Jake Steinman, founder and CEO of the NAJ Group, which publishes the Inbound Report and hosts TheTourOperator.com website, recently conducted his final Listening Tour for the year 2015, during which he met with some 50 receptive tour operators and staff in their offices in the Greater Los Angeles area. Much of the discussion with the receptives centered on the strong and still growing market from China. Following are some of his observations from the experience.
- Receptive Tour Operators—especially the Chinese—are evolving into DMCs for areas in which they have offices: mostly Los Angeles, New York, Las Vegas, and Orlando. They would like TheTourOperator.com to connect them to DMOs or DMCs in other areas for which they receive requests.
- The Chinese market, even after running over speed bumps (the Yuan devaluation and stock market volatility), continues to boom into 2016—driven by the 10-year China-U.S. visa extension agreement made in November 2014 and the Chinese government declaration that 2016 would be the Year of USA. However, it is clear from our visits that the market has become hyper-competitive with many existing operators challenged by “under-the-radar” agents on one side and by the growth of FIT on the other.
The under-the-radar operators comprise a parallel universe in which they are hacking the market. Plying family and long time personal relationships in China, there is an entire unregulated industry in the U.S. of receptives serving their contacts in China, as well as marginal travel agents in China who obscure their identities through the practice of leasing desks from one of the major travel companies (such as CITS or CTS) in fourth tier markets, much like a hair stylist rents a chair in a salon. While they have no official ties to the home agency, their business cards usually include the logo of the home agency—thus creating a false sense of identity.
- While we were in their offices, a couple of Chinese operators received cancellations from groups that were fearful of traveling to Los Angeles after news of the San Bernardino shootings became known.
- Shooting guns and Self-Drive Tours. These two activities were mentioned by more than a half-dozen companies as one that appealed to their incentive clients, especially for Las Vegas where they have the option of Bullets and Burgers or Exotics Racing; in the latter, visitors can drive $300,000 Lamborghinis. And Chinese operators told us they now organize self-drive tours for young couples and FITs who use GPS and the Internet to get around everywhere, as well as head up caravans of 10-20 people in rental cars with a tour director in the lead car communicating to all others via walkie-talkie.
- Receptive Tour Operators, at least in major cities such as New York and San Francisco, have lost leverage with hotels. Hotel occupancy rates, as predicted by PKF Consulting, are expected to remain high through 2017, it will continue to be a seller’s market, which is not good for business in major cities, where ADRs increased 4 to 5 percent in 2015 and hotel revenue managers and GMs have all the power. Operators are now focusing on providing service.
- Operators are hedging their bets with outbound travel. It isn’t only the Japanese and Chinese operators who have been opening outbound divisions, but also traditional operators such as AmericanTours International (ATI) which, through its AAA partnerships, has established outbound programs, with founder Noel Irwin Hentschel pioneering the opening of Cuba through her long standing relationships in that country. (More than 20 years ago, she led a group of ATI’s most prominent international clients on a VIP tour of Cuba, where they had a private audience with Fidel Castro).
The Underbelly of the Chinese Tour Operator Market: To fully understand how the Chinese market works, Steinman recounted two stories from last month’s “Listening Tour” in Southern California.
The Parallel Universe: Appointments were made for us by a local Chinese supplier who also volunteered to be our guide to meet operators. One afternoon, our meetings shifted from San Gabriel to Torrance and our guide received a text from her sister-in-law asking her to stop off and pick up some Jujubes at a location near Torrance. (Dried dates, the Jujubes are a delicacy used for stuffing duck and goose.) We thought this might be a small Chinese food market, but the address pointed us to an auto repair shop. After double checking the address, we noticed the overhead pull-down door was closed, so we knocked on a side door around the corner and were greeted by a family of four, apparently owners of the repair shop, who were in the middle of lunch. They invited us in. Yes, they assured us, this was the right place. The owner went into the back and pulled out 5-10-and-20-pound bags of Jujubes that our guides were delighted to buy. He also offered us pre-packaged samples of tea made from Jujubes that he could also sell us. The garage owner told us he owned a 20-acre Jujube farm in Big Bear and did not sell on the Internet—only 100 percent word-of-mouth and off the books. It occurred to us that this was probably how the Chinese travel industry operated … with rogue receptive operators purchasing hotel product through one of the Chinese online bed banks powered by Hotelbeds, Tourico or GTA inventory: Low overhead, low risk, and flying under the radar of official governing bodies such NTA, they operate in a parallel universe that is frustrating official receptives.
The Sad Story of Gary Huang: The other is the story of Gary Huang, a little known but once highly successful operator who built a strong receptive business through a tight network of “old friends” in China to whom he extended 90-day credit terms, which has become the norm for budget and group tour business. After several years of strong growth, his friends began paying him later and later until he got to the point where he was holding off his creditors all the way down the supply chain. They told him the only way they could pay down their debt to him was if he accommodated more of their coming tour groups. Eventually, of course, Huang had to file for bankruptcy and move back to San Gabriel where another receptive and hotelier, to whom he owned over $75,000, took pity on him and hired him. With no money and rising personal expenses–he borrowed $20,000 more from his employer for his daughter’s wedding—the financial pressures became insurmountable. One day last May, he collapsed at his desk and later died of a stroke that his friends felt was caused by unbearable pressure.
