At 2:00 a.m. on Monday the 23rd of September, our 178 year old employer, travel advisor, hotelier, airliner and frenemy -Thomas Cook- passed away after 20 years of terminal illness.
Here is why.
The name of the illness: Disruption
I really think that there are some striking lessons to be learned for a lot of companies in other industries, that have not yet been disrupted as much as travel. Yes, disruption. That is the name of the illness that Thomas Cook died of.
I am writing this analysis from an outsider’s perspective. However, I was an industry insider at another company called Kuoni, formerly also one of the globally leading travel companies. Some of you might recall my post almost four years ago on ‘ Why Kuoni failed (the Digital Transformation) ‘. Yes, both suffered from the same illness. However, four years ago, even I would not have expected Thomas Cook not being among us anymore so soon. To me as an outsider, at least they seemed to do their life-prolonging homework of increasing efficiency pretty well. But fate stroke earlier than even I expected. Of course the individual patient history was different in Kuoni’s case, but I really believe it is the same illness, which killed them both.
But to diagnose it correctly, you need to look a bit below the skin; behind the symptoms.
The symptoms are what you see all over your LinkedIn and media streams now; It’s what the managers, industry analysts and journalists blame short-sightedly as causes of death. E.g. “the debt burden”, “bad management”, “risky bets”, “hedge funds”, “online competition”, and my two favourites: “hot weather” (a classic scape-goat in tourism) and “uncertainty over Brexit” (see e.g. the Guardian’s coverage on an array of symptoms).
The real question behind is: Why was Thomas Cook not resilient enough? I would call most of the named symptoms just business as usual. Nothing a market leading company should die from.
If you look at Thomas Cook’s financial results, revenues suffered a clear downward trend until 2016 and then seemingly recovered in the last two years (in my reading, driven by an upswing in airline demand and some other effects that are not entirely transparent to me):
However, if you look at profits, a different story unfolds:
While revenues were shrinking since 2011, the company seemingly managed to improve net income, i.e. lower the losses and reduce net debt. In other words: They fired people quicker than their revenues broke away. This certainly was a very tough job. 2017 was the point of turnaround, or at least it seemed. But already in 2018 the figures went deep red again. To quote their last CEO announcing the 2018 financial results:
[…] the sustained heatwave restricted our ability to achieve the planned margins in the last quarter. The UK was particularly hard hit with very high levels of promotional activity coming on top of an already competitive market for holidays to Spain.
Peter Fankhauser, 2018
In other words: He was blaming the same symptoms that are now quoted as reasons for their collapse.
But look at the figures above again to see a much bigger picture: For a decade -at least- Thomas Cook did not create any value any more. A decade.
Behind the symptoms lies a much deeper truth.
The failure to transform
Why was the debt there in the first place?
Sure, the debt burden was suffocating meagre operating profits. But why was the debt there in the first place? Stefan Stern in the Guardian traces it back to “the deal-making era of former chief executive Manny Fontenla-Novoa”.
Why were they spending so much money that they did neither have nor generate from their operating results, and therefore needed to borrow so expensively?
The answer is that “deal-making” is just another word for something else that was going on: Industry consolidation. It’s what the big boys play.
Industry consolidation is an expensive game
The following examples illustrate how that deal-making looked like in practice. Among dozens of other deals a few stood out: In 2007 Thomas Cook merged with MyTravel, known for its brands Airtours and Going Places. In 2010, Thomas Cook merged its branch network with that of The Co-operative Travel. The merger created the UK’s largest travel network. Also in 2010, Thomas Cook bought the German tour operator Öger Tours.
The three mentioned deals (and many others), had two things in common: a) They were terribly expensive and b) The targets were all old-school travel companies, much the same breed as Thomas Cook. That’s why they felt the deals would turn out nicely.
It’s the natural thinking that comes to incumbent managers when facing external stress on their business model. This stress materializes as shrinking profits in their P&L, which they feel they need to address with bold actions: They acquire big targets and justify this with “economies of scale”. However, the other lens of looking at the same action is called “empire building” in management theory and can be summarized as follows: Managers like size and power in its own right. That’s why they buy other companies.
But how sustainable can it be to harness several struggling businesses together and justify doing so with reduced cost? How on earth should that make those businesses more competitive? I would label this strategy rather life prolonging measures in the geriatric ward. As such, they can make sense, but only in the short term. Never ever does such a strategy justify entering the levels of debt seen at Thomas Cook.
Vertical integration is expensive, too — and it locks you in
Compared to Kuoni, Thomas Cook apparently had better cards. Kuoni was forced to pursue a strategy called “asset light”, which meant getting rid of hotels and airlines. This was without alternative at the time, as Kuoni was too small to hold a “reasonable amount” of such assets to operate them efficiently. The price they paid for their asset light strategy was to let go of margin. Thomas Cook however was big enough to hold such assets. Therefore, they bought hotel and airline chains and integrated them into their packages. This is called vertical integration and in the theories of strategy consultants makes a lot of sense as you can claim the margins of neighbouring elements in the value chain. Vertical integration is an expensive game, too. Just imagine how much an airplane costs.
Also, it locks you into your current business model: By melding those value chain elements together, you make both of them dependent on each other. One for the supply side, the other for the demand side. This makes it virtually impossible to disintegrate them later on. This is why Kuoni had a much easier time being dissolved and cut into pieces while Thomas Cook “only” could go bust.
Digital is more than a channel
Already back in 2007 it was clear, that the Internet as a channel will dominate travel in the future. E.g. the online share in flight bookings exceeded 20% at that time already in most markets, including the UK. Scott Galloway of NYU Stern considers this to be the tipping point, at which incumbents in an industry start to struggle. Both Kuoni and Thomas Cook saw and recognized that fact and yes, they tried to use Internet as a channel, too.
After all, how hard can it be for a large company with such great talent to master a new distribution channel? — Impossible, it turns out.
Thomas Cook tried a plethora of strategies to get their hands on the online channel. E.g. they invested heavily into what the industry called “booking engines” to boost online sales and in 2009 they even struck a deal to provide an online video player for Thomas Cook TV (“Content is king” was the word of the day, remember?).
It turned out, it wasn’t that easy. Apparently you can’t teach an old dog new tricks. The rules of the game on the Internet were completely different from the rules that the company used to play by.
What would have been required were new business models, playing by a different set of rules and creating value from a different economic engine.
The failure to diversify
Why didn’t they create new (Digital) Business Models?
In the traditional travel industry, the dominant paradigm was operational excellence. It was all about moving people from A to B efficiently and bundling those efforts into what they called a “product”. Those “products” actually were just packaged trips put into brochures (yes, brochures, remember those? The traditional travel industry considered “brochure production” one of their core processes, along with running trips).
The internet on the other hand allowed for something completely different: Speed and flexibility. It turned out, consumers world-wide appreciated personalized components more and more over the rigid package-structures of the old paradigm. The old travel industry essentially missed the mega trend of individualism. Unfortunately, this old way of thinking was engrained deeply into their cultures.
Both Thomas Cook and Kuoni tried to diversify into new business models playing around with the occasional startup coming around. E.g. in February 2008, Thomas Cook bought booking website Hotels4U.com for £21.8 million and in December 2008 they took over Gold Medal International, owner of NetFlights, in a deal worth £87 million.
However, those were “acquisitions” that were subsequently “integrated”. Without knowing details of the deals in question, one thing is sure: None of those deals ultimately grew new business for the parent. It was online business, yes, but within the old paradigm and hence susceptible to the same disruptive forces as the non-digital parent company.
The bigger picture
It’s just a historic fact that every business model is going to die at some point. This is a normal process. It’s called the business lifecycle.
If this happens in whole industries at once, where a new type of superior business model takes over, it’s called disruption. This is what is going on in travel for the last two decades.
But there is something even bigger going on: The above effects, by no means, are limited to tourism alone. They are happening everywhere, only a bit delayed by the height of the barriers to entry into a specific industry (tourism had none). There is a paradigm shift going on in the whole economic landscape from operational excellence into the digital paradigm of speed and customer centricity. If such things happen, i.e. the industry structures as a whole move into a new paradigm, it’s called an industrial revolution.
Thomas Cook had the bad luck of being a major player in one of the first industries to go down in the course of the ongoing industrial revolution: The Digital Transformation.
This is what killed Thomas Cook.
While Digital Transformation on the level of the economy is both fact and irreversible, it’s a much different beast to deal with on the level of a business model such as Thomas Cook’s Tour Operating Business. There is very little reason to believe that a transformation of a big organization on the level of its business model has worked anywhere.
Evidence from many transformation cases suggest rather, that Thomas Cook could not have been saved from its terminal illness. At least not by means of “transformation”.
Or could it?
Conclusion: Strategic diversification is the only cure
There are a few notable exceptions of seemingly successful transformation cases. Take the example of Netflix, which is quoted often. But look more closely: Almost all of those examples were no transformations; they were diversifications. This includes Netflix, which created their streaming business in a totally new organization, headed by a different board with only one link to the old DVD-renting business: The person of the founder, owner and visionary Reed Hastings himself.
The only cure for Thomas Cook would have been a strategic diversification — 10 years ago that is, the latest.
But why did neither Thomas Cook nor Kuoni diversify earlier, when there was still time?
It turns out, Kuoni did! And even successfully so: In the 1990ies their Indian MD founded Visa Facilitations Services as a diversification into an adjacent field (Visa), to solve a pressing business problem (their customers didn’t get Visa to the USA because of resources shortages at the US embassies). 20 years later VFS turns out to be the only remaining asset of value in the former Kuoni group (which is why they were “only” sold and didn’t go bankrupt such as Thomas Cook).
Kuoni, by chance and not by plan, did the right thing of diversifying its business model into an adjacent field, where they had a right to play in the form of a scaling advantage. But unfortunately they, too, didn’t do so enough to survive as a company. At least and at last, there was some value left in Kuoni that stemmed from that diversification.
Unfortunately, no value was left in Thomas Cook.
For all the large incumbents in the world, we offer one lesson to learn from the collapse of Thomas Cook: Invest early and consequently into a smart strategic diversification!
About the author: Jan Sedlacek is co-founder and partner at Stryber, a company specialized in building strategically diversified new business portfolios. Previously, Jan not only started several startups, he was also working as a strategy consultant and then as an executive manager on the (unsuccessful) transformation of Kuoni.