I read Colin Fryer's recent column on tour operator margins with interest. As a smaller inbound tour operator, securing decent commissions and protecting our margins is an ongoing challenge. The negotiation with suppliers often hinges on volumes. For a small bespoke operator selling multiple destinations, generating decent volumes at each supplier is impossible. Some key suppliers may receive a substantial volume of business each year, while others may only see a handful of bed nights.
In addition, limited availability may limit volumes of confirmed bookings. During 2016, we've often heard suppliers say, "Sorry, we're fully booked," which is a good sign. It means the industry is doing well and occupancy is high. At such times, inbound operators and DMCs not holding advance block bookings may find themselves having to look hard for suppliers with availability, and possibly having to use new suppliers at lower commission levels. But if their volumes with popular or existing suppliers drop due to limited availability, it is not unheard of for those suppliers to then want to bump down the operator's commission, citing reduced volumes. Happened to us this week.
This is terribly short-sighted. Over the years, I have noticed a trend in the industry: when things are going well, arrivals are up and occupancies are high, certain suppliers get stingy about commissions and are quick to sideline smaller agents and operators by not offering them competitive STO rates. We have seen this with a number of big hotel groups in particular. But when the economy is down and occupancies are low, they're keen to woo back all the smaller agents and operators with promises of better commission to help them fill their beds.
Of course, hoteliers need to maximise their revenue and generate maximum profit for their shareholders, so let's not judge too harshly. Such are the market forces in a capitalist society. Loyalty and relationships sometimes take a back seat, which is sad to see. But apart from the damage done to the relationships, there is another reason why it is short-sighted.
Protecting the big at the expense of the small
Uneven commissions perpetuate inequality and create an uneven playing field. How can an emerging entrepreneur, who produces insignificant volumes and is stuck on, say, 20% commission, compete with the larger, established operators who produce massive volumes and earn 40% commission? It is not possible. Due to economy of scale, the overhead cost per client for small operators is often higher than that of larger companies, but their margin is smaller. Clients and agents are extremely price conscious and if the small tour operator or DMC’s quote cannot match the quotes of the big players, because of the difference in STO rates, there is no way the small, emerging entrepreneur can compete. It is not a level playing field, and it protects the big guy at the expense of the little guy.
Perhaps we as established operators should be happy about this, as it makes it harder for new competitors to enter the market. But here in South Africa, we live in a country of immense inequality, where economic transformation needs to speed up if we are to avoid a destructive, painful revolution. One of the best ways we can assist and empower emerging entrepreneurs is to ensure a level playing field and make it easier for smaller operators to earn decent commission at lower volumes. At the moment, it is almost impossible for them to get a foot in the door and compete.
Collectively, smaller operators account for a significant percentage of bed nights across the industry. They can give up their independence by joining an amalgamation, to benefit from collective bargaining power and secure better STO rates. If they do so, it will cost suppliers 30% or 40% commission anyway. Why not offer the individual operators decent STO rates in the first place? A bum in a bed is better than an empty bed, no matter which operator produced the booking.
Show me yours first
I would argue that to level the playing field, we need to do away with the volume-based model that holds to the incorrect notion that you can incentivise operators by saying "show me the production, then we will increase your commission". I've heard this many times over the years, but it works the other way round. Show me the commission, then I might be able to increase my production. You will never see increased production by lowering my margin. We compete with big players on 30% and 40% commission, and our overseas agents want their cut. Without decent STO rates from suppliers, we cannot compete, cannot support you and will never increase booking volumes. Especially not while there are competing properties we can use that do offer decent commission. As Colin said, cut our margins, and we might lose interest altogether in your property.
A final argument for the South African context is that we need to keep our business and revenue here, and grow our own economy by supporting local businesses. None of the smaller tour operators or DMCs in South Africa can compete with the car-rental rates offered by the big, foreign-owned, online aggregators. They get the best nett rates because they produce the highest volumes, but they are able to produce the highest volumes in part because they get the best rates. (They insist on them, of course. Their buying power allows them to dictate to the suppliers.) We lose a lot of car-rental business to these large, international, online agencies, simply because we cannot compete with them on rates. I have found more than once that even our nett STO rate is higher than their online selling price, for the same car and dates, from the same rental company. If we value our own economy and currency and want to support local business, this should not happen.
The same with large OTAs based in other countries. If they are able to secure better STO rates than local operators, we will increasingly lose business to foreign-owned OTAs and OTOs, rather than seeing local companies generate that revenue and help grow our own economy. The easiest way to prevent this is to ensure local operators or DMCs have access to the same nett rates, so that it is never cheaper for a client to book through an online booking platform.
It may sound naive and idealistic, but is it not time to value loyalty and long-term relationships above size and volume? Is it not time to level the playing field and start supporting smaller, local businesses and emerging entrepreneurs? If it sounds like charity, it is not. It's about learning to appreciate the collective value of small contributions from the many smaller players in the industry.