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Are Flight Centre Travel Group Ltd shares a good buy for 2018?

At a time when it seems like consumers are increasingly turning to online retailers to buy almost everything, it’s refreshing to see the stock of a traditional brick-and-mortar company like Flight Centre Travel Group Ltd (ASX: FLT) performing so well on the market.

Over the last year the share price has increased over 42% from $31.45 to be pushing $45 today, after hitting a 12 month high of almost $50 in late August.

And canny investors who purchased the company back at its lowest point in March 2009 would now be sitting on an astronomical 885% gain! 

The Strategic Advantage of a Physical Presence  

Due to practically non-existent switching costs at pure-play online retailers, customers often make their shopping decisions based solely on price. This makes brand loyalty a real issue for these companies. And it might help explain why Flight Centre GM of Product Advertising Darren Wright views the 689 stores in their retail network as a key competitive advantage.

When speaking to Sky News earlier this month, he stated that welcoming people into their stores is part of a customer experience model that helps position the Flight Centre brand in the minds of consumers.  

The market itself provides evidence for and against Wright’s strategic advantage claim. The share price of online travel agent Webjet Limited (ASX: WEB) has been pretty volatile over the last 12 months, up about 7% for the year.

But online sellers in other retail sectors have performed much better, with Carsales.com Ltd (ASX: CAR) up over 30% and REA Group Limited (ASX: REA) up 41%.   

Helloworld Travel Ltd (ASX: HLO) (formerly Harvey World Travel) is Flight Centre’s key competitor in the physical retail space with over 2,000 independent franchised stores of its own across Australia, and its share price has also seen strong growth of 30% this year.   

But it’s interesting that the trailing 12 month return on assets tells a slightly different story. Flight Centre’s TTM ROA of 7.45% is better than Helloworld’s 3.36%, but both lag well behind Webjet’s 11.93%.

This demonstrates the increased efficiencies possible through a purely online business, where less physical assets are required to generate sales.   

This is all to say that, while Flight Centre’s share price performance has been strong, whether or not its success is purely down to its physical presence is debatable.

And the people costs of maintaining such a large retail network are high: employee benefits paid by Flight Centre during 2017 were equivalent to 54% of total revenues, versus only 28% for Webjet.

So the onus is really on Flight Centre to preserve net income growth by defending its market share. 

This hasn’t stopped them from continuing to invest in training and development. Flight Centre recently announced a partnership between their Travel Academy and Torrens University, where successful students could earn a Diploma in Travel and Tourism.

Great customer service may be a dying art in an online world – but Flight Centre is making it a strategic priority.  

It’s also worth noting that Flight Centre is not completely ignoring digital technology in its sales strategy. In the same interview with Sky Business, Wright spoke about using virtual reality in Flight Centre stores as a way to enrich the customer experience. 

Foolish takeaway

Flight Centre is optimistic about 2018, and forecasts its profit before tax to grow between 6.2% and 15.6%. But it’s worth looking at their results alongside others in both the traditional brick-and-mortar and online retail segments.

Your choice to invest in Flight Centre may well come down to whether or not you agree with Darren Wright’s positive view of their retail presence and customer service model.

If you think digital sales are the way of the future, then Webjet’s purely online business model might be better able to capitalise on the growth of the travel and tour operator market in Australia. 

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Motley Fool contributor Rhys Brock owns shares of REA Group Limited. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia has recommended carsales.com Limited, Helloworld Limited, REA Group Limited, and Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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