China's second largest online travel agency (OTA), eLong reported a 25 percent decline in second-quarter profit recently. While revenues through online bookings were up 17 percent, the cost of sales and marketing increased 42 percent. Ctrip, China's largest OTA, also reported a 20 percent increase in sales for the quarter (of which acquisitions added 4 percent), but like eLong, sales and marketing costs soared 33 percent in the quarter, and therefore Ctrip only eked out a 4 percent increase in operating profits.
While the landscape is getting more competitive, with new OTA players like Taobao gearing up and the recent Baidu investment in China's largest travel search site, Qunar, it also appears that there is a lull in growth. Based on the most recent CNNIC survey released in July, China's official Internet monitoring bureau, while China's netizens now number 485 million people (up 15.4 percent from 12 months ago), and group buying and microblog sites reported triple digit growth (125 percent and 209 percent respectively in just six months), the travel category grew just 2 percent. ComScore tells a similar story in China Internet travel – with total unique visitors up just 2.8 percent from September 2010 to June 2011.
The relative "slowdown" is surprising as there are a number of reasons why online travel should grow. According to a recent TechCrunch article, in China only 8 percent of travel is booked online vs. around 50 percent in the U.S., so there should be plenty of room for expansion. Especially considering air travel in China grew by 15.8 percent last year and outbound Chinese travellers are expected to grow from 56 million in 2010 to 100 million in 2020, according to the WTO. Leisure travel in particular is set to explode, where far more research and purchasing is done online vs. offline (around double that of business travel according to TNS International research).
So what is the deal here? And why would Baidu spend $306 million on a strategic investment in Qunar, if online travel is flat or down? The anecdotal reason is travel ad revenue is growing and the landscape is shifting. We are just beginning to see the big travel service providers, eLong and Ctrip power erode in China – a hold they have had for the last 10 years or so. IResearch in China recently reported that Ctrip's share of all hotels booked in China at around 47 percent, down from more than 50 percent of the market in their 2009 travel report.
Travel suppliers like hotels and airlines are beginning to realise that if they just learn to track marketing ROI, spend effectively on search sites like Baidu and Google, travel search sites like Qunar, travel vertical sites and content networks, as well as effectively use social media, and beef up their own site, they can sell travel directly more effectively and at a higher margin than doing so through online travel agencies. There was a similar phenomenon in the U.S., where Travelocity and Orbitz were the dominant players in the early 2000s, but eventually the suppliers figured out how to take their message directly to the consumers.
In China, according to a survey from TNS International, only 14 percent of netizens who booked travel did so through a hotels' official website. Conversely, 63 percent of global online travel sales are booked directly with suppliers like hotels and airlines versus just 37 percent via online travel agencies, according to PhoCusWright, a leading travel research firm. So while eLong and Ctrip no doubt spend a lot on Internet advertising, there are far more suppliers than OTAs, and they will be prepared to spend a lot more once they get their e-marketing acts together.
Ratings agency comScore covers both China and the United States, and based on their June 2011 travel site rankings, only one supplier site (airline or hotel) cracked the top 20 in China in terms of visitors – Air China at number 17. Conversely, in the U.S., while online travel agency Expedia tops the rankings, nine of the top 20 are suppliers (three airlines, five hotel chains, and one rent-a-car agency). (See chart, courtesy of comScore).
There's no doubt that the above chart in China will change dramatically in the months and years to come. Expect at least five to 10 nationwide suppliers to break into the top 20.
In the meantime, the Internet marketing learning curve transition for suppliers will continue, which includes learning how to adopt the hottest tools, like group buying and micro-blogging. With that, suppliers will begin to loosen the stranglehold the OTAs have had on the market for the past 10 years. It will be interesting to keep an eye on the top 20 to see who the next supplier will be to crack it.
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Michael Zung currently heads up Bite Communications digital practices in Asia Pacific, serving clients like Skype, Coach, Marriott, and Toys R Us for both their digital marketing and communications needs. Previous to Bite, Mike served as senior vice president in HSBC's Asia Pacific personal banking services, where he launched and headed up HSBC Direct in Taiwan and was responsible for the growth of HSBC Direct in Korea and Taiwan, the first "branchless bank" in both countries. Prior to HSBC, he founded OneXeno, a regional digital marketing consultancy based in Hong Kong that was subsequently acquired by Bite Communications. Mike first came to Asia 10 years ago, working for DoubleClick, where he served in various positions including managing director for North Asia and was also the first editor of AccessAsia, a guide for Asian specialists and current research. He holds an MBA from New York University and an MA from University of Washington.
March 19, 2014