The departure of chief executive and financial director at online travel agent Expedia, after a boardroom clash over the company’s direction, signals just how tough OTAs are finding the market.
The move to cut the team came after flat third quarter results that left markets disappointed. “Ultimately, senior management and the board disagreed on strategy,” said chairman Barry Diller. CEO Mark Okerstrom and CFO Alan Pickerill both resigned and have left their positions with immediate effect.
Diller suggested that the board had grown impatient, as Okerstrom’s restructuring plans failed to deliver a positive result, quickly enough. “Earlier this year, Expedia embarked on an ambitious reorganization plan with the goal of bringing our brands and technology together in a more efficient way. This reorganization, while sound in concept, resulted in a material loss of focus on our current operations, leading to disappointing third quarter results and a lacklustre near-term outlook.”
Expedia shares, which had fallen 26% in November, rose 6% on news of the executive clearout. Underlining his assertion that the shares are undervalued, Diller declared he would personally be buying more, and the board authorised further company buybacks of up to 20m shares. Vice chairman Peter Kern asserted: “We believe there is significant opportunity for Expedia to grow revenue and margins in what is still a very dynamic online travel industry.”
The upset at Expedia came as Tripadvisor broadened its European reach, by purchasing Bookatable, from Michelin. Branded as “a content and licensing partnership”, the acquisition will see Bookatable wrapped into Tripadvisor’s existing restaurant booking platform TheFork – creating what is claimed to be the largest online restaurant booking platform. The move gives Tripadvisor access to a much broader number of European consumers, notably in the markets of United Kingdom, Germany, Austria, Finland and Norway. New restaurants added to the platform will include high end establishments holding coveted Michelin stars.
For Expedia, the future could head in one or more of several directions. “They’ve still got a good consumer proposition, as a travel conglomerate,” one industry insider told Hotel Analyst. “But every third party operator is trying to stop being just one thing.”
The more alarming issue, he suggested, is Expedia’s reliance on marketing via Google, leaving them out of control of their distribution. “Organic is becoming irrelevant on Google,” he added, noting the USD1.6bn Expedia spends on online marketing, referenced in recent quarterly results. “You could question if this is actually a tax.”
Maggie Rauch, senior director of research and head analyst for Phocuswright, warned: “Expedia has also been losing ground on its home turf to Booking Holdings, while not outperforming in international markets.”
Expedia is not the only online business to see a change at the top. Larry Page and Sergey Brin, founders of Google, have stepped down from their chief executive and president roles at parent company Alphabet. The pair declared the group needs simpler management, but they will continue to be actively involved – and hold 51% of the voting shares.
HA Perspective [by Chris Bown]: Stuff long term strategy, US-listed company executives are consistently measured on quarterly results – and the ensuing impact on the share price. A restructuring launched by Okerstrom and Pickerill might ultimately be the right thing for Expedia – but they won’t be around long enough to see if that’s the case.
Looking at Expedia’s traditional business, it is hard to see where Kern thinks higher margin growth will come from. Particularly in the hotel space, pressure from new platforms (Airbnb, Oyo, et al) is going to make it harder to increase commissions. It’s not just hotels, flight ticket commissions were down in the recent quarterly results, too.
What Expedia does have, is lots of data – and mining that could provide new opportunities. An Expedia executive recently told us that, in Europe, they see plenty of opportunities to work with hotel owners, to improve yield. Plus there is the hope of more wholesale deals, similar to that struck with Marriott; but while those will deliver sales volume and stability, they likely won’t deliver higher margins.
Some have argued that the deleted senior executives spent too much time blaming Google for making life hard, when the OTAs have simply become reliant on a “free lunch” in the form of organic search, for too long. “If I owned a business that happened to be getting free prime time TV ads for years, I would also be upset if I suddenly had to pay for TV ads like any other ordinary business does,” said former eDreams cofounder, Mauricio Prieto in an online response to the news.
There’s also the question of what Google does next. With the guardians of the “don’t be evil” motto stepping away from the business, the omens don’t look great.
Additional comment [by Andrew Sangster]: A point we have repeatedly made at Hotel Analyst is to consider OTAs as retailers and hotel brand companies as product branders. The equivalence is Kellogg’s and Walmart or Weetabix and Tesco. Hoteliers are the Kellogg’s and Weetabix and OTAs the Walmart and Tesco.
A better analogy is perhaps a sportswear firm like Nike, which sells most of its stuff, about 70%, through wholesalers. And Nike has declared it wants to grow its direct business. In November it ended its two-year old arrangement to sell through Amazon in a bid to increase profitability and control its brands.
In the hotel business, the numbers are usually the inverse of Nike. OTA business is at most chains between a quarter and a third of total room sales. At many of the US global majors, it is barely into double digits.
This gives hoteliers a strong hand with OTAs. Amazon failed to satisfy Nike that it was controlling the activity of third-party sellers and thus it lost the relationship with Nike to directly supply Amazon.
Nike has been able to increase selling prices and enhance its margin. But hoteliers should be wary of trying to emulate Nike. No hotel company has a brand anywhere near as strong as Nike’s and delisting from platforms (OTAs) would represent a significant loss of business.
Instead, hoteliers should use their strong current position and negotiate the best possible deals with the platforms as retailers while continuing to invest in brand building. The Expedia and Marriott deal on wholesale rates is a great example of what can be achieved, with Marriott at a stroke eliminating the headache of rate parity issues with wholesalers by having one of the most effective online players to act as a police force to ensure compliance.
A strong direct business is important – hoteliers should continue to invest in technology to deliver this and in particular in their websites (which, by the way, remain way behind the best online players) – but it should not be seen as a weakness if OTA sales continue to grow. Omni channel has been a favourite buzzword in retail and it one that hoteliers should be happy to adopt regarding how rooms are sold. Maximise the potential through all channels.
In the meantime, OTAs are continuing to suffer. It seems highly likely to me that they will eye the margins currently being made by the hotel brand companies and fancy taking a piece of the action.
Next year, an OTA hotel brand launch seems probable. Expedia seems more focused on partnerships at the present so my money would be on something coming out of Booking Holdings.
Expedia has some clear issues, as outlined in our story above, but its role as a full-service travel agent ought to offer stability in the medium to longer term. Booking Holdings, however, is almost entirely reliant on the accommodation space and is somewhat belatedly looking to add in air as one of its offers.
And while Expedia has been beaten up the most by investors over its reliance on Google, Expedia’s status as a dividend paying company means that it will have a much less brutal adjustment as investors acclimatise to the slower growth environment. Booking Holdings either has to rediscover growth or it will have to pay a dividend; and this will be a rockier road.
Booking’s Q3 numbers showed stronger profitability than Expedia but it was just as weak in terms of room night growth, barely hitting double digits. Overall sales growth was just 4%. Part of Booking’s growth strategy could well be the launch of a Booking hotel brand, offering an “own-label” variant for its customers.