If you read Part One of this story, published in our last newsletter, you know that TravelFest was an immediate success with customers. The store was not big enough to handle the traffic, so we decided to build larger stores.
The original 6,000 square foot store in Northwest Austin, opened in July 1994, was quickly followed by a 10,500 square foot store on West Sixth Street near downtown Austin the following May (1995). We set up our “headquarters” upstairs above that store. Then, two years later, we opened a third store, 10,800 square feet in the River Oaks Shopping Center in one of the most affluent parts of Houston (August 1997).
The Economics of Growth Retail Chains
In order to understand the TravelFest story, one must understand how growth retail chains are built. The key number to watch is store-level profitability or “four walls profit.” This number is calculated before Headquarters or “corporate” overhead costs are taken out and tells us whether the stores make economic sense or not. The stores must be nicely profitable in order to justify expanding the chain. New stores can take up to three years to become profitable at the store level, but great stores should be profitable within a year, sometimes immediately upon opening, then make increasing profits as the years go by. So each location must be selected and the lease negotiated with great care.
At the same time, since we intended from the outset to build a national chain (as we planned at Bookstop), we had to gradually build a central organization (headquarters/overhead) that could support not only a chain but a rapidly growing chain. Setting up common products, having talented buyers to select and price the merchandise, developing accounting and other systems and controls, and a team to design and build new stores takes money. One or two stores, even if highly profitable, cannot cover the costs of building such an organization. Only when you have more stores, lots of stores, does the company become profitable as a whole.
As you open more stores, the headquarters cost as a percent of sales comes down. (These ideas are explained in more depth, with examples, in my “retail handbook.”) If the stores are profitable before those overhead costs, the chain will eventually become profitable. Great retailers like Target and Home Depot lost money at first, until they reached the “critical mass” required for overall profitability. Sometimes it takes years, depending on how fast you build new stores and how profitable each one is. Bookstop took about seven years to achieve corporate profitability, not an unusual length of time. Amazon took longer.
TravelFest Economics
In that context, TravelFest proved very challenging. Our first store was on track to become profitable in two-and-a-half years, the second larger Austin store more like a year-and-a-half. So we were getting better. The combined two stores had a store-level loss of 23% of sales in that first, partial year 1994, lost 9% the next year, and 3% the third year, prior to the opening of the Houston store.
In the same time frame, our Headquarters cost as percent of sales went from 38% to 11%, also headed in the right direction. Total corporate losses in the first two-and-a-half years were about $6.5 million.
Throughout this process, more capital is continually required, both to open new stores (at $1.0-1.5 million each) and to cover the losses. Investors must have confidence in the core concept and its appeal to customers, which we had proven, and the ability to ultimately become profitable as a total company, which we had not yet demonstrated.
So the whole process is a tricky balancing act, between adding new stores, perfecting the existing stores, finding new business opportunities, overcoming challenges, and raising capital. All at the right time, at the right pace, in the right amounts.
Challenges in Building TravelFest
The challenges we encountered were numerous. Some we foresaw, others we did not. Yet even when you know about a potential challenge, actually experiencing it is a different thing. Here I relate three examples of the challenges we faced.
The typical travel agency was open five days a week, regular office hours, plus sometimes a partial day on Saturday. In this system, each customer had “an agent.” Often someone they had worked with for years. Anytime they called the office, that person would be there, unless out to lunch or on vacation.
With our long hours for customer convenience, we could not operate that way. If you showed up at 8 PM Thursday, we could not guarantee that your favorite agent would be there. Traditional agencies did not have this problem. So we had to develop systems which allowed agents to work in teams and backstop each other, so more than one agent would be familiar with you and your travel plans.
A second issue was the fact we were newcomers blazing into an industry that was well-established. We needed more agents, lots of them. We sought agents who were not happy where they were working. But we also needed to hire and develop new agents.
At the time, the travel industry was full of codes for each airfare, each airport, each airline, and more. Learning how to use the Computerized or Centralized Reservations System (CRS) – we used SABRE from American Airlines – took months of training. Travel agents were also expected to know something about every possible destination worldwide and all the transportation options. The net result was that it could take three to five years for a travel agent to become a real pro. That was too slow for us. We began talking about developing our own “university” to more rapidly bring new hires up to speed. The “HR” (human resources) function became more important, sooner, than in my other startups.
The third example: when we had a real pro agent, the profits were high. The top agents could generate three or more times the ticket or cruise sales as the average agent, in the same amount of time. How could we raise the average productivity?
One of our strengths was ski packages, which sold well to the young Austin market. We had a few agents who could wrap up a ski sale quickly, but most could not. If you called the right store at the right time of day, you might get a pro, but often you would not. You’d hear, “I will ask Sally when she gets back” or “You should talk to Sally later.” Our operations chief, Glenn Astolfi, got the ski pros together in a room and spent all day learning what questions they asked and how they got their ski deals done so efficiently. From that session, we learned that you had to ask only three questions:
- What is your budget?
- Are you a pro or amateur skier?
- Do you hit the sack after skiing, or do you want the “Après Ski” nightlife?
We created a page with those questions. Given the possible combinations of answers, we kept a list of the current best ski options for each customer. Even novice agents could look at that sheet and give our customers good, fast, informed service.
Thus, we looked at each challenge and tried to figure out the best solution. We also continued to add offerings to our “one-stop shopping:” currency exchange, more classes including Berlitz language schools, a larger phone bank for our telephone agents, and more of our own “TravelFest Package Tours” to Mexican and Costa Rican resorts. We took hundreds of passport photos for our customers and could expedite the passport process. Each of these initiatives required more people and investment at the headquarters level.
Downfall
I continued to work hard raising the required funds via Texas “intrastate public offerings” and private placement offerings made available in other states.
While we were busy trying to perfect our chain, the airlines had finally decided that the travel agents were not really earning their keep. In early 1995, when our second store was under construction, the airlines put a “cap” on domestic airline commissions at $50. We no longer got $150 on a lucrative $1500 first-class ticket. Only Southwest and TWA did not make this change, Southwest being kind enough to give agencies a one-year advance notice of any changes they would make in the commission structure.
By the fall of 1997, after we had opened our third store, the airlines made further cuts. While our emphasis on leisure travel, cruises, and package tours meant that we were probably hurt less than our competitors, it still cost our embryonic company at least $2-300,000 a year in gross margin dollars available to cover expenses.
Our challenge therefor became even greater.
In these same years, the first online travel sites were created. Expedia was formed by Microsoft and Travelocity by American Airlines/SABRE. They did not take much business at first. I was still on the Hoovers board of directors, where my successor Patrick Spain had led the company onto the Internet far earlier than most companies. So I understood the potential of the new online services. While the new services were not a major factor at the time, their presence added a dark cloud over our future.
Nevertheless, our stockholders were still in love with our concept, which offered a more engaging experience than any competitor or online service. At one annual stockholders meeting, in which we solicited from our investor-customers detailed input on travel and TraveFest, we had more shareholders (over 200) attend than attended the General Motors stockholders meeting that year!
We even attracted the attention of a senior investment banker with one of the big New York investment banks. He had agreed to raise additional funds for us to continue our plans. Just as we were about to seal the deal, the fellow lost his job and the agreement fell through.
We held many meetings with our shareholders to alert them to our issues and to try to raise more money to keep going.
Home equity loans were illegal in Texas, a remnant of efforts to prevent the foreclosure of people’s homes. In about 1998, that law changed, and home equity loans became legal. I took out a $300,000+ home equity loan on my house on Lake Austin the day they became legal, borrowing to the limit. All the funds immediately went to cover TravelFest payroll. Not including me, because I had earlier stopped taking any pay.
I still owned a nice block of Hoovers stock but borrowed against it to loan money to TravelFest, perhaps about $200,000. I knew Hoovers was soon going public and would pay off big, but I could not wait. When TravelFest failed, I had to give up all that stock. Hoovers went public in 1999 and was sold to Dun & Bradstreet in 2003 for about $117 million. I received $60,000 of that, all of which I owed to others.
All these efforts to save the company were for naught.
As the airline commissions came down and the online travel services rose up, it became impossible to raise more money.
In order to serve our customers and secure jobs for our employees, in November 1998 we sold the two Austin stores to one of the city’s top travel agencies, Pace Travel. We did this at a great loss but got some cash to pay down debts. That successor business failed within a few years. We closed the Houston store, which had not done as well as the Austin stores and for which we could not find a buyer.
At the end, we opened a branch with travel merchandise only at the “new” Austin airport (ABIA). We tried to franchise our system of books and luggage to other travel agencies. I stepped down from day-to-day leadership and we hired a franchising expert. But it was too late.
Taken together, we lost about $12-13 million of investor money. No one was happy about that. While a few loudly complained to me, I am sure there were others who said nothing. At the same time, contrary to what all the lawyers had said when we raised money from non-accredited investors, nobody even threatened to sue me or the company. Perhaps it was because, even in our television ads to raise money, I had said, “If you cannot afford to lose this money, you should not invest.”
I ended up borrowing something like a million dollars, only paying down that debt (in part) by selling the house on Lake Austin in 2003. (That property, with a new home built on it, is now valued at $6 million, vs. the $400,000 I paid for it in 1990.)
In the early 2000s, an artist went by the then-vacant Sixth Street Austin store, and liked the colors and beauty of the store. He took a bunch of pictures, including those shown here:
After TravelFest
Had we succeeded in raising additional capital and kept the business going and growing, what would have happened to TravelFest?
The odds are that the cyclical nature of travel, the industry recessions or depressions caused by the SARS epidemic, then by September 11 2001, and by COVID, would have killed the business a few years after the events described above. The rise of do-it-yourself online booking would also have hurt, as it did almost every travel agency.
I have mused about what kind of changes we might have made to survive. Our book, luggage, and services businesses were all strong. But without the agency and ticketing side, we would not be able to justify the big stores and large rent bills we were paying. We would have had to start over with a new concept and smaller stores. Even that might not work, since airline ticket sales generated much of the traffic that bought the books and luggage.
With the power of hindsight, it is hard for me to see how TravelFest could have survived.
Lessons Learned
Needless to say, this whole story was beyond painful for me personally. It was my first entrepreneurial failure. We failed to live up to the expectations of our customers, employees, and investors. Going from being a millionaire to scratching to pay my bills was also, to quote Mark Twain, “damn inconvenient.”
In the classes I teach to future entrepreneurs, I am often asked how I coped with the failure. My two best answers are, “Have loyal, good friends and keep a sense of humor.”
From a business standpoint, the airlines acted as one (except Southwest and TWA) when they slashed commissions on tickets. I have always preached never to become reliant on one customer or one supplier. From TravelFest’s viewpoint, the airlines acted like one company, and that company was by far our largest revenue and gross margin dollar generator. So I learned my own lesson the hard way.
I had also personally guaranteed the Houston lease in order to get a good deal, against the advice of my lawyer. That cost me dearly, almost driving me into personal bankruptcy before the landlord agreed to a lower settlement amount.
Of course, all this leads to the big question, often asked of me by students, “How do you know when to give up on a venture, when to pull the plug?”
To which my answer, always consistent and from the heart, is, “You will need to talk to someone else about that. I am the type who places all his bets on the current venture, the type who goes down with the ship.”
(And I was in fact the last guy to turn off the lights and lock the door at TravelFest, selling off my office supplies to nearby offices.)
Further Beyond TravelFest
Despite this enormous setback, my love of serving customers continued and continues. My next two ideas were RoadStory USA and The Spark, reflecting my belief in “experiential retailing.” I may tell those two stories, neither of which came to fruition, in future newsletters. (Please submit YOUR stories here!)
I also began to write books and online posts, to teach at the University of Texas, and to give talks around the world. My experience both with great success and great failure probably make me a better teacher of entrepreneurship.
As you know, all my energies today are focused on my latest idea, the American Business History Center, the first non-profit venture my friends and I have started. We appreciate your support for this venture and are confident it will not be another TravelFest!
Gary Hoover
Executive Director
American Business History Center
PS, here are the present uses of the old TravelFest store locations:
Store 1, Arboretum, Austin: https://www.yelp.com/biz/simar-seafood-cocina-austin
Store 2: West Sixth, Austin: https://www.yelp.com/biz/julian-gold-austin
Store 3, River Oaks, Houston: https://www.yelp.com/biz/mens-wearhouse-houston-20
