Travel platforms Expedia and Booking are finding the going tougher, as they battle growing costs and lower margins.
Expedia disappointed the markets, with lower profits at Trivago and Vrbo, and reduced full year guidance. At Booking, while volumes grew, average room rates slipped and are expected to slide further in the coming quarter.
At Expedia, the challenges included lower commissions on air tickets, down 10%. CEO Mark Okerstrom warned things were not immediately looking up. “I think we’re going to see the next several quarters, we expect there to be continued muted growth rates. And then we’re optimistic that once we get past the lapping over some of these changes that became more acute in the first half of this year, that we should be in a spot where we’re able to return to growth rates that we’re more satisfied with.”
Among the accommodation businesses, Vrbo demonstrated the challenges at large. While gross bookings were up 5% and revenues grew 14%, ebitda was just 3% up. “Revenue growth was partly offset by continued investments in both performance and brand marketing to support the Vrbo brand and higher payment processing costs as Vrbo accelerated the shift to Expedia Group’s payment platform,” explained CFO Alan Pickerill.
“We continue to be happy with the trends we’re seeing at Vrbo,” said Okerstrom. “They continue to see growth rates in the double digits, but unfortunately, even that is swamped by some of the SEO impacts and some of the replatforming work. The plan is to roll out the Vrbo brand in more markets over the course of the next couple of quarters, and Vrbo does plan to put some marketing spend against those rollouts and then there’ll be further rollouts across 2020.”
The group also struggled with online marketing changes, benefiting less from traditional SEO and consequently spending more on online marketing. The company is testing out alternative online routes to market, such as Instagram, but find it harder to calculate ROI.
Okerstrom took comfort from the recent Marriott deal, hinting there could be more to come: “Our recent agreement to become Marriott’s exclusive optimized wholesale distributor is a great example of the power of our platform and technological capabilities, and we see a long runway of opportunity at our partner solutions business going forward.”
At Booking, listings of alternative accommodation, ie rentals other than hotels, continue to be a big focus. Said CEO Glenn Fogel: “We are encouraged with the progress in alternative accommodations business and continue to witness growth outpacing our overall business, while maintaining solid profitability. Booking.com’s total alternative accommodation listings now stand at over 6.2 million as of September 30, a key goal continues to be improving both the quality and variety of our listings in this area.” The group has introduced new tools to help owners improve the management of their listings.”
The group continues to pin its hopes on getting consumers to book their whole trip via the platform: “We believe the connected trip has tremendous potential to create a more robust travel ecosystem that will result in greater loyalty and engagement for Booking.com’s very large active customer base and it is an opportunity for our large supplier base to merchandise their offerings,” said Fogel.
While the latest quarter delivered better-than-expected room night growth, profits did not flow through. Room rates are under pressure, said CFO David Goulden, with trade tensions at the heart of declines: “We saw about 3% decline, in the fourth quarter we’re expecting about 4%. About half of that decline is due to lower rates in key countries, and the ones I call out would be US, Japan and Hong Kong. About half of the decline is due to a mix shift toward lower ADR countries away from higher ADR countries.”
As quarterly results were declared, rival Airbnb announced it will now start vetting listings. It also promised a hotline for neighbours who might be concerned about rowdy guests next door. The moves, which will add further administrative burdens and costs to the Airbnb platform, came after an Airbnb listed property in California was used for a Halloween party, at which shots were fired and five people died.
Also looking to innovate online is Accor, which announced a strategic partnership with Chinese online platform Alibaba. The promise of “a series of digital applications and loyalty programmes” from the two will aim to link Accor’s new loyalty programme ALL with Chinese consumers. Alibaba, which claims to be the world’s largest retailer and e-commerce company, promises access to almost 700m consumers, across its retail marketplaces.
HA Perspective [by Andrew Sangster]: This could well be a critical turning point in the OTA versus hotel brand company relationship. The evolution that looks possible is for this to become an OTA plus hotel brand company versus Google.
Richard Clarke, analyst at Bernstein, points out that Google has been a sleeping giant for some time. In September 2018, Bernstein estimated that google was part of the search process for a hotel room booking 55% of the time but was only paid 16.5% of the time. This made it all but inevitable that Google would take initiatives to close the gap.
These initiatives have, at least in part, been taken and the first signs of damage to other industry players was revealed in the third quarter results of the OTAs and the metasearch outfits like Tripadvisor and Trivago.
On November 7th the market values of the companies dropped dramatically: Tripadvisor down 27%, Expedia down 22% and Booking down 8%. This was a result of negative comments during the Q3 results, particularly regarding Google.
There is a danger that hotel companies will think Google is their friend and continue to work with the super aggregator to help damage what the hoteliers think is their main enemy, the OTAs.
But all Google is doing is ensuring that the OTAs and rival metasearch players end up paying more. In the process, it is clear that hoteliers are enjoying more direct referrals from Google however the long-term implications are surely that hoteliers will also eventually face bigger bills from Google too.
Hoteliers should remember that Google’s best customers are the OTAs, with the two giants, Expedia and Booking, paying close to USD10bn a year for performance marketing. Google is hardly likely to favour its smaller customers over its bigger ones in the long-term.
This is why hoteliers should seize the initiative and begin working closer with the OTAs. Commission levels are now much lower – nearly all chains now pay low teens and Marriott has got Booking down to 8% in the US – and the OTAs are pretty much uncatchable in terms of online retailing given that they are each spending in excess of USD1bn on tech every year.
All three groups – OTAs, hotel brand companies and Google – need each other. The real victims look set to be the other metasearch players. Trivago has just shed its CEO Rolf Schromgens, a co-founder of the business, in a surprise move and Tripadvisor admits it is still struggling to monetise its content.
Bernstein points out that Google’s resurgence is going to tip things further towards the big global hotel brands at the expense of independents and small chains that lack the expertise to fully exploit the opportunities available from Google and do not have brands that resonate with guests.
There continues to be speculation about OTAs launching their own hotel brands. But I would argue this is unlikely given the damage it would do to the tech companies return on capital employed.
OTAs will look to integrate more fully in the value chain of hotels but they have already backtracked from areas which proved too costly, notably Expedia with its retreat from conference booking (it sold its fledgling business).
There will be more competition for hotel brand companies in areas like loyalty schemes and apps, and the hoteliers will need to respond by ensuring that their offers are competitive, particularly on the technology front, an area where they still lag considerably.
But now is the chance to forge long-term relationships with the OTAs that benefit both sides. The outlier in this scenario is Airbnb. It has built an effective direct-to-consumer channel via its own website and might believe it can adopt an OYO-like model of branding properties itself.
The problem is that it loses its value as a neutral distribution platform. Much more likely then is that Airbnb will become another OTA, a move which would be good news for hotel brand companies.