleet. Similarly it does not have to pay another insurance company as the company has its own insurance firm. Similarly foreign exchange for Thomas Cook clients is guaranteed at the best rates as the company provides foreign exchange. It also has its own prepaid credit card which has a very high sales rate.

With multiple brands like Sunset, Thomas Cook sport and Thomas Cook essentials and Cresta direct holidays; Thomas Cook has a service to satisfy every traveler.

Weaknesses

Though Thomas Cook is a market leader but it has inherent weaknesses. One of them is multiple brands which though lead to market diversification but are not appropriately marketed. Too many brands have led to confusion in the minds of customer’s foreg JMC and Holiday essentials. Another problem which Thomas Cook faces is its assets. Contrary to the belief that fixed assets are raw power, for Thomas Cook managing its multiple assets and head office spaces is problematic.

With continued development Thomas Cook has acquired the capacity to serve more people than it actually does. This leads to high costs as fixed costs of mantainence remain the same. High volume costs are also reported as the company incurs high marketing and administrative costs.

Opportunities

Thomas Cook has extensive resources which it has frequently used for mergers and acquisitions. The same resources can be used to tap unexplored markets. Emma Holland in her article “Package Holidays” observes that tour operators should provide unique offerings to the more adventurous, discerning and demanding holiday makers. In her context successful travel agents will be the ones who can differentiate their customer base and target them efficiently. (Holland, 2007). Thus Thomas Cook should explore places where travelers are reluctant to go alone without any external agents help.

Thomas Cook should also exploit its brand name strength and further strengthen it. This will lead to greater customer reliability. Thomas Cook should also take advantage of small tour operator being forced out of the travel industry due to the economic breakdown. The company should ensure that it fills the void created by these small operators.

Threats

The recent merger of Thomas Cook and Cooperative has resulted in job cuts. This doesn’t help raise employee morale and workers might be unhappy with the brand. Another environmental threat that Thomas Cook faces is of new strategies by its core competitor TUI AG. TUI has the no 1 market position which is now threatened by the new Thomas Cook merger. It is necessary for Thomas Cook to observe at all strategies employed by TUI.

The most easily foresee-able market threat is the decline in demand. It is very evident from statistics that though the package holiday market is growing slowly, it is not exactly booming. The cause is custom made holidays from the internet. Thomas Cook will have to capture and retain customers and yet ensure that it provides the best possible rates.

Thomas Cook also faces threat from the huge promotional campaigns of fellow tour operator specially those who are completely virtual. Online operators have low overhead costs so they can employ more advertisement yet sell at lower rates. Thomas Cook will have to ensure its online presence, promotion and price and quality competitiveness. Though it has party struggled to do so forming a coalition with Expedia, further effort is required in order to secure its share from online travel agents.

A threat which is common to all travel providers and thus engulfs Thomas Cook is the perish ability of products and dependency on environmental factors such as weather. Plane seats if unoccupied can lead to losses similarly if a booking is cancelled the tour operator faces a loss. Weather conditions such as rains and clouds can delay flights also leading to losses. These are all threats which cannot be overcome despite careful planning. These general threats keep the travel industry at its pulse.

Thomas Cook is well known both in the industry and amongst travelers. It is strong financially and has both a reputation and market share to allow growth. As all industries are laced with challenges, the package holiday industry also faces some but with its innovation, ambition and loyal customer base Thomas Cook is expected to maintain its market presence and in fact go completely global from being international.

Conclusion

Thomas Cook is a market leader and the current industry analysis and the competitive position of Thomas Cook allows expectations that it will continue to do so. It has got both the resources and current customer base to both maintain and grow its operations. This is not only evident from its previous mergers and expansions but the current Sports tourism it has sponsored in the form of 2012 Olympics. Though the industry is not growing at a very fast rate as it is quite saturated but Thomas Cook with its innovative products and old world reliability manages to hang on to its customers by completely satisfying them. In the most recent developments Thomas Cook has formed a partnership with Expedia to maintain and grow its online presence.