On The Beach

On The Beach is the UK’s leading retailer of packaged short-haul beach holidays. Their business model is a hybrid between a Tour Operator (think Thomas Cook or TIU Travel) and an Online Travel Agent (think Hays Travel or Trip Advisor). The business has a market cap of £630m. Last year it generated £84m of revenue, almost all of which came from selling European package holidays to UK consumers.

A traditional tour operator, such as Thomas Cook or TUI, typically own their own aeroplanes, shuttle buses and have long running contracts with hotels & resorts. The drawback of this business model is that tour operators typically promote only their own hotels as well as restrict customers to flying at inflexible and anti-social times. These businesses typically have set aircraft and bed commitments that must be hit, meaning that in the event of significant geopolitical events (which do occur in this industry) tour operators are exposed. Additionally, due to the significantly lower cost base, the average cost per booking for a traditional tour operator can be as much as 5x that of OTB. This lower cost base means OTB should be able to offer sustainably cheaper packages than tour operators.

Online Travel Agents do not have their own assets however they typically do not source their inventory directly. The key disadvantage here being the commission payable to third parties, as well as not having a direct relationship with suppliers. 

Where On The Beach differ is in their business model. They are a hybrid between the above two models. They do not have their own assets such as planes or hotels but source their accommodation directly with a group of BDM’s. Their size allows them to get good deals (averaging 20% on accommodation and 50% on shuttle buses) with 25% on exclusivity deals. Over 65% of OTB’s accommodation is contracted directly with suppliers. This generates a cost saving for OTB as well as increases their ability to work with the hotel in order to improve yield. They can get these contracts over other OTA’s due to their size (for European Beach Holidays they’re the second biggest seller to the UK consumer, behind TUI with roughly 20% market share) as accommodation providers are reassured that OTB can provide volumes due to their web traffic.

The overall package holiday industry in the UK is forecast to grow at a moderate 6% pa between now and 2022. Within this, prices are expected to make up 2% pa with volumes expected to make up 4% pa. This alone doesn’t sound like an industry we’d like to invest in, however, when you consider OTB is stealing market share from the incumbents at a high rate, it makes it interesting.

OTB have managed to increase the volume of packages sold at 15% pa over the last 5 years while UK Tour Operators volumes have declined by 7% pa since 2008.
 

Although OTB doesn’t have the resources of a TUI or Thomas Cook, because they are focusing on a specific segment of the market (European Beach Holidays) they can excel. This approach has resulted in them stealing market share consistently each year until they have now carved out 20% of their target market.

Its main edge vs the competition lies in their in-house purpose built marketing function. They have over 100 developers and digital marketers continuously testing conversion rates, optimising PPC bidding strategies and AB testing personalised site layouts for user accounts. This efficiency has meant their marketing spend has dropped from 53% of revenues to less than 48% in the last two years, despite revenues going from £60m to over £80m.A large effect of their efficient marketing is a higher percentage of “branded (free) traffic”. 59% of traffic is direct. Their website receives 70m daily visitors who convert at an average rate of 0.7%.

All of this combined has resulted in a very attractive consumer proposition. Repeat customers’ makeup 40% of their sales volumes. This tailored marketing strategy, coupled with their lower than Tour Operator costs and more product range than Online Travel Agents are the main reasons why the business has grown so fast in a mature industry.

Risks

Travel companies have always faced inherent risks to do with geopolitical events, terrorism, currency swings, or a general economic recession (beach holidays are a luxury item for most). As such, most travel companies’ trade on low PE’s. OTB is priced as a tech company, at an average PE of around 20.Any significant geopolitical shock could see the shares fall quite significantly.

OTB heavily relies on Google for traffic. A significant change in Googles algorithms could have a short-term impact on volumes but also a longer term impact on OTB’s algorithm which is used to spend AdWords budgets efficiently (a large part of its edge).

Our View

We like this business. The incumbents have been complacent for too long and OTB are doing a good job at providing a better service. They are the market leader in their sector. It’s a simple business doing what it does, well. They are the only operator running with this business model in the European Beach Holiday space and they have many other verticals that they can easily move into. 

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