This article is written by Ritesh Gupta, reporter at TravelDaily China.
If there is one entity in the Chinese travel e-commerce category that stands out for its sustained investment, operational efficiency and profitability, then it has to be Ctrip.
While international brands struggle to establish a feasible business model, Ctrip is persistently expanding its reach, with sustained product development and sales and marketing expenditure as well as strategic alliances.
As for the travel category on the whole, the online penetration is the biggest opportunity.
“As of now, online is accounting for around 10-15% of the total transactions in the travel category in China,” said Jenny Wu, chief strategy officer of Ctrip.com International. She expects this figure to rise up to about 20% over the next 5 years. “Relatively mature markets like the U. S. and Europe have over 40% penetration (for online transactions). There is strong potential upside in China that should take place.”
Ctrip has built its business assiduously over the past 15 years.
“One of our strengths is independent quality assurance and six sigma quality management. It’s a procedure that defines our work flow. We delve deep into service issues and operational efficiency, there is no room for wastage of resources and capital. There is periodical scrutiny of each project, and the management is deeply involved inspiring teams, and different generations to work as a cohesive unit,” shared Wu.
She added, “Running an OTA business model isn’t a straightforward task, and it takes a profound vision and expertise to run a profitable OTA business. Travel service has proven to be a low-margin business, if we look at how traditional agencies operated over the years. But our margin has shown that we can deliver at a huge scale. So far we are still the only online travel player in China that has margins with all other peers being in heavy losses.”
Be it for it strategic alliances or organic growth, Ctrip.com is aggressively looking at refining its one-stop travel platform with addition of travel-related segments.
Take the case of how Ctrip is strengthening its transportation related offerings – optimizing the combination on air, train and bus components for travelling from one city to another. As shared by Ctrip, the statistics for the train segment indicated that the category witnesses two billion tickets on annual basis, and for bus, it is 30 billion tickets a year. Even as air tickets are currently driving the volume growth in the transportation ticketing services (in Q2 it was 83% year on year), the plan is to strike a healthy combination in the long-run so that Ctrip could effectively serve customers from the start to the last mile of their trips.
Market leader Ctrip is counting on 2014 as a year of strategic investments. The entity’s expansion plans and associated investment isn’t necessarily related to revenue generation in the current year.
Ctrip’s product development expenses for the second quarter of 2014 increased by 55% to RMB479 million (US$77 million) from the same period last year and 9% from the previous quarter, primarily due to an increase in IT and product development personnel related expenses.
The company asserted that its direct product in conjunction with its open platform product will result in varied choice for its users.
The operations are poised interestingly at this stage. While Ctrip won’t divulge much, but it is clear that the product mix is as diversified as ever. And with an extensive assortment of offerings, for instance, bus and train tickets being among the latest addition, how the volume-margin matrix is going to impact its financial results in the future is worth keeping an eye on. “Although we spent aggressively in the past two quarters in certain key areas, we still successfully achieved the industry’s leading profitability of 12% operating margins. Most of investments we are making are more related to our long term growth targets, rather than directly associated with revenues in the current year, associated costs and expenses are partly up front-loaded and we expect more revenues and operating leverage will gradually kick in later on.” Wu mentioned.
Ctrip points out that the introduction of bus, train tickets or visa-related services, or new offerings like student travel is resulting in brand stickiness. Ctrip recently became a strategic investor in Beijing Mind Education who has served more than 700,000 travellers. The investment enables Ctrip to further extend its user coverage to the people aged 3 to 18 years which could help cultivate a strong habit of using Ctrip from an early stage of a customer’s lifetime. The volume for booking visa applications through Ctrip’s mobile app has increased to five times its volume a year ago. Ctrip has also introduced overseas shopping service. It offers discount to Chinese travellers when they shop at overseas brand stores. The shoppers can get cash rebate from their spending overseas, and Ctrip is garnering commission from the merchants.
Also, the fact that the Ctrip mobile app downloads has now reached 200 million, growing at a rate of 67% quarter-over-quarter, it means the company would be in a better position to personalize and hence capitalize on monetization opportunities, say cross-selling.
As users rely on mobile apps for planning and booking, it means Ctrip would end up with itineraries that users end up booking. This data, if utilized proficiently, can pave way for strong affiliation with the brand and the company’s offerings. Ctrip is also ensuring that mobile customers are being lured into using the mobile portfolio. For instance, customers can avail Ctrip gift cards and manage their balance through the Ctrip mobile app. These cards are for travel products offered by the OTA, as well as third-party vendors such as restaurants.
Ctrip is clear that it just can’t afford to slip on the user experience, as well as after-sales service. One of the highlights of second quarter proved to be the chunk of transactions that were booked online or through mobile channels. This accounted for around 80% of Ctrip’s transactions.
In this context, Ctrip clarified that its call centre operations still remain a vital part of its multi-channel distribution mix. The company reckons that its call centre is more like an after-sales service avenue, and is still being counted upon as Ctrip’s key competitive advantage.
Every travel intermediary has different DNA, different advantages, said Wu.
“Ctrip.com stands out for its service, and operational efficiency. We are focusing on delivering a one-stop travel service platform, and this is completely different from just directing the traffic as done by some distribution and marketing intermediaries,” said Wu, who mentioned that the company’s performance stands out for its 12% operating profit margin vs. heavy loss making by literally all its peers.
Being asked about her view on Qunar.com, Wu did mention that it isn’t easy for any IT-oriented entity to improvise and transform into a service-oriented model. “Ctrip is profitable, and proven its expertise time and again. Our accelerated growth rate, strengthened market leadership, and stabilization of margin all indicate this,” said Wu who has been Ctrip’s chief strategy officer since November last year and before that she was the company’s chief finance officer for about two years.
Wu further added, “When a supplier works with us, they could simply leave all the labor intensive service work to us by treating us as their outsourced customer service center and order processing center, then they can allocate their resources on working out the best possible user experience based on their core competency, such as, for hotel managers, they now could primarily focus on how to ensure the best experience when customers stay in the hotel.”
Ctrip.com acknowledges the trend of OTA-meta-search strategic alliances, the most prominent one being Priceline acquiring KAYAK. But in China, Ctrip.com states that it has achieved this goal through its organic expansion, that is, by upgrading itself to a one-stop travel service platform and by adopting an open platform. “We are running the best hybrid model in China travel space, smoothly combining the best essence of both a traditional OTA model and a meta-search model.” Wu claimed.
However, it is being pointed out that with the adoption of so-called hybrid or open platform model, Ctrip is also facing significant challenges for quality and service control on the products offered by 3rd parties as all bookings are still completed on Ctrip’s website or mobile app. As Ctrip is aggressively pursuing this model, the team needs to be very cautious about selecting its business partners and sustaining the service standard as expected from them.
Jenny is scheduled to speak at the upcoming 2014 TravelDaily Conference in Shanghai (September 3-4, 2014).