TT-901 (Tourism Edition) -- JTB and Other Japanese Travel Agents Getting Killed in Inbound Market

* * * * * * * * 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.

Tourism Sector Edition Sunday, June 18, 2017, Issue No. 901

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+++ JTB and Other Japanese Travel Agents Getting Killed in Inbound Market

The largest travel agency in Japan, JTB, was not its first. That honor
falls to Nippon Travel Agency (NTA), which was formed in 1905 by one
Minami Shinsuke, who organized domestic pilgrimage tours by rail to
Koya-san and Ise Shrine from Kusatsu (Gunma). To this day, NTA continues
to have a close relationship with the Japan Rail (JR) company and is the
primary distributor of its foreign-tourist-focused JR Rail Passes,
through a broad network of resellers around the world.

JTB on the other hand started in 1912, but interestingly was also
controlled in part by JR and by extension of that, by the government.
JTB was created to provide managed Inbound travel services, mirroring
what NTA was doing for domestic Japanese. Later, around 1923, JTB
received government patronage to compete in the local market and thus
the company began a long-term close collaboration as a services provider
to the government. Because of historical events, particularly the surge
in Inbound post-war travel, JTB fared the best out of the two companies
and today is by far the largest local player.

What is still special about JTB is the amount of government patronage
the company is able to receive. Got an Olympic Games that needs taking
care of? No problem, JTB will do it. A Rugby World Cup? Yep, one
exclusive relationship managing all the action coming right up. What
about a 5,000-person U.N. conference on Disaster Risk Reduction to be
held in Fukushima? Done. For whatever reason, this vast flow of projects
has so primarily favored JTB that it has stunted the ability of its
domestic competitors to go after the same business, and thus JTB is
often the only candidate big enough and diverse enough able to deliver.
This is a great strategy for domination of the domestic travel sector,
and you could be forgiven for thinking that the company is still part of
the government.

But here's a curious fact. Despite the massive contracts and various
preferences JTB receives every day, the company barely improved its
sales and profit numbers overall in FY2015 and appears to have actually
dropped in revenues from early FY2016 results - all this despite being
in the middle of the largest Inbound travel boom in Japan's recent history.

More specifically, JTB's revenues in FY2015 were JPY1.34trn (US$11.9bn),
of which JPY1.08trn involved marketing and selling to Japanese
consumers, and only JPY122bn selling to foreigners. The domestic market
in FY2015 was worth JPY604bn to them, the Outbound market (almost 100%
Japanese consumers) was worth JPY480bn. Meanwhile the Inbound market was
a much smaller JPY122bn (US$1bn). Just as a comparison, over the same
period (FY2015) the next biggest travel agencies were HIS with sales of
JPY523bn and KNT with JPY424.9bn.

[Continued below...]

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As mentioned, the numbers for FY2016 are not finalized yet, but
according to the Travel Voice magazine, it looks like revenues will
actually drop: with a 6% decrease in JTB's mainstay domestic market and
a 4.4% drop in Japanese going overseas (even though that market has
recovered slightly this last 12 months). The only bright spot seems to
be the much smaller international travel business (which includes
Inbound), which was up 27.2% over FY2015. So what's going on? Well, as
JTB's own CEO Hiroyuki Takahashi admitted to the press recently, "Travel
agencies are struggling with the emergence of major online tour vendors
such as Expedia, 'one of our biggest rivals.'

Yeah, so it's not rocket science. JTB, a 100-year old huge and
organizationally complex company that is used to owning its market, is
for the first time being challenged, no actually, it's being "killed",
in the market place by more nimble, more focused, and more
technologically advanced foreign competitors, ranging from Expedia and
TripAdvisor, to Airbnb and China's CTrip.

The challenges that JTB is struggling with in our opinion fall into two
main categories: 1) Management seem not to have woken up to the idea
that they have to radically overhaul the business and how it is
organized and directed. They seem stuck on the idea of maintaining their
many subsidiaries and social relationships - despite the fact that the
company's byzantine org chart means that teams are often competing
against each other and that for managers hiring more manpower is cheaper
than sorting out the computer systems. Instead, I believe that JTB needs
to gain a sense of crisis and to implement far-reaching changes like
those that JAL was forced to go through when it skirted bankruptcy a few
years ago.

The second problem the company has is its IT systems and online business
capabilities. I was told by an ex-employee that the company has some
core systems that go back decades and which have never been
interconnected. So that even within one business unit data may need to
be re-keyed several times to complete the entire work flow. If this is
true, then the firm badly needs far-sighted architecting and
professional integration. This is not to say that JTB doesn't have some
operationally excellent technical capability, but from what I can see,
it's isolated, non-contiguous internally, and most problematic of all,
not optimized for mobile devices and modern consumer expectations.

To compete with Expedia and others, I don't think JTB has a choice other
than to start a separate 5-year project to completely replace its
existing systems rather than just patching them up. It needs end-to-end
modern architecture and unified data and interconnectivity (through APIs
of course), and with this new interconnectivity, it needs a broad
spectrum of smaller more nimble partners to re-package and re-sell its
solutions. To get this done, senior management at the parent company
needs to mandate to all subsidiaries that they need to cooperate and
submit to the effort, even though it might temporarily impact the
business results.

Although it's hard to see this level of change happening in the current
hot Inbound market, maybe they will decide to buy out one of the many
travel management software companies instead. Certainly leverage through
M&A has become a favored tool for JTB recently, as can be noted from the
two major acquisitions it has done so far this year.

However, rather than confront the foreign monsters head-on, it seems
that for now JTB has decided to dodge the bullet by moving to focus on
more specialized niches, such as Destination Market Company (DMC)
activities. DMCs provide ground operations and tours development, on a
country-specific basis, and on May 30th it was announced that they had
bought for an undisclosed sum the global travel business of
Switzerland's Kuoni, putting the firm close to becoming the world's top

We find this a curious deviation from the real challenge, in that OTAs
everywhere are pushing hard to expand their operations and it will only
be a matter of time before they start overlapping the DMC niche. We can
already see this trend starting to happen with the M&A activities of
Expedia, and the new business services roll-outs of Airbnb and CTrip. By
going down the DMC M&A route JTB may well buy some time, but I think it
is only a matter of 1-3 years before these segments will be challenged
directly by the international OTAs. If I was part of JTB's senior
management, I'd be doing some serious strategic thinking about how to
get my own systems and teams in order so as to meet the oncoming threat.

Either that, or I would turn around and buy-out Expedia with the help of
some government financing... :-)

...The information janitors/

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