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The threat in Ctrip’s internationalization and the opportunity for travel startups

02/05/2019| 8:17:19 AM| 中文

With competitive services, quality control and lower cost, the established players usually gain the greatest traction in user traffic and capital support, and will ultimately dominate the fragmented markets.

2018 is just another tough year.

China's tourism industry has been through years of slowdown. On the positive side, the market is back to rationality. As investors are getting more careful on their bets, travel firms are cutting their costs and subsidies. There are ups and downs for the market, and people will eventually run out of gimmicks.

The Chinese market is not as optimistic as some may think, and most travel companies are looking for a breakthrough, especially Ctrip, the leading online travel company.

Leading international journey

A few years earlier, Ctrip began its strategy of internationalization and expansion to lower-tier cities. After struggling in 2018, the company's international business (mainly Trip.com) is still not ideal.

If you just look at the growth figures, Trip.com looks good. But for Ctrip, taking the Trip.com as a base to expand the group’s international business is not just about getting orders from metasearch and regional channels and getting good data.

After all, this is not a long-term solution.

The core of Trip.com's success lies in its business-to-consumer model, which sees rapid growth in direct customer traffic and builds brand trust in different countries. But Trip.com's attempt to speed up in a short time is largely unrealistic.

However, for Trip.com, in the initial stage, it is a good way to get familiar with the pure overseas business model and business scenario requirements through metasearch and corporate-side channels.

Trip.com's international strategy is no exception. It has a long way to go to dominate the Asia Pacific region. After all, Agoda, a subsidiary brand of Booking Holdings, has been deeply rooted in Asia Pacific for years. The brand awareness and supplier tie-ups Agoda has accumulated there are not what Trip.com can outperform in the short term.

Trip.com also has a strong rival in South East Asia: Traveloka, an Indonesian unicorn. In the past two years, Traveloka has taken on Agoda in the Asia Pacific region after obtaining a huge investment from investors including Expedia.

Trip.com's international journey was predictably no less fraught with pitfalls.

Back-end provisioning and service challenges

Trip.com also faces the challenge of building a back-end supply chain and service system. It currently follows Ctrip's proprietary OTA mode in China, which is different from metasearch engines like Skyscanner in terms of international expansion.

Metasearch doesn't have to control the quality of service on the back end, whereas OTAs do -- which is why OTAs always emphasize the quality of their service. But quality service depends on strong back-end supply chain and service system.

Looking at Trip.com's international path, it first expands in Asia Pacific markets such as Hong Kong, South Korea, Japan and Thailand, which are popular destinations for Chinese outbound travel. Hong Kong is said to be  Trip.com’s most successful market, followed by Korea, Japan and Thailand.

The volume of orders from Chinese tourists still gives Ctrip a say in some of these destinations. In addition to that, Ctrip also partners with third parties in overseas destinations to secure supplies from wholesalers.

With the development of its business, Ctrip continues to recruit a large number of BD overseas, establish call centers, set up stores at airports. The company obtains IATA licenses in various countries and regions and strengthens its back-end supply chain and service system behind the scenes.

However, the construction and improvement of back-end supply chain can't be accomplished by just money and human resources. It needs to be supported by orders and demand. This goes back to the core issue mentioned above. Trip.com's own traffic has to take off first.

In addition, Trip.com has set up a multilingual website and promoted it in different countries simultaneously. As for offline services, standardized products such as air tickets and hotels are relatively easy to deal with.

A simple example is the local guide service. It is convenient for a Chinese tourist to visit Thailand and find a Chinese guide to provide the service. But it's hard for a Korean or Japanese visitor in Thailand to find someone who can speak Korean or Japanese there to provide local services.

In the case of on-site services, it may take some time for Trip.com to explore how to build a multilingual customer service system, how to coordinate and how to improve the service system for customers from different international source markets.

Supply-side opportunities

The global giants are constantly competing and integrating with each other. When an established player has consolidated a regional market, it will certainly continue to expand outward to obtain more and broader market space.

It is very difficult for a startup to build a platform in the consumer-facing market and scale up. After all, the global market has been dominated by giants including Booking Holdings, Expedia and Ctrip. Trip.com is still small in size, but it can't be underestimated. It may become a huge variable in the future.

Amid constant competition and integration in the global tourism market, how to find opportunities is a problem that not only Trip.com but also China’s domestic tourism entrepreneurs need to keep thinking about.

The key is profitability, either by making money from information asymmetry, or by offering value-added services. However, when international OTAs enter the field that they are not particularly good at, there is a huge demand for quick access to the optimal supply resources, especially for offline services, instead of standardized products.

In 2018, many OTAs and startups are targeting the tours and activities sector by acquisitions. Startups in the sector, like KLOOK and KKday are also under the radar for investors. These companies are growing rapidly in the Southeast Asia markets, while GetYourGuide is focused on the European markets.

Just a few years ago, Chinese tourism startups were also focusing on the outbound market, targeting the Chinese travelers in a large scale with price war in full play. But when the gross margin was so low and the capital market was no longer so booming, it was difficult for these companies to survive.

The information asymmetry of tourism and the demand for on-site services do not exist only when Chinese people travel abroad, but also when global tourists make cross-border trips.

The huge demand behind these scenarios presents a big opportunity for a large number of travel startups. Building a multilingual service system, accurately grasping the demand of tourists from different countries and taking care of the services is indeed a difficult problem to be solved.

The Chinese travel startups should no longer confine themselves to just the Chinese source market. Instead, amid the current economic downturn, they should look to the global source markets.

Getting down in the funnel with efficiency

When the global tourism industry is integrated, everyone is constantly pursuing internationalization and aiming to achieve higher efficiency, and the role division in different markets will become more and more clear.

The established travel platforms are getting bigger, while the barrier for market entry will grow higher. However, the back-end supply integration and the hard work offline will always be essential, and the core energy of the platform will be more focused on the operation and distribution of traffic. The online platforms are not good at operating asset-heavy projects, so they will reap the harvest through investments or acquisitions.

From the perspective of the overall travel industry, air tickets and hotels have always been the highlight. The products are standardized enough, the supply chains of both front and back ends are complete, and the division of labor is clear, showing an obvious industrial reform trend.

In the hotel industry, online traffic platforms, hotel wholesalers, technological service providers and hotel groups each played an important role. But over the years, online platforms and hotel groups have become more concentrated and larger, while hotel wholesalers have been consolidated.

In the global hotel distribution market, hotel wholesalers have been raking in a lot of profits, but in the past few years, everyone's profit margins have been declining, similar to the situation of ticketing agents in the aviation sector.

However, the information asymmetry exists in not just the market within each country, but also between different countries and continents. That may still give wholesalers the space to live.

In the short term, neither hotel wholesalers or resellers will die out quickly, but the space for this segment will continue to shrink. With integration of the back-end supply chain, the value of the middleman will become smaller and smaller.

Opportunities in flights and hotels are becoming scarce, but there are still lots of integration potential in the destination service sectors. But to take this path, startups will have to get down the funnel with asset-heavy operation, which can be industrialized and localized but still has certain barriers for entry. There is no shortcut or rapid replication for that.

The supply-side resources of many travel-service segments are very fragmented. How to effectively integrate resources and scale up is a big topic. This also presents a huge challenge for asset-heavy operation: how to make full use of financial tools, and efficiently operate on multiple factors such as user acquisition and customer conversion, system support and refined operation. In fact, many travel startups are already on this road and it remains to be seen who will win at the end.

With competitive services, quality control and lower cost, the established players usually gain the greatest traction in user traffic and capital support, and will ultimately dominate the fragmented markets.

TAGS: Ctrip | Trip.com
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