Terrie's Take 959 (Tourism Edition) - How Japan's Travel Companies Can Claw Back Market Share

Mon Sep 3 10:45:40 JST 2018

* * * * * * * * TERRIE'S (TOURISM) TAKE - BY TERRIE LLOYD * * * * * *
A bi-weekly focused look at the tourism sector in Japan, by Terrie 
Lloyd, a long-term technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

Tourism Sector Edition Sunday, Sep 02, 2018, Issue No. 959

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+++ How Japan's Travel Companies Can Claw Back Market Share

I spend a lot of time talking to Japanese travel companies - partly to 
understand the current status of the market and partly to encourage them 
to step up and start challenging the big foreign firms who control the 
Inbound market. I do this because the lost revenue is not getting 
reinvested locally, and this hurts the development of new products and 
services. In my view, to survive, Japan Inc. needs to organize and take 
back some of this huge tourism market (the Inbound market) that they are 
all losing market share on. My guess is that about 60% of all foreign 
tourist spending is with foreign Online Travel Agents (OTAs) before 
those travelers even get to Japan. Since the foreign OTAs are all taking 
15%~20% margins, they function like an external tax on goods and 
services that are eventually supplied (OK, with the exception of some 
air tickets) by someone in Japan.

There are 3 distinct travel markets in Japan. The Domestic market, which 
is huge - and in 2017 saw about 325m domestic travelers overnight or 
take longer trips around the country (another 300m did day trips). 
Collectively they spent around JPY21trn. This market is dominated by the 
train firms, large domestic hotel chains, and of course the century-old 
travel firms like JTB, KNT, and NTA.

The Outbound market, which used to be No. 2 and which still sees about 
17.89m Japanese travel abroad each year, saw spending in 2017 of around 
JPY2.8trn. The big players in Outbound are JTB, HIS, and the many 
Japanese internet companies such as Rakuten, Yahoo, DeNa, and others. 
This sector has been flat in recent years and is unlikely to increase 
further - mostly because of demographics and the fact that much of the 
nation's wealth lies with the elderly, who don't go abroad so often, 
although they do take a lot of one-day bus/train trips.

The third big travel market, and the one that everyone is talking about, 
is of course the Inbound sector, which saw 28.7m foreign tourists visit 
Japan in 2017 and which will most likely hit around 32m travelers this 
year. The total spending in 2017 was about JPY3.7trn, a good 50% more 
than what Japanese spent abroad, and it has become an increasingly 
important contributor to Japan's overall GDP. Because this sector has 
risen so quickly, almost 500% since 2011, there is really no dominant 
local player. Yes, JTB tries to compete, but they are so badly equipped 
to handle foreign travelers, that apart from their Sunrise bus tours and 
government-assisted sports projects (Rugby World Cup and Olympics), they 
have become almost irrelevant in the sector. I would say the only 
Japanese firm with any standing is HIS, which is pretty active in their 
"people moving" operations (air tickets and tours).

So who is dominating the Inbound sector?

[Continued below...]

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[...Article continues]

It depends on the slice of Inbound travel you want to look at. For air 
tickets the biggest players are the airlines themselves, something that 
is reflected globally due to airlines taking back control of pricing and 
inventory from large-lot OTAs about 5 years ago. For hotels and similar 
accommodation, currently the biggest player is Booking.com, which by 
some measures may control as much as 80% of all hotel bookings made by 
foreign travelers to Japan. This is an amazing company that has spent 
tens of millions of dollars (my estimate) on developing its own 
inventory here, and now that investment is really paying off for them. 
Airbnb would have been a great No. 2, but as readers know, their Japan 
accommodation business imploded back in June.

Then in the experiences sector you have TripAdvisor (Viator), Airbnb, 
Klook, and a number of others. There are two Japanese firms trying to 
make a go of it, being Veltra and Rakuten's Voyagin, but frankly, I see 
both firms getting swamped by the big foreign players. Japan's biggest 
experiences provider, Asoview, which has over 19,000 experiences from 
more than 5,000 operators around the country, has a smallish English web 
site that they are obviously not spending much time or effort on.

The domestic transport sector is still safely in the hands of the 
Japanese majors, such as Japan Rail (JR) for rail, JAL and ANA for local 
air hops, and Willer/JR for buses. Regionally you also have the many 
private railway companies who have a finger in every pie (rail, buses, 
hotels, travel agencies, etc.), such as Odakyu, Tokyu, Kintetsu, Hankyu, 
and many others. This transport lineup is unlikely to change or be 
challenged in the near future, as each entity represents many billions 
of dollars invested in real estate and equipment.

All the public transport companies have been doing well from the Inbound 
tourism boom, partly due to the fact that Chinese nationals generally 
can't drive in Japan due to their driver's licences not being recognized 
here. As repeaters from other countries increase, though, I expect 
rental car usage to surge, along with other transportation options. As 
an example of the tourism windfall being experienced, in 2017 JR enjoyed 
a 10% pop in profit thanks to all the JR Rail Passes they sold. In fact 
they did so well, in 2018 they slashed the online reseller commission 
for their JR passes from 10% to just 4%.

[Continued below...]

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-----------------------------------------------------------

[...Article continues]

Hotels and experiences, two of the four biggest selling tourism products 
(the fourth being food) are firmly in the hands of foreign companies. 
Why is this? Well, mostly because those foreign firms have overwhelming 
superiority in the following areas:

* Online marketing power. Most of the foreign online companies are 
global in nature and therefore handle huge volumes of travelers already. 
Booking.com, for example, is estimated to have over 420m visitors to its 
site every month. No one in Japan comes even close to this.

* Single focus. Although there are of course single-focus Japanese 
firms, because the Inbound sector for Japan is just for a single 
country, there isn't enough business for a single-focus Inbound Japanese 
firm to grow. Rather they would need to go global with their businesses, 
which requires some serious capital backing...

* Financial strength. Hong Kong's experiences site, Klook, was 
established as recently as 2014 and yet has already raised about US$300m 
in capital. Now compare that to Japan's pioneer in experiences, Voyagin, 
which started much earlier, in 2011, and yet had only raised US$500,000 
by 2014. In 2015, after rumors that the company was struggling to stay 
afloat, Rakuten came along and snatched it up for an undisclosed amount 
(but which we believe to be around US$3m). To it's credit, Rakuten has 
since bolstered Voyagin's offerings and online market visibility, but I 
believe it will still fail because of their punitive pricing for local 
merchants, who can easily list with Klook and TripAdvisor for a fraction 
of the cost.

* Technology. This is probably the biggest drawback for Japanese firms. 
Elsewhere in the world, most slices of the tourism business are already 
interconnected in real-time, through APIs. Japan has reasonably good 
automation for hotels and rental car operators, but even that technology 
is either focused on the domestic market or the flow of their 
API-connected inventory is limited to wholesaling out at very meager 
margins to foreign OTAs. All the big players such as NTA, KNT, JTB, 
Ikyu, DeNa, Yahoo, even Rakuten, have ceded the international markets to 
their foreign competitors and have given up trying to build a brand for 
themselves.

What can Japanese companies do to start fighting back and regaining 
market share? I'm not sure that there is anything they can do 
individually. Instead, they need to take a leaf from the book of their 
predecessors in the manufacturing sector after WWII and consider the 
following:

* Japan Inc. There needs to be a concerted effort/investment by the 
Japanese government to foster technology and re-groupings among the 
major Japanese travel firms, starting with a top-to-bottom 
reorganization of JTB. Having real-time inventory and API access across 
all segments of the Inbound travel sector should be made a national 
priority.

* Unleashing capital investment. There needs to be a concerted effort by 
venture investors and the Japanese banks (with government guarantees) to 
bankroll upcoming Japanese technology and travel firms, so that they can 
make the necessary capital and marketing investments to regain a 
meaningful share of the global audience. Innovative travel products can 
still go viral, but buying the equipment or construction needed to make 
such products happen, is crucial. My guess is that Booking.com spent 
about US$50m in building its hotels database here in Japan - great 
investment, even greater result.

* Inventory control. Although I don't personally believe in market 
manipulation, it nonetheless surprises me that Japanese firms who are 
largely the investors and owners of infrastructure, don't practice 
better inventory-pricing control. Currently the market is a free-for-all 
where owners compete on price, which only hurts them. Instead, if they 
were thinking with their Japan Inc. hats on, they would get interim 
support from the government, constrict the flow of inventory, and focus 
on moving pricing and availability into more locally controlled 
channels. This would be no different to what the world's airlines have 
done, in wresting price and inventory control away from the big OTAs. 
Again, I'm not saying I'd support this kind of action, it's just 
surprising to me that it hasn't happened yet.

...The information janitors/

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