Thomas Cook collapses

On 23 September 2019 the British tour operator Thomas Cook collapsed, leaving thousands of tourists stranded far from home and debts owed to Spanish hotels, especially in the Canary and Balearic Islands. Before any economic consideration, the news was a difficult situation for many families who were travelling and saw their return, or their holiday, left in the air overnight. For the hotels and companies affected, the news arrived with staffing and supply commitments already made, which reduced their room for manoeuvre.

For the Spanish tourism sector, the collapse also had a direct effect on the accounts of establishments that worked with the operator. A hotel chain or independent hotel that depends on an intermediary to fill its rooms is exposed when that intermediary falls: it loses future occupancy and, in many cases, receivables for services already provided. The situation also affects other links in the tourism chain, such as carriers, restaurants or leisure activities that indirectly depended on those visitors.

What a tour operator does

A tour operator buys hotel places, flights and services in bulk and sells them in packages to travellers. Buying in bulk lets it negotiate better prices, and its sales network gives it access to a broad clientele. For the traveller it offers convenience; for the supplier, volume and predictability.

For a hotel, it is a customer that brings volume and occupancy. When it collapses, the hotel not only loses those customers but may be left with unpaid invoices owed by an insolvent debtor, with little chance of recovering the full amount. The usual commercial relationship, comfortable while it works, then becomes a significant financial exposure. When the debt of an insolvent customer is significant, recovery is usually slow and partial, which is why it is better to prevent than to claim afterwards.

The risk of concentration

The situation shows the risk of depending on a few large customers. If one of them falls, the effect on a business’s liquidity can be immediate, because fixed costs keep running while income disappears. It is a risk that particularly affects the tourism sector, where a few intermediaries channel much of the demand. In a business with high customer concentration, any delay in a large payment is felt immediately in the ability to pay wages, suppliers and taxes.

But it is not exclusive to tourism. Any company that sells a large part of its output to a single customer, or to a small number, shares that vulnerability. Concentration is usually comfortable in normal times, because it simplifies management and allows volume to be negotiated, and it is paid for dearly when the main customer has a problem that could not be foreseen. That dependence is not always perceived as a risk while the customer pays on time, which is why it is best analysed in calm moments.

Prudent measures

It is worth reviewing customer concentration, payment terms and payment guarantees. A simple analysis is to list the ten largest customers, calculate what percentage of turnover each represents and what would happen to the cash position if the largest stopped paying for a quarter.

Also consider taking out credit insurance, advance payments or deposits where possible. And keep a cash cushion large enough to absorb unexpected non-payment. An adviser can help design a scheme proportionate to the size and sector of each business, without making the relationship with customers unduly costly. When margins allow, widening the customer base or opening new sales channels reduces dependence and strengthens the bargaining position with intermediaries.

A diversified customer base is the best defence against the failure of one of them.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.