Perhaps no sector has been as badly hit by the pandemic as tour operators, given their intrinsic connection to cross-border travel as well as human interaction. Based on our research and discussions with over a dozen executives we see an industry on the precipice of major changes.
This report will focus on the global multi-day tour operator sector with a heavy emphasis on itinerary-based guided tours. We will also briefly touch upon packaged tour sales. Multi-day tours are one of the last truly offline spaces of the travel industry. But that isolation cannot last. This report will cover the structure of this complex and fragmented industry. We see an ecommerce revolution occurring in the next five years that will reshape the way the industry supplies and distributes its products.
We will also discuss the impact of COVID-19 on the industry and how we see the types of tours offered, and the operators themselves, evolving as a result.
What You'll Learn From This Report
- How the complex supply chain of the multi-day tour industry works and the different kinds of businesses and tours that exist within it.
- How digitalization is disrupting the industry and where the biggest new opportunities exists
- How tour operators have responded to the pandemic
- What we think the new multi-day tour landscape will look like as COVID-19 fades
- Matt Berna, Managing Director, North America for Intrepid Travel
- Murray Decker, Chief Executive Officer of Tour Amigo
- Gavin Delaney, CEO and Co-Founder of TravelStride
- Tom Hale, Founder and President of Backroads
- Travis Pittman, CEO and Co-Founder of TourRadar
- Catherine Prather, President of the National Tour Association
- Massimo Prioreschi, CEO of MT Sobek
- James Thornton, Chief Executive Officer of Intrepid Travel
- Gavin Tollman, President of The Travel Corporation
- Enrique Velasco Jr., Chief Commercial Officer of Coltur Peru
- With special thanks to Jared Alster and Tom Buckley, Co-Founders of Dune7 for their background contributions to this report
From our vantage point today it’s easy to take for granted that people across the world would use their leisure time to travel. But tourism — traveling for the pure enjoyment of it rather than for trade or religion — is a relatively recent development in the grand scheme of things. Most date the birth of modern mass tourism to Thomas Cook’s first package tour in 1841.
But naturally a lot has changed since then. Today’s tour operators need to be constantly evolving to keep up with the changing face of modern travel, as Thomas Cook itself discovered the hard way — and that was before a global pandemic hit!
This report will focus on the global multi-day tour operator sector with a heavy emphasis on itinerary-based guided tours. We will also briefly touch upon packaged tour sales. Though smaller than the hotel or airline industry, anyone seeking to understand leisure travel overlooks tour operators at their own risk. Pre-COVID, 12% of U.S. leisure travelers booked a package tour and in the United Kingdom, 47% of household travel spending was on packages. In Southeast Asia, 60%+ of trips were packaged or semi-guided tours.
Perhaps no sector has been as badly hit by the COVID-19 pandemic as tour operators, given their intrinsic connection to cross-border travel and human interaction. Many operators are still seeing revenues down 80%+ even as other sectors like hotels and airlines are moving to a recovery. The pandemic changed the kind of tours that people want, driving them to seek the outdoors, small groups, and domestic trips.
Based on our research and discussions with over a dozen executives, we see an industry on the precipice of major changes. It is one of the last truly offline spaces of the travel industry, but that isolation cannot last. There is a need for new modern tools and digital distribution, which presents a massive opportunity for new tech startups in the space. We see an ecommerce revolution occurring in the next five years, similar to what short-term rentals experienced following the success of Airbnb. This disruption will be compounded by the profound damage inflicted by the pandemic
In a sense, we already have a bit of a roadmap based on the past trajectory of other travel businesses that moved offline to online. We expect to see the emergence of a few major online booking sites and a new class of intermediary tech vendors to handle online bookings, channel distribution, and inventory management. Eventually this will lead to conflicts over direct distribution, repeat guests, and rate parity.
We also believe that the pandemic will spur a winnowing of the ‘middle class’ of tour operators. A wave of bankruptcies and mergers is likely to come leading to consolidation in a handful of large players on one side and on the other side a long-tail of specialist operators that can niche down into their own unique offerings.
The Tour Operator Landscape
The multi-day tour industry is a big tent that incorporates a wide range of operators, suppliers, and distributors. Plus, at times it seems like every company in the space is running a slightly different business model.
Definition and Core Products
Our first step towards untangling this web of interconnected tour companies is to put a basic definition in place.
Tour Operator: A tour operator is any company that sells two or more trip components together. At its most simple this could be a flight, hotel, or cruise sold together as a package. More complex tour operators bring together transportation and accommodation with local meals, activities, and guides.
There are three core products sold by tour operators: packaged travel, itinerary-based tours, and small ship & adventure cruises.
Small Ship, Adventure, and River Cruising
Small expedition ships and river cruises are often included as within the tour operator space. The same travel agents that sell land-based multi-tours frequently also offer specialized cruises. Major booking sites like TourRadar have a prominent and well-stocked river cruise section.
This space was traditionally dominated by specialists, like Azamara, Lindblad Expeditions, orViking River Cruises and they are some of the fastest growing businesses in the entire cruising sector. Arguably these smaller companies have as much, if not more, in common with a land-based tour operator than they do with the mega-ships of Carnival or Royal Caribbean. And to that point, we are now starting to see traditionally land-locked operators go to sea, with, for instance, Intrepid Travel now offers polar cruises and TUI owns several cruise ships.
Small ships do meet our definition of a tour operator as they bring together transportation, accommodation, activities and food into one package. Though in fact, if you stop and think about it, so does the entire cruise industry, regardless of ship size. In order to prevent this report becoming too big we will set aside all cruising — big and small — as its own topic to be covered in future research. The rest of this report will be focused on land-based multi-day tours.
Packaged travel offers the distilled essence of our original tour operator definition. These trips bring together two or more components of travel supply, usually a flight and a hotel, and offer the combination together as a single new product to the consumer. The main selling propositions for this kind of product is typically value for money, convenience, or unique supply. Packages are also very commonly sold as an upsell for travel suppliers.
Given that there is no itinerary design included, this type of product is most popular among those looking to ‘fly and flop.’ These guests are typically looking to spend their leisure time off in a hot location with a cold beverage. And they want to access that vacation as easily and cheaply as possible.
One of the main reasons why package tours can offer better pricing to a traveler than assembling the separate components of the trip themselves is because, from the point of view of a travel supplier, packagers operate as an opaque selling channel.
Take hotels as an example: in a package the customer is quoted a single price for the entire bundle – flight + hotel + car – so the traveler can’t pinpoint how much they are paying per room night. This means that hotels can offer discounted rates without violating rate parity and undercutting first-party pricing. Tour operators tend to move high volumes so hotels are incentivized to offer bulk pricing for their business. Bed banks and global distribution systems often act as intermediaries providing wholesale supply to tour packagers.
Convenience is another main driver of packaged tour sales. There is a large segment of consumers, especially in Europe, that don’t want the stress and confusion of booking all of their own travel arrangements. While those of us that have the most severe cases of the ‘travel bug’ may have turned booking travel into a hobby (perhaps many of you reading this), we can admit that this is possibly not the most fun part of a trip for an average vacationer.
Another reason why a traveler might pick a packaged tour operator is because they can offer exclusive supply. Perhaps there is a resort that the operator owns and therefore the only way to visit it is by booking via a package. One of the best examples of this is TUI owns or operates over 400 hotels to ensure it can control the guest experience and provide access to rooms in supply-constrained markets like Cape Verde. It also owns nearly a dozen cruise ships and several charter airlines. Jet2 also follows a similar model with its own in-house airline that complements its vacation packages as it can offer uniquely convenient airlift for its guests only.
One of the most exciting developments in the packaged tour space is dynamic packaging. This is a relatively new development in the packaged tour space driven by the growth of tech connectivity in the industry. The concept is that, rather than operators or agents manually pulling rates and building bundles by hand, algorithms automatically create package deals live during the guests’ shopping experience.
The next step for this market is the development of open platforms that plug into suppliers’ booking engines and allow dynamic packaging ‘as a service.’ For example Hotelbeds offers dynamic packaging via an API that could allow for this. Third-party platforms for bundling opens up a whole new world of plug-and-play upselling capabilities for travel suppliers that might not have traditionally considered a packaged tour product, although it also brings with it the potential for rate parity issues.
Airlines have long used packaged tours as an upsell to drive revenue and margin on the flight products they were already selling. These bundled upsells often accounted for a small slice of revenue. JetBlue in a 2018 investor day disclosed that its attach rate for JetBlue Vacation was just 1.5% of transactions. However these small percentages can add up to big dollars, like at LatAm which sold $22 million worth of tour packages in 2020, still less than 1% of group revenues. But the package revenue shares can go quite high, even at a traditional mainline carrier. Japan Airlines Group (JAL) — certainly not a discount packager like Jet2 — sold $485 million of packaged tours in 2021, accounting for ~10% of group revenue, according to IdeaWorks.
Most airlines, if they sell tours at all, operate closer to Jetblue with the business driving a low single-digit share of group revenues. But JAL and other exceptions prove just how high the numbers could potentially get. Many airlines see today’s low package numbers as a mere starting point from which to build significant ancillary revenue streams to complement their unbundled retail strategies. Dynamic packaging has made this far more feasible and now airlines of all types from AirAsia, Allegiant, and EasyJet to Emirates and American Airlines are selling tour packages.
In the past, standing up a packaged tour offering at an airline would require a lot of time-consuming negotiations with hotel and car rental suppliers and even after all of that work, supply might still be limited. Airlines are in the core business of selling flights and not negotiating hotel wholesale rate contracts. With dynamic packaging airlines have the ability to tap into B2B platforms that can build bundles around their routes with relatively low lift. Bedbanks, like Hotelbeds, GDSs, like Amadeus, and tech vendors, like Switchfly all now offer dynamic packaging tools. This means that in today’s fast evolving landscape, airlines can add new routes and immediately be selling dynamic packages around that destination on launch.
The development of dynamic packaging further blurs the line between a tour operator, like a TUI, and an online agent, like Expedia. If JetBlue (supplier), TUI (operator), and Expedia (OTA) can all sell the same flight plus hotel package, what is fundamentally the difference between these three companies?
We believe that online travel agencies like Expedia and Booking will be some of the biggest beneficiaries of the move towards dynamic packaging and the above blurring of industry lines. In a dynamic world, having the most possible permutations of trip choices is a key differentiator. And the OTAs sit in a sweet spot where they have strong pre-existing direct customer relationships while also having millions of hotel, flight, and car listings across the globe already live in their databases. When guests shop for a flight, the OTA can then offer them the upsell to add on a hotel room or car booking, all for one packaged rate. The discounted package price is calculated automatically on the fly based on the unique combination of travel choices selected by the shopper. The discount can come from specific wholesale rates pushed by the suppliers to the OTA or the booking site might just choose to algorithmically reduce its commission margin to encourage an upsell to a higher ticket purchase. They can also resell their inventory and technology as white-label dynamic packaging tools to other agents, hotels, and airlines. Both Booking Holdings and Expedia as well as smaller OTA players like lastminute.com have all been running experiments around the best way to sell tour packages. Expect to see more developments in this space.
Itinerary-based tours are, arguably, the heart of the tour operator industry. These tours go beyond simply bundling component travel products, adding on top of that core package a layer of local expertise and itinerary design. These tour operators will be the focus of the rest of this report.
Price is not often the main selling point here. Rather, the convenience of not having to plan, the assistance of a guide, or the uniqueness of an itinerary is the main selling point. There is quite a lot of variety within products offered in this space.
There are three main variables that we can use to define the main types of itinerary-based tour products:
- Fixed-Date Departures vs. Custom: Fixed date tours are offered with a pre-scheduled departure date and a set itinerary. Travelers buy these pre-built itineraries off the shelf. In contrast, custom tours are built to suit each individual guest with a unique schedule and departure date.
- Guided vs. Self-Guided: Though the classic image of a tour includes a guide leading a group, this does not always have to be the case. Self-guided tours are growing in popularity. In this case, the traveler buys a travel package that can include local connections, activities, meals, and suggested sights, but no in-person guide to contextualize the destination.
- Group vs. Individual: This has more to do with the buying behavior of the guest than the actual itinerary on offer. In group travel, the entire tour is booked up by a single organization, perhaps a school group, work retreat, or a large family. On the other hand, individuals traveling book a single slot as part of a larger overall planned departure that combines many other individuals or a small group of travelers that don’t know each other.
We can mix and match these different variables, offering for instance a guided group fixed date tour or an individual self-guided custom tour.
In addition to the main products on offer, there are two primary layers of operators in the itinerary-based space. One is based on the source market that the travelers buying the tour are departing from, and the other based on the destination market that the tour is taking place in.
- Outbound Tour Operators: These tour operators service international travelers. They typically focus on a single origin market but often service multiple overseas destinations. Outbounds specialize in the market that travelers purchasing a tour are departing from and can provide native language marketing, sales, and customer support. They also have the cultural context to understand what kind of itineraries may appeal in their home market. Outbound businesses may operate their own in-destination trips or outsource the local logistics to a destination management company. An example would be a UK based tour company that offers British travelers a variety of trips across Asia and continental Europe.
- Destination Management Companies: Also known as inbound tour operators or receiving tour operators. These operators receive inbound international travelers. They typically focus on a single destination market but often service travelers from multiple overseas origins. By specializing in a single destination, they have the local know-how and logistics to ‘make the trains run on time.’ They can sometimes use their local connections to source unique experiences. DMCs usually contract with an outbound tour operator but increasingly may sell direct to the overseas consumer. An example would be a local Peruvian tour operator that specializes in running Machu Picchu treks for guests coming from many different outbound operators and nations.
The line between outbound and inbound operators has always been blurry and it is only getting hazier. The core distinction we will be making when referring to outbound operators vs. DMCs is the difference between retail-specialists focused on the source market and logistic-specialists focused on the destination.
These terms originate from the cross-border market but, especially as local tourism boomed during the pandemic, have a place in domestic markets as well. While they may not technically be ‘outbound’ operators when within the same country, there can still often be a separation between the retail tour operators and their domestic DMC partners or subsidiaries (though one could even argue New York City might as well be an outbound foreign market from the perspective of a Utah river guide).
Illustrative Example of the difference and connections between Outbound Tour Operators and Destination Management Companies.
The Tour Operator Value Chain
With the baseline definitions and products understood, let’s examine the lifecycle of how a tour is created and comes to market in the land-based tour operator space.
Our model of the tour operator chain has three layers of value add. It starts with the supply of core travel products like hotels, flights, trains, and cars. These ‘raw materials’ of the tour might come from direct contracting with an airline or via a reseller like a bed bank. Some fully integrated tour operators even own their own charter airline or resort properties.
The next layer is the tour operator itself. “The tour operator is the manufacturer,” says Catherine Prather, President of the National Tour Association. Unlike a hotel or airline that is fundamentally anchored to a physical asset, tour operators sell a value-added travel service not tied to a single tangible product. By that we mean that tour companies ‘assemble’ unique trips by taking building blocks from other travel suppliers and adding an additional layer of intangible value-add. That value-add might be local expertise, cheap bundled pricing, or peace of mind. This transforms the raw materials into a more valuable new product which they can resell into the marketplace.
We distinguish here between tour packagers that are doing pure bundling and itinerary-based tours where an additional layer of in-destination curation and expertise is used in the ‘manufacturing’ process. A company like TUI is still a multi-day tour operator at this tier. It ‘manufactures’ its own tour products and retails them through first-party channels and also re-sells through agents and other distribution channels. But the tour products it offers are mainly a bundling of different supply components. In contrast, a G Adventures both bundles the supply components and adds an additional design component by planning daily activities and arranging for local guides.
There is also the opportunity in this layer for wholesalers and retailers. Specialist DMCs often design local tours that can be resold to larger retail travel agencies that can tap into their local market of outbound travelers.
The final layer is that of distribution. There are three primary channels. First is the direct channel driven by in-house sales and marketing efforts. Then there are the two major intermediaries in the space, online booking sites, which operate on both commission and advertising models, and travel agents. It should be noted that tours are one of the last great bastions of traditional travel agents (along with business travel). A very significant volume of tour products is distributed by the large travel consortia and even, in some countries, by brick-and-mortar retailers. This is because tours are one of the most complex travel products, a result of the above ‘manufacturing’ process, making a human intermediary much more valuable.
A hotel room might have a handful of core attributes (star rating, price, location, room type) and several more secondary ones (Wi-Fi, pool, view, floor height). But even the most basic tour can have dozens or more key attributes (departure date, size of group, length of trip, itinerary variations, level of physical activity, type of accommodation, age of participants, etc.). This creates difficulty to code for tours in the back end, as well as for consumers to shop and compare multi-day tours. This has made it doubly hard for online booking sites to take off in the space; however, these challenges are slowly but surely being overcome and digital platforms are growing in prominence as distributors of tours.
We understand that we have tried to simplify a very complex space and so there may be many nits to pick with this diagram. But we think that these core mental models of three main tour products (packages, itineraries, and cruises) sold via layers of value (supply, operation, and distribution) is a useful way to help decipher the tangle of different operators in this industry.
A lot of the confusion in the space seems to stem from the many different permutations of how vertically integrated an organization chooses to be and what permutation of products they choose to sell. But by building this mental model of the industry we can better see past the superficial differences of each specific company. A lot of the variation we see across tour companies is often reflective of different choices about what parts of the value chain to vertically integrate and what products to sell. But within each specific part of the value chain in isolation, business models are often more similar than they may first appear.
For example, tour operators that run their own in-destination programs vs. ones that outsource to a DMC are not two fundamentally different types of tour companies but are instead making different decisions about how vertically integrated they want their organizations to be. Or a travel agent that sells tour packages is best thought of as vertical integration between the ‘manufacturing’ stage of packaging process and a distribution channel, rather than as a wholly separate kind of company from a tour operator with a large first-party salesforce.
Technology Shakes Up The Multi-Day Tour Industry
It is clear from our research that a wave of technological change is washing over tour operators as we write. Tours are one of the last major travel industry categories still heavily built off analog tools and manual processes. Catalogs and phone calls are frequently a part of the tour sales cycle.
Research from the Adventure Travel Trade Association (ATTA) suggests that just 8% of bookings came via online travel agents. And that more than two-thirds of bookings came from some form of offline channel. Though this was just a small sample and only representative of a niche type of tour operator, it speaks to just how small online distribution platforms are in this space.
Travel has attracted significant investor attention — nearly $30 billion of funding over the last five years — much of it focused on the digital transformation of the industry. Online platforms, which started in just airlines and hotels, have pushed into nearly every travel market. Nowadays practically every sub-sector from short-term rentals and business travel to day tours and packaged tours has either a major public company or a “unicorn” private startup valued at more than $1B, oftentimes both. All that is except for multi-day tours.
Tours and in-destination activities have actually been one of the fastest growing categories of travel investment, raising nearly $900 million in 2019, but almost all of these dollars seem to focus on single-day, rather than multi-day tours. Three of the largest startups in multi-days tours — Evaneos, Tourland, and TourRadar, have collectively raised under $300 million in capital while activity OTA Klook has raised $720 million by itself.
Part of this is the challenge of marketing complex tours online as well as resistance from incumbents content with the old ways of doing business. But changing expectations among employees, supplies, and customers, accelerated by COVID-19, are driving digital innovation to the fore in the sector.
This digital ‘splash’ will have ripple effects up and down the entire tour value chain, affecting everything from the smallest on-the-ground guide to the largest corporation. Gavin Tollman, President of The Travel Corporation, one of the largest tour operators in the world, believes that, “digital has really been one of the greatest evolutionary changes during [the pandemic] for us.” And being the last major travel sector to digitize does have a silver lining: by drawing on lessons from other sectors, we have a pretty good road map for how the industry may be transformed.
Digital Marketing to Become Primary Sales Channel
As with hotels and airlines, digital marketing will only continue to grow in importance to the industry. Naturally, this means that search engine marketing budgets will have to grow.
This is especially true in the U.S. market. Matt Berna, Managing Director, North America for Intrepid Travel, explained that, “[in America] We spend the lion’s share, easily 80% of our budget, on direct digital marketing strategies.” Although Berna caveats that in other markets, like Australia, travel agents and retail storefronts remain key marketing tools, that a large tour operator like Intrepid is so heavily invested in digital marketing should be a sign of the times.
But the rise of digital marketing goes beyond performance marketing. For instance, Search engine optimization is arguably just as important and when done right is not cheap either. “We’ve done a lot with SEO,” says Berna, “building a lot of new content, writing content, building out our pages and website.”
Digital marketing also involves building brand recognition at the top of a sales funnel moving online, with brand advertising shifting to platforms like YouTube and ‘word of mouth’ being spread on social media. In fact, Gavin Delaney, CEO and cofounder of online tour site Travelstride told us that 90%+ of customers start their tour research online.
Speaking to the power of social media, Tollman told us, “if you said to me, what has been one of our greatest success stories in the last year? It has been the use of social channels to tell our stories in a robust way that people can look and see. When the world was shut down and we were still operating trips, how powerful it was to show people that they could still go and show them what we were actually doing.”
Rise of Online Booking Platforms
Directly linked to the growth in digital marketing techniques is the rise of online booking platforms for multi-day tours. That’s primarily startup websites like TourRadar, Tourlane, Evaneos, and TravelStride. Today, these come in two flavors: commission-based agents (e.g. TourRadar) and advertising-based listing sites (e.g. TravelStride). There are still few true metasearch sites that search other online booking sites due to complexities of itineraries in the space.
Complex itineraries make it difficult to convert online intent to online bookings and Travelstride’s Delaney says that two-thirds of the industry still ends up being booked over the phone or via another direct channel through an operator or agent. “One thing to keep in mind,” he explains, is that “a hotel and a flight, they have five key data points… a departure date, an arrival date, a return flight, a price, a seat type, right?” And while alternative accommodations may expand that to 10 data points, Delaney points out that, “In a multi-day tour, typically, we have 125 data elements… does day three include breakfast? What are you doing in the afternoon of day four? What’s the average physical level? How much walking is there? Is this appropriate for an age group? … [Multi-day tours are] a step function, more complex in terms of how you organize that information to make it useful for travelers to search and feel confident enough to book.”
Adding to the difficulty of driving online sales is that these are expensive bookings, the average transaction at TourRadar is $2,500. But Travis Pittman, CEO and cofounder of the online booking site says that it regularly takes “bookings up to $10,000, $20,000.” In contrast the average transaction on Airbnb is ~$400.
Despite these challenges, online booking sites are making strong headway. We note that large online travel transactions are becoming increasingly common. To continue the previous example, despite its low overall average transaction size, Airbnb’s fastest growing category is long-term stays of 28+ days which can easily run up to $2,000 – $3,000 ticket sizes, all sold online.
And as aggregators of both tour supply and online demand, multi-day tour OTAs are uniquely positioned to win in a digital marketing heavy environment. We believe that the industry will inevitably close the gap between the 90% of travelers that start their searches online versus the third of travelers that end up completing this process by booking online.
For starters, consumers are increasingly coming to trust these online platforms. To that end TourRadar’s Pittman highlighted that, “a key part of TourRadar has always been reviews… that’s how we began really, and that’s stayed throughout.” Those reviews do more than just establish credibility with guests, they also help from a search engine optimization standpoint.
Reviews paired with the wide range of tour supply on the platform, means that an online booking site will probably be a highly ranked organic result for high intent tour searches. This also drives a “billboard effect” where online users that are “passing by” while searching for travel inspiration repeatedly come across the same few multi-day tour aggregator and review sites.
The guest starts by searching for a tour in Peru but also considers one in Columbia, and ultimately shifts focus to a Costa Rican trip. The destination specific brands will change each time, but TourRadar, TravelStride, and others will keep popping up. This familiarity drives trust in the platforms and makes users more likely to eventually book via an online intermediary, even if not for the destination they were originally searching for.
These platforms also have an advantage in online distribution by means of the wide range of supply that they aggregate. This comprehensive supply lets them drive repeat customers who want to explore a variety of different tours and destinations. An Argentinian tour specialist will struggle to drive guest loyalty because as Delaney points out, “even if you have the best possible trip, most people won’t go back to Argentina twice in a lifetime.”
It’s more than that, customers can be quite picky about even simple things like departure dates. Says Delaney, “the vast majority [of tour customers], even when they have a great time with that tour operator, … It’s just like, oh, I really liked Intrepid, but their itinerary dates don’t quite match up and G Adventures has a very similar one but their dates … match up with what I want better.” This mercenary behavior plays into the hands of online booking sites and other aggregators like travel agents who have cross-brand supply and allow for comparison shopping across dates and prices for similar itineraries.
This means that all else equal, the same exact customer probably has a higher lifetime value to an online booking site than they do to a regional tour operator. Pittman emphasized that, “CRM [customer relationship management] and bringing customers back is an extremely important part of this journey.” Accordingly, TourRadar and similar sites can ‘afford’ to outbid regional tour operators in performance marketing because even though they may end up paying more in dollar terms, they could still well be earning the same or an even better ROI on their ad dollars than what the regional specialist was targeting.
The final piece of the puzzle comes from the focus and size of an online travel agency. As we have seen with flight and accommodation OTAs, these booking sites eventually grow to have larger marketing budgets than most individual tour operators can hope to muster. This, paired with the above ROI efficiencies, let online booking sites win more online performance marketing search auctions, more consistently than other operators, driving traffic.
All of this means that if, as we believe, the amount of multi-day tours being booked online grows, then the relative importance of these OTAs is also likely to grow.
The Ongoing Shake-Up of Supply Chain Roles
In our previous section on the tour operator value chain, we discussed the difference between local wholesale tour operators and outbound retail tour operators. In the past these two businesses had a mutually beneficial relationship. Running dozens of local operations was impractical for the retailer while for a local operator, in Morocco say, it would have been unthinkable to directly market tours abroad in multiple countries.
But the accessibility of online marketing and digital distributors has upended this relationship. It has opened a whole new world of opportunities that were never before possible while also bringing with it a whole new slew of challenges. “We’re seeing DMCs also work with us now,” says TourRadar’s Pittman. “… They’re [DMCs] seeing the opportunity to go direct to market. So they’re not just reliant on these bigger operators to get to [market]”.
That local DMC in Morocco can now list its tours on an online booking site and collect bookings from across the globe. Though it will have to pay a commission – likely 15% to 25% – a DMC can now cut out the intermediary and bring those retail margins in-house. All of this without a direct booking engine! If the Moroccan DMC chooses to invest in an English-language webpage and a modest AdWords budget it could be in the direct tour business across the U.S., Canada, UK, and Australia almost overnight.
“What’s happening is that the producer and the consumer are getting closer and closer and closer,” says Enrique Velasco Jr., Chief Commercial Officer of Coltur Peru, a local DMC. “They [the producer and consumer] can start speaking to each other. Whereas before, they were thousands of miles apart, there was no communication between them.”
Wholesalers are now competing directly against their retail partners. And to make matters more confusing, many of these retail tour operators also distribute through travel agents and OTAs. That means that the same exact tour could well be marketed to the consumer in four different places (direct via wholesaler, direct via retailer, indirect via OTA, and indirect via travel agent).
Adding in another layer of complexity, Pittman told Skift that TourRadar plans to launch a new platform for redistribution by the end of the year that will, “basically allow any third party to distribute the inventory that we have… the GDS of multi-day [tours].” The ability to push the same tours through as many distribution channels as possible will never have been easier.
On the one hand, this breadth of channels means more shots on goal and more chances for the right guest to find the right tour. As TTC’s Tollman puts it, “Consumers are going to buy travel where they want to buy travel. And we will ensure that we are in those places for them.”
But on the other hand, imagine a physical store putting the same exact products right next to each other on the shelf, just with slightly modified packaging. Each variation with different pricing and margins. That would never fly in the real world, the consumer would optimize for lowest price and the manufacturer for best margin until only one product remained.
The main reason it works with tours is because of confusion in the space and unsophisticated customers that prevent true comparison shopping. Travel agent clients today are unlikely to be comparison shopping with online travel agents or direct channels. And guests are often afraid to book complex and expensive itineraries online or with a party they don’t have a pre-existing relationship with.
Compounding this, many tour operators – both wholesale and retail – are heavily reliant on third-party sales. Though they see the potential of direct, it is currently too small a part of their business to be self-sufficient and they are afraid that too sharp a pivot towards direct will alienate distributors and result in a net overall decline in sales.
But we would argue that fear and opacity are not a strong foundation to build a business on. The clear trend in online shopping is towards more transparency across products and prices and for the rising generation of customers to be more comfortable with making large ticket purchases online. Plus, over time, tour operators will become more confident in the size and stability of their direct channels and more willing to confront distributors over commissions.
We think that the blurring of industry lines will drive several reactions. It will cause distributors to delineate their value add more clearly, with travel agents for instance retrenching into high-touch luxury service with many add-ons and complex arrangements. Wholesalers will be able to compete on price as direct-to-consumer wholesale clubs like Costco do today. And retailers will be driven to vertically integrate so that they can offer more destinations, in turn driving repeat guests, and potentially also create more exclusive supply arrangements so that they cannot be undercut or resold by other players.
James Thornton of Intrepid told us that, “I think we’ll increasingly be more vertically integrated as an organization. In 80% of the cases it’s our DMCs operating the products that we sell [and] you’ll see us potentially move into other aspects of verticals. It might be more accommodation, it might be having exclusivity of certain routes or departures. You might see us have more small ships, for example.”
The New Era of Modernization and Professionalization
Let’s face it, most founders of a tour operator didn’t jump into the business out of their love for programming. They did it for the love of travel! But with the world going the digital direction we describe above, the need to modernize and professionalize many tour operators, especially smaller ones, is becoming increasingly urgent.
Many operators still keep the details of their tours logged on excel or even pen and paper. And we know of operators and travel agents that need to make multiple phone calls to confirm a booking. According to Tourism Research Australia, 88% of bookings are still made manually through email booking requests and offline methods. A survey by ATTA found that just 50% of operators they surveyed have an online reservation system that takes credit cards. This won’t fly in the coming era of tour operators.
In order to drive effective direct to consumer capabilities, tour operators will need to develop a full technology stack. This includes responsive websites with SEO in mind, booking engines to capture sales, customer relationship management software to track guest inquiries and bookings and MarTech tools for performance advertising, retargeting, and email marketing, among other techniques.
James Thornton told Skift that Intrepid Travel wants to have “more focus on customer experience on the website. [We are] trying to improve the overall digital experience both at the point where people come into the brand and transact with us, but then also when they come on the trip more of the documentation being served up in a digital format, the feedback loops being in a digital format. And that just helps us as an organization be able to react more real-time than previously we would.”
Shockingly to us, Intrepid Travel only installed its first CRM system just three years ago. This is a standard sales and marketing tool for major corporations and Intrepid’s late adoption of this software speaks broadly to the industry’s need to modernize its tech stacks.
We should note that Intrepid still managed to attract 460,000 customers a year and a 25% repeat rate without CRM software. Pretty good. But it could be better, and looked at from a glass half full perspective there is a huge amount of untapped potential ahead for Intrepid to grow into as it modernizes its sales operations.
Even though Massimo Prioreschi, CEO of MT Sobek, a boutique mountaineering and outdoor adventure company, runs a smaller business than Thornton, he too has been investing in new technology. “In the last 18 months we’ve revamped our reservation system, phone system, CRM, and guest portal” he says. “This time of fallow, where there weren’t guests traveling”, Prioreschi explains, “[was an] opportunity to upgrade our technology. And so I think in five years, our guests will feel this ease of dealing with us.”
Above these core investments, a particularly exciting tech development we heard about came from The Travel Corporation, which “started using robots for all yield management,” according to its President Tollman. “We have dynamic pricing on all of our trips,” he explained. “And what that has done for us is … if costs are added to [a tour], we can adjust them dynamically as we move. So we are not stuck with flat pricing, which is one of the most high-risk features of the old way that tour operators used to work.”
This kind of revenue management is industry standard in the airline and seeing growing adoption across hotels. Based on this cross-industry trend, while TTC may be an early adopter, we expect more tour operators to adopt similar pricing tech.
And all of this is just on the direct-to-consumer side.
The technology for business-to-business (B2B) distribution is evolving as well. “Historically it was PDF and Excel files,” Berna explains. “[Peak DMC would] get a quote and then they’d send it to an Intrepid salesperson, who would make it look good and send it to the client.” That approach won’t fly anymore. Berna says that, “technology is going to improve a lot … [to allow us to] provide quicker quotes, more accurate quotes, better looking quotes so that DMC can work directly with those tour operators.”
Tour operators aren’t exempt either as they have distribution partners of their own – online and offline travel agents – that will be demanding modern booking capabilities. For instance, Tollman told us that The Travel Corporation is, “evolving our APIs to expand and let agents actually get even more content, and more content that’s relevant. Not just dates and rates, but all robust content there too.” Interestingly, he sees potential for APIs to expand the company’s distribution reach even outside the bounds of traditional channels, teasing that “We are also looking at a number of distribution channels, which typically have never sold multi-day tours.”
And although the largest operators in the world are starting to evolve, the reality is that most small and medium sized tour companies lag significantly behind. Here’s a striking fact: Murray Decker, the CEO of multi-day tech vendor Tour Amigo, told us that, “of all the operators we’ve had discussions with, about 95% of them actually don’t have a dedicated multi-day tour [backend] system, or are using a mix of multiple systems that are designed for other travel business (day tours, activities, etc).”
If there is to be a post-COVID gold rush in multi-day tours then these back-end vendors, like Tour Amigo, are selling the pick-axes. Inventory management, content management, and booking engines are part of a standard digital retail tech stack in airlines, hotels, short-term rentals, and most recently day tours. Not only do they allow for operators to keep up with evolving distribution channels, but there is a major book-keeping and business management benefit as well.
Digitizing inventory allows for more advanced sales analytics, quicker account reconciliation, fewer back-end staff, and reduced errors. Murray estimates that at large travel agencies and tour operators the error budget due to manual loading mistakes can run into the millions of dollars.
The path forward is clear to us: DMCs and tour operators alike will need to buy or develop new back-end systems that can deliver live pricing and availability. Intrepid’s Matt Berna reflects that, “I used to talk to product managers and ops directors about how great our products were. Now I talk to data science engineers.”
These backend systems and APIs are increasingly table stakes to participate in the current digital tour operator landscape. But they don’t come cheap and an unfortunate reality is that, especially in the wake of COVID-19, many operators will not have the cash on hand to upgrade these systems, shutting them out of modern tour distribution. We see this creating a class of have and have nots, especially in the more commoditized product offerings. This will drive some to sell out to more sophisticated tech platforms or simply to fall behind and go out of business.
The Impact of COVID-19 on the Multi-Day Tour Sector
Up until this point in the report we have discussed the structure of the industry and how long-term changes in technology are causing tour operator business strategies to evolve. In this section we will discuss the more immediate changes caused by COVID-19. This includes both new trends in the actual tour products being offered, as well as how some industry-wide practices and standards are evolving in the wake of the pandemic.
COVID-19 Is Driving New Types of Tours
“We are going through a seismic shift in our world,” says Gavin Tollman, “the fact is we’ve entered just an entire new world.” COVID-19 has caused a dramatic shift in what kind of tours that travelers take. Some of it is due to changing preferences, such a desire for more cleanliness and safety, while other changes are due to government orders such as the closing of borders. Regardless of the reason, tour operators have responded by creating new types of tours for the pandemic era.
Rise in Domestic Tourism
The biggest new trend to emerge from the pandemic is the new emphasis on domestic tourism. At Intrepid Travel, Berna tells us that, “before COVID, about 60% of our customers worldwide came from Australia. … It’s flipped now. The US is our biggest booking market for Intrepid worldwide… 50% now of all travelers are American.”
Tollman of The Travel Corporation concurs. “Our domestic US travel brands [are doing] unbelievably well. Our domestic Australia brands, pre their last shutdown, [were also] unbelievably well… One is really beginning to see whether it’s in South Africa, the U.S., Australia, or the UK, domestic first, near-destination second, and international third.”
Focus on Sustainability
The other major new shift has been towards a more thoughtful understanding of travel’s impact on ourselves and the world around us. “If you said, what is fundamentally changed,” Tollman asks, “it’s going to be sustainability.” His family of tour brands are making significant shifts to be more respectful of the communities they visit and have pledged to be carbon neutral by 2022.
James Thornton, the CEO of Intrepid Travel was emphatic about this point. “Increasingly people want to be purchasing and working for and buying from companies that are truly sustainable, not companies that say that they’re sustainable, but companies that really are and have the independent accreditations to back that up,” he explained. Intrepid Travel is the world’s largest certified travel B-Corp and has been carbon neutral since 2010.
This is not just a COVID shift but a generational one, according to Thornton. “Increasingly millennials and gen Z are wanting the higher standards of environmental and social expectations when they travel. … Younger people are expecting brands to reflect their own values and particularly think about things like climate change.”
The shift towards sustainability doesn’t have to come at the cost of the trip experience, and if executed thoughtfully, can even enhance the overall experience. Thornton gives the example of a trip to Cambodia which would typically have an internal connecting flight. But the airport is a generic and stressful experience. “What we’ve now done,” he explains, “is remove the flight aspect of that trip and introduce a boat trip. One, it’s a more relaxing experience. Two, it’s a more local experience. Three, it emits a tiny proportion of carbon by comparison.”
Thornton also believes that demand for domestic travel can continue due to its climate impacts. “I think there’s going to be more questioning about just jumping on a plane to fly to the other side of the world, to go there for a week,” says Thornton. “I think you’ll see a trend towards people traveling closer to home more frequently, but then when they go for longer trips overseas, those trips will probably be a bit longer in nature to factor in the carbon emissions.”
The Pandemic Also Accelerated Many Existing Trip Trends
There has also been a shift towards smaller groups, custom itineraries, and more high-end accommodation. This kind of travel provides extra space, flexibility, and exclusivity which are perceived as cleaner and safer, the ultimate luxuries during pandemic.
But rather than this being a new trend introduced by lockdown, Catherine Prather of the National Tour Association explains, the move towards small groups, “was already happening prior to COVID and that’s really been amplified [by the pandemic]. I think that’s something that’s really just here to stay because people were already wanting to have a smaller group experience, but that was being driven by not only generational changes, but also by people wanting those authentic experiences. It’s easier and better to have that with a smaller group.” She also highlights luxury travel as, “something that was already happening.” But now, Prather says that “People equate luxury with safety and cleanliness and security.”
Another big COVID-19 winner has been active and outdoor vacations. This was already a fast growing trip type but the perceived safety of the fresh air and the backlash to lockdown really poured a lot of gas onto the fire for these tours.
Tom Hale, Founder and President of Backroads, a leading bike and active tour operator, told Skift that, “demand for active travel was already growing pre-pandemic, and COVID has accelerated the trend with people wanting to spend more time outside in a safe and active environment.” 2022 bookings at Backroads are currently 70% above 2019 levels, its best historical year ever.
Further reinforcing the above domestic trend, Hale spoke to how Backroads quickly pivoted to add domestic capacity, leading to them taking “20% more guests on trips in the US than we ever had before.” Hale sees the trend towards smaller, active trips continuing even as the pandemic fades. “We expect to see huge demand for Europe and other international locations in 2002] … and predict that … 2023 will see unprecedented numbers of active travelers.”
Collaboration and Transparency Across the Industry
Outside of product offering, another major industry transformation due to COVID-19 that many spoke to us about was a new sense of teamwork and transparency across the industry.
“There has been a lot more collaboration,” says Prather, “hey, this tour can go, but I really need five extra people. Do you have clients who may want to experience or go on this trip?” This is partially born out of a sense of camaraderie brought about by the near-death experience of COVID and a realization that it will be a group effort to keep the sector afloat.
“People are a lot more open,” agrees Matt Berna. “What I mean by that is DMCs will go to the partners and say, ‘Here’s our costs. You can see them, but I need to make 5%.’ … Nowadays, it’s open books. We’re all in this together. We need to all make money, but we also need to see where our costs lie… That trust piece I think that still will continue.”
There is also an element of working together to develop best practices and industry standards in the face of a rapidly shifting disease picture. “There definitely has been a lot more sharing of information,” Prather explains, “How are you dealing with this? Are you asking for proof of vaccination? Are you masking on your tours?”
Bankruptcies are Coming
The final reality of COVID is that despite many operators’ best efforts – all of their cost cutting, pivots to new tours, and industry-wide collaboration – many will not make it through this crisis. There have been far fewer bankruptcy cases than expected, but we believe that this is mostly because of emergency funding, lenient creditors, and forgiving customers. All of this will soon begin to wear out.
Prather warns, “I don’t think we’ve seen the shakeout as much yet in terms of true consolidation because of the PPP loans [A U.S. small business aide loan] and idle loans and things like that, that have helped people survive.” Gavin Delany of TravelStride goes even further, “there definitely is going to be significant consolidation. A number [of tour operators] have already gone out of business, mostly smaller ones.”
Many businesses went into hibernation but may find that restarting is more challenging than expected. For instance, many tour operators’ first trips back will be 2020 tours rescheduled into 2021. And while it must feel good to be operating again, the timing of cashflows can be deadly. There are few new dollars coming in the door as these were mostly previously paid for, but staff salaries and suppliers need to be paid all the same. This further draws down already diminished cash reserves.
Delaney says that, “I’m actually sort of surprised at this point. I would have thought more companies would have gone out of business. So up until this point, they’ve been fairly resilient.” He points out another challenge of coming out of hibernation. “I think part of the challenge is the rebound will actually be slowed a little bit by the fact that [tour operators] cut all these sales staff. So in June, pre Delta variant, we had this surge in interest. People wanted to book trips and there were not enough people to answer the phone and answer questions.” As with seemingly every other industry, tour operators are being plagued by labor shortages and supply chain backups.
There is also a great disparity between the types of services that tour operators provide and the kinds of regions they service. Those with a domestic outdoor focus are obviously doing better than an operator that specialized in international study abroad, which has been totally shut down for the foreseeable future.
On the whole though, revenues are still down dramatically. the ATTA, in a survey of adventure tour operators found that 74% of respondents had seen a 80% or greater reduction of revenue in 2020 compared to 2019. And these are the outdoor operators that are supposed to be doing the best! Prather says that “our members are telling us… It won’t be until 2023 that we will really see a full recovery in terms of getting back to 2019 levels.”
And that’s a long way for a struggling tour operator to make it alone. Add in the investment required to digitize and the scale increasingly needed for effective distribution, and the hurdles become insurmountable for some. In that same ATTA survey, 15% of tour operators surveyed said they are possibly closing down, 3% are definitely shuttering. 28% surveyed were interested in being acquired by or merging with another company.
As bad as things have been for tour operators, we believe that we have yet to see the full wave of bankruptcies and consolidation to come in the multi-day tour industry.
What Will The New Multi-Day Tour Landscape Look Like As COVID Fades?
Overall, we believe it is possible to look at how flights and accommodations were transformed in the wake of their digital revolutions in the early 2000s as a road map for the multi-day tour industry.
The flip side of the rise of digital marketing and online booking sites is that, as many an airline or hotel discovered, tour products will become increasingly commoditized. Both OTAs and Google search encourage suppliers to fit their tours into the neat boxes drawn up by online distributors. And comparison search engines necessarily require that the more unique aspects of a tour be minimized in favor of the more standardized feature sets like departure date, price, length, and destination.
Matt Berna, Managing Director, North America for Intrepid Travel told us that, “the reason I say that the price is becoming more important is some of these OTAs.” Berna clarified that, “we like to work with review sites like the TourRadars of the world where [the sort algorithm] goes by customer reviews… whereas [if] we go just to a platform that sells a price only, it’s going to be really, really competitive and it may not be worth the business for us.”
Commoditization, in which the main means of competition becomes price, is exactly what the rise of digital distribution did to airlines, hotels, and alternative accommodations. True, tours are more complex products, and therefore may never become quite as commoditized, but the direction of the trend is clear to us.
Using this as a benchmark, we see four broad paths forward for tour operators to follow in response to the rise of digital channels and online and the commoditization it will bring.
1) Embrace Commoditization: If you can’t beat ‘em, join ‘em, as the saying goes. Rather than try to fight it, some tour operators will choose to compete on price and make up for lower margins with volume. Call it the Walmart strategy.
Sometimes customers just want, “your bread and butter trips” says Berna. Berna explains that Intrepid works very hard to differentiate even these trips based on quality, but admits that, “once you get into that competitive set, we’re all selling the Inca trails… of course, the only way to really compete sometimes is the price.” Intrepid, as one of the largest tour operators in the world, has the scale necessary to run trips like this.
But very few other operators will be able to grow to the size necessary to win at this game. Expect only the largest operators in the world to pursue this strategy. That leads us directly into the next industry shift we expect to see.
2) The Big Get Bigger Through M&A: There’s safety in numbers, and more importantly, operating leverage. We discussed in the earlier online booking section how these sites have a scale advantage in performance digital marketing. The airlines and hotels both found the best way to compete was to consolidate to build this same marketing advantage for themselves. Call it the Marriott/Starwood strategy.
By consolidating, the biggest players broaden their supply choices which makes it easier to drive loyalty program customers who consistently book direct and have higher lifetime values, justifying higher upfront marketing acquisition costs. This makes large-scale businesses better able to compete with booking sites in performance marketing. Plus, with growing name recognition they can invest in brand marketing which drives new customers and makes performance spend more effective.
Consolidated suppliers also have more leverage to negotiate lower commissions with travel agents, both online and offline. Finally, with larger balance sheets comes the ability to control exclusive and/or scarce resources that can only be sold through exclusive first-party channels. By this we mean sources of unique supply like national park permits, private islands, or wholly owned hotels and resorts, which are very expensive to acquire or develop.
3) The Boutique Route: For many, competing on price and volume is a race to the bottom that only the biggest can win. Like with the boutique hotel movement, we think there is a great opportunity for tour operators to de-commoditize their product by providing very high service or specializing in a very specific niche.
The niche for these ‘boutique’ tour operators can be anything from a specific region, a type of tour (e.g., mountaineering or biking), an affinity group (e.g., photography or cooking) or a style of travel (e.g., train travel or sailing). But the key is that it needs to be something where the operator can be differentiated and best in class. By committing to a niche, it precludes growing to a large size, but it means that you can be the world leader in your particular area and attract direct bookings looking for this unique offering. Even better, because fewer other operators commit to any given niche there will be less competition and these boutique businesses can have stronger pricing power.
A good example of this is MT Sobek which has a 53 year pedigree in mountaineering and adventure travel that started in Nepal. Massimo Prioreschi, its CEO, told us that, “[adventure travel is] a tough business to scale… It’s hard to manufacture deep knowledge and excellence in guides.” He explains, “I’ve been at companies before that were very scale driven. And [MT Sobek] isn’t, it’s quality driven, it’s connection driven, it’s relationship driven. And that really, I think that’s why we’re still here.” Prioreschi has turned the slow process of grooming a mountain guide into a competitive moat for his business by embracing the boutique nature of their organization. As a result MT Sobek sees 90% direct traffic and 75% of their business comes from repeat guests or word of mouth.
4) Embrace The Complexity of B2B: In response to an increasingly competitive B2C market, some may drop it altogether and pursue the still largely offline B2B market. Coltur Peru, a local DMC is an example of this. As a result of COVID it reorganized to drop its lower-end consumer offerings. Now Coltur focuses largely on complex custom group tours and special interest itineraries.
“There’s this mass hysteria that everybody has to be with one foot in B2B and one foot in B2C and if you’re not in B2C, then you’re going to die,” says Coltur’s Chief Commercial Officer Enrique Velasco Jr. Dismissing this conventional wisdom, he says that the company is, “trying to focus in market segments that do need the middleman. That segment … might, as a percentage of the whole industry… become smaller. But it’s not going to die.” Velasco sees the challenges incumbent in planning a custom itinerary as a competitive moat, telling us, “the more complex what you’re looking for, the more we stand apart from our competition, that’s what we believe.”
This is akin to the strategies pursued by business travel agencies which, up until COVID-19 hit, had continued to grow by providing high-touch service to large organizations while leisure offline travel agencies shrunk in the face of D2C challengers. There is still a lot of value to be had in planning high-value and complex tours. The addressable market may be smaller than the mass-market D2C opportunity, but those that can successfully hang onto their slice of the pie will be rewarded with stable cash flows.