ChinaTravelNews - What would it take for Qunar.com to turn profitable in 2016? This conundrum is among the most followed topics in the Chinese travel industry.
While Ctrip never refrains from asserting the fact that the OTA stands for its performance that reflects in profitability, Qunar is confident of a major break-through in the next couple of years.
So what’s going to contribute to Qunar.com’s profitability even as it witnessed an increment in operating loss in Q3, 2014, largely owing to sustained investment in product development and product sourcing to drive business growth?
The company is counting on its expanding scale, top-line growth, plus it believes it is going to manage operating expense management diligently.
“In 2014, Qunar invested resources in building and strengthening its technology infrastructure and product sourcing capacity. With an ever nimbler and more efficient technology platform, and ever growing product collection, profitability is projected to be a result of growing scale, and disciplined operating expense management,” said a former executive of Qunar.
Qunar believes in technology-driven operational efficiency.
If one were to assess the performance of Qunar in the last reported quarter then it has to be revenue growth (108% year-on-year in Q3, US$81.6 million), mobile accounting for 40% of total revenue, and direct sales contributed 51% of total hotel volume. This strong growth momentum is based on technology that is serving as its backbone.
For Qunar, much like Kayak.com, the company has its roots in meta-search, but it considers that directing leads to other sites is not a winning proposition in the mobile age.
“In anticipation of the mobile potential, Qunar developed SaaS, and then when China went from offline to mobile in 2014, it fully embraced the seismic shift. The company’s leading position on mobile is a result of its early determination,” said the executive. Elaborating further, the source said, “Qunar uses mobile technology to drive transaction volume, to service users and merchants through high machine touch on a more real-time basis, and to build an online travel community that helps with user stickiness. All of its mobile related metrics continue to be industry leading and also trending up rapidly, with mobile in Q3 accounted for 40% of total revenue, 55% of TEHR (Total Estimated Hotel Room-night volume), and 43% of TEFT (Total Estimated Flight Ticket volume). Cumulative activated downloads reached 457 million by end of Q3.”
From product mix perspective, Qunar is bullish on the hotel business. “The hotel direct business has greater potential for monetization,” said the executive.
Coping up with OTAs
Ctrip has quite often stressed about being profitable, its operating profit margin, and being ahead of all other online intermediaries.
When Qunar started in 2005, two major Chinese OTAs were already public.
“Qunar came in as the disruptor, as the technology play. It follows a different philosophy and business model from its peers, and nothing is derailing it from its current path,” said the source. “Travel is one of only a few annual trillion RMB verticals, and it is a space where in steady state, dominance by few, not perfect competition, will likely happen. We don’t comment on other companies' profitability, but your statement (about Ctrip’s profitability) is not true if you look at our peer’s latest financials closely.”
A source closely associated with the Chinese travel e-commerce category said today in terms of the number of bookings for hotel traffic that Qunar.com garners, 60-70% of CPC bookings are associated with the meta-search business, and the remainder is related to transactions that are being directly handled by Qunar.com for commission-related revenue. “The going hasn’t been easy for Qunar as the company isn’t working with Home Inns (which has a shareholder in Ctrip), and Ctrip, too,” said the source. It would be interesting to assess whether Qunar can work with B2B players to gain access to Ctirp.com’s inventory. In all, Qunar works with leading 20 OTAs for its meta-search business.
The key for Qunar.com is the overall utility in the booking funnel. “Qunar.com isn’t going to do away with its hybrid model - meta-search plus transaction one. As long as hotel suppliers are given value for their association, banking on traffic generation (Qunar garnered over 60% of its traffic without incurring any payment for it in 2013) as well as transaction side of business, they would work with Qunar,” said a source.
Counting on hotel business
The net commission rate for Qunar direct and platform businesses will trend differently over time, i.e. net commission rate for its direct business will trend higher than that of platform business.
Importantly, in Q3, the size of Qunar.com’s hotel direct business surpassed that of its platform business for the first time. The hotel business has evolved from meta-search to a much more direct model in less than a year. On the flip side, a section of the industry also highlighted that part of this share shift is also due to Ctrip’s drop off its listing from Qunar in Q3, which has pushed Qunar to push more direct business to customers.
“Given most of China’s hundreds of thousands of hotels are independent and previously offline, this is Qunar’s answer to bridging the needs between the hotels and the Chinese consumers,” asserted the source.
A source says Qunar now features over 200,000 properties in the domestic market for travel accommodation. The team says it has in place requisite infrastructure and e-booking system in place for over 140,000 small independent hotels, B&B and apartment-oriented listings. Even though a section of the industry says Ctrip.com is lagging behind, the top OTA too has been making progress in tier 2 and tier 3 cities. Overall, even though China has over 350,000 hotels, over 40% of them just have data against them – name and address – but are yet to go online. So expect the battle to continue as far as hotel content is concerned.
The battle for economy/ lower-end of the fragmented hotel space is getting intense. For instance, Meituan is being termed as key competitor in this segment. “They have built the extensive network for product sourcing in tier 2 - 3 market. Innmall, a mobile-only start-up for hotel booking, which has an investor in Ctrip, is also competing with Qunar in low-end market,” shared an executive from the industry.
The team at Qunar.com acknowledges that it needs to catch up within the lucrative 5-star and 4-star segment, where the commission can be as high as average 18%-20%, translating into US$10-12 revenue per booking. Being a late entrant meant that Qunar found it tough to deal with a certain section of the hotel industry owing to their existing relationship with Ctrip.com. Even today Ctrip has a strong hold in the “star-rating” category of the market.
In addition to possessing unique hotel content or gaining early mover advantage in the lower-end, Qunar has been pushing hard to gain control of bookers (featuring hotels with as many as 20-50 rooms only). (Read Qunar’s customer poaching riddled with “phantom sales” and Qunar’s “customer poaching” heats up cutthroat OTA war).
Qunar believes once it starts to monetize this segment at a certain scale, it can attain meaningful margin. Also, the team would be counting on big data and analytics to understand the preferences of a mobile user, as the usage of mobile apps reaches a critical number to drive monetization.
Qunar also needs to watch out for some of the tactics that can adversely impact its performance, such as hotel chains jointly urging OTAs to stop cash rebates.
Also, the blurring of lines between traffic generation and transaction business models – just the way Qunar evolved is a threat to Qunar. For instance, Ctrip.com recently introduced a hotel price comparison function that displays other OTAs’ hotel room rates and booking links on its search results page and enables users to click through to complete bookings. It has emerged that the OTA is currently working on A/B testing for both air and hotel product. Existing players also need to be wary of start-ups, for example, Alibaba launching Alitrip, a platform for travel agencies big and small to set up online storefronts.
The state of distribution margin is also changing. Major carriers are lowering their base commissions, cutting it down to even 1%.
According to an expert, the key for Qunar would be to grow scale in the hotel business, managing it efficiently by cutting down on manual process, and driving bookings from the entire spectrum of its hotel content. The team is relying on technology to keep its call center size at less than 500 people. “By using our proprietary SaaS system and various mobile tools, suppliers were brought online, and previously manually processed steps are easily done at their fingertips, for example, hotel room confirmation,” said the executive.
The team is looking at making inroads into Ctrip.com’s traditionally strong areas, and also gearing up to garner revenue from the fragmented market that is yet to be tapped in a big way.
The company is expanding its product mix, too. As per the information available, Qunar has set up a dedicated business unit so-called Smart Accommodation to develop the “Airbnb-style accommodation”. “But the properties are centrally managed by Quhuhu (brand name, in English means going to sleep) and all check-in/check-out are automated by the smartphones. They have developed the so-called smart key/ locker,” shared a source. Quhuhu is managing the day-to-day operation for these properties. Now Quhuhu owns over 10,000 plus listings across major cities in China. Also, one former Alibaba executive has been chosen to head this division.
Moreover, Qunar is also looking at consolidating is presence in the travel planning and booking service – to serve as one-stop shop for the entire journey. For instance, Qunar is promoting its own car hiring app and recruiting the drivers across China.
How all of this contributes towards profitability is going to be keenly followed.(Report by Ritesh Gupta)