Charlie Funk
Charlie Funk
I think we tend to pull for someone in a disadvantageous situation because at one time or another, all of us have been there. History is peppered with examples of the little guy standing up to a bigger adversary and triumphing in the end. The Biblical account of David and Goliath comes to mind.


Another example is the 1959 satirical film "The Mouse That Roared," about the tiny, fictitious Duchy of Grand Fenwick, where the economy is almost entirely dependent on making Pinot Grand Fenwick wine. An American winery develops a similar wine, pushing the Grand Fenwick economy to the brink of bankruptcy.

The country's prime minister decides that the only solution is to declare war on the U.S., be defeated quickly, then be made the recipients of a Marshall Plan-type recovery effort. But in an absurd series of events, the Fenwickians defeat the U.S. after coming into possession of a super powerful weapon that could possibly destroy the planet if detonated.

That was the kind of tapestry that came to mind when Viking Cruises announced that it would discontinue its business relationship with Costco following unsuccessful efforts to resolve compliance with Viking's rebate policy (http://vrc.com/ta-policy).

Briefly, Costco offers gift cards to customers who book cruises and travel. These, in turn, can be used for purchases in Costco store
s. Some of the cards reportedly are for amounts that require a comma.

To understand how the parties came to this place, we need to know more about Viking, its genesis and its willingness to innovate and sometimes break the mold.

Viking's founder, Torstein Hagen, engendered a rich cruise industry history when he founded Viking River Cruises in St. Petersburg in 1997. The early premise for all his ships (KD River Cruises was purchased in 2000) was to offer a simple, standardized cruise experience that appealed, especially, to older residents of the U.S. and Canada. By 2007, Viking had 23 ships in Europe, Russia and China, garnering high marks from passengers and reviewers alike.

By some accounts, one of the most important marketing strategies in river cruise history was Viking River Cruises' 2011 decision to become became a sponsor of PBS' "Downton Abbey" series. Many believe it did more to raise awareness of river cruising in the U.S. than all previous marketing and promotional efforts combined.

Viking's 2013 announcement that it would launch an ocean-going cruise line puzzled some in the industry because adding an upscale (don't call it luxury) ocean line seemed incongruous with the company's contemporary river product. Those who thought that had forgotten the roots of the company's founder.

Viking supports travel agents because it was the agent channel that, early on, helped the brand grow. As one example of its agent-friendly culture, Viking some years ago abolished noncommissionable fees, a major policy shift away from every other major cruise line. Agents saw the move as a brand standing up for the little people: the majority of retailers selling cruises.

Which brings me to rebating.

Cruise commission rebating has been a problem for years, both for retailers who decry what many perceive as an unprofessional practice and for cruise lines trying to maintain some semblance of brand identity and integrity. Efforts to get the practice under control began almost 15 years ago when cruise lines implemented a series of policies regulating the practice.

It is common for most cruise lines and tour operators to have rebating policies today that limit the type and amount of compensation that retailers can offer as an inducement to book with them. Policy violations by retailers have put suppliers in a quandary at times about how rigidly to enforce the policies, particularly when the violating retailer produces substantial revenue.

At some point, suppliers have to decide whether they or the retailers are in control of their business. Therefore, it should have come as a surprise to no one that when Viking and Costco failed to reach an agreement on rebating, Viking ended the relationship.

If you're wondering what impact Costco's rebating has on the cruise industry, consider:

  • In 2016, Costco reported annual sales of roughly $129 billion and net income of about $2.7 billion.
  • Costco's strategy has been characterized by some as simply pulling sales from other retailers by rebating.
  • While Costco does not split out revenue by product category, it apparently considers travel sales to be highly beneficial based on reports (unsubstantiated) that the company is in the process of hiring a lot of new sales agents -- anywhere from 140 to 400, depending on who's doing the telling.

In the case of the travel industry, at least, the theft-of-customers rap is, at best, a mischaracterization.

In discussions with cruise executives, I was told that the percentage of Costco sales to passengers who had never previously sailed with the line in question ranges from about 35% to a staggering 90%. Let that sink in. If this were true for only one or two brands, it might indeed mean that Costco was playing a zero-sum game. But that is not the case; Costco is actually growing the market.

I also learned that Costco's average sale as well as the percentage of balcony cabins it sells rival those of traditional retailers, and that they are higher than those stats for most OTAs and other rebating retailers. Onboard spend by those buying through Costco is also higher than for most OTAs.

Interestingly, travel agents are almost universally critical of Costco's travel selling, even though many are themselves Costco members. Apparently, it's OK to compete with other retailers for sales of tires, caskets, eyeglasses, contact lenses, appliances, hearing aids, drugs and 36-count toilet paper bundles. Just not travel.

Some have dismissively noted that Costco's profits are less than the revenue it gets from sales of membership cards, suggesting that membership sales somehow diminish or marginalize its business. To put that in perspective, one major cruise company had about $2.8 billion profit on $16.4 billion in sales. However, "onboard and other" revenue of about $4.1 billion yielded a profit of about $3.5 billion. So, without onboard and other revenue, it would have lost money. Does that suggest we should disdain its business model?

The cruise business has not been about ticket sales for quite a few years. The model is all about getting passengers onboard to spend money. The retailer is simply the facilitator in making the model work. Costco's model is to sell memberships to get people into its stores to spend money.

So, what can the vast majority of retailers do to compete against rebating by Costco or any other retailer?

First, stop trying to compete on price. If a potential buyer is only interested in the lowest price, consider that the likelihood he or she will ever become a repeat customer, ultimately a client, is slim and zero.

Second, I guarantee that no one ever said, "Honey, let's look at Costco to see what cruise has the biggest rebate, and that's the one we'll take." By the time a rebate search begins, the decision on the trip is made.

Third, sell the value of what you know. Bolt together many pieces to make a great vacation. To test this, call one of the retailers with a reputation for rebating and express interest in a cruise from Rome to Barcelona or some such. Add that you want to go early and need help booking a hotel near the Spanish Steps, getting names of nearby restaurants and finding a private tour guide. These are things you need to know how to do, because the rebating retailer either cannot or will not take the time to assist.

Finally, support suppliers that enforce rebating rules and continue to encourage them to tighten policies.

It's like this: Rebating is not going to go away, even though suppliers would rather it did. Agencies that continue competing with rebating retailers solely on price will go away. The key is to compete with rebaters by providing superior planning.

Were that not the case, Costco, with its 81.3 million members -- about 40% of the over-25 U.S. population -- would own the industry.

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