Is TripAdvisor killing Expedia?

The coming of the internet has led to one round of disintermediation in the travel market, and I hypothesize that review websites such as TripAdvisor are going to lead to another. Let me explain.

In the “good old days” if you wanted to travel there was no option but to reach out to the neighbourhood travel agent who would give you options of a few airlines and hotels. The best you could do to figure out if you were being taken for a ride was to check across multiple agents, but even then the only thing you could compare was price. It was impossible to compare hotels in terms of quality and you would take the word of the travel agent.

And then the internet happened.

Now, with sites such as Expedia or Travelocity, you got more transparency in pricing – especially when it came to airline ticketing. The travel agent could no longer take you for a ride when it came to the air fares – you could cross check online and bypass the agent if he wasn’t offering you a good deal (of course some things such as flexible schedules were best booked via agents, and they continue to hold sway in the corporate segment for that reason). Simultaneously airlines started selling tickets direct, via their own websites (this was led in part by “low cost carriers” who saw this as a good way of saving cost by cutting out agent fees).

This was the  first round of disintermediation in the travel industry. Airlines selling tickets direct and customers being able to book directly online meant the overall business of travel agents reduced. Some of them were cut out completely while others were replaced by large-scale technology enabled agents such as Expedia or Travelocity. Those that survived either have corporate clients (who need flexible schedules and have little time to book online) or have resorted to packages – where they arrange for flights, accommodation and cars, and quote you a consolidated fee – in which there are margins to be made.

The move to large-scale technology-enabled agents meant that some of these agents were now large-scale aggregators. This gave them significant bargaining power vis-a-vis hotels and this allowed them to bargain for deep discounts. While earlier conventional wisdom was that “travel agents” could get you “good deals”, now these large online aggregators were the ones providing the “best deals”. Thus it made eminent sense to book via these aggregators.

Simultaneously most hotels also started direct booking on their own websites. However, the problem was that the hotels themselves did not have the technological capability to implement good revenue management practices on their own websites. They also did not have the technological capability to offer a seamless and smooth booking experience. Thus, large online agents such as booking.com and Agoda prospered.

There are two functions that a travel agent performs – helping customers discover hotels and then actually executing the booking. In the traditional model, agents don’t charge for the discovery process. That service is instead cross-subsidized by the fees they make on the actual booking process. The first level of disintermediation in the travel agency (which we’ve seen above) has chipped away at this model, however. What do I, a travel agent, have to gain if I put in painstaking research and find you a hotel, only for you to find that you can book it for a lower price online? Agents, however, have not figured out a way to charge for the discovery process.

However, it is unlikely that they need to. For you now have websites such as TripAdvisor which have user-generated reviews and ratings for a large number of hotels, and which rank hotels in each city by type and user ratings. TripAdvisor has become so ubiquitous for user-generated ratings for hotels that nowadays travel agents add links to TripAdvisor profiles of hotels that they are recommending. Thus, we can see that the hotel discovery process can exist independently of travel agents.

What of the bookings itself? Don’t we need travel agents for that? Note that irrespective of whether a travel agent is online or offline, the hotel has to pay them a commission for selling their inventory. In the past given their size, hotels (unlike airlines) were unable to effectively sell rooms on their own websites and thus resorted to paying travel agents. However, advances in technology now mean that it is easy for a hotel to adopt a third-party software to effectively manage their inventory and sell tickets on their own website, and at a fraction of the cost they need to pay travel agents.

So, if TripAdvisor helps you discover hotels and then you can book hotels directly through their own websites, who needs travel agents? For now, most large online aggregators have a price matching policy and thus match the prices that hotels quote on their own websites. However, in order to save booking fees (rumoured to be of the order of 17% of the total booking value) hotels are trying to innovate and add freebies to their offering.

For example, a hotel in Cambodia I stayed in last week offered a free massage to guests who had booked through their own website (unfortunately I booked via Agoda and couldn’t avail of this offer). The Bangkok hotel I stayed in last week offered a 10% discount on payments made via American Express on their own website (again we discovered this after we had booked on Agoda, using an AmEx. To their credit, Agoda gave us a refund to the extent of the discount we would have got on the hotel website).

Essentially hotels have figured that with the growing popularity of platforms such as TripAdvisor, they don’t really need travel agents, small or large. As TripAdvisor gets more popular and third party hotel booking softwares gain traction, we are likely to see the decline of large travel aggregators such as Expedia, Travelocity and Agoda.

In essence, the growth of TripAdvisor is going to lead to the partial downfall of its erstwhile parent Expedia.

Tata Sky’s Revenue Management (or the lack of it)

Last week Direct To Home (DTH)  television provider Tata Sky launched a new channel called “Star World Premiere HD”. As the name suggests it is a high definition channel, and it broadcasts TV shows from the United States simultaneously in India (as opposed to the usual lag of about a year before a show goes on air in India). The business case for this channel itself is particularly strong – for people are nowadays unwilling to wait for a TV series’ release in India and instead download it from illegal torrents. The availability of the TV Series now through a legal channel will discourage torrents, and also allow the producers to make some money via selling advertisements.

The problem, though, is with the pricing. With great fanfare, Tata Sky had launched this “Mega Pack” a few years ago, where for a fixed annual fee (of the order of Rs. 6000) you would get all channels for an entire year. Built in to this plan was the promise that any channels launched during the year would be available for free for all Mega Pack subscribers. It was like the subscribers were paying a premium for the option of not having to pay for any newly introduced channels.

For the last few years, this plan has been going well. Numbers are not available publicly but based on a small sample of people I know, I know that the Mega Pack has a large number of subscribers (Disclosure: I too subscribe to this). Given the “bundled pricing” (which is what the Mega Pack essentially is), Tata Sky is making more money than it would have with subscribers picking only the channels they wanted.

Unfortunately their handling of Star World Premiere HD is likely to change this. With this channel, they have reneged on their promise to provide any new channels for free to Mega Pack subscribers and have asked subscribers to pay Rs. 60 per month for the channel. Over the course of the last week, there has been considerable outrage on Twitter about this. There are reports of people (Mega Pack subscribers) calling up the call centre and talking of failed promises and getting the channel for free. There are other reports of subscribers who last updated their Mega Pack after February 1st 2013 getting this channel free for the remainder of their current Mega Pack subscription period. Tata Sky CEO Harit Nagpal has been on Twitter, and has explained that he wasn’t able to offer the channel for free due to some fee arrangements with the broadcaster (Star TV India). In all, the entire handling of the launch of this new channel has been a mess.

So far, there has been a cozy relationship between Tata Sky and Mega Pack subscribers. Subscribers pay up once a year, no questions asked. In return, they get all channels for free. So far, the renewal process has been fairly mindless – given the seamless experience customers are renewing without much thought.

What this mis-handling of the Star World Premiere HD launch by Tata Sky will do is to get the customers thinking. With this one breakage of promise on the part of the distributor, customers whose Mega Packs come up for renewal will soon start asking themselves if Tata Sky will not renege on their promise with respect to other channels also. While porting across DTH operators is still not easy, what is likely to happen is that customers will critically evaluate whether they need all the channels they are paying for, and opt for a package which only includes channels they need (after a regulatory change last year, all channels have to be offered a la carte).

In short, Tata Sky’s mishandling of this episode is likely to reduce the number of their Mega Pack subscribers, and thus a decrease in their overall revenue. The additional amount they are charging for Star World Premiere HD is Rs. 720 per subscriber per year. The price gap between the price of a Mega Pack and any other pack is much more than that. In short, it has been a process of extremely bad revenue management by Tata Sky.

PS: We would be interested in offering revenue management consulting to Tata Sky or any of its competitors. If you are from any of these companies, get in touch with us through the contact form in the Contact page.

Would you want a free membership card?

Last weekend I was at Cafe Coffee Day on MG Road, waiting to meet a prospective client, when one of the store staff walked up to me with a card. “This is a free loyalty card, Sir”, he said, going on to tell me that if I were to buy three coffees using the card I would stand to get a free additional coffee. Considering that Cafe Coffee Day is my favourite meeting room, I thought it might make sense to use the card.

You might have noticed this in supermarkets, too. Invariably you get asked if you want a free membership card. In case you tell them that you had taken a card but are not carrying it, they offer to find your card number for you based on your phone number. Given that it probably costs the store to issue these cards (cost of cards, maintenance, staff time, cost of rewards), there must be a good reason that they are so eager to give it to you for free.

What separates traditional retail from modern is that in the latter, there are way too many customers who visit a store, and way too many store staff who attend to them. Consequently, it is hard for store staff to know who is a regular, and what the regular customers want. You might go up to your regular “single store” bar, and the barman might start mixing your favourite drink as soon as he sees you pop in. In a chain such as Cafe Coffee Day, however, such information is not forthcoming.

What loyalty cards enable stores to do is to track repeat purchases. You might be buying a kilo of rice every week at the neighbourhood supermarket, but in most cases there is no way for the supermarket to know it is you who bought the rice each time. Once you have a card and your sales are logged to that each week, the store knows how often you visit and what kind of items you are likely to buy together. Loyalty cards allow the store to “profile” you and thus hope to serve you better. The cost of the card is small compared to the value of the information the store gets about you.

A new trend in loyalty cards is “third party cards” that work across stores. These cards are issued by independent third party vendors and multiple stores subscribe to them. The advantage with these cards is that the third party has information about the customer across retailers. So for example, it makes it possible for the vendor to know the brand of formal shirts that people who buy Levi’s Jeans buy.

While this is a dream from an analyst’s viewpoint, the uptake of such cards so far has been low. I know of at least one company in this area that folded up and another that is not doing too well. Hopefully this trend will reverse soon and we will find one player who manages to scale up and issue cards at lots of retailers.

Levi’s Price Discrimination

So I’ve never managed to buy jeans on discount. Let me explain. Unlike most other people (if you go by what the store assistants tell you), I don’t like to wear faded jeans. It is perhaps an inherited hangover since my father used to consider jeans to be inherently dirty and would make me discard jeans as soon as they faded a little bit. It could also be more practical – since I sometimes like to wear jeans to official meetings, I want to wear jeans that look neat.

Now I’ve managed to drive my wife crazy with my shopping (and we’ve known each other for barely four years, shopped together for three maybe). She thinks I’m way too fussy about clothes, and can’t make up my mind easily. I’ve explained earlier on this blog why I take a long time over shoes (my sandals are now wearing out, so I’m getting ready for another ordeal). But the more fundamental differences that my wife and I have is with respect to jeans.

The problem is that we fundamentally disagree on what purpose jeans serve. I have traditionally looked at jeans as comfort wear. Trousers I’m absolutely comfortable in (I sometimes even sleep in my jeans), which I don’t need to wash too frequently, and which can be worn even after they get torn in non-strategic places. I’ve always bought “comfort fit” jeans, and after I graduated to branded jeans towards the end of my teens, my staple had been the comfort-fit Lee Chicago.

The problem is that my wife thinks of jeans as fashion-wear – things you need to necessarily look good in. Some of the jeans she owns are so skinny that sometimes she takes a really long time to change. She looks great in them, no doubt, but the problem is that she expects that I too wear such jeans. And so after some ten years, I have given up my loyalty towards Lee Chicago, and instead have to try out various skinny fits (as things stand now, I own only one pair of Lee Chicago, bought in 2009).

Ok all this is besides the point of this post (and the point of another post which I never wrote). Coming back to the point of this post, the deal is that nowadays I find it extremely hard to shop for jeans. Of course it doesn’t help that I don’t live in Kathriguppe (with its dozens of factory outlets) any more, and that in my part of town (Malleswaram-Rajajinagar) the only place you can find decent branded clothes is in malls, which are a pain. The bigger problem, though, is that it is very hard to find stores that stock my kind of jeans.

In the last couple of years, our strategy for shopping clothes has been to visit a multi-brand outlet in one of the two malls near our place, so that we have a wide variety of choice. Except that I have no choice. Because stores such as Lifestyle or Shopper’s Stop or Westside (which now mostly stocks private labels) or Central don’t stock my kind of jeans. At all. If you happen to locate a store clerk and ask him for “mid blue straight cut non-faded jeans” he will look at you as if you have just landed from another planet. He can be excused for giving you those looks, for his store simply doesn’t stock non-faded jeans, because of which he has never sold them!

So I happened to be on Brigade road over the weekend, and I had a small gap of about half an hour between two meetings, and thought I should visit the Levi’s flagship store there. I must mention that the salespeople there were definitely significantly more polite than I’ve ever seen at a multi=brand store. However, as soon as I repeated my mantra (mid blue straight cut non-faded jeans), the first thing the salesperson who approached me told me  was “oh Sir, but there’s not discount on that!”.

It’s clever price discrimination by Levi’s, to not sell non-faded jeans on discount. For they know that people who buy non-faded jeans tend to be older (hey I’m only thirty), or will be buying them for office wear, and they are less price elastic than the typical college kid who buys faded stuff. So while the college kid needs discounts to be attracted during the “discount season”, the “formal jeans” buyer needs no such attractions, and will pay full price for his stuff.

It is interesting to note, however, that companies that make formal clothes (not Levi’s) also offer massive discounts during the “discount seassons” (one of which is on now). That, though, can be explained by the fact that most people need a few sets of formal clothes (even those that normally wear faded jeans), and discounts are necessary to attract customers.

Now I’m beginning to think that the market for “formal jeans” in India is extremely niche, and if I”m acting above my age because I prefer such jeans. I half-expect my wife to call me an “uncle” be cause of this.

Branding and traditional retail

Last night, the wife sent me to the grocer with a rather long shopping list. The grocer in question is Bhuvaneshwari Traders, a rather efficient “traditional retail” store close to home. There are lots of shop-boys there to service your requests, billing happens in a jiffy (yes, you get a printed bill) and they usually tend to stock most items that you are likely to  need. Of course, being a small kirana, they’re not able to stock a particularly wide variety of SKUs (and I don’t think that makes business sense, as well), but they seem to do quite awesome business by serving most of the customers’ needs, and very quickly.

It is in this kind of a context, I realize, that branding plays a major impact. Twice in my “shopping process”, I had to decide on the brand of a good quickly, and both times, I went for a brand that was on top of my mind – a brand that had “pull marketed” well enough for me to remember them. So, the shopping process consisted of my reading out from my long prepared list, and the shop boys producing those items at a phenomenal speed. The speed at which those guys worked made me believe that it was an insult to myself, and to them, if the speed at which I ordered was to be much slower. This was like Vyaasa dicatating the Mahabharata to his scribe Ganesha. Since Ganesha was so fast in writing, Vyaasa was compelled to dictate at the same rate.

So, when I asked for “1 kg salt”, the shopkeeper responded with “which brand?”. Given that I had to respond quickly, I had about a split second to decide what brand of salt I wanted. Captain Cook came to mind, with its ads of the “free flowing” salt. But then, I remembered having been told that the brand stopped production some ten years ago. The next thing that came to mind was Tata Salt, and I immediately remembered that my mother used to use the same. I also remembered their recent ad on Kannada TV “deshada uppu” (the country’s salt). I didn’t need to think further.

A few items down the list, when I asked for Garam Masala, two shop boys popped up with two different brands. Now, I don’t recall having bought too much Garam Masala earlier in life, and  I didn’t recall any ads either. But then, one of the packets produced was “MTR Garam Masala” and the other had a name that I had never heard. Here, the general branding of the two manufacturers in question played its part, and I instinctively went for MTR.

The purchase process for “traditional retail” is significantly different from that of “modern retail” (the supermarkets and the likes), and I hope, and think, that Indian marketers understand this difference in order to market their goods appropriately. While it is true that in the traditional retail context, “sales” plays a large part – give higher margins to the shopkeeper, and he will “push” (since some customers take his recommendation) your product rather than a competitor’s – there is also the “pull” factor. It is very rarely in these contexts that a customer sees a number of competing products side by side and has time to make a rational decision – most shopkeepers don’t afford them that luxury. The key to this is efficient branding, which leads to the customer demanding a particular brand of products, so that the shopkeeper has no opportunity to push the one that gives him better margins (some shopkeepers do try this – offering a competing brand claiming it is superior, but I’m not sure customers buy this).

And I think a lot of Indian marketers understand this.

Coffee

I have been drinking coffee for as long as I can remember. Maybe I started drinking at the age of  three. Maybe even earlier, maybe later. But I clearly remember that back when I still had half-day school (i.e. kindergarten), after my afternoon siesta, I would sit down with my grandmother (another major coffee drinker) and we would sip coffee together. My father had been pissed off that my mother never drank coffee, and he had told my grandparents (with whom I spent the day while both my parents went to work) that they should bring me up differently. And so my grandmother had initiated me to coffee fairly early in life.

When I was in high school, I remember being one of the few people in my class who drank coffee. Back then, it was before the coffee days of the world came up, and coffee was still seen as downmarket. Something that you would invariably order at the end of “tiffin” at the neighbourhood Sagar, or Darshini. Coffee was uncool, and had an “uncle” feel to it. It was what you got when you went visiting relatives, or when guests came home. In my family, a visit to a relative’s house would not be complete without at least four rounds of coffee, one as soon as you arrived, one just before “tiffin”/lunch, one after food and another one “for the road”. And my poor mother would miss out on all this.

For a strange reason I can’t fathom now, for a long time I used to prefer the coffee that my father made, a nasty “decanted” brew, made from finely ground coffee powder we got from “modren coffee works” in the Jayanagar Shopping Complex. Despite my grandmother’s exhortations that the coffee she made – from a steel filter using “pure” (i.e. without chicory) coffee beans sourced from India Coffee Works – was superior, I would tell her that it never measured up to my father’s coffee. It was only later on in life (maybe when I got to high school) that I started finding my father’s coffee disgusting (interestingly back then, his mother (i.e. my “other” grandmother) and siblings also made coffee the same horrible decanted way), and I convinced him that we should also start making coffee using a filter.

During the last few years that I lived with my parents (ok I didn’t really live with them, only visited them during (substantial) vacations), coffee had the aura of a “special dish” in our house. We would make coffee only if we had guests. My mother anyway hated the drink, and my father would have had his daily fix at work, so instead they made  tea at home, some four times a day, with plenty of sugar. If I protested, I would be asked to visit the nearest darshini (one abominable place called Anna Kuteera). I would grudgingly sip my tea.

So coming back to high school, it was uncool to drink coffee. It was “uncle” to do so, and with friends you only had pepsi (or coke or thums up or whatever). So I was mildly shocked when I found that some classmates in my “new” school (which I switched to in 11th standard, and which was decidedly upmarket compared to my earlier school) had gone out “for coffee”. And a few days later, I ended up accompanying some of them, once again “for coffee”. We all had the relatively inexpensive espresso (Rs. 10; cappuccino was Rs. 20) that day at Cafe Coffee Day (#youremember?) on Brigade Road. It was the first time in my life I had felt “cool” drinking coffee (yeah, back then I was a wannabe and all that).

Six years later, when I got admission into IIMB, my father decided that along with me he too should “go upmarket”. The day I got my admit, we went for coffee (!!) to the Jayanagar Cafe Coffee Day (my mother refused to accompany us since she found that they made chicken samosas there). Soon, I found that my father had started having some official meetings also in coffee shops, rather than in his office (where “office boys” would source coffee in flasks from Adigas a few doors away).

Another level up was when Kalmane Koffee opened an outlet at the forum, and another in Jayanagar. Now, we could sit in a coffee shop and have “real coffee” (I never took a fancy for the taste of cappuccino). It is indeed unfortunate that they haven’t managed to scale up the way CCD has. Though I must mention here that the only time I had a “personal interview” back when I was in the arranged marriage market, it took place at a Kalmane Koffee outlet. And I don’t know why just about everyone I go to that coffee shop with ends up ordering this coffee called Nelyani Gold (I stick to plain vanilla Filter Kaapi).

Some three years back, I had bought a Moka pot from a Coffee Day outlet (they have coffee powder stores apart from their cafes). For the last six months or so, I have abandoned my filter and have been exclusively using this pot to make my coffee. For a long time, I didn’t get good results, but this time I read up and instructed the person manning the counter at Annapurna Coffee Works close to my house to grind my beans extremely finely. Awesome coffee I get, now. Now, if only I can figure out how to froth the milk at home like those Cappuccino machines in Rome do…

Retail and FDI and Channels and Food Wastage and …

About five years back, I spent a brief period of time working for a management consulting company. Back then, we had been told that “retail” was “big” – if not in anything else, because it was potentially going to bring a great deal of consulting business to my firm. There was a partner or two who had moved to India from the US specifically to lead the retail practice. In my last week in the company I had even written a paper on what was ailing organized retail in India back then.

Around the same time, friends in competing consulting firms also told me that their firms, too, were bullish on retail. Naturally so, for it was around the time when this whole idea of FDI in retail had come up. Unfortunately back then the UPA government wasn’t particularly keen on any reforms, and the idea died. The only good thing that happened in 2006 was that FDI in wholesale was upped from 51% to 100%. Unfortunately that doesn’t seem to have had much of an impact.

I’ve mentioned several times in the past that I’m not a fan of modern retail. I think the service there just sucks, that they are staffed by a bunch of imbeciles and the systems (both IT and otherwise) are designed so badly that it is more likely for the customer to come out of there disgusted rather than delighted. Where organized retail does trump unorganized retail is in their superior sourcing practices and supply chain systems.

In this context, I had predicted back then (no this wasn’t consulting advice I sold to a client) that the winning formula would be with the front end (basically retail) remaining with the kiranas, who would then be backed up by an efficient wholesaling channel that would do all that was required to put efficiencies into the channel. Unfortunately that doesn’t seem to have taken off. Metro Cash and Carry, the first multinational to set up a wholesale shop in India has been stuttering, with only about a dozen stores. Bharti-Walmart is supposed to be doing well, but very restricted in terms of geography.

There are two fundamental problems here. On one hand, there are several laws that prevent the development of an integrated supply chain system in the country. In several states, farmers are forced to sell produce to the APMC (agricultural produce marketing committee) yards, which have a virtual monopoly over procurement of produce. There are curbs on inter-state movement of goods to complicate things (octroi is all but gone, but ohter barriers remain). Then, there is the human element with existing vested interests in the “channel” trying to block entities such as Walmart-Bharti or Metro from functioning efficiently.

On the other hand, I guess organized wholesalers suffer from precisely the same problem that plagues organized retail today – that they don’t have an efficient salesforce and customer relationship strategy that can wean retailers away from the existing channels. The existing wholesalers offer retailers credit (Metro on the other hand is “cash and carry”), deliver goods to their shopfronts at regular intervals so that they can manage inventory effectively and come up with periodic sales promotions which the retailer prefers.

In the face of this barrier, the wholesaler would have to offer significant price discounts to the retailer for the latter to give up his existing set of wholesalers, and they don’t seem to be achieving that. This is perhaps the reason the strategy I thought would win has completely failed to take off.

Then you have the consultants. With the presence of retail specialists in practically all top management consulting firms in India, it would have been expected that by now they would have transferred the foreign “best practices” in retail to their Indian clients. Given that it hasn’t happened, it could mean two things. Either Indian retailers weren’t really interested in engaging their services (unlikely, given the networks these firms maintain), or (more likely) the consultants recommended cut and paste formulas from the west and those have failed.

If the latter is the case, then the Walmarts are not going to have it easy in India. If consultants, who are generally known to be smart and typically know the worldwide best practices, working with Indian organized retailers, who know the markets well, haven’t been able to crack the code for organized retail in India, one may not be too optimistic about how the foreign firms would fare.

PS: coming back to the current failure of foreign-owned wholesalers, the new regulations will mean that these wholesalers will have “captive” retailers to sell to. So you’ll have retailers who will actually have low costs in terms of purchase prices (inclusive of supply chain costs). But I’m not sure if they’ll crack the customer service bit which hardly any current existing organized retailers have cracked.

Cross posted at The INI Broad Mind. Also see my post on the broad mind on the politics of the recent cabinet decision about retail.