Investment Matters

A lesson from Thomas Cook

It was a restless week for customers of UK travel agency Thomas Cook.  Some 150,000 holidaymakers were left stranded after the company entered compulsory liquidation this week.

While the shock announcement may have been precipitated by several factors (its airline business, devaluation of the pound and restrained demand post-Brexit), a key underlying driver was a strategic misstep in underestimating the structural changes in its industry.

Travellers have migrated online, preferring the economy and convenience that comes with self-booking.  Furthermore, online services such as Expedia and Airbnb have enabled a shift away from package deals, with consumers creating their own bespoke itineraries.

Thomas Cook fundamentally failed to respond to these changes.  The collapse highlights that in a world where “disruption” and “innovation” are the buzzwords of the day it is important to seek out companies that continue to adapt and evolve.

Those that do not, risk getting left behind.  We have seen this play out in the past.  Companies that were once thought to have a highly defensible competitive advantage have been stagnant, and have watched while this advantage has been whittle away in the face of change.

Examples include Yahoo (failing to acquire a superior search engine in Google), Nokia (touch screens and smartphones) and Kodak (digital photography).


Left behind: Companies that have been slow to react to change

Week 13 FY 20 Thomas Cook


We must, therefore, be hyper-aware of the potential for disruption and change.

In the context of investing, the prospect of change:

  1. Provides an opportunity to identify companies who are innovating to create new, or reshape existing industries.  
  2. Differentiates companies that are “cheap” and those that are “cheap for a reason” – that is, those that are in a period of transition and those that are structurally challenged with little recourse.
  3. Is a cause for caution, particularly when prices imply the status quo will continue in perpetuity.  An example of this is the current “lower for longer” view on interest rates (implied in the price of bond-proxies such as Transurban).

Thus, Thomas Cook’s collapse is a reminder to take a view of the world that is probabilistic, explores multiple scenarios and considers the potential impact of change.