Me too says Thomas Cook…but is that wrong?

On Wednesday, after a torrid build up, Thomas Cook‘s management team got to announce its new Corporate Strategy….or was it TUI’s strategy they announced?…..Difficult to tell, considering how similar they now are! However, is it wrong to copy the “Right” strategy?

Personally, I think not, with Thomas Cook now clearly heading in the right direction in my opinion. Given the rapid advance of lower priced dynamic packaging, it is essential for traditional tour operators to differentiate their product by adding value to its proposition by investing in hotels, staffing levels and in-resort infrastructure to improve the quality of the holidays they offer. Therefore, the stated aim to increase their differentiated stock from 31% to 50% must be the right direction. However, in a cash strapped organisation this may prove difficult to achieve, since differentiation often equates to the long term commitment of cash and a considerable increase in risk stock and company gearing.

The reduction in the size of its internal aircraft fleet from 41 to 35 aircraft will give Thomas Cook more flexibility to cut its capacity to meet likely demand, as reflected in the 8% capacity cut for Summer 12. This will be essential in a market which will be damaged in demand terms by the Euro 2012 football, London Olympics and a general toughening of the economic environment as the Euro zone staggers from one debt crisis to another. The only down side is that in the very same week Ryanair announced another 22 flights a week to Majorca and 20 to Ibiza, clearly looking to fill any gaps left by tour operators seeking to tighten the supply of holidays.

The only disappointing aspect of the strategy announcement was the lack of clear strategy for the 50% of its business that Thomas Cook must now recognise is a commodity market based primarily on price. It did state a clear desire to increase its online sales from its current relatively low 25% level to a 40-50% level, however it is unclear how this will be achieved. Tui has a multiband online strategy with Late Rooms, Hotel Opia and the traditional tour-operating site Thomson Holidays. Controversially, Thomas Cook seems to be trying to do every thing under a single Thomas Cook umbrella site. Although there is a great deal of logic in focusing on the strongest brand you have, its hard to see how Thomas Cook can effectively support its relatively expensive “undifferentiated” tour operating product whilst at the same time exploiting the low priced dynamic packaging sector.
The single biggest problem faced by Thomas Cook management, is that it is over invested in the high street stores and its recent £90m deal to secure 400 Cooperative Travel shops really look’s a stinker. Already, 55 of these shops are set to be closed, which in simplistic accounting terms represents a £24m write off of an investment only made 3 months ago. It’s an obvious deal to question when you add 400 shops to your network, only to announce 2 months later a 200-shop closure program, but as they say “The King is dead, so everything we did was his fault and long live the new King. Well until we need to blame somebody else.”

Overall the management of Thomas Cook must be applauded for the brave move of clearing the decks by writing off £573m of dubious assets in its balance sheet and openly recognising the mistakes of the past in order to move forward. A copycat strategy is not a wrong strategy, when the requirements of the modern package holiday market are so clear. Differentiated product sold via traditional high street shops complemented by the Internet sales of commodity stock, where the lowest price producer wins, has to make sense.

Thomas Cook still has a massive strength in its brand, which has only been mildly tarnished by its recent financial crisis, as demonstrated by its latest summer 2012 sales figures. If it can decide how to best focus this brand whilst introducing secondary online brands to segment the market, then it can still be onto a clear winner. Unfortunately, its weak financial position means that it will miss out in the bidding battle to acquire the leading dynamic packaging retailer “Travel Republic”. It had better hope that Tui does not swoop to further strengthen its online distribution lead and make Thomas Cook £90m investment in 400 high street shops seem even more fool hardy.

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