2020: The Travel Industry's Reset and Restart | Frees Fund

If you cast your mind back to the era when people still listed "hobbies" on their résumés, "travel" and "reading" were the two most frequently cited. From our parents' generation's saying — "Traveling ten thousand miles trumps reading ten thousand books" — to the internet-native generation's coinage of "poetry and distant horizons," journeys have always promised delight, and faraway places have always shimmered with novelty.

Of course, this isn't uniquely Chinese. "Broad, wholesome, charitable views of men and things cannot be acquired by vegetating in one little corner of the earth all one's lifetime," wrote American author Mark Twain in his 1869 travelogue recounting his travels through Europe and the Holy Land. His The Innocents Abroad became one of the best-selling travel books of the 19th century.

The tourism industry contributes over 10% of global GDP. In China alone, it represents a trillion-yuan market (in 2019, Chinese residents spent 6.5 trillion yuan on travel). In the realm of leisure, tourism is the essential non-essential.

Paradoxically, our research into this quintessential leisure activity lags far behind our study of "food and drink." After the OTA wars subsided, the travel market settled into relative calm — nothing like the frenzied battles over fresh groceries, restaurants, and packaged foods. In recent years, travel has produced few genuinely refreshing innovations.

This was our starting point for revisiting the industry six months ago. We were intensely curious:

• Why hasn't tourism's pace of innovation kept up with other consumer sectors? Why hasn't it seen conflicts on the scale of the ride-hailing wars, the food delivery wars, or the new retail wars?
• The visible trends of younger travelers and online migration of distribution channels — what long-term changes will these bring to travel? How will these changes drive supply chain evolution? And whose opportunity will this be?

The pandemic froze travel from peak season to standstill overnight. We've watched industry professionals endure hardship, read news of companies shuttering and entering liquidation, and seen giant Trip.com Group attempt self-rescue through presales. As COVID-19 spread globally, the revenge spending rebound that travel operators anticipated would likely arrive later than many hoped.

The hardship is temporary. We're sharing our observations and reflections on the travel industry, hoping to offer fresh perspectives and inject some confidence. Precisely because we've identified certain long-term shifts, we're actively seeking investment targets and look forward to connecting with more entrepreneurs and industry experts. Reach us at yangxiao@freesvc.com, or add Frees Xiaorui on WeChat (ID: freesfund).

01 What Does the Travel Industry Look Like?

Before analyzing the long-term changes underway, let's examine the industry's original form.

First, from the demand side: travel is low-frequency, high-ticket, with vague user needs and lengthy decision cycles.

Take destination selection — it's highly random. We might deliberate for ages or decide on impulse. We care about social media recommendations, yet one friend's negative review can kill a destination. Choice depends on schedule flexibility, budget, and more. Moreover, travel isn't yet life-essential; it's nice-to-have. Plenty of people talk about travel constantly yet rarely act.

Travel's low frequency and predominantly offline service delivery make supplier selection a weighty decision. When on-site service meets minimum standards, there's little impetus for demand upgrading — after all, revisiting the same place soon is unlikely. Destinations resist horizontal comparison due to vastly different resources. More interestingly, travel is heavily experiential; memories tend to beautify over time: discomforting episodes fade, peak moments shine.

This makes travel heavily brand-driven. Users gravitate toward big brands or develop trust in brands they've used.

Second, from the supply side: travel's service chain is long, with varying informatization across links.

Transportation products — flights, trains, airport transfers — are highly standardized and well-informatized. Destination-specific experiences like paragliding, diving, and deep-sea fishing are fragmented, less standardized, and poorly informatized.

The smallest informatized unit determines overall informatization level. The weakest informatized link determines supply flexibility.

This is intuitive. Because every cinema seat is informatized, we can reserve specific seats. In other scenarios, your ticket grants entry but you find your own seat — first-come, first-served — because the smallest informatized unit is the venue, not individual seats within it.

Third, destination informatization determines what OTAs can sell. OTA offerings depend on destination resource informatization. Currently, two main supply types exist:

• Package tours: low informatization, heavy destination services, offline fixed itineraries (standard products) dominate, relatively inflexible;
• Independent travel: minimal destination services, high online booking penetration, high flexibility.

These are essentially set-menu dining versus buying ingredients and cooking yourself.

Between these, customized travel has emerged — "à la carte" style. It helps users crystallize vague needs, with private guides accompanying throughout and assisting execution. Being bespoke, it's service-heavy and generally pricey.

Fourth, travel preferences vary individually, determined by factors including internet proficiency for gathering travel information, past travel experience, self-sufficiency abroad, and spending power.

Users weak at information gathering or low in self-sufficiency abroad basically must join package tours.

Conversely, those adept at online search and booking, with ample travel experience and strong self-sufficiency, can choose independent travel — at the cost of time and effort spent planning.

Users wanting personalized private travel without the information-gathering burden can trade money for quality and time, choosing customized travel.

02 Consumer Side: New Demographics, New Channels, New Demands

New Media Content Stimulates Demand, Driving Supply Chain Improvement

Before fragmented images and short video proliferated, travel demand was triggered by complete, coherent content.

Initially, pioneers wrote books and pamphlets — like Twain's travelogue mentioned earlier. Later came documentaries. In the internet era, whether DQYER forum posts, Mafengwo travelogs, QQ Zone travel diaries, or destination news reports and documentaries, content maintained relatively complete narrative arcs.

With smartphone普及 and the explosion of "new content" on new media platforms, travel content consumption changed. Now, user demand is more easily sparked by fragmented content.

On Xiaohongshu, searching "travel" yields 1.2 million+ notes covering guides, attractions, outfit suggestions... Comments overflow with "So want to go!", "Stunning", "Flying XX/XX, anyone want to group up?"

According to Ocean Engine's Douyin playback statistics, numerous hot tourist cities gained massive attention through Douyin — 72 Asian cities hit 100 million views, with 13 cities exceeding 500 million. Though actual conversion data is hard to obtain, fragmented images and short video have undeniably become the new travel content consumption format.

Even without active searching, travel content finds you. During major holidays, this feeling intensifies. Scrolling Moments, you can "tour" the world; a geotagged landscape photo or a few seconds of travel highlight Vlog can stir desire.

The shift from long-form content to fragmented Moments and short video means what moves users may not be complete itineraries, but single "photo-worthy" attractions.

"That 200-year-old bar, visited by Gaudí, Dalí, and Picasso — I must go. That viral swing, so many friends have been — I must go. That street-side shop's rice cakes and shaved ice, trending on Kuaishou — I must go."

Human nature cannot resist such dazzling temptations. These "peak" moments that deliver extraordinary experiences are what travel and service industries cannot ignore. In 2002, Nobel laureate and psychologist Daniel Kahneman proposed the "peak-end rule": our memory of an experience is determined largely by its peak (best or worst moment) and its ending.

Yet traditional supply — fixed-itinerary products — cannot satisfy demand triggered by single highlight attractions.

Consider a common scenario: you're captivated by a Dali hotel, but the travel agency says their three-day premium Dali package excludes it; you can book that hotel separately at additional cost. This solution may dissatisfy you, leaving you to research flights, trains, services, and manage everything locally yourself.

To summarize: changes in distribution chains and user migration online require travel supply chains capable of rapidly expanding single attractions into complete itineraries, meeting diversified demands.

▍Demand Upgrades from Rising Consumption Levels and Changing Travel Companions

The youthification of travelers is already trending. Per the China Tourism Academy's industry report, in 2018 domestic travel data, post-80s were mainstays while post-90s reached 17%, surpassing post-70s. Over time, post-90s will become travel's new growth engine.

Their preferences diverge noticeably from post-70s and post-80s. The China Domestic Tourism Development Annual Report 2019 shows Beijing, haloed in older generations' minds, had fallen from post-90s' top 10 vibrant cities.

This generational gap extends to outbound travel. Per the 2018 National Tourism Consumption Trends Insight Report, among top 10 destinations by booking volume, post-70s favored immigrant destination Canada — absent from post-80s and post-90s top 10 lists — replaced by post-80s' fascination with Cambodia, while Russia became post-90s' new favorite.

With new demographics come personalized needs: showing parents the world, broadening children's horizons, or booking premium package tours for leisure-rich parents.

Moreover, as economic capacity rises, the expanding middle class pursues higher quality and value in travel products, gradually transitioning from value-for-money to quality focus.

Take transportation modes. Cheap, lower-quality package tours are increasingly "disliked." This correlates with growing travel experience. Per the China Tourism Academy's China Outbound Tourism Development Annual Report 2019, in 2018, 55.24% of mainland Chinese outbound travelers chose package tours, with 50.65% indicating future package tour participation — down significantly from 72.1% in 2017. Users abandoning package tours will gradually shift to independent and customized travel.

Similarly fading are "been-there-done-that" mass-market attractions, while offbeat routes and niche destinations rise. Compared to hurried glimpses of multiple places, living somewhere for a period has become travel's advanced form.

E-commerce evolved similarly: initially buying cheap non-standard items on Taobao, later shifting to quality branded goods on Tmall.

Youthification brings another change: dramatically higher online share in travel decisions.

As digital natives, young people trust internet recommendation indices and freedom more than visiting offline agencies based on flyers. Attracted by socially trending new travel content, and adept at online information search and verification, they're more willing to arrange itineraries and book services online.

Additionally, post-pandemic psychological concerns about large package tours (unpredictable health status of fellow travelers) should spur growth in small-group customized and independent travel.

We believe independent and customized travel will gradually converge, with market emergence of products less expensive than customized travel yet more serviced than independent travel.

Such hybrid products readily satisfy post-upgrading user psychology.

First, travel is low-frequency, high-ticket; with rising consumption levels, value-for-money isn't the primary demand — brand trust and service expectations matter more.

This parallels home renovation. Users think "how often do I renovate?" and typically exceed budget.

Our tradition holds "travel rich, live poor" — bring ample funds when away. With higher spending power, the "since we're here" mentality more easily overrides value considerations, pushing toward experiential products and services near one's spending ceiling that deliver profound experiences.

Second, due to travel uncertainties and growing preferences for booking-while-traveling and experience-focus, guaranteed services represent new demand in the upgrading era: airport transfers, check-in assistance, chartered cars, and itinerary adjustments based on weather, destination incidents, or spontaneous needs.

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/ 03 / Supply Side: What's New?

The continuous improvement of travel products means constantly providing more value-added services and new experiences beyond natural scenery.

Tourism originated from natural landscapes — great rivers, seas, strange mountains, exotic rocks. Then came artificial designs upon nature: cultural tourism products. From viewing West Lake to watching the Impression West Lake performance. With attraction commercialization came participatory activities leveraging natural advantages: skydiving, surfing, diving, skiing, bungee jumping. Recently, we've seen various characteristic towns and commercial districts develop.

As supply enriched, travel supply chains optimized and innovated step by step.

A key recent observation: increasingly fragmented destination experiential activities are being integrated into supply chains, connecting with higher-credibility origin-based travel agencies, forming trust transmission.

Thus in consumption decisions, trust backing reduces fraud concerns, making in-trip booking a new growth point for destination spending.

This is intuitive. Traveling unfamiliar places, users prefer checking Tripadvisor, Dianping, and similar platforms for hotel, restaurant, and attraction reviews over asking strangers or reading posted "chef's specials."

Some startups already offer services letting travelers flexibly view and select local travel products and services at destinations. This means users can conveniently book and purchase travel products and services spontaneously during trips.

Booking and payment via mobile or internet further unlocks demand. Now, booking a Thailand show ticket, hot air balloon ride, or sailing trip resembles buying movie tickets on Maoyan.

Greater information transparency emboldens consumption, more easily forming closed loops from "information" to "decision" to "transaction."

However, frankly, travel's informatization has been painfully slow.

First, supply-side improvement motivation is typically non-urgent. Low frequency means mostly "one-off" transactions; even with repeat business, intervals between visits are long.

Second, travel resources are highly dispersed, requiring upstream online travel service providers to drive resource-side informatization.

For end suppliers — running a small theater or owning several boats — most lack IT capabilities. Given their strong resource control, if business is adequate, spontaneous online migration is unnecessary.

Upstream travel service providers differ: they aggregate local resources, profiting through traffic distribution. They need refined management of fragmented supply, "putting it online" to connect with global OTAs.

As offline resource providers grow dependent on online channels, upstream service providers guide them step-by-step in product listing, online order management, and online customer service.

Moreover, social media's popularity and user migration to social channels accelerates supply-side online migration. Supply best adapting to short video, livestreaming, and other new media forms, completing online migration first, will brand-build first.

Because once informatized, they're transmitted through informatized platforms to the most informatized demographic. These people are social amplifiers: prolific content creators who stimulate more travel intentions through sharing and interaction. Winning them enables end-resource word-of-mouth positive cycles and scale.

Take the Palace Museum. In 2017, it pioneered online ticket sales for cultural venues, then used social media marketing to transform its formerly stern, rigid image, winning affection across age groups especially youth.

Another example: Douyin's "internet-famous city" Xi'an. In 2018, over 70 Xi'an government agencies including publicity, tourism, public security, and cultural heritage bureaus opened official Douyin accounts. They shifted from broad city promotion to refined event marketing, repeatedly exposing Xi'an elements — lamb paomo, roujiamo, liangpi, Bell and Drum Towers, old city walls, Furong Garden — on Douyin. During 2018's May Day holiday, Xi'an tourism revenue surged 139% to 4.5 billion yuan. In 2018, Xi'an videos exceeded 610,000, with over 3.6 billion total plays and over 100 million likes.

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/ 04 / Platform Roles: Social Media and New Supplier Platforms Will Accelerate Travel Product Brand Incubation

In recent years, travel market share has continued concentrating in leading OTAs, with market concentration further increasing.

To capture new demographics, expand channels, and meet new demands, giants like Trip.com Group have enhanced competitiveness through various acquisitions and mergers. Per Qianzhan Industry Research Institute's compilation, from early 2012 to mid-2018, Trip.com Group made 47 investments in flights, hotels, and travel, including promoting Tongcheng-Elong merger, investing in China's largest non-standard accommodation platform "Tujia," acquiring overseas car service platform "TangRenJie," etc.

Besides Mafengwo's $250 million funding round in May 2019, recent years have seen few massive travel industry fundings or refreshing innovations.

So no opportunities remain? Of course not — we see two changes, and change breeds opportunity.

First, new social media channels' new interaction methods accelerate both travel product dissemination and branding.

Compared to one-way printed brochures and city promotional videos, new media channels — WeChat, Weibo, livestreaming, short video platforms — offer more diverse, participatory interactive forms, enabling travel brands and service providers to maintain long-term two-way user communication while better discerning user needs.

For example, travel logs shared on Mafengwo or QQ Zone might only reach fellow travel enthusiasts, while a Moments travel photo radiates to more potential travel-interested users, expanding circles. More users "get seeded" then "harvest," potentially generating more Moments content, triggering further attention.

A positive cycle forms.

Precisely because online customer acquisition and brand-building through new channels and content is entirely viable, we're seeing many upstream suppliers vigorously building proprietary channels. Apps and mini-programs are becoming standard for airlines, hotels, and attractions.

Second, supplier platforms capable of incubating new travel brands have emerged.

New user demands may be captured by new brands, which need soil to grow.

In my view, new travel service brands might emerge from e-commerce platforms like Fliggy. In October 2018, Fliggy launched its "New Travel Alliance" initiative, shedding its "OTA" label to emphasize "platform" and "enabler" concepts, providing incubation space for new brands. On Fliggy, third-party sellers入驻 like opening Taobao stores — they can display brands, directly respond to user reviews, and build connections and trust accumulation with users.

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/ 05 / Two Types of Opportunities

Travel's essence is timely resource matching and service necessity created by information asymmetry.

Any industry change brings new players. Based on the three changes mentioned above, I see two opportunity types in travel. One: brand suppliers who master full-chain efficiency and emphasize service will emerge. The other: enterprises using technology to empower offline stores will find development opportunities.

▍First Opportunity: Brand Suppliers Mastering Full-Chain Efficiency and Emphasizing Service Have Room to Rise

Pandemic shocks will crush weaker SMEs, making industry concentration and branding more pronounced. To stand out, startups need distinctive advantages.

As mentioned, user demands are upgrading toward quality, freedom, and personalization; travel content consumption and decisions increasingly move online. Thus brand suppliers who preemptively capture emerging market demands and extend industry chain layout will find development opportunities.

Given that for travel, supply matters more than demand. Without supply, user demand goes unmet. Suppliers with strong full-chain efficiency control will have competitive advantage; those with exclusive resources even more so.

Moreover, with travel's many uncertainties, service-emphasizing brand suppliers will likely outperform pure information-matching suppliers.

▍Second Opportunity: Supply Chain Empowerment for Traditional Offline Travel Agencies

China's travel industry has numerous companies with relatively dispersed resources. Per the Ministry of Culture and Tourism's 2019 H1 national travel agency statistical survey, as of June 30, 2019, there were 37,794 travel agencies nationwide — five regions exceeded 2,500 agencies, while six regions had fewer than 500.

These scattered offline agencies mainly serve as offline channels in travel's long chain: reaching users and selling various fixed-route products.

In recent years, leading OTA platforms have frequently invested in and acquired offline agencies, primarily valuing their offline sales capabilities. For example, in October 2016, Trip.com Group strategically invested in Travel Master, which had over 5,000 offline stores.

Undoubtedly, for considerable time, some people will still prefer visiting offline agencies. Whoever empowers more such offline stores to enjoy informatization benefits will capture opportunity.

For example: currently visiting an offline agency, sales staff likely cannot immediately quote a plan. Typically, you wait a day or two for a document with itinerary and pricing based on your vague needs and preliminary interests. Since received information may be insufficiently intuitive or require adjustment, back-and-forth communication ensues.

This efficiency is low for you. Store sales also dislike it — with basically fixed per-deal pricing, more user consultations mean worse conversion rates.

With highly informatized agencies, the difference could be night and day: consulting at a store, staff could directly quote plans and prices, instantly querying, adjusting, and booking based on your needs. A originally planned seven-day-six-night itinerary could be shortened to five-day-four-night on demand; users could even on-site check travel items and service tiers.

Improving offline store informatization levels can, in the long run, bring travel's offline customer base online. Online's inherent information transparency and rapid response characteristics then demand greater travel product richness and flexibility. Thus offline stores need another empowerment — product empowerment: connecting them to more diverse, flexible supply, using more SKUs to meet users' diversified travel demands.

Summary

1. Post-pandemic, small-group customized and independent travel not involving crowds should see new growth waves.

2. In new media's dissemination environment, content users receive and spread grows increasingly fragmented, with much travel intention sparked by highlight moments. This will push the industry to develop capability for rapidly expanding single attractions into complete itineraries.

3. Travel's essence is timely resource matching and service necessity from information asymmetry. Two player types will gain competitive advantage: brand suppliers mastering full-chain efficiency and emphasizing service, and those providing supply chain empowerment for traditional offline stores.

Today's Question

What other service-heavy offline industries are flipping from offline to online? Share your thoughts in comments below. By 9 PM March 15, the 3 most thoughtful contributors will receive limited-edition FreeS Fund customized Three Squirrels nut gift boxes.

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