There's no dispute: Travel agencies are the primary sales channel
in the cruise market. It's not even close, with brick-and-mortar
retailers accounting for 95% of cruise sales, according to a study
published by PhoCusWright in February.
But the industry can hear footsteps, as online retailers -- led
by Travelocity, Expedia and Orbitz -- are poised to capture an increasing share of
the market. By 2005, PhoCusWright projects that online agencies and
cruise line Web sites will have won 10% of the market.
The so-called "Big Three" online agencies simply will not be
denied, said Henry Harteveldt, senior analyst for Forrester
Research.
"Anyone who underestimates the intelligence and drive of the Big
Three is shortchanging their financial future," Harteveldt
said.
"These guys play to win -- they're well-managed and financially
strong. Travel agencies must work to shore up their cruise
business, or they will lose it."
The Big Three have been able to put a dent in traditional
agencies' market share, even though booking technology is still in
its early stage of development. According to PhoCusWright, most
sales closed by online retailers -- 50% to 60% -- are completed
over the phone.
Seeking simplicity
The major Internet players are striving to improve technology in
order to make cruise booking -- a complex process -- user-friendly
and simple. Both Travelocity and Expedia, considered the leaders
among the online retailers, are developing their own cruise-booking
technology. Travelocity, when contacted, declined to discuss its
plans.
Christopher Roberts, Expedia's group manager for cruise product
development, said Expedia is developing its own cruise-booking
engine. Currently, Expedia outsources that functionality to
National Leisure Group (NLG).
"Our philosophy is to make the shopping and booking process as
simple as possible for consumers," Roberts said. "NLG has taken
that to a certain place, and we want to take it further. It's about
empowering people to make the bookings on line."
Harteveldt said Travelocity, so far, has done the best job of
developing a user-friendly interface and providing information that
travelers want -- like photos of cabins.
Marketing prowess
But overall, he said, the online agencies have yet to promote
cruising through advertising because the technology hasn't
developed to the point where booking a cruise on line is easy.
Still, the marketing power of the Big Three is enough to draw
many consumers.
Steve Gelfuso, president of CruiseBrothers.com -- an agency in
Cranston, R.I., that was once traditional but is now Internet-based
-- knows he's up against formidable opponents in the massive online
retailers.
"It's a huge concern," he said. "Our main competition is Expedia
and Travelocity -- most of our customers are comparing us to
them."
Despite its tiny size relative to the monster Internet travel
sellers -- Cruise Brothers generates about $24 million in annual
sales -- the company decided to focus the business around its Web
site, almost exclusively, more than a year ago.
Gelfuso says the Internet is the most effective medium to market
cruises.
"We built our place on newspaper advertising, but the last
couple of years the number of phone calls that referenced newspaper
ads has gone down," said Gelfuso, who added that he still
advertises in the Boston Globe, Providence Journal and Newark
Star-Ledger. "Now, the vast majority of our calls reference the
Internet."
Being a small, family-owned company, Cruise Brothers can't
afford the expensive, sponsored links that are usually occupied by
one of the Big Three at the top of a Web page after a consumer uses
a search engine like Yahoo or Google.
Rather, Cruise Brothers advertises on Travelzoo, a Web publisher
of travel specials, and Cruise Critic, an online cruisers' guide
with ship reviews.
Gelfuso said the online advertising -- along with creative
methods of getting his site's link listed high on a search engine
(for example, the keywords "cruise deals" get Cruise Brothers
listed fourth on Google) -- has led to a sales boom.
"Compared with last June, our volume of calls has tripled," he
said.
Promoting expertise
Gelfuso knows he's going to lose sales to the giants because of
their marketing power.
However, he's hoping that he'll capture clients who are
dissatisfied with the mega sites' service, as Gelfuso promotes his
business as a Web site where knowledgeable agents are readily
available to answer questions.
"Expedia and Travelocity are booking some serious cabins -- I'll
take their falloff of people who aren't happy," he said.
According to Jeff Sturman, owner of Best Cruises in Edison,
N.J., Expedia and Travelocity are moving a lot of inventory, but
usually they're booking three- or four-day cruises -- often bought
for low prices at the last minute.
"Frankly, I'm not interested in selling a $399 cruise," said
Sturman.
But because they aggregate so much volume, the Internet giants
can make more on a $399 cruise than a small travel agency could,
according to Dan Bohan, chief operating officer of Fairfax
Va.-based Omega World Travel, which owns Cruise.com.
The Big Three rake in cruise commissions over 20%, while the
average brick-and-mortar agency earns 12% to 16% commission.
Cruise.com earns between 15% and 20%, Bohan said.
Bohan said the Web giants are not using the higher commissions
to undercut pricing offered by travel agents.
"The Internet retailers don't discount at all," said Bohan.
"Sometimes their prices are higher than a travel agency's. The
majority of prices are identical."
Ships to fill
But with so much capacity in the cruise market, "commodity
cruising" is a reality, and the large Internet sites can use their
marketing power to fill staterooms, Sturman said.
"If cruise lines keep pumping out the tonnage, they will do what
they have to do to fill up the ships," Sturman said.
Sturman is confident that he will be able to run a profitable
business as long as consumers buy more expensive cruises from
travel agents.
Kevin Hamilton, general manager of Spartan Travel in East
Lansing, Mich., said customers are hesitant to click the purchase
button on a seven- or 10-day cruise -- on which they could be
spending thousands of dollars -- without talking to a consultant
first.
Hamilton knows from experience. His agency featured CruisePath's
consumer booking engine on its Web site -- before CruisePath went
out of business -- and in a year's time, two cruises were booked on
line, he said.
"In 10 years that could change," Hamilton said. "But right now,
cruise lines heavily rely on travel agents to sell the high-yield
stuff [offline]."
While they can't win a marketing war with the Big Three,
Harteveldt said agencies -- particularly those that have focused on
cruising as a niche -- can successfully sell their expertise and
counseling.
"Offline agents can focus on speaking intelligently about the
different options and getting themselves out in the community to
promote cruising," Harteveldt said.
Report: Direct sales on the rise
By Jerry Limone
NEW YORK -- Traditional travel agencies don't sell cruises as
well as they should and will lose significant market share to
supplier-direct initiatives and online agencies in the next three
years, according to a white paper published by Credit Suisse First
Boston (CSFB) for investors.
CSFB forecasts that traditional agencies' share of the cruise
market will shrink from 90% to 60% by 2006, while supplier-direct
sales (Web and phone) will reach 25% by that time. CSFB projects
online agencies will be selling 15% of cruises by 2006.
In its thesis, titled "Changing the Channel: A White Paper on
Shifting Cruise Industry Dynamics," CSFB said traditional agencies
"have served more as a transaction-processing function than a
retail sales force."
CSFB suggested agencies should be performing better considering
cruising's high satisfaction level among consumers.
CFSB cited the Cruise Lines International Association's (CLIA)
most recent market study, which found that only 12% of North
Americans have cruised, a low percentage, CFSB said, considering
CLIA's finding that 71% of all first-time cruisers said their
experience exceeded expectations.
"This disconnect suggests a distribution problem," according to
the white paper.
CSFB said that many distributors, particularly volume call
centers and the large Internet agencies, "treat the cruise product
like a commodity, as the focus is to sell the price/discount, not
the product's benefits and value."
Cruise lines, the report said, will push supplier-direct
initiatives in the next three years, not only to expand their reach
but to preserve brand value.
By selling 25% of all cruises directly to consumers by 2006,
Carnival and Royal Caribbean would reduce commission costs by $138
million and $75 million, respectively, according to the white
paper.
While increasing direct sales, CSFB said cruise lines are likely
to maintain base pay and pricing consistency across channels but
will pressure agencies to tighten preferred-supplier relationships
and "sell the product, not the discount."