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Where does China fit in Priceline’s expansion strategy?

10/14/2009| 5:03:10 PM|

The US-based company believes that the fundamental strength of the business has allowed Priceline to continue to invest in the future while delivering impressive current earnings growth.

When Priceline announced its second quarter results in August this year, the online travel company categorically stated that its international gross bookings benefited from geographic expansion, growth in hotel supply, and growth in new markets. Its international business gained momentum throughout the quarter, with 32% gross bookings growth on a local currency basis.


The US-based company believes that the fundamental strength of the business has allowed Priceline to continue to invest in the future while delivering impressive current earnings growth.

And going forward, Priceline’s CEO and president, Jeffery H. Boyd, is clear about international business. The company intends to continue to invest in geographic expansion and integration initiatives. In fact, Priceline plans to open offices in places like Sao Paolo, Cape Town, South Africa and in the Middle East.

Significantly, a venture in China continues to elude such plans or at least there hasn’t any indication about it yet.

Timing

Priceline’s executive vice president - corporate development Glenn D. Fogel says the company would certainly consider a physical presence in China “when conditions are right”. 

“However, one of the wonderful things about the Internet is that companies can achieve meaningful levels of business in a country without the necessity of a formal office,” Fogel told TravelDaily.cn’s correspondent Hriday Malik.

Priceline has time and again reiterated that one can be a late entrant and still be very successful.

“We think that there are many factors to success besides being early in a market. That being said, our Agoda.com and Booking.com hotel reservation brands have been putting guests into Chinese hotels for some time and we continue to add hotels there to improve inventory,” says Fogel. “We also have Chinese customers using our services to book hotels around the world given our excellent rates and extensive Chinese-language hotel content,” he added. 

Overall, Priceline has been expanding in China through its Agoda and Booking.com hotel websites. Both brands are expanding the number of hotel partners they market in China, increasing local sales personnel to support this growth and developing affiliate partnerships to provide increased visibility for their online hotel reservation products.  The company agrees that the Chinese travel market, both domestic and international (outbound and inbound), remains an attractive market and will continue to grow. 

That’s why the company is continuing to build its hotel inventory in China, translate content, and working diligently to maintain its leadership as one of the largest distributors of hotel rooms in the world.

Pure online model

One of the main concerns of running an e-commerce business in markets like China is related to working as a pure online player.

In the past, Priceline had referred to the fact that while its business from call centers in the market its serve is minuscule, in China, the great majority of so-called online transactions are actually being done in call centers. Plus, the credit card penetration was also a concern.

But several top players including eLong now say the scenario has changed.

Fogel says it is true that more of Priceline’s bookings come as pure online transactions rather than from its call-centers. 

“However, we do book through our call centers and believe our customers are well served by this channel.  Of course, from a profit perspective, we would prefer more people would book using just the online process but we recognize that in some areas online transaction adoption is going to be slower than it is in other areas. Regardless, China is already an attractive market to us and we will continue to build our business there through Booking.com and Agoda.com,” he said.

Fogel added, “While a pure online model is a great advantage when call center wages are high, as is the case in Europe and in the US, Ctrip has proven that a call center-focused travel company can achieve great success if wages are relatively low.  The debate of labor costs versus technology costs is an old one and as technology costs continue to decline while wages increase, there will be more benefit to tech-oriented model.” @@
Supplier expansion

China is still witnessing continued expansion of hotels, especially in the third tier cities and in the tourist destination cities. Even in markets like Beijing and Shanghai, hotels are being built up.

Events like the World Expo offer great opportunity for online travel distribution.

Fogel agrees and says the World Expo is another shining opportunity for the Chinese travel industry.

“That being said, the key to travel growth is not one-time events like the Expo or the Olympics, rather the important factor is overall economic development.  So as long as China’s economic growth continues its rapid pace, there will be a need for more hotels.  No doubt, sometimes hotel supply can get a bit ahead of demand and sometimes it is the other way around.  However, from our perspective as an OTA, it is our job to fill hotels regardless of whether there are too few rooms, too many rooms or the number is just right,” said Fogel.

“Of course, when there is excess supply, hotels are less restrictive in giving inventory to agents to sell and that is when a company like ours is extremely helpful.  Because we have global demand, if there is excessive hotel supply in certain Chinese cities, we are well positioned to assist that hotel by driving demand other places in the world, and there are very few companies besides us in the entire world that can do this effectively,” explained Fogel.

Role of OTAs

Priceline believes that the online travel distribution channel has played a valuable role in promoting consumer demand in a vacation season that looked at the outset to pose considerable challenge to the supplier community.

Online distribution, according to Fogel, is both a very powerful channel and a very flexible one.  When demand drops, there are many ways using the Internet and all of its tools to build demand. 

Whether targeting different niches with better deals, promoting destinations more rapidly and less expensively than used to be done through conventional media and “brick-and-mortar” agencies, the Internet is a great benefit to the travel industry, said Fogel. 

He added, “However, it is important to keep in mind that agents can only move demand slightly.  In the end, it is the economy and prices of key travel components like jet fuel, that will have much bigger impacts on total travel sales.”

In China, OTAs like Ctrip and eLong say they are managing to attract new customers.

eLong in its second quarter results emphasised that in the same quarter comparison, it had 40% growth in new customers.

By managing cost control such as efficiency customer acquisition and sticking to pure online model, OTAs are in a position to make most of the new customers and even conversion from traditional channels. 

Fogel said, “We believe that regardless of culture, people want to travel.  And they want it to do it with as much value as possible – meaning the lowest price for a given quality level – and they want the booking and research processes to be as easy as possible.  For these reasons, people around the world find researching and booking travel on the internet to be a better way than the traditional channels.  Hence, we believe that, over time, more and more people in China, as in other places around the world, will embrace booking online.”@@
Localisation

Few years back, Fogel was quoted as saying: “Just transferring Americans to other areas of the world is usually not a recipe for success”.

Fogel says he is now even more certain of the general truth of that statement. 

“While we all know exceptions in which a person from one culture has been very successful in leading a business in another culture, for the most part, we think it important to have local talent.  In China, that means the people who are contacting hotels to explain the benefits of signing up with our Agoda.com and Booking.com companies are Chinese, understand the needs of the Chinese hoteliers, and understand the overall market in China,” he said.

“Of course, this does not mean that everyone in our offices must be staffed only by people of that culture.  In fact, that would be a huge mistake as there are great benefits by mixing people who have different backgrounds and experiences so there can be cross-knowledge.  However, it is important that there be sufficient local talent so people understand the local business and travel environment.  And we have been very successful with this method.”

Outside the US, Priceline, through its international subsidiaries Booking.com and Agoda.com, fills more hotel rooms than any other online travel agency in the world. 

During the second quarter of 2009, Booking and Agoda booked more than $1.4 billion worth of hotel rooms or more than $15 million a day on average. 

“So, we think our method is working well,” said Fogel.

Mr. Glenn D. Fogel will speak during the upcoming TravelDaily China Travel Distribution Summit which will take place at Interlaken OCT Hotel Shenzhen from Dec.2 to 3, 2009. For more information, please visit the website at http://summit.TravelDaily.cn/distribution/.

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