A Deep Dive Into Ctrip and the China Online Travel Market 2017

by Jared Wein + Skift Team - Jul 2017

Skift Research Take

As the Chinese economy has grown and opened up to the West, both domestic leisure and outbound travel have ramped significantly. At the same time, the country is still in the early stages of moving bookings from offline to online. A growing travel market and increased adoption of online bookings is a potent recipe for growth at Ctrip and the industry as a whole.

Report Overview

The following report is equally an analysis of Ctrip’s strategic and financial path and a study of the Chinese online travel market. Given Ctrip’s dominance of the industry in China, it is crucial to understand what they are doing to decipher the broader trends shaping the future. As part of our primary research, we spent several weeks in Asia, including time at Ctrip headquarters meeting with management and specialists at the company. We attended the ITB China conference, visited the local offices of several hotel companies, and spoke with two of the most respected private equity investors in China. Given the complexities of the market in China, these interviews, which are included in the report, are even more crucial than usual. We also partnered with three companies to provide data and insights. YipitData provides us with granular reservation, room night, and property numbers. ForwardKeys offers flight booking trends for multiple countries in Asia, Europe, and North America for both inbound and outbound travel. Finally, Dragon Trail Interactive provided us with broad insights on the outbound market. What follows is a 45,000-word report including interviews from the entire C-suite at Ctrip, executives from Skyscanner, TripAdvisor, and leading global hotel chains, and investors, along with data and research collaboration with specialists. China is a complex market, but has immense opportunities (and risks) for the travel industry.

What You'll Learn From This Report

  • Overview of Ctrip’s products and strategy
  • In partnership with YipitData, reservation, property, and room data for China, Africa, Asia ex-China, Canada, Caribbean, Europe, Mexico and Central America, the Middle East, Oceania, South America, and the U.S.
  • How Ctrip uses two types of agency models – guaranteed allotment and on-request
  • Air travel trends in China
  • In partnership with ForwardKeys, inbound and outbound booking data for Japan, South Korea, Taiwan, Hong Kong, Macau, Thailand, Australia, U.S., Canada, U.K., France, Spain, Germany, and Italy
  • What caused the Qunar airline boycott and how it was resolved
  • Why Ctrip strategically invested in bus operators in the U.S.
  • Mobile and online penetration trends in China
  • Takeaways from our trip to Asia
  • Ctrip’s financial trajectory and our valuation framework
  • Rationale and impact of key M&A transactions both through public financial filings and management interviews
  • The story of how the Skyscanner deal came about and closed via a lengthy interview with Skyscanner’s CFO
  • Why we expect margin to ramp as Ctrip integrates Qunar and eLong and mitigates aggressive price competition
  • Behind the scenes look at the Qunar and eLong investments from two of the leading private equity investors in China
  • Trends across domestic, inbound, and outbound travel
  • Ctrip market share estimates
  • WeChat and broader outbound data, analysis, and strategy via our partnership with Dragon Trail Interactive
  • The rapid rise and fall of outbound travel to South Korea as a case study on the risk and rewards of outbound Chinese travel
  • What the “BAT” (Baidu, Alibaba, Tencent) companies are doing in travel directly and through investments
  • A look at two key competitors in LY.com and Meituan-Dianping
  • The current value of the financial stake by Priceline and our expectations for the partnership
  • Expedia’s divestment of eLong and what that means for its China strategy
  • How TripAdvisor is focusing almost exclusively on the higher-end outbound travel market
  • Broad China travel insights from leading hotels including Marriott, Peninsula Hotels, Hyatt, Hilton, and Wyndham

Executives Interviewed

  • Jane Jie Sun, CEO, Ctrip
  • Cindy Xiaofan Wang, CFO, Ctrip
  • Maria Sun, COO, Ctrip
  • Colin McLellan, CFO, Skyscanner
  • Steven Pang, General Manager, China, Skyscanner
  • Daniel Pan, Chief of Staff, China, TripAdvisor
  • Jixun Foo, Managing Partner, GGV Capital
  • Tony Jiang, Co-Founder & Partner, Ocean Link
  • Lawrence Ng, Vice President, Sales & Marketing for Greater China, Marriott International
  • Frank Sanders, General Manager, Shanghai Marriott Hotel City Centre
  • Jin Qian, Area President, Greater China and Mongolia, Hilton
  • William Zhao, VP, Development & Strategic Alliances, Wyndham Hotel Group
  • Rieko Kibe, Director of Marketing, East China, Peninsula Hotels
  • Cecilia Lui, Regional Director of Communications, China, Peninsula Hotels
  • Gloria Lu, Area Director of Sales and Marketing, Korea, Hyatt
  • George Cao, Co-Founder & CEO, Dragon Trail Interactive
  • Michaela Mentasi, Marketing Director, Dragon Trail Interactive
  • Roy Graff, Managing Director, EMEA, Dragon Trail Interactive
  • Dylan Zhang, CEO, Varitrip
  • Thomas Griffiths, Director of Distribution, Varitrip
  • Nicola Farronato, CEO and Founder, B-Sm@rk

Executive Summary

Ctrip is by the far the largest and most successful online travel agency in China. It has grown revenue rapidly and taken meaningful share within online travel. At the same time, margins have been deflated by aggressive price competition in the industry. Management made several key transactions to address the issue, taking large stakes in both Qunar and eLong. These purchases essentially ended the drag from “coupon wars”.

We see revenue continuing to grow at over 20% into the next decade. The two macro tailwinds, both of which are meaningful, are the move of bookings from offline to online in China and the broader increase in Chinese travel as a whole. The latter has, and continues to benefit from, a rising middle class and booming domestic leisure market. At the same time, one of the largest opportunities going forward is capturing the growing the outbound market. We believe that Ctrip is well-positioned to benefit from these trends. Skift also sees meaningful margin expansion for Ctrip through a combination of operating leverage (expenses growing more slowly than revenue) and synergies from the Qunar and Skyscanner acquisitions.

It cannot be emphasized enough that China is a unique market. Companies that have tried to penetrate the country without partnering with local entities have had mixed results at best. A few key issues, among many, include a language barrier, cultural differences from the West (and even the rest of Asia), and the influence of a powerful government that is still centrally planned, but opening up economically. Aside from the complexities of navigating the market as an outsider, non-Chinese companies also need to compete with a robust local talent pool, especially in the technology space.

In the past, the West had been far ahead of China in the technology industry. Eventually, China closed the gap where companies like Tencent, Alibaba, and Baidu could be considered Chinese versions of Facebook, Amazon, and Google. Today, those same companies exceed their peers in certain business lines. For example, Facebook’s messaging platforms can look to Tencent’s WeChat as a model of what could be.

The big three Chinese tech companies, Tencent, Alibaba, and Baidu, are both potential competitive threats and partners for Ctrip. Baidu generates ad revenue via search under a Google-type model, has a large stake in Ctrip, and co-invests with Ctrip in Tujia and Make My Trip. Alibaba has its own travel brand, which has been rebranded from Alitrip to Fliggy, or Flying Piggy, which targets outbound millennial travelers through “Amazon-like” storefronts. Tencent’s main stake in the travel industry is advertising on WeChat, but it also co-invests with Ctrip and Baidu in eLong and in LY.com (with Ctrip). Tencent also has a 15% stake in Meituan, which is a “Groupon-like” site catering to the lower-end, price conscious consumer. This would compete more with Qunar brand than the Ctrip namesake, but Meituan could eventually move upscale and away from group-buy and into an OTA or meta model.

Skift recommends that companies looking to break into China in a meaningful way follow the model that the Priceline Group or Disney has laid out. Priceline has partnered with, and taken a stake in, Ctrip. Priceline’s Booking.com provides international inventory to Ctrip and brings the outbound Chinese guest to Booking.com. Ctrip benefits from Booking.com’s global and massive inventory while Booking.com gets the localized expertise and client base of Ctrip. This partnership should prove lucrative for both sides. For Disney, the company pursued a joint venture with Chinese entities to open the Shanghai park. During our trip to Shanghai, we visited the park and it was clear that the success was in no small part from taking a Western brand and localizing the experience.

At the ITB China conference, there were hundreds of destinations present and looking to take share of the outbound China market. It is an immense opportunity that should be pursued, but there are risks that often get overlooked. South Korea experienced rapid growth in tourism from China. Many hotels came to rely on these travelers to maintain high occupancy rates and fund expansion. When the Chinese government pushed to cut travel to South Korea on objections to THAAD (Terminal High Altitude Area Defense), travel from China collapsed with declines approaching 50%. Other destinations should be aware of the risk. Investments in the Chinese market should be made cautiously and costs be as variable as possible so that those expenses can be pulled back in the event of a macro shock.

China continues to evolve and grow and its impact on the travel industry has become global.

Key Considerations

  • Ctrip’s strategy is to provide its consumer with a full travel offering via accommodations, transportation, packaged tours, and corporate travel. The company is built for a mobile-first world with more than 70 percent of bookings completed on mobile last year. Its Baby Tiger program encourages innovation at the company, helps retain key talent, and encourages innovation. In some ways, this reminds us of a smaller version of Google’s “moon-shot” businesses. The scope is much narrower, but Ctrip is willing to sacrifice some near-term profit margin to test new ventures that could become growth drivers over time.
  • The push by the company to encourage families and keep parents in the workplace is notable. Our sense was that Ctrip is a leader in China in providing working parents with resources. This not only improves the quality of life for the employees, but also lowers attrition and helps groom the next crop of leadership at the company.
  • Ctrip uses two types of agency models. Under the guaranteed allotment model, the hotel guarantees a specified number of available rooms each day, allowing Ctrip to notify the consumer instantly of a booking confirm prior to the hotel being notified. Of the 520k hotels in China, the majority operate under this arrangement. The remainder is booked under the on-request model where bookings are subject to availability.
  • In April 2016, government-owned China Eastern, Air China, and China Southern implemented a boycott of Qunar after customer complaints of irregular bookings. Another factor was a Chinese government mandate that the airlines generate at least half of flight-ticket sales directly through their own channels by 2018 versus 20-30% in 2015. After Ctrip took a stake in China Eastern and Qunar made some changes, the issue was resolved in 2016. The example shows the potential impact of government policy shifts in China.
  • Ctrip made three strategic investments in bus operators in the U.S where they will share resources and provide quality control and a higher level of services to Chinese people traveling in the U.S. The company is also in the midst of an English language push where both Chinese and English are “official” languages at the company. This is clearly part of Ctrip’s vision of becoming a more global company.
  • We expect 20%+ revenue growth and meaningful margin expansion as we look ahead into the end of the decade. As the company accomplishes this, a $50 billion plus market cap is achievable in the next 3 to 5 years.
  • When investing in other companies, Ctrip focuses on strategic resources, technology, and geographic expansion. By taking large stakes in Qunar and eLong, Ctrip resolved aggressive pricing battles and will reap the benefits in the coming years. We believe that under Ctrip, Qunar can finally become profitable. Skyscanner had strong traffic in Europe, Asia-Pacific, and North America, but lacks the scale Ctrip has in fulfillment and inventory. Ctrip should be able to improve monetization of Skyscanner’s robust traffic over time and push up its revenue and margin trajectory.

CTRIP ANALYSIS

Product Overview

Ctrip is by far the largest OTA in China and offers accommodations, transportation ticketing, packaged tours, and corporate travel management. The company acts primarily under the agent model and does not take inventory risk. The agency model also makes it easier for them to build out inventory; this is part of the reason Booking.com has been able to grow so rapidly and why Expedia pivoted to the agency model over time.

TYPICAL CUSTOMER

The Ctrip customer is often an independent traveler at the higher end of the market that is willing to pay higher prices in exchange for a better travel experience. The stake in Qunar, much more on this later, added a more mass-market audience to the fold.

Accomodations

As of 2016 year-end, Ctrip had 520,000 hotels in China and 670,000 internationally, bringing inventory to almost 1.2 million. Within the international total, Priceline had 547,000 hotels at year-end and, we believe, that partnership drives the bulk of the international inventory. In China, the inventory is vast and a significant barrier to entry to compete with Ctrip.

Through its stake in Tujia, Ctrip has exposure to alternative lodgings, but this is a small portion of the business.

Accommodations account for 37% of revenue in 2016. We believe profitability is much higher here than for airline ticketing so profits would be higher and likely well above 50%.

Based on our conversations with management and public disclosures, we believe the average commission rate would be in the 10-15% rate versus the U.S. and Europe where the range is wider at 10 to 25+%. We believe that the lower rate is partially from competition and partially from the government not wanting rates in the 20%+ range; in China, the government not “wanting” is significant given its control of the economy.

Yipitdata: Reservation, Property, and Room Estimates

YipitData, a company that provides web data and analysis for investors, collects and analyzes terabytes of public data every day from company websites for investors. The team distills raw data into critical insights and metrics that clarify key investment narratives with datasets that are extremely granular, enabling 0-2% accuracy of company reported metrics. The 80-person team consists of data analysts, engineers, and research analysts from MIT, Bloomberg, Blackstone, and Goldman Sachs, among others. The company has provided us with detailed estimates on reservations along with property and room count.

For gross reservations, China dominates the picture with close to 24 million in the first quarter of 2017. This accounted for just over 90% of reservations for Ctrip. After that, Asia ex-China accounts for 8% with international in its infancy, but growing meaningfully.

Source: YipitData

The following charts show monthly trends for China, the rest of Asia, and non-Asia outbound.

Source: YipitData

Source: YipitData

Source: YipitData

For properties, the inventory includes the partnership with Booking.com and is part of the reason why China is “only” 38% of the total versus 90% of reservations. The other part simply being less demand versus domestic leisure. Other parts of Asia account for 10% and the U.S. sits at just over 6% of properties. This data shows that the Booking.com partnership gives Ctrip vast inventory to grow the outbound business, especially in Europe. At the same time, the reservation numbers indicate that we are in the very early stages of outbound bookings for Ctrip (we will have much more on outbound travel later in the report).

Source: YipitData

Note: Data for each quarter is the average for the three-month period composing that quarter

Source: YipitData

The room count shows a similar story with Booking.com driving the European inventory and China being the core of the business under Ctrip.

Source: YipitData

Note: Data for each quarter is the average for the three-month period composing that quarter

Source: YipitData

Agency Models

Ctrip uses two types of agency models. Under the guaranteed allotment model where the hotel guarantees a specified number of available rooms each day. This facilitates Ctrip being able to notify the consumer instantly of a booking confirm prior to the hotel being notified. Of the 520k hotels in China, the majority operate under this arrangement. The remainder is booked under the on-request model where bookings are subject to availability.

Outside of China, the bulk of bookings again are through Booking.com rather than hotels directly working with Ctrip.

Pricing Clause

Within these contracts, the hotels are typically required to “offer prices that are equal to or lower than their published prices”. The hotels have to notify Ctrip of rate changes so Ctrip can lower its prices when the hotel does so.

Transportation

Ctrip has all of the major Chinese airlines including Air China, China Eastern Airlines, China Southern Airlines and Hainan Airlines, plus over 300 international ones, offering 3 million flight routes, connecting 5,000 cities in 200 countries. The company also offers bus and train ticketing.

Transportation contributed 45% of revenue, though likely much less in profits in 2016.

Transportation would be much lower commissions than accommodations, likely in the low to mid-single digits (lower-end for state owned airlines and higher-end for private car rentals). For the government-owned airlines, commissions could be near zero. Similar to in the U.S. and Europe, Airlines are important to bringing traffic to the OTA and generating more lucrative hotel bookings. For Ctrip, packaging in things like travel insurance can be high-margin and quite important additions to the transportation business. Additionally, Ctrip benefits from high-priced international ticketing on non-Chinese government owned airlines where there would be at least 1-2% commissions plus higher-end travelers paying more for hotel rooms.

Air Travel’s Rapid Growth in China

Better infrastructure and increased travel demand has led to tremendous growth in air travel in China. The chart below, sourced from the World Bank, shows air passengers carried in China over time (both domestic and international aircraft passengers of air carriers registered in China) compared to the other leading countries. The U.S. is still the leader at over 800 million passengers, but this is clearly a mature market with growth in the low single-digits. China has been booming with 15-20% growth over the past decade and steady low double-digit growth since 2010.

Source: International Civil Aviation Organization, Civil Aviation Statistics of the World and ICAO staff estimates.

IATA forecasts that China will surpass the U.S. as the largest market by 2024 with 927 million people by 2025 and 1.3 billion by 2035. The key point here is that as more people take to the skies, lucrative hotel bookings accompany them so Ctrip gets the small commission on the flights, the high-margin add-ons like insurance and rental cars, and then can cross-sell hotels with 10-15% commission rates. With travel booming broadly and online travel still in its early stages, Ctrip is well-positioned to continue its growth trajectory.

Source: Bloomberg, IATA

Forwardkeys Booking Data

Skift partnered with ForwardKeys, which predicts future travel patterns by crunching and analyzing 14 million booking transactions per day. The ForwardKeys.com database is fed daily with air reservation information (GDS) processed by 180,000 online and offline travel agencies worldwide, for a total of around 25 billion reservations. The data excludes direct bookings with airlines, charter flights, and some online reservations. Due to this exclusion, the data should not be taken as the entire market sizing, but rather an indication of the rate of change and where things are trending.

INBOUND TRAVEL DATA

The following data chart shows inbound bookings. The largest markets have been Taiwan, South Korea, the United States, Hong Kong, and Japan.

Source: ForwardKeys

Source: ForwardKeys

After steady mid-teens growth from the U.S, things have slowed down this year with H1 coming in at up less than 5%. Amid conflict over THAAD, more on this later in the report, travel from South Korea is down 7.7%. The Hong Kong market remains sluggish and is down 2.5%. Canada and Australia are up over 25% and Japan and Spain are up over 10%.

Source: ForwardKeys

ForwardKeys provided Skift with projections for the balance of the year. The drop from South Korea is expected to accelerate with it down 28%. Meanwhile, they see modest declines from Taiwan, Hong Kong, and Macau. The U.S. is also expected to drop slightly. Australia is the only country with projected 10%+ growth while Japan and European countries should show low single-digit growth.

Source: ForwardKeys

OUTBOUND TRAVEL DATA

We will discuss the outbound market in much greater detail later in the report, but below we can see country-specific trends based on ForwardKeys data.

Prior to the massive decline post THAAD controversy, South Korea was the most popular place to visit. After roughly a 50% drop, it is no longer in the top three with Thailand, Japan, and the U.S. now taking those positions.

Source: ForwardKeys

Source: ForwardKeys

The rapid outbound growth seen in 2014 and 2015, has slowed a bit with 2015 up 45% on aggregate, but 2016 up only 2.0%; we note that industry data shows double digit growth for the outbound market. Part of this is a greater push for direct booking by Chinses airlines. Another part is more outbound travel through OTAs that may not have data sharing as well. The data shows that Europe has picked up in 2017, while the U.S., Thailand, Hong Kong have dropped and South Korea and Taiwan fell meaningfully.

Source: ForwardKeys

The outlook for the rest of the year calls for declines in South Korea, Taiwan, Hong Kong, Macau, and the U.S with growth in Japan, Thailand, Australia, and Canada. European markets are mixed.

Source: ForwardKeys

Outbound is highly seasonal with three peak periods: Chinese New Year Golden Week, summer school break (July-August), and National Day Golden Week.

The following chart shows aggregate departures to the locations discussed previously. IN all charts the blue shaded region is 2016 and the red line is the 2015 period.

Source: ForwardKeys

South Korea


Source: ForwardKeys

Thailand


Source: ForwardKeys

Japan


Source: ForwardKeys

Hong Kong, Macau, Taiwan


Source: ForwardKeys

U.S & Canada


Source: ForwardKeys

Western Europe



Qunar Airline Boycott

While this has been resolved, it is worth revisiting as it shows the risks of government owned entities in China exerting influence. Ctrip has successfully been able to navigate this and fixed the situation after buying Qunar, but as an industry, this is a risk. For international companies trying to push into China, it is just another example of the complexities of doing business there and why local partnerships are key.

In April 2016, the big three Chinese airlines (China Eastern, Air China, China Southern), which are all government owned, implemented a boycott of Qunar. Part of this was over customer complaints of irregular bookings. The major Chinese airlines’ boycott of Qunar, according to South China Morning Post, took place as some carriers, including China Southern, eliminated commissions for agents such as Qunar, and pushed hard to comply with a Chinese government edict that the airlines generate at least half of flight-ticket sales directly through their own channels by 2018 versus 20-30% in 2015.

By June 2016, China Eastern and Air China ended the boycott. Interestingly, and likely not coincidentally, Ctrip invested $440 million in China Eastern in April 2016 and that seems to have helped resolve things with Qunar. By July 2016, China Southern conditionally removed the boycott. The Ctrip brand did not have the same issues as Qunar given longer standing and better relationships with the airlines.

Packaged Tours

With over 10,000 platform partners, Ctrip offers independent leisure travelers packaged tour bundles.

This business accounts for 12% of revenue.

Commissions here would be a blend of lodging and transport.

In 2016, Ctrip made three strategic investments in bus operators in the U.S. The tour operators are Universal Vision, a New York-based bus tour operator and travel agency; Ctour, a Los Angeles-based wholesaler and China group-tour operator, and Tours for Fun, a Los Angeles-headquartered online travel agency focused on overseas destination travel. The idea behind the investments and partnerships, forming the Quartet, as Ctrip calls it, is to share resources, provide quality control and a higher level of services to “Chinese people traveling in the U.S.,” Ctrip states. The terms of the investments were not disclosed. Universal Vision and Ctour have over 50% share of China bus tours.

When announced in October 2016, Ctrip stated that “This strategic investment will be significant in enhancing the outbound travel services of the Chinese traveling to the U.S. and strengthening Ctrip’s market position in both East and West Coasts of North America. According to the memorandum of strategic partnership, the Quartet will cooperate with each other on the channel of receiving customers, the procurement and distribution of resources, and their respective advantages. The purpose is to provide more diversified and cost-effective products, and to provide Chinese tourists with high-quality experience and service guarantee.”

The main point is that Ctrip has the ability to make outbound travel more comfortable for the Chinese guest once they arrive.

Corporate Travel

In addition to transportation, accommodation, and packaged tours, Ctrip offers corporate clients travel data collection and analysis and other solutions.

This business accounts for 3% of revenue.

OTHER PRODUCTS AND SERVICES

A very small portion of the business, likely a few percent at most, includes online ad sales, a Property Management System (PMS), and a related maintenance service.

This business accounts for 3% of revenue.

Ctrip Is Well-Positioned For A Mobile-First World

In China, mobile penetration has rapidly increased in the past ten years, going from 24% in 2007 to 95% in 2016 and users jumping from 50 million to 696 million over the same time period according to China Internet Network Information Center (CNNIC) “The 39th China Statistical Report on Internet Development”. Netizen is simply a term for internet users.

While mobile use has ramped up, other forms of internet usage have declined with desktop and laptop use falling. This trend is one example of why Chinese online travel companies along with hotel groups need to design their websites for a mobile world and make sure there is a focus on building a strong app along with participating on WeChat.

According to CNNIC, online penetration for travel expanded to 41% in 2016 with steady 15% growth year/year.

Tencent’s WeChat dominates usage at 80% followed by its own QQ at 60%. Travel companies need to embrace WeChat as a platform to advertise to and communicate with customers.

For Ctrip, mobile accounted for 71% of transactions in 2016. The English version of the app is a bit stripped down, but the Chinese version is quite robust offering the core products plus plenty of in-destination type things.

Call Centers

Because the Chinese consumer expects a very quick response for customer service, Ctrip operates two large call centers in-house that are open at all times. These are Ctrip employees rather than outsourced ones.

Skift Visit To Ctrip Headquarters

As part of the research process, Skift visited Ctrip’s corporate offices in Shanghai, China to meet with senior management and get a better first-hand view of the company. The lengthy interviews are included further along in the report, but some more subtle takeaways are below.

After an hour plus drive from the center of Shanghai, we arrived at Ctrip’s sprawling campus. It felt surprisingly very much like being in San Francisco with multiple top-of-the-line buildings, restaurants, and a general buzz in the air at the company. While we normally dress very casually at Skift, we put on our attire assuming a more formal Chinese culture. Instead, it was very much jeans and t-shirts outside of the C-Suite. The point here is that while broader Chinese business culture tends to be formal, at Ctrip and other tech companies, things have become far less so.

We were given a tour of the campus. One stop included a room that looked like mission control for a space program where a team of engineers monitored web traffic and bookings globally on a massive screen showing real time data. The room had a strict no-picture policy or else we would have shown this for our readers. The team monitors what is going on and if anything dips off expected trendlines that their models predict, they immediately work to address the issue (if there is one).

Another room was a test lab where consumers come in and use the Ctrip app. We tested this out where I searched for flights and hotels and the system monitored where my eyes were looking on the screen. The goal was to make sure that the app is optimized for how people view and click on it.

Ctrip wanted to show us a softer side of the company as well: the in-house daycare facility. They were very proud of this initiative and even introduced us to the teachers and some children. One thing that struck us was that the ceiling in the lobby was painted with Disney characters showing how Disney’s brand resonates in China and how Ctrip embraces a global culture. More importantly, the company is actively promoting families. Founder James Liang has been very active in pushing against the 1-child policy in China and laid out economic cases that it is suboptimal. It is clear that his push for larger families in China is being encouraged at Ctrip as well.

ENGLISH INITIATIVE

Management is pushing the company to be at least bi-lingual with both Chinese and English being official languages spoken at corporate. In fact, COO Maria Sun gave her first lengthy interview in English. She was a bit worried about it, but she was quite fluent. The company is promoting English learning as an international language as Ctrip looks to grow its outbound travel business. The current app outside of the local Chinese version is not as robust, but we can see this changing as we look out past 2020.

Interview With Jane Jie Sun, CEO, Ctrip

Jane Jie Sun serves as Chief Executive Officer and a member of the board of directors from November 2016. Prior to that, she was Chief Operating Officer since May 2012 and Co-President since March 2015, and Chief Financial Officer from 2005 to 2012. Ms. Sun is well respected for her extensive experiences in operating and managing online travel businesses, mergers and acquisitions, and financial reporting and operations. During her tenure as our Chief Financial Officer, she won the Best CFO Award by Institutional Investor and Best CFO Award by CFO World.

Prior to joining Ctrip, Ms. Sun worked as the head of the SEC and External Reporting Division of Applied Materials, Inc. since 1997. Prior to that, she worked with KPMG LLP as an audit manager in Silicon Valley, California for five years. She is a member of American Institute of Certified Public Accountants and State of California Certified Public Accountant. Ms. Sun received her bachelor’s degree from the business school of the University of Florida with high honors. She also attended Beijing University Law School and obtained her LLM degree.

Skift: What are some of the biggest changes at Ctrip from the time you got there to where we are now?

Jane Sie Sun: When I joined Ctrip, Ctrip was very small. The market cap was only about $500 million. As the CFO, it was important for me to let more investors know about Ctrip, China, and the Chinese travel industry. As an example of what I did was, normally I had my earnings call on Monday, and then right after that, I would get on a flight, fly into San Francisco, where you gain some hours from the time change. I’d fly in at 8:00 on Monday morning, go directly to the meetings for the whole day, a roadshow, and then take a red eye flight to Boston and then leave Boston at 6:00 am, take a shower, go to a one-day roadshow in Boston, and then, that same day, go to New York. Although, I would spend one week in the United States, I only would spend one whole night in a hotel. The other nights were all in transit on the flights. I would then fly into London, Scotland, and then back to China.

Lots of people asked, why should we invest in China? I shared my thoughts by telling them my personal story. I used to be work and live in the Silicon Valley, which was the fastest growing area in the United States. I told the investor, everyone one of you have different criteria but I invested my lifetime in the company. Why did I choose to do so? I think you need to ask three questions.

Number one is do you want to invest in China, which is the fastest growing economy in the world. Now, everyone wants to invest in China, but twelve years ago, lots of people did not know China that well.

The second thing is if you want to invest in China, what industry is the most promising? After people make enough money to buy a house and a car, send their children to school, the rest of the money is disposable and travel definitely will increase the happiness of each family.

If you decide to invest in China and in the travel industry, which company has the greatest potential to do that? Definitely Ctrip is in the best position to do that.

When I was the CFO, I believe it’s in 2010, 2011, I was ranked to be the best CFO in Asia. The board felt I was ready to be promoted to COO. As the COO, my scope was much wider. You need to take care of the investor along with the employees. It’s a very wide span.

In 2015, at the beginning of the year, James felt that I was ready to take over the role of CEO, but I felt our team was still very green. It’s better for them to be very motivated, united, so we stabilized our workforce for about one year. At the end of the year, both James and I felt it’s the right time for us to make that announcement. That’s why I stepped us as the CEO of the company.

Skift: When you look out over the next two, three, four years, and prioritize growth, how do you view things like lodging versus air travel or outbound versus the increase in domestic leisure travel?

Jane Sie Sun: Maybe I can talk with you on the markets and then product, because that’s the two different angles we can look at. In terms of market, there are two major markets we are very focused on. The first one is the domestic market where Ctrip is very strong in first-tier cities, and some of the second-tier cities. For the third or fourth-tier cities, we haven’t penetrated them to the same extent. We’re spending more marketing dollars into these areas. That’s one priority in a domestic market.

Skift: Is that through the Ctrip brand or through the Qunar brand, or both?

Jane Sie Sun: Both. Ctrip will probably will focus on the top thirty cities, and Qunar will focus more on the lower market.

That’s the domestic market. Then another opportunity for international expansion. We made an investment in Skyscanner, which has global brand that compares the prices for air tickets, but does not have a direct booking facilities like Ctrip has. Our two teams will work together, make their direct booking facilities through us. That’s our priority. Also, in other promising markets, such as India, we made investment in MakeMyTrip, which is the leading player there. In the United States, where we see huge growth potential, we made investment in three local tour operators.

Skift: For MakeMyTrip, do you see that as a meaningful contributor or more of an incremental piece of the pie for Ctrip?

Jane Sie Sun: Right now, we are the second largest shareholder. The reason we feel it makes sense is the two markets are very sizeable. China has 1.3 billion people and India has 1.2 billion. If you look at the GDP per capita, India is about 15 years behind China. If they learn from our past experience, probably they can avoid a lot of pitfalls.

Skift: What about some China outbound trends?

Jane Sie Sun: Okay. For Chinese travelers, because of the short distance to places like Japan, Korea, Taiwan, Hong Kong, Macau, and Thailand, if you take off one day or two days you can make a very nice long weekend. The travel frequency to Asian countries is much frequent than long-haul travel. But China does have two or three long-haul opportunities.

One is the Chinese New Year, where the whole country shuts down for one week. Another one is National Holiday which is October the 1st, the country shuts down for seven days. Another one, which lots of family will enjoy is the summer holidays. These are the long-hauls.

Our focus first of all is the Asian market, because we feel our air product in Asia is very strong. And we can leverage our network to serve the rest of the Asia for air products. We also have lots of other products such as rental cars, attraction tickets, train, golf-tour, etc.

Skift: In China, Ctrip has so much functionality beyond hotels and air travel. Do you see that progressing to other markets where you’ll have a US version, you’ll have a European version? Or do you see this being the Chinese version and the US version is a little bit stripped down and it’s more about that air and hotel?

Jane Sie Sun: It’s very interesting. In the China market, people like to have everything in one place. In a PC world, it’s very easy to open different apps and compare price. But in an app world, it’s not very easy to open multiple apps to compare price. Consumers, at least in the China market, like to have it all on one site where they can have everything. It will be an interesting experiment to see how the rest of Asia progresses.

Skift: In China, the economy is growing nicely and policy changes have made travel easier from an inbound perspective. A U.S. visa used to be a one-time entry, but now I spend 140 dollars and can make unlimited trips for 10 years. Are you seeing strong growth in inbound?

Jane Sie Sun: Yeah. For the U.S., the 10-year visa is going to greatly boost the multicultural exchange. It is also the same thing with outbound travel. We, very much want to open up more for more countries. The US-China now has 10-year visa. If this happens with Europe, the rest of Asia, it will promote a lot of the international travel.

Skift: Then you mentioned that you were COO and CFO before becoming CEO. From a managerial perspective, do people tend to rotate amongst groups? Or is it more they’ll specialize in a specific area and work their way up?

Jane Sie Sun: Sure, maybe I can walk you through the different levels. Every employee is required to take 40 hours per year training classes at our Ctrip University. The classes can be very specialty driven or soft-skill driven focusing on things like negotiation skills, time management, leadership skills, etc.

It is very diversified. If they do very well at the university and at their work, top candidates will attend the Ctrip in-house MBA program. In that program, you will be taught the normal MBA classes as well as classes. We invite different CEOs to be the teachers as well as academic professors. If they do very well in this program, we elevate them to do the Eagle Program. The Eagle Program is for young leaders which are positioned to take on more responsibility in a set of challenges. That’s one level of the elevation.

Now on the work level, we have Baby Tiger Program. We select a CEO, CFO and a CTO. That becomes almost like an independent company. We give them an evaluation so their unit has stock price associated with it. That’s a very good way to motivate and select the young leaders. Very young employees, like 20 years, 25 years, 27 years can already be the CEO of a business. They are not ready to run a huge operation but in our small Baby Tiger programs, they can take on the leadership.

We feel that training program really motivated employees to dare to challenge and dare to take on responsibility. It’s a good training ground for employees.

Skift: Are there other competitors or other companies in China that are doing similar things? Or is this unique to you?

Jane Sie Sun: It’s quite unique for Ctrip. It’s not very easy for any other companies.

We’re very open. Employees come in, they take pride to challenge CEOs and chairmen. That’s very unique in China because normally when the professor comes to teach in a Chinese company, within five minutes, they can tell who is the Chairman, who is the CEO of the company. Because whatever the number one or the number two say, employees will follow.

But in Ctrip, they come to teach, even after an hour, they don’t know who is the number one or the number two guys in the company. It’s a very democratic, flat atmosphere. I’m a strong believer that employees need to be thinking their very equal to CEOs. Then they get dared to challenge you in any business decisions you are making. That’s the dynamics in a company.

This is very different from a traditional Chinese company. In a sense, Chinese people respect authority, but in Ctrip we respect numbers. We objectively evaluate performance and are results driven. That is very unique.

Skift: A subtle thing I noticed walking around Ctrip is that you have a nursery there. I would imagine this is not common in China?

Jane Sie Sun: No, not at all.

Skift: Can you discuss how the nursery came about, how it helps employees, and with retention?

Jane Sie Sun: China used to have this one child policy. Our founder James wrote the book on this to promote reversing the policy because in order to have stabilized population, every family needs to have 2.1 children. In China now, it’s below that at 1.3, 1.2. It’s really a severe issue. What we believe is the government needs to give tax breaks to incentivize family to have more children. And enterprise also needs to take on the responsibility to support our young families. At Ctrip, any children from 18 months to kindergarten can be brought here. During the summer and the winter, we have camps. We open up our conference room for the kids to be there.

For pregnant women, we give them a taxi for free. When they have babies, we give them a monetary gift. For some of the employees, if they are in a remote area, they can join the work at home program if the coverage is slow.

All of these measures are intended to send a message to society as a corporation that we need to be corporate good citizens. We need to encourage our employees.

Skift: I know you are pushing all employees to learn English. What is the driving force there?

Jane Sie Sun: Sure. Our employees are very young and very curious. They grew up in China so I have lots of confidence that they can serve the China market very well. But in order to go abroad, the first barrier is the language, otherwise you won’t be able to communicate with the other side. I feel that to learn English is very important. English is a global language. No matter where you go, you want to communicate with the rest of the world. Learning English becomes the first and very important step for them and fortunately, our employees are very eager to take on the challenge.

Our official language is not Chinese now, but rather dual Chinese and English.

Skift: In the past, the U.S. was almost always the leader in tech and you’d have the Chinese company a little behind. This has changed where companies like WeChat are an example of what Facebook Messenger could become versus the other way around. What have been the main drivers of this change?

Jane Sie Sun: In the first stage, China was so much behind the USA. I talked with you last time that when I first came to the USA, my professor brought me to a grocery store and I saw an aisle of food for pets. And I burst out crying because in China in 1989, lots of poor people were starving. That’s the level that we’re looking at. At that stage, if we talk about technology, innovation, there was no ground. People were still trying to meet their basic needs.

Throughout the past 30 years, I think that the government has done a good job of lifting the poverty level so the majority of Chinese people are out of poverty. Feeding people is not an issue anymore, right? Then, people start to have better education, workers will be sent to global universities. They learn from the world.

The second stage probably was following the footsteps of the U.S., U.K., and the rest of the world. What they did, we copied.

Now, China is already surpassing Japan, Europe, Germany, and the U.K. China is the second largest economy in the world. The vision becomes more global. Chinese people are very strong in math, chemistry, physics, and computer science. The general education is very strong in math and logic thinking. That gave China an advantage.

Another thing is the Confucius teaching in the past 2,000 years, being diligent is part of the culture. Our team works very hard. Creativity is created by people. If you’re willing to put 16 hours versus a person who puts in 8 hours, your productivity will be double the other one. One year in China probably equals two years in the rest of the world.

Skift: What is your vision for Ctrip over the next five years?

Jane Sie Sun: Ctrip wants to be the most innovative online travel agency in the world. We need to encourage more and more young employees to take ownership in their business. I want their authority. I always tell our employees right now, and we have about 30,000 employees, if each employee treats them as the CEO of their business unit, our company will innovate. I want them to use CEO mentality to handle their day to day work.

Financials

Source: Company Filings, Skift Estimates

REVENUE

Ctrip is clearly still in a rapid revenue growth phase with 2014, 2015, and 2016 revenue growth at 36%, 48%, and 76%. Part of this is due to acquisitions, with Qunar being consolidated for the first time in 2016. Qunar generated $644 million in 2015. Assuming a 20% growth rate, 2016 revenue from Qunar was likely around $770 million.

Stripping this out, Ctrip’s constant currency revenue growth in 2016 was around 27%. Going forward, it is reasonable to assume that Ctrip can grow 20-25% per year for the next five years as it continues to gain incremental share, benefit from less competition post Qunar consolidation, the continued move from offline to online travel, and the growth of outbound travel.

By product line, transportation represented the largest part of the business whereas it was equal to accommodations prior to Qunar. The reason is that for Qunar, flights represented 53% of the business and accommodations were 35%. With the Ctrip brand driving more growth, we expect accommodations revenue as a percent of business to rise over time. This will help boast margins and profitability.

Source: Company Filings, Skift Estimates

COST OF REVENUE

This line item primarily includes salary to customer service center personnel, payments to travel suppliers, credit card service fees, and telecommunication expenses. Most costs here are variable in nature where they go up with revenue growth almost linearly keeping margins constant, but payroll is scalable where Ctrip is becoming better at getting more revenue per call center employee with efficiencies and technology enhancements. Gross margin has increased over the past several years from 71% to 75%. Considering, Qunar had a 66% gross margin in 2015 versus Ctrip at 72%, this number should continue to expand to approach the 80% level. This trend is on pace as evidenced to start 2017 where gross margin hit 80%. The two drivers were improved efficiencies in back-end technology and Skyscanner’s meta model being additive (100-150 basis points).

“PRICELINE-LIKE” OPERATING MARGIN IS ATTAINABLE OVER THE LONG-TERM

Normally, we are proponents of including share based compensation in operating costs. However, with the M&A strategy and growth profile, this metric distorts the business economics in a more steady-state. As such, we strip out share based compensation from each operating cost line item to see where the trajectory is going.

Source: Company Filings, Skift Estimates

Once we do this, we have an adjusted margin at around 10% as a starting point. Ctrip has guided to it reaching 20-30% in the next few years. While it seems like a stretch at first glance, it is a very reasonable goal with both revenue growth growing faster than fixed costs and synergies from M&A talking effect.

In Q1’17, operating margin hit 15% already. For context, Priceline’s operating margin is close to 40%. Expedia is lower at 18%, but has HomeAway and trivago both in the ramp-up stage where margin is low (for now). With Ctrip’s dominance in China, a “Priceline-like” margin looks attainable.

The chart below lays out our base case for margin expansion. By its nature, this is impossible to have a high degree of confidence in the exact numbers, but the trajectory is clear; margins are going up meaningfully in the next several years.

Source: Company Filings, Skift Estimates

Product & Development

Expenses here include costs to develop the travel supplier networks as well as to maintain, monitor and manage the transaction and service platform. Excluding the impact of stock compensation, which inflates 2016 to 40% of revenue, this item has been in the 28-29% level for the past three years. Ctrip has created immense scale over the past three years so we expect this number to decline to the 20% level over the next five years.

Sales & Marketing

This includes compensation to sales and marketing personnel along with advertising. Pure advertising has accounted for 15-16% of sales while total sales and marketing expenses were at 28-29%. We see non-advertising scaling down as it grows slower than revenue and ad spend growing steadily. Unlike in the U.S. and Europe, China is a mobile-first app/WeChat world, which helps reduce reliance on search engines like Google and Baidu. Over the next five years, it is likely that sales and marketing accounts for just under 20% of sales in total.

General & Administrative

This includes costs for administrative staff, professional service fees, and other administrative fees. This has held steady in the 7-8% range. As revenue ramps up, and Ctrip integrates Qunar, we see a 5-6% level.

Qunar Integration

We discuss this at much greater length in the M&A section, but bringing Qunar to break-even could add 250 basis points to operating margin.

DEBT

Leverage is not an issue for Ctrip with net debt to capital at roughly 15% and adjusted interest coverage (operating income divided by net interest expense being around 12x).

Valuation Framework

We leave the investment opinions to the sell-side equity analysts affiliated with investment banks and independent equity research shops, but feel that providing a reasonable valuation trajectory would be useful for our readers.

If we use a simple revenue multiple, we believe Ctrip can maintain its current 2017 price to sales multiple at around 7-8x given steady 20%+ growth. As a reasonable comparison, Priceline trades at 7x, Alibaba at 10x, Tencent at 10x, and Baidu at 4-5x.

Assuming a 7x multiple and 22.5% revenue trajectory, we see Ctrip growing meaningfully to become a $50-60 billion company in the next five years. If we want to look at current present value, discounting this at a 12% discount rate gets to a $34-39 billion present value.

In order to justify this multiple, the company needs to achieve strong revenue growth and ramp margins.

Source: Company Filings, Skift Estimates

On an EV/EBITDA basis, the valuation implies a high-teens multiple, which is just below the big three Chinese internet players in Baidu, Alibaba, and Tencent and above Priceline, which is around 16x. The higher multiple than Priceline is not about quality of business, but about timing in growth where Ctrip is earlier in its trajectory so investors will pay a higher multiple of future cash flow.

Source: Company Filings, Skift Estimates

Interview With Maria Sun, COO, Ctrip

Ms. Sun Maohua (Maria Sun) started her career in various management roles for the JinJiang Hotel Group. In 2000, she started at Ctrip where she was director of the Customer Service Center and implemented a comprehensive quality management system. In 2006, Ms. Sun was promoted to Vice President, then Senior Vice President in 2011. In 2012, she transferred to the Accommodation Business Unit, where she served as Executive Vice President and CEO. In late 2016, she was appointed Chief Operating Officer of Ctrip, while still maintaining her role as CEO of the Accommodation Business Group. She received her undergraduate degree from JiaoTong University (Shanghai) and her MBA from China Europe International Business School (Shanghai).

Skift: Do you tend to focus more on the merchant or the agency model for hotels?

Maria Sun: It is more agency model with the merchant model as a compliment.

Skift: Is the focus going forward more towards agency?

Maria Sun: For hotels, it is more agency, but there is a merchant focus for some hotels. For air tickets, the merchant model is the major model.

Skift: In the U.S. and Europe, under the agency model, it is very seamless to connect with hotels. There’s no backend connections. This is why Expedia started to switch to the agency model despite higher fees for merchant. In China, is there a similar dynamic, where the hotels like the ease of the agency model? Is it different dynamic here?

Maria Sun: We have a bit different dynamic, because there are a lot of merchants in China. Some merchants, they only rent maybe ten hotels, but they have a good relationship with the hotel for some reason. They have the best price, and our agents can never get it.

Skift: So it’s very relationship driven.

Maria Sun: In China, there are so many small merchants. We have thousands of merchant companies working with us. They give us good pricing, but it’s very difficult to manage. That being said, the service level is quite low. We do have to develop software for them. The relationship is comparable to how merchants sell on Amazon.

Skift: How has leisure travel changed?

Maria Sun: During my first year at Ctrip, almost all the customers were business travelers. Now, China leisure travel is exploding. Now, we have between 30 and 40 percent of bookings for leisure customers.

Leisure is especially strong for the holidays or weekends. For example, before the Chinese Festival was our lowest season for hotel business. It is high ticket season for airline tickets because a lot of people need to go home, but it is lowest season in the year for hotel business. Now it is a peak season too as people travel more for leisure.

Skift: When did you start to see the inflection where leisure ramped up?

Maria Sun: It was around 12 to 14 years ago. As more people owned cars, they looked to escape the heat on the weekends in the summer. More recently, in 2012, WeChat became quite popular and people would show their trip location in WeChat. It became easier for people to communicate with their friends, to organize travel, and to enjoy leisure travel in general. The first year the Spring Festival become part of peak season in 2013, we didn’t have enough labor, because traditionally, it was a low season. Our hotel employees had gone back home. It astonished us how busy it became, almost three or four times busier than we predicted. After that, we know, and the Spring Festival became peak season.

Leisure travel become more and more fashionable.

Skift: You mentioned WeChat. Do you view them as more of a competitor or a partnership tool?

Maria Sun: The travel industry uses WeChat to show pictures where in some ways it is kind of like free advertising for the industry. It’s much more powerful than a travel ad on television saying, “oh come here, come here to my country”.

Skift: In the U.S., many people tend to start the search for travel with Google or TripAdvisor reviews. For leisure travel in China, when people are looking at where to go and what hotels, what is the typical path? How much does word of mouth drive things?

Maria Sun: First is Ctrip. We have the most popular information for the travel. There’s still some travel guide companies as well. People use a search engine and word of mouth as well.

Skift: You mentioned leisure travel. When you look at domestic China travel, outbound travel, inbound travel, how do you see bigger picture trends there?

Maria Sun: After the Chinese GDP per capita grew to $8,000 USD, demand to go abroad increased. After it hit $4,000 or $5,000, they were able to travel more domestically.

Ctrip has partnered with Booking.com to grow the outbound business along with our own organic growth.

Skift: Can you discuss the importance of the Booking.com partnership? We’ve seen other companies try and fail to go to China alone from abroad. Expedia tried it by themselves with E-Long. It didn’t really work that well. Even, Priceline’s booking.com which dominates the global hotel OTA industry still needed to partner with Ctrip.

Maria Sun: Yeah, we need each other, both Priceline and Ctrip. Ctrip needs Priceline’s global inventory. For Chinese people, it is not so easy to sign a contract outside of China. First, because the language barrier is very hard. It is quite expensive to staff internationally in different languages.

Second, if we don’t have volume for these hotels, we can’t get good pricing. We believe it is much better to have a friend in booking.com. We have inventory and we can cooperate very closely. Booking.com still needs us, because Ctrip has the Chinese customers, especially the richest customers in China. We also sell airline tickets, have a tourism business unit, and offer best in class service for the customers.

The Chinese consumer is quite demanding for service quality. Maybe we spoiled them in the last ten years, because they want to get in touch with our employees immediately, in less than 20 seconds. We did a lot of work to build our call centers.

Skift: For booking.com on its own Chinese inventory, is it more targeting inbound, international travelers?

Maria Sun: Yeah, but there are still a lot of good hotels that Booking.com does not have on its own.

Skift: When people from China book a hotel outside of China that’s from Booking.com’s inventory, from their perspective is it booking through Ctrip or Booking.com?

Maria Sun: On the Ctrip side, if Booking.com wants to reveal the brand, it can do it so the customers know it’s from Booking. On the Booking.com side, they can hide a brand for Ctrip and the customer will think it is booked from Booking.com. If the customer has an issue, he can contact Booking.com and Booking.com will contact Ctrip’s staff to help them.

Skift: So, if I book on Booking.com, but the inventory was from Ctrip, it will probably just say I booked Booking.com, but if it’s a Chinese customer booking Booking.com inventory on Ctrip, the customer knows it is from Booking.com so Booking.com can advertise to the Chinese customer?

Maria Sun: Yeah. Because Booking is a bigger brand.

Skift: What are some of the regions you’re seeing the most growth in outbound travel?

Maria Sun: It is Asia with countries including Korea, Japan, India, Indonesia, Vietnam, and the Philippines. Europe and America have healthy growth, but Asia leads.

Skift: Is the growth more leisure or business?

Maria Sun: It is almost all leisure.

Skift: What is the growth for inbound travel?

Maria Sun: It is not a very large market for inbound, because of some restrictive policies. The visa is not very easy to get to China. Inbound is stable, but there is almost no growth.

Skift: Inbound is much more business travel for the most part?

Maria Sun: Yes. There are tourism spots, but these days, its more about business travel.

Skift: With the change in Visa policy for the U.S. to 10 years unlimited, it seems like the government is trying to encourage more inbound travel. Do you think that’s the case?

Maria Sun: I don’t know. More travelers stay in China for longer time periods than before. However, for just pure tourism, it shrank.

A lot of foreigners like China, and they come here and they stay for one or two years. They think it is a good way to taste the culture of China. This has picked up and may explain why shorter duration tourism has shrank.

Skift: In the U.S. and Europe, the large hotel chains pay 10% to 15% to the OTAs per booking and you’ll have the smaller independents pay 15% to 25% for commission in the OTAs. In China, is it a similar dynamic here, or is it lower?

Maria Sun: Yeah, I love their commercial rate. In China, the rate is lower, but it depends on the hotel group or independent hotel.

Skift: What would be the average?

Maria Sun: Around 13%, so some lower and some higher.

We have a type of ranking system. We will consider both the commission rate and the competitive price, the service level, friendliness to Ctrip’s customers, and reviews.

Our commission rate is not a fixed one, but is flexible. We have a bottom line for it, for example, 10% or 5%. We also have a top line at about 20%. We don’t want to get too much money from the hotel, because we will destroy our relationship.

Skift: For hotels, is it a fairly fragmented market like Europe?

Maria Sun: China is something like Europe. It’s quite fragmented, but still has some big hotel groups, especially in the economy class.

For the high-end hotels, it’s still quite fragmented, although they have big hotel groups. A lot of owners, they want to manage themselves.

We have 400,000 hotels in our platform in domestic hotels, but the group hotels, it’s less than 20,000. It’s much less, including some very small groups that only have four or five hotels.

It is a trend that more and more hotels want to join a group.

Skift: What percent of bookings in China are still done offline?

Maria Sun: It’s more than 70%, even more than 75% is still offline.

For example, we need to penetrate small cities. In the big cities, the people will book online. We need to optimize our apps to be easier to use by people outside the large cities.

We also need to purchase more inventories and design better tourism lines for them, for the small cities. In Ctrip, we have focused on bigger cities in the past several years – Shanghai, Beijing – and now we penetrate to the provincial cities, as heavy as capital cities. You want to go deeper to the small cities.

Skift: Moving to the transportation part of the business, for airlines is it similar to the U.S. with commission rates being 1-2% at best?

Maria Sun: It is quite low here in China and similar to the US.

M&A Strategy & Insights From Cindy Xiaofan Wang, CFO, Ctrip

 

Source: Company Filings

Ctrip is very active in M&A, but is quite disciplined, focusing on strategic resources, technology, and geographic expansion. We discussed this with CFO Cindy Xiaofan Wang. She noted that:

We are very disciplined; we only focus on the travel or travel related industries or sectors around the world.

There’s three major strategies where we focus and where we make investment decisions.

First, the company should who have very strategic resources. For example, Ctrip made investments in the three major economy hotel chains in China. We think they are strategic for us. Because if you look at the China hotel industry, it’s a very fragmented market. There is no single hotel chain with a very significant presence in the market. The only segment that hotels have very strong marketing power is the economy chain hotel. All three hotels don’t actually rely on a single distribution channel like OTAs or metasearch to distribute their inventories. So that’s the reason we made investments in them.

The second area is the technology company. Of course, we still are focusing on the travel and travel-related business. For example, we made investment in Travelfusion, which is a London based aggregator of local carriers. They are kind of the GDS of local carriers. Their technology, probably, is the best in the world. Through that investment, Ctrip’s customer have access to all the local carriers worldwide. We bring a lot of new incremental volume or traffic to Travelfusion’s business. So that’s the second area.

The third one is geographic expansion. For example, we made an investment in MakeMyTrip. A lot of people say MakeMyTrip is the Indian version of Ctrip. So, we both have a lot of synergies, not on the business side but on knowledge sharing. They actually learned a lot from us about how to consolidate a very competitive market and they’ve successfully consolidated the number two players. Of course, Skyscanner also fits in that category. We had the multi-language website, which not only serves the inbound traffic coming to China, but also the international market. Our competitiveness in the international air ticket business has become stronger and that’s a reason we made investment in Skyscanner. In Europe and most of the Asia-Pacific countries, they have very strong traffic.

For example, they have around 16 million monthly active users (MAUs), which is at the similar level to Ctrip’s brand, which tells you how powerful their traffic is. Together with Ctrip’s improving inventory suppliers in the international market, we see huge synergies between the two companies and that’s one reason. Also, in terms of our geographic expansion, from day one they are multinational company with their employees coming from more than 50 countries. So these are the three areas we will be very focused, in the past and going forward.

Skyscanner

Ctrip acquired global metasearch player Skyscanner in December 2016 for £1.4 billion or $1.74 billion.

At the time of the acquisition, we wrote that competitiveness for meta boils down to scale, brand strength, and technology. Skyscanner hits a relative home run on all three. On the technology front, there’s the easy way and the hard way to build a meta site. The easy way is the plug-and-play way accessing inventory through GDS. The hard way is to build direct connections with the suppliers. Skyscanner went about it the hard way; operating in a fragmented European market required them to build those connections early on, and it clearly paid off for Gareth Williams and team.

When asked about the rationale and synergies, Cindy replied that:

Skyscanner has very strong traffic in the international market, especially in Europe and the Asia-Pacific market. They are also growing very fast with triple-digit growth in North American market. What they don’t have is the fulfillment and the inventory suppliers for the international air ticket product. But Ctrip, we actually have a very comprehensive and competitive international air ticket product to serve the air customers.

And on top of that, Ctrip also has very rich experiences in terms of the service like the payment, the fulfillment capability, and the ability to close the whole loop. For metasearch, especially during the mobile age, a lot of the incremental traffic coming from mobile is actually being wasted because you cannot fully close your loop.

So, we will start with what we call the Direct Booking Project. We actually have joined forces with Skyscanner’s team on that project so that we can help all the traffic, all the customers, to close the loop within Skyscanner’s platform, which will, hopefully in the future, significantly improve the monetization rate as well as the user’s experience.

SKYSCANNER FINANCIALS

As Skyscanner was a private company, it had limited financial data. However, U.K. companies still provide limited annual financial reports that can be found on the Companies House website. Additionally, there was an update to revenue after that initial filing where it increased around $10 million.

Revenue was up almost 30% in its last full-year filing to £120 million. Growth would have been even stronger excluding the impact of a depreciating British Pound. EBITDA margin dipped from 18% to 15% as Skyscanner invested for growth, but has since picked back up to around 20% according to the Skyscanner team.

The multiple paid would be somewhere in the 7x revenue range based on continued 30%+ growth.

Source: Company Filings, Skift Estimates

We then spoke at great length to the CFO and Head of China of Skyscanner. Those interviews are below.

Interview With Colin McLellan, CFO, Skyscanner

Colin McLellan is Chief Financial Officer at Skyscanner. Colin joined Skyscanner in 2013 as Group Financial Controller, and was previously interim CEO of Skyscanner Japan (a joint venture between Skyscanner and Yahoo! Japan). Colin’s position as Financial Director in a business growing at accelerated pace means he’s involved in a wide range of activity – from investments to acquisitions and the implementation of an award-winning employee share scheme.

Skift: What made this the right time for Skyscanner to be acquired?

Colin McLellan: That’s a good question. One of the major motivations for why we were able to do anything was about positioning Skyscanner in the right place for the next part of its growth.

The options here were continuing to be an independent business, to potentially IPO, or to partner with another entity.

Continuing on our own or IPO’ing, neither of those things produce any positive synergies in terms of accelerating our growth or accelerating the rate at which we can provide value to our travelers, whereas the right partnership for a deal could create that. And that’s what you saw in Ctrip. Gareth [Williams, Skyscanner CEO] already had a relationship with James [Liang], the co-founder and chairman and the discussion evolved from that.

The more we talked with Ctrip, the more we agreed on what the future would look like in the travel industry.

Skift: Were there other serious discussions with potential acquirers other than Ctrip?

Colin McLellan: I don’t think it’s prudent for me to give anything away in regards to that. I mean, you wouldn’t be surprised that we have had communications ever since Skyscanner first came on people’s radar.

Skift: Fair enough. Can you walk us through the timeline of events, and from the time Ctrip approached Skyscanner to the closing?

Colin McLellan: Back in August 2016, there was an opportunity for some of the senior Skyscanner management team to go and visit Ctrip in Shanghai.

Myself and our Chief Legal Officer went. The plan was that Gareth, our CEO, would actually go out to Ctrip as well, but a week before we were due to go, Gareth moved houses and lost his passport.

We went out to visit the Ctrip team and it was Jane, and James, and Cindy their CFO, and a collection of a few others, and Gareth connected via phone from Edinburgh. At that point, it was more about where do we see the future of Skyscanner and where do we see our ability to add value to the travel industry.

So, that was how it kicked off originally.

Things progressed quickly. Within a matter of weeks after that, it became clear that Ctrip was interested in potentially acquiring us. The vision was aligned and obviously you have to walk through the detail and that’s always the part that takes the time and the diligence. But the fundamentals were agreed very quickly because we recognized we were actually on the same page about what’s important to travelers and how to provide that to them through the strength of technology and the strength of product. Because we had that strong foundation and understanding between each other, everything else was just the details, really.

After that first meeting, it took only a couple of weeks for Ctrip to show their intentions to acquire us. It was then another few weeks after that we had come to terms and then we moved onto a period of diligence, which again, happened very, very quickly. To their credit, Ctrip mobilized everything on their side quickly and extremely professionally. The diligence was done, it was very in depth and Skyscanner was in really good shape for it. This meant that the diligence could take place really quickly too. I think it was about three to four weeks for the diligence period.

Skift: That’s very fast.

Colin McLellan: And then at the end of November when the deal was done, there was a period of completion before closing. Usually from arrangement to completion there are a few loose ends to tie up. In our case, there wasn’t. The only thing between signing and completion of the deal was actually just to get Skyscanner’s shareholders to approve.

Actually, looking back on it, although at the time it was a very intense, it was actually a very straightforward deal because the intentions were aligned right from the very start and that’s what set us up for success.

Skift: Do you think the fact that Skyscanner had so many direct connections with the airlines that it built out over time rather than being heavily plugged into the GDS’s a meaningful factor in Ctrip’s desire to own Skyscanner?

Colin McLellan: I think the fundamental benefit that Ctrip saw in Skyscanner was our global footprint. I think that was the fundamental thing. The direct connections help our gross margin, so that would be a factor, but fundamentally it’s the fact that Skyscanner is a global business and there aren’t any metasearch sites that can claim to have that global footprint and understand how to localize the product across all the different markets that we have. I think that’s what really appealed to them, was that international aspect.

Skift: How independent will Skyscanner truly be? Will there still be synergies from working together?

Colin McLellan: One of the important things to the management team of Skyscanner was that we needed to continue to operate independently to pursue our strategy and retain our culture too. It’s a lot like a marriage. You do as much research before you get married as you possibly can to make sure that you’re making the right choice, and you’re going into it with your eyes open. And you do it with the best of intentions and hope for the best. It’s not really until after the paperwork is signed that you know how it’s going to play out.

I’m very pleased to see that everything that we hoped would happen has happened so far. We are operating independently. We are pursuing Skyscanner’s strategy as it was before the acquisition and Ctrip is being immensely supportive and helping to share their knowledge, because their product is deeper than Skyscanner’s is. Where we can help them is to better understand the international aspect of localizing product for specific markets. At the same time, they can help us understand the breadth of their product and share knowledge. They are very hands off but they’re absolutely there if and when we need them to be.

Skift: Before the acquisition, you were starting to push more into hotels, given it’s a much higher margin business, and higher commissions. This was still pretty early for you guys, but is that something you see continuing under Ctrip?

Colin McLellan: Yeah, I think hotels definitely still have a place. As you say, it’s still fairly nascent for us, but our growth is strong, so we’ll continue with that.

Skift: Operating margins were low double digit in the last couple of years. Being part of Ctrip do you see revenue synergies that helps operating leverage? And then what are some of the cost synergies that you see as well?

Colin McLellan: EBITDA margin was maintained at around 20% in 2016. Revenue and margin will benefit from being part of Ctrip as we continue to develop our product, and therefore drive better retention and a better revenue profile. The growth will not come from any sort of cross-synergies. Any operational leverage that Skyscanner gets will not be from cost reductions in terms of headcount. We are actively hiring right now so it’s definitely positive synergies that we get partner with the Ctrip group, not negative ones.

Skift: You’re obviously very international, you’ve been well-known in Europe and expanding in the U.S and Asia. When you look on forward, where do you see the most growth in your markets?

Colin McLellan: That’s a brilliant question because that to me genuinely is, all over. But looking at it by market, there are markets within Europe that are still performing very well and even markets, which people would technically think were saturated like the U.K., but they’re still growing very strongly.

Skift: The growth, is it more Skyscanner taking share within meta or meta and online travel growing?

Colin McLellan: Global online travel’s growing around 11-12% per year. So, in terms of online travel we’re absolutely taking market share away from other players in that space.

In terms of growth in meta, I don’t know the exact number, but I would suspect that growth is greater than the industry growth in that area and we can take market share there too.

Skift: Meta has had a lot of consolidation. Do you see this trend continuing or now that the big guys have been gobbled up, will it slow down?

Colin McLellan: Two things. One is that any product has to be differentiated in some way and has to have a value proposition to travelers that others don’t and whatever product doesn’t have that, it will either die out or have to merge. The second thing is, that with acquisitions in meta, more people are realizing the value that meta provides to travelers.

Skift: Does Ctrip’s financial backing change your strategy at all?

Colin McLellan: That’s a really good question, it’s one I’ve had a few times before. And the way I’ve had it raised is essentially now you have Ctrip, does that mean you’re going to spend a lot more on marketing? The approach we’ve taken to growth as we call it, opposed to marketing is, fundamentally, growth comes from the value of the product, that drives sales and retention.

We take a very cautious approach to paid marketing because if you spend a penny today you’re going to have to spend that penny next year just to stand still, potentially plus extra. So, paid marketing is something we approach with a lot of caution. And fundamentally we are traveler first and we sell our travel through our product, not through spending more on marketing. So that was a long answer. The short answer is, no.

Skift: Do you see technology synergies with Ctrip?

Colin McLellan: Definitely. Ctrip has thousands of very talented engineers. There is a huge amount that we can learn from them. As I said before, we’re in a very fortunate position where Ctrip is absolutely not pushing anything on Skyscanner.

Ctrip has a much broader product than we do. It does everything you could possibly need in relation to travel within China domestically. So, we can learn an awful lot if Skyscanner does want to develop this product and to perhaps new verticals then. I don’t know if there any firm plans to add any new verticals or anything like that, but it’s great to have that depth of experience.

Skift: How does meta play out in China? We’ve seen it succeed in the United States and in Europe, but clearly Ctrip is an OTA. It’s had plenty of successes in the airlines and hotel space not running a meta.

Colin McLellan: Yeah, you’re right. And another reason that we are really excited to be part of the Ctrip group now is that we see the Chinese traveler as the lead indicator of and what consumers expect from an online travel product, not an outlier. Ctrip has fantastic customer service. The breadth of this product, the way it handles payments … These are all things that we can learn from. And it’s not just because they teach us, and they’re very good at doing it. It’s because the Chinese traveler is the lead indicator of what other people will expect of travel product.

Something like 80% of the Chinese market. Europe and America will continue to move toward mobile web and toward app and follow those dynamics that we see in China.

China is not held back by any of the legacy that perhaps Europe and Americas have, particularly in banking payment systems. So, credit cards are not that prevalent in China but people will happily make payments with WeChat.

Interview With Steven Pang, General Manager, China, Skyscanner

Youbibi’s co-founder and Chief Executive Officer, Steven Pang, took up the position of General Manager for Tianxun [Skyscanner], and has since overseen real growth in the Greater China region.

Skift: Before we discuss Skyscanner and now, Ctrip I want to go back to Youbibi. Can you discuss how you started it, how it grew, and why you sold to Skyscanner?

Steven Pang: We started Youbibi around late 2009 early 2010. We saw an opportunity at the time, I had come back to Asia from many years in the U.K. and had used products like Skyscanner.

We saw an opportunity for a similar, not necessarily identical, but a similar product to serve specifically the Chinese traveler. Especially for the niche of outbound travel, which at that time was still relatively recent. I think if there’s one thing we got right we saw that was going to grow.

It was a start-up and we grew pretty much organically to a reasonable size. We weren’t huge, but we wanted to get serious scale. To do that we’d need to essentially raise some funding or partner with someone and at that point, one of the options that became available to us was joining Skyscanner, and that’s what we did.

It’s been very good, because obviously they’ve given us a lot more resources and skill and I think it’s been hopefully a good two-way thing. Skyscanner has learned a lot about the China market and applied some of those learnings to its global products. This includes things like direct booking and mobile style branding.

Skift: Were you also heavily focused on airlines or more mixed?

Steven Pang: Airlines and hotels, but we were, as was already relatively common in China even four or five years ago, very much focused on being a fully transactional marketplace where you don’t have to redirect out.

We needed to persuade some partners to do that and really getting them bought in on the idea of having a flagship store and branding. Even though to us that was not very revolutionary, I think to Skyscanner it was a bit of an eyeopener. That’s kind of informed a little bit of what you’re seeing with Skyscanner now.

Skift: Interesting, so as you joined and they integrated Youbibi, did the business change much? Or was it the case where they took your existing operation and called it Skyscanner?

Steven Pang: Essentially the latter.

Skift: For Skyscanner, how much of the China business is inbound versus outbound versus domestic?

Steven Pang: For Sky Scanner in China our users are primarily looking for outbound products. It is over 80 percent outbound and that really was the niche that we always had, even as part of Youbibi, and then joining Skyscanner. Really that was one of the reasons we joined Skyscanner, money aside, was that felt they could give us resources of all these foreign non-Chinese suppliers and the connectivity to them.

Ctrip will see that quite possibly every one of its portfolio brands or companies has its own niche. Skyscanner is global, so that’s already a clear niche, but within China it can have a niche for independent outbound travel.

Skift: What type of growth do you see for outbound, inbound, and domestic leisure?

Steven Pang: I don’t think it’s going to come across as very ground breaking, but I see the bigger growth in outbound and in domestic leisure travel. I think inbound, there will be growth but China’s not yet a major tourist destination. The major growth is going to be people in China who’ve reached the level of affluence who want to go out, or even before they reached the level of affluence to take your first trip locally. Just like in the U.S.

You get enough money, beyond your Maslow’s hierarchy of needs, you’ll have to eat and all that and then I got a color TV, and a washing machine and then I’ve got a bit of spare cash. Why don’t I go take a road trip to go and see the Grand Canyon? Then after I’ve done that a few times I’m like, why don’t I go to Mexico, why don’t I go to Europe.

It’s really the same thing.

Skift: It seems that it is very difficult to build brand awareness in China, especially for a non-Chinese company?

Steven Pang: It’s challenging to build a brand in this market without burning a lot of money.

Ctrip won’t hide from the fact that they were in a pretty vicious spending war with Qunar before they ended up merging essentially.

I would say that is candidly one of the reasons why Skyscanner, while it has a clear niche and has been growing organically, has never spent the sort of money on T.V. or other sort of brand related advertising to grow brand awareness in that way.

It really hasn’t done that in any country in the world. It’s a different strategy from Trivago.

It’s different in other ways too where there’s the core question of do we want to spend 85 percent of our revenues on trying to grow new users. That’s one strategy, it’s valid, but the other part is you can do that when you have a certain level of margins and hotels perhaps play into that. Skyscanner has always been a flights-led business, initially at least, and so that created a different dynamic.

Now, as it seeks with Ctrip’s help to expand to other products, I think it’ll be interesting to see how that evolves, but I think the DNA of the company is very much that we’d rather not make Google, Facebook rich as Amazon Prime or anything.

We’ll definitely do some, but if anything, if we’re going to spend that money, we’d rather give it back to the consumer.

Skift: Being part of Ctrip, how much does that help with inventory?

Steven Pang: What Ctrip enables Skyscanner to do is to go to that hotel chain and say to them, “You know we can deliver you the Chinese traveler, but now on top of that we can deliver you 60 million users a month from Skyscanner who are in Europe and in many other places.” That’s quite a compelling proposition for a hotel chain. I think that will help us gain more inventory and better, more competitively priced inventory.

Skift: Turning to mobile, conversion has always been more difficult than desktop, it’s a big challenge for everybody. China is heavily mobile driven, how does Skyscanner manage this?

Steven Pang: I think China skipped web 1.0 and went straight to 2.0 and beyond.

Chinese consumers by and large aren’t going to go back. They’re not going to use credit cards to buy stuff anymore because they skipped that.

It’s not to say that the U.S. is not cutting edge. Our CEO is very candid. When he grew up as a developer he was like, “Oh of course I’m going to look at Silcon Valley.” Now more and more, not just because we got acquired by Ctrip, if anything maybe this would have influenced why we ended up getting acquired… He was like, “We need to look to China because a lot of cool things are happening there.”

I think what Skyscanner’s trying to learn in terms of really being mobile first it’s that there are challenges. If you take the view of what Mr. Lee wants and Mr. Jang here wants now from an internet product, is what Mr. Smith is going to want in five-years-time? Do you start building that now? How do you transition that? I think our view is that we should start building that now, but at what point will you stop using your credit card to pay for stuff in the west?

Nobody knows.

Skift: What are your thoughts on consolidation in the metasearch industry?

Steven Pang: The distinction between direct and intermediated is getting more blurred.

We’ve seen this in China for a while. The consumer wants to get the most choice and be able to buy what he wants most conveniently.

He does not care whether you call yourself meta or OTA.

Nobody really spends time obsessing in the travel media here about whether we’re called a meta or an OTA. I think this is a little bit more of a legacy western thing because that’s how the industries grew up.

Where, coming back to the earlier thing, because the west did originate and then go through 1.0 which was web based, highly advertising focused, and arguably China and lots of Asia skipped that and went straight to 2.0. which is kind of mobile based, app focused, and commerce based more. There’s much less long tail publishing, much less add exchanges, which support the business models here. You’ve developed a different ecosystem and the west is still kind of evolving. The models are evolving.

QUNAR

In October 2015, Ctrip participated in a share exchange with Baidu, which had a large stake in Qunar. Ctrip issued $3.4 billion in shares resulting in Baidu taking a 25% stake in Ctrip and Ctrip taking a 48% stake in Qunar. Qunar has since been taken private via the private equity firm Ocean Management, which is an affiliate of Ocean Link, which is a strategic partner of Ctrip and has Ctrip founder James Liang as a board director. In total, this suggests that Ctrip will control Qunar even if its stake is not 100% directly. We interviewed Ocean Link and that interview will follow this section.

Prior to the transaction, Qunar had aggressively been competing with Ctrip. The business is similar to Ctrip’s in offering transportation ticketing, hotels, vacation packages, and attraction tickets, but focuses more on the lower end of the market and lower tier cities where pricing is lower and competition is more price than service driven. Prior to 2014, Qunar was primarily a meta model for lodging, but pivoted to the OTA space as most hotels in China do not have their own online booking sites. The company had 350k hotels in its inventory as of its last annual filing in 2015.

While revenue growth was strong, the company was never profitable and consistently lost money as it invested for growth and competed aggressively on pricing at the same time.

Revenue in 2015 for Qunar was $644 million or around 40% of Ctrip’s; Ctrip’s economic exposure would be around $320 million. Stripping out all stock compensation still puts the company operating at a $300 million loss or negative 46% margin.

As Ctrip integrates Qunar, it should be able to take this to at least break-even. Doing so would increase Ctrip’s operating margin around 250bps by 2020.

CINDY XIAOFAN WANG, CFO, CTRIP

Cindy Xiaofan Wang has served as Chief Financial Officer since November 2013 and Executive Vice President since May 2016. Prior to that, she was Vice President since January 2008. Ms. Wang joined Ctrip in 2001 and has held a number of managerial positions at the company. Prior to joining Ctrip, she served as finance manager in China eLabs, a venture capital firm from 2000 to 2001.

Previously, Ms. Wang worked with PricewaterhouseCoopers Zhong Tian CPAs Limited Company. Ms. Wang received a Master of Business Administration from Massachusetts Institute of Technology and obtained her Bachelor’s degree from Shanghai Jiao Tong University. Ms. Wang is a Certified Public Accountant (CPA).

Skift: For Qunar, can you discuss how the deal came about and the rationale?

Cindy Xiaofan Wang: We wanted to rationalize the competition, especially pricing competition. Qunar actually lost billions of dollars trying to take share in the hotel business.

Because Ctrip was trying to compete head-to-head with them, we had to engage in pricing competition, which, at the end of the day, is not good for the whole ecosystem. It doesn’t make sense even in the long run because we lost a lot of things that were more important. For example, the customer service and innovation in the product offerings.

That’s the reason we are trying to rationalize competition. We hope to make Qunar break even or even profitable going forward. That’s good not only for our investment but also actually good for our customers because when you have more cash, when you have more profit, you have the room to make investments to further improve your service.

After we made our investment, we helped Qunar build up their service center. Before that, they only focused on price. They didn’t even have the financial bandwidth to build up their service capability. We helped them to build service capabilities so that all of Qunar’s customers could enjoy very reliable service when they book through Qunar.

Skift: When we look out five years from now, do you still see Qunar as a separate brand as opposed to being rolled up under Ctrip?

Cindy Xiaofan Wang: Yeah. We actually engaged a Chinese movie star to advertise the brand and help further expand into second and third tier cities. We will stress both brands because what we observed is the two brands actually target two totally different sets of customers with the overlap at only like 20 to 30%. We see a lot of upside potential that we can use to target totally different market segments to grow the total pie for our group.

Skift: What about technology synergies too?

Cindy Xiaofan Wang: Yes. Ctrip’s CTO is coming from Qunar. Separately, the head of our PR team is from Qunar as well.

We spoke to GGV’s Jixun Foo who was an investor in Qunar and a key player in bringing the deal together.

Interview With Jixun Foo, Managing Partner, GGV Capital

Jixun is a Managing Partner at GGV Capital, having joined the firm in 2006. He has more than 15 years of experience in venture capital investing and have worked with many successful entrepreneurs. Jixun focuses on the online travel, mobile transportation, and on-demand service sectors. Jixun has led GGV’s investments in Qunar (NASDAQ:QUNR), Youku-Tudou (NYSE:YOKU), UCWeb, Didi Chuxing, Mogujie-Meilishuo, MediaV, and currently serves on the boards of Aiwujiwu, GrabTaxi, Tujia, Douguo and Diandian Yangche. Jixun played a critical role in many key strategic mergers and acquisitions, such as those of Youku-Tudou (first ever multi-billion dollar tech merger in China), Baidu/Qunar, Ctrip/Qunar, and Mogujie/Meilishuo.

Prior to joining GGV Capital, Jixun was a Director at Draper Fisher Jurvetson ePlanet Ventures, where he led investment efforts in Asian companies such as Baidu (NASDAQ:BIDU). Prior to DFJ ePlanet, Jixun headed up the Investment Group under the Finance & Investment Division of the National Science & Technology Board of Singapore (NSTB), and was previously a R&D project group leader at Hewlett Packard. Jixun graduated from the National University of Singapore with a First-Class Honors degree in Engineering, and received a M.Sc. in Management of Technology from the university’s Graduate School of Business.

Jixun ranked 35th on The Forbes Midas List in 2015, and has been recognized by Forbes China as one of the “Best Venture Capitalists” every year since 2006. Jixun was recognized as one of the Top 10 Venture Capitalists by Zero2IPO, and was named “VC Professional of the Year” by the Asia Venture Capital Journal.

We spoke to Jixun Foo about his investments in the travel space in China and broader trends in the industry. Below is a summary of that conversation.

Jixun moved to GGV in 2005 to build out its China presence along with Jenny Lee. The founding thesis was cross border investments with one team in two geographies.

Qunar Stake

Jixun got to know Qunar in 2005. At the time, the OTA market was split between Ctrip, eLong, and Qunar. He saw an opportunity three years later when leisure travel picked up and ticketing became digital. Ctrip continued on high touch high service and call center approach but was not competitive on price. Baidu was great at search broadly, but Jixun saw the growth potential in vertical search as well.

During the financial crisis, there was a turning point for leisure, and consumers were more price sensitive. This helped Qunar drive its ticketing business.

Fast forward to 2011, Qunar’s position became delicate so GGV worked with them on a path forward. The options were to be acquired or compete with Ctrip. First, Baidu took a large stake in Qunar, which allowed it to compete with Ctrip. The battle was tough and Qunar went public. However, Qunar still bled money. Eventually, it showed strong ROI at least so it got shareholder support and did a convertible note. Qunar focused on the 1-3-star hotel market rather than upscale, which was harder to penetrate. The aggressive pricing strategy chipped away at Ctrip share, but in 2015, James came back to Ctrip as CEO and focused on mobile. GGV knew M&A needed to happen.

They went through a round of conversations and made the deal in 2015. GGV had a good relationship already with Ctrip due to both being invested in Tujia. He had good relationship with Ctrip given its investments in Tujia

We asked if Baidu would look to acquire Ctrip. Jixun believes they will stay a passive investor and it is in their best interest to do so.

For Tujia, which Ctrip has a stake in, there is a lot of excess inventory, but the challenge here is the consumer behavior where you need a more mature service economy. When Tujia first started, they had an offline and online business. The offline business had a service model with agencies running units. This was not a very scalable model. Online is scalable, but they first need to build supply and trust. This is not easy and it takes time, but he sees market momentum with generational change. Chinese people are looking for more experiential travel.

Jixun offered insight into what Tencent, Alibaba, and Baidu are likely to do in travel. For Baidu, he sees it being more passive with its exposure through advertising and investments in things like Ctrip. For Tencent, he sees the focus staying on QQ and WeChat and advertising more broadly versus trying to be an OTA. For Alibaba, he expects Alitrip/Fliggy to be strong in flights as the airlines want diversity of channels. Hotels is a much harder market to capture where you need volume and lowest pricing and availability of inventory. Additionally, Ctrip and Qunar drive most of inventory and Meituan leads at the lower end of the market.

We discussed why it is so difficult for non-Chinese firms to compete in China without a local partner. He noted that localizing is very hard for foreign companies and that the China market is very different market. The Chinese expect very quick response time while the U.S. expects to wait or do self-service.

ELONG

In May 2015, Ctrip acquired a 38% stake in Chinse OTA eLong for $422 million from shareholders including Expedia. One year later, eLong was privatized and became the wholly owned subsidiary of E-dragon Holdings Limited. Before the private transaction, filings show that Ocean Imagination (Ocean Link) held 22% of shares and Tencent through TCH Sapphire held 15%. After the transaction, Tencent increased its stake while Ctrip remained the same.

eLong’s last filing was for 2015. It generated $168 million in revenue with accommodations being almost 90% of the total. Its operating loss was $184 million. Share based compensation was very large versus revenue at $288 million. Ex that, the company would have generated around $100 million in profits.

This transaction is less about a direct financial impact and more about rationalizing the competition while Qunar was both (and much larger in size).

Skift: Can you discuss eLong?

Cindy Xiaofan Wang: The brand has a very strong awareness in the northern part of China. Also, if you look at the average daily room rate for eLong, they are in between Qunar and the Ctrip. A certain percentage of their customers are very loyal, who are living in the northern part of China, where Ctrip has comparatively less brand awareness. Qunar is also in the northern part of China but they are much more focused on the lower end of the market. So, to some extent, eLong is very complementary to both Ctrip and Qunar.

Interview With Tony Jiang, Co-Founder & Partner, Ocean Link

Ocean Link is the first independent private equity firm focused on China’s growing travel and tourism sector

The cultivation was carried out in 2016 during a pivotal period of growth and development for the travel and tourism sector in China. With increased consumption and changing immune actions driving a shift in the country’s economic landscape, there is an immense opportunity for the sector to evolve to Serve the rising number of domestic and international travelers.

With the support of strategic partners Ctrip, the largest online travel agency in China, and General Atlantic, a leading global growth equity firm, the firm’s team of investment professionals in Shanghai and Hong Kong combine deep local reach, strong investment acumen, and extensive industry Expertise to identify attractive opportunities in the rapidly expanding travel and tourism sector in China.

Ocean Link deploys both RMB- and USD-denominated funds to invest strategically across the broad value chain and sub-verticals of the travel and tourism sector. This includes hotels and resorts, attractions and online travel agencies and operators, transportation services, and related business solutions providers.

Mr. Tony Jiang is a Partner at Ocean Link and serves on the firm’s board of directors. He brings over a decade of investment experience in the travel and tourism sector. In addition to back investments in Ocean Link’s current portfolio, he has been previously being involved in the investments in New Century Kaiyuan Hotels, Crystal Orange, Plateno Hotels Group, as well as several other companies in the travel, consumer, and internet sectors. Prior to founding Ocean Link, Mr. Jiang was with The Carlyle Group from 2006 to 2016 where He most recently served as a director in the firm’s corporate private equity division, focused on buyout opportunities in Asia. Prior to this, Mr. Jiang worked in the banking unit of Deutsche Bank, the leading provider of educational tours and summer camps in China, and Ruby Hotels, a Europe-based hotel chain leading the “lean luxury” concept with expansion plans to Asia. He received a BS In Electrical Engineering from Columbia University where he was a Fu Scholar.

Skift: Can you talk about Ocean Link broadly and your background?

Tony Jiang: Before founding Ocean Link, I used to work at a US private equity firm, the Carlyle Group for 10 years. That was from 2006 to 2016 and when I was at Carlyle, I mainly focused on two areas. One was travel and the other one was internet. When I was at Carlyle over the past 10 years, I think one thing that I realized is that the private equity investment environment is getting more and more competitive both within China as well as globally.

Having a sector focus is actually quite important so we decided to set up a sector focused fund. We’re basically looking at which sectors to focus on. Obviously, given my background in travel and internet, these are the natural segments that I’d like to focus on, but more importantly, I think consumption growing in the Chinese market. We figured that travel is safe. It’s actually very big, but also growing very quickly. Private equity into segments for which we focus on, makes a lot sense in terms of the availability of deals, the potential for growth, and also investment returns.

I had worked on a couple of travel deals in the past, including with the founder and chairman of 7 Days Inn, which used to be the second largest budget hotel chain in China, now part of the Shanghai Jinjiang Group. From his perspective, he felt that the travel market was actually very strong with a lot of investment opportunities, but he wanted to partner with professionals who actually do that. We have Alex Zhang, who used to be the founder and the chairman from 7 Days Casino to join us in putting this together. He also used to work with Ctrip relatively early on, around I think 2000 to 2005. He used to run the southern China business for Ctrip, as well as marketing for entire China for Ctrip back then. He helped to put us in touch with James Liang and the senior management of Ctrip. We actually worked with Ctrip before already.

There was a sort of a connection in the past and then with regard to this particular investment, this particular sort of opportunity to put together Ocean Link, we spoke to the guys at Ctrip and got their support as well as General Atlantic Partners, a U.S. based firm.

It’s really a joint venture. Ocean Link is joint venture between the team, which includes myself as well as Alex, and Ctrip and General Atlantic. It is a mixture of both investors as well as the management team with private equity background as well as industry background to focus on this one particular sector. It has a very wide scope in terms of investment opportunities. There is very high growth both within the China domestic travel market as well as the outbound Chinese traveler market for us to invest in.

Skift: One of your initial investments was in eLong, which Ctrip also has a stake in. Were you invested in that before the Expedia exit? Can you talk about eLong broadly?

Tony Jiang: eLong was a deal that we worked on together with Tencent as well as Ctrip to acquire the controlling stake from Expedia as take it private off. This was actually one year ago, in May 2016. eLong used to be sort of the number two OTA in China, very closely followed by Ctrip back in early 2000. Then Expedia was the controlling shareholder in the business.

For one reason or another, it ended up with a similar situation as many other U.S. controlled internet companies in China, whether it’s eBay, whether it’s Groupon China or it’s Uber China or a Google product. When we look at the landscape of internet players in the China market whether it’s an OTA, whether it’s ecommerce, whether it’s chat platform, or ride sharing, it’s actually the domestic player that’s dominating the market. Expedia, sort of didn’t run the company I guess at its optimum level. Then with the sort of very heavy competition and subsidy that Ctrip and that Qunar, as well as Meituan and Alitrip did, they were starting to fall behind a little bit and obviously, Expedia was still under pressure as well.

What we felt made sense was to buy a controlling stake from Expedia, take a bit of this private, and then really, the two innovative shareholders would work together and do a major turnaround of that in the business. I think we are now exactly one year into the completion of the take private. The business actually did very well. Revenue last year more than doubled the revenue of the previous year and I think that it has a lot to do with the change of the management, the booking channel that was provided on Tencent’s WeChat and inventory collaboration with Ctrip and with Qunar.

From our perspective, we felt if the turnaround situation was from two very strong co-shareholders and also a very strong management team and then from a business perspective, it would succeed, especially within the mid-tier hospitality lodging segment which is the core most area for the hospitality industry in China.

Skift: Then just on the turn around, was a big part of it also the pricing competition you had with Qunar, Ctrip, and eLong before or for eLong specifically, was it more about inefficiencies and management issues?

Tony Jiang: Yeah, it’s actually a couple of things. First of all, I think it’s the management change so I guess I wouldn’t really blame the prior management, but I think it really has to do with basically a Chinese subsidiary functioning under Expedia. I guess sort of the quickness and responsiveness, things like that. I think it’s not exactly on par with the local players. I think there was enough inefficiency with management issues to start with. Basically, that was addressed by the change of the management after the change of control, that’s number one.

Number two is I think that in terms of traffic, I think for any internet business right now, basically traffic acquisition cost is pretty much the number one cost. For the companies in the travel industry, whether the business succeeds or fails, really depends on how they actually acquire users. Given that travel for most people is a relatively low frequency type of application or a function that they would use, whether or not a company acquires traffic or users very efficiently and effectively is another key issue. eLong really didn’t have too much of a unique approach other than its organic traffic, other than the brand name they sort of build up over the past 12, 13 years in the China market. After they were taken private, there was a lot of traffic directed to it by Tencent to WeChat.

WeChat is the number one chat application, it’s the messaging application that people use here in Asia or in China more specifically. There is a sort of wallet function, so there is a virtual payment feature that’s associated with WeChat and the hotel booking functions that’s provided by WeChat. Behind that, is 100% provided by eLong. There has been a very significant user pick up for eLong as well.

It’s not exactly about pricing, but more about how do the OTAs in the China market compete with each other and at the same time, compete on more effective basis. Before 2015, the subsidy in the market was actually very irrational. The example that I would give is if you look at the leading players like Ctrip, eLong, Qunar, Alitrip and Meituan, these guys are actually focused on very different segments of the market. The other way of saying it is that they’re core users are actually very different just because of how the company started, how they got traffic and the DNA of the business. If we look at Ctrip, I mean the average rates of room that’s booked on Ctrip is over 500 RMB.

If we look at eLong, that’s about 300 RMB. If we look at Qunar, that’s probably 150 to 200 and then Meituan is a bit lower at 100 to 150 and Alitrip is below 100 RMB. They actually have very different core users. Before 2015, what we’ve seen in the market is that people actually try to compete for users somewhat irrationally in the sense that Qunar and Alitrip will offer heavy subsidies to try to attract a high-end user from Ctrip.

Then once that subsidy goes away, then there’s no incentive for their high-end user on the Qunar platform to stay, because the user experience and core product is very different. When the subsidy goes away, the customer goes away as well.

Now what we’re seeing in the market is that there’s still competition, but it is more rationally done in the sense that there are no longer the same types of subsidies.

Skift: Online travel in China is still underpenetrated. Why is that the case? That being said, it seems like the shift from offline to online is accelerating?

Tony Jiang: There are a couple of things. Number one is the penetration of smartphones. When you go to Shanghai or Beijing, most people use smartphones. When you go to a lower tier city, the penetration of smartphones is lower but growing. Number two is the change in demographics. People have only recently started to travel more frequently.

If we look at the 40 to 45-year-old age bracket, these people have the spending power. For them, it’s actually a shifting process of adaption. For the younger generation, I think it’s about graduating from college and then having more money to spend on travel.

It also has to do with the frequency of traveling as well. In the past, people did not travel as frequently so the convenience that comes with online booking was not as important when you only travel once or twice or three times a year and were used to going through a booking agent or doing it by phone in.

The other thing is that since travel was infrequent, people did not have to download an app for that. WeChat has the built in a plane tickets booking function, railway ticket booking function, hotel room booking function, and people are getting more accustomed to the convenience as well as the transparency in pricing.

At end of the day, I think if you look at business travel for example, a lot of large corporates still use the traditional travel agencies or travel management service companies to do that. I think it’s a gradual process to actually realize that in terms of pricing, in terms of convenience, in terms of 24/7 services, the online players are actually starting to do a better job than the typical travel management services. I think that there will be a large switch or migration from the traditional travel service arm to travel agencies using by corporate.

Skift: During my time in Shanghai, the general consensus was that the biggest growth drivers as an industry are outbound travel and the rise of domestic leisure travel. Would you agree with that?

Tony Jiang: When we look across the space, we do see a very significant growth increase actually across all fronts, including the ones that you mentioned. I guess obviously the outbound travel is a segment that grows from a relatively smaller base. I think the growth is actually very significant both in terms of number of travelers as well as sort of the amount of money that people actually spend on traveling. Also within domestic travel, whether it’s leisure domestic travel, business domestic travel, I think there are two trends that we’re seeing.

On one hand, it is about more people getting on the roads. A part of that has to do with consumption, a part of that has to do with the fact that the infrastructure is getting better. There is high-speed rail now and that continues to be built. Chinese airlines are putting more capacity for both domestic routes as well as international routes. With the additional infrastructure, that gets more people on the roads. Equally important is that for the domestic travel market, we actually see a very clear trend in terms of consumption upgrade in the sense that people are spending more money, both for leisure trips as well as for business trips.

If we actually look at the past 10 years or so, that has been the golden decade for the budget hotel segment. Over the past 18 months or so, the budget segment became saturated. It’s a very clear trend in the sense that people are actually saying I’m no longer willing to stay at the budget hotel or at a condo hotel. When I travel, I’m willing to spend double the amount of money than I used to.

Partially, it’s about income increasing and partially it is the user becoming more sophisticated. The younger generation is willing to spend more money to treat themselves better.

Skift: Tencent, Alibaba and Baidu seem to have their tentacles all over the online travel market where sometimes, they overlap with each other or sometimes with Ctrip. What are your thoughts on this dynamic?

Tony Jiang: I think in China, I think it’s quite interesting in the sense that the big three internet players in Alibaba, Tencent, and then Baidu are all very aggressive or active in investments. I think Baidu to a certain extent does this a bit less, but if you look at what Tencent has been doing, what Alibaba has been doing, not only in travel, but also in many other sectors, they actually make very extensive investments in all these areas.

Alibaba, Tencent, and Baidu used their traffic resource as part of their financial resource to actually tap into many segments. It’s not only for travel but broadly speaking, they’re everywhere. They all started in a very different way in terms of how they actually got into the travel market.

Baidu really started with the investment in Qunar, then because of the merger with Ctrip, Baidu has a meaningful stake. I don’t remember the exact percent, it’s probably around 20-25% in Ctrip.

Then Tencent actually never intentionally built a large travel business. Their focus is on one hand instant messaging and on the other hand, online video games which generate close to half of their revenue. Because of the amount of traffic that they have, they now work closely with eLong on hotel booking. Basically, they don’t really operate that business in the sense that they direct their traffic to eLong and eLong uses their inventory and infrastructure to generate hotel orders on that.

Alibaba was the latest in terms of intentionally getting to that market. Ali has been very local along the way in terms of the Ali travel business. I think internet is one of those segments, whereby vertical expertise is extremely important. Ali tried to actually compete with Tencent by rolling out an instant messaging product but then that didn’t really take off as expected. At the same time, Tencent tried to sort of compete with Ali’s ecommerce through a WeChat ecommerce platform, but that didn’t really take off as well.

Right now, Ctrip is still clearly leading in market share. They’re sort of dominant in a way in the market given the supply chain that they have built up to get the specific expertise in the travel space. Ali is probably among the top three (Baidu, Alibaba, Tencent), the one that has been most vocal as well as most intentionally doing a travel business, but I think they are still lagging quite a bit behind the other players.

Skift: Ctrip took a stake in Tujia and Airbnb is pushing more into China. How big of a growth opportunity do you see alternative lodgings being in China?

Tony Jiang: We actually spend quite a bit of time on this. I think so far, we don’t think there is a clear window in the market for a couple of reasons. I think one of the most important reasons is that in many countries like the U.S., most of Europe, and Japan for example, the fundamental mathematics is that commercial real estate has a higher cost or a higher valuation than residential real estate.

That mathematics really created a room for arbitrage for the property providers on Airbnb, etc. because they can get their house or apartment at a lower cost than a hotel room. Then that basically translated into low competitive pricing for travelers who stay at an Airbnb vis-à-vis the hotel. In China, for most markets, it doesn’t work in the sense that residential properties tend actually to have the higher value than the commercial real estate.

That room for arbitrage is not as clear so I think that’s the big challenge in the sense that the math behind it doesn’t really work. Then so the consequence of that is that actually if you look at Beijing, Shanghai or other large cities, so pretty much a lot of places across China, the hotel rooms are actually not that expensive. Five star hotels in Beijing, Shanghai room rates 1,000 RMB and then sometimes, you can get it much lower than that. For economy hotel, typically around 200 RMB. The mid-tier ones, 300 to 400 RMB which is $50 to $100.

The pricing shows that lack of arbitrage in the sense that the cost is actually already very competitive for hotels. People get good experience and there is really no need to stay at an Airbnb. I think that’s the most fundamental issue. That being said, I think there are still markets whereby the residential real estate is cheaper than commercial real estate so that room for arbitrage is there.

Also, if you look at Airbnb today, a lot of the property providers on Airbnb who are not really the original individuals per se but small business, professional operators. If you look at professional operators then basically, becomes in the same scope of hotel companies. These are all operators and typically, a large operator would have a higher efficiency than a small operator.

The fact that Ctrip took a stake in Tujia showcases that OTAs are also paying very close attention to how the apartment sharing type of business may impact their business and how do they actually capture this part of the growth in the market segment.

Our conclusion is that it’s going to be much more difficult for a China equivalent of Airbnb to come out but we are also still very close to following the market situation on that.

Skift: Who do you think is doing the best job in capturing the outbound traveler in China? There are like TripAdvisor moving in and they have a very small stake in the market but it seems like they offer a lot when it comes to content and inventory abroad. Who do you think is doing the best job in China to kind of match inventory in Europe and in U.S. to the kind of the needs of the Chinese traveler?

Tony Jiang: I think depending on which specific segment there we’re looking at. You mentioned TripAdvisor. I actually have been a very long-time user of TripAdvisor. When we look at the market, when I just turn around and ask my old high school classmates, very few of them actually use it. I think partially because they don’t like the user interface and partly because the Chinese translation is quite lousy. I think one of the important aspects of that is that what TripAdvisor had is really in the information of point of interest.

For a lot of the Chinese travelers, they’re not there yet. What they tend to do is to actually read a sort of what we call I guess travel strategy. Basically, it’s like a Lonely Planet type of thing. You actually read about Paris, everything about Paris, about how do you actually spend three days in Paris. People sort of pay less attention on particular point of interest and more about how they should actually think about spending the three or four days in Paris.

One big difference is that I think a lot of the Chinese users, they actually have already built up a behavior to book on Ctrip and to book on for example, Booking.com. Also, to some extent, Agoda. When they actually do their homework on TripAdvisor, they do it there. I think in terms of transaction, we actually see very little transaction conversation.

In terms of outbound travel, Ctrip and Qunar are the leaders in terms of your ticketing and then Ctrip as well as Booking.com and also Agoda in terms of hotel booking. Ctrip is actually doing a very good job in terms of global expansion as well. I say that from personal experience as well in the sense that now I think what I use to book my travel, I think for China, outbound China domestic, I used Ctrip.

Skift: Just in terms of kind of user generated content and reviews, it sounds like the Chinese travelers aren’t necessarily there yet compared to travel habits of western consumers where a lot of the research they’re doing, they’re pulling content from Google maps, TripAdvisor to get around and figure things out. It sounds like for the typical Chinese traveler, it’s more kind of nailing down the itinerary and that’s what they use the big travel websites for but in terms of the content, it’s not necessarily there, is that a fair assumption?

Tony Jiang: That is correct, absolutely, yes.

OTHER INVESTMENTS

Skift: On the hotel side, can you discuss BTG and Homeinns?

Cindy Xiaofan Wang: They are in the first category as strategic partners for Ctrip.

Skift: What about Tujia?

Cindy Xiaofan Wang: Tujia is slightly different because they are kind of an Airbnb model in China. For Ctrip, our hotel business is not called hotel business, but rather is part of accommodations where we include alternative accommodation types, which actually Tujia fit in that category.

Skift: When we see alternative accommodations on Ctrip’s app, are many of those being powered by Tujia’s inventory?

Cindy Xiaofan Wang: Yes. Basically, in the Ctrip mobile app, we outsource this to Tujia.

Skift: How big of a trend is alternative lodgings becoming in China?

Cindy Xiaofan Wang: It’s still early stage, but we see momentum there.

Skift: What about the China Eastern Airlines?

Cindy Xiaofan Wang: China Eastern was a strategic investment in one of the three airlines with dominant positions in China. With their headquarters in Shanghai, we have very frequent communications with their teams. Among all the state-owned airlines, they are the most pro-business one.

Skift: Hanting?

Cindy Xiaofan Wang: They are a strong brand name in the hotel sector. So, by making our investment, we formed a strategic alliance with them.

Skift: LY.com?

Cindy Xiaofan Wang: LY is the number two OTA now, because we basically consolidated the others. We are trying to build a very healthy ecosystem in the travel industry so we made an investment in LY. We provide, for example, the hotel and air ticket product for them to sell. There’s no way that they can build up their own inventories in terms of air ticket as well as the hotel. By making an investment and providing these products, we can eliminate all that original pricing competition.

Skift: You touched on MakeMyTrip briefly before, but can you discuss that investment and India a bit more?

Cindy Xiaofan Wang: MakeMyTrip is now a very clear leader in the Indian market. We have a lot of experiences to share with them.

Skift: What about Tuniu and its packaged tour business?

Cindy Xiaofan Wang: To some extent, they compete with LY in the traditional package tour business. But for Ctrip, by making investment in both of them, we provide the inventories to expand our customer base and as return of cost we can charge commissions from the business and we can eliminate all the original pricing competition in the hotel and air ticket business.

Skift: When you look out over the next couple of years, how do you see Ctrip continuing to evolve?

Cindy Xiaofan Wang: Moving forward, we have a very clear strategy. The first part is to further expand into the second and third tier cities of China. And the second part is internationalization.

Ctrip together with Qunar has less than 10% of the total China travel market, which is about 4.6 trillion RMB. This tells us that there’s still huge room to grow domestically.

Industry Overview

Domestic travel is the core of what Ctrip does with the vast majority of bookings and revenue coming from this. Outbound is much earlier days for Ctrip accounting for 16% of bookings and 27% of revenue (higher cost for international travel), but adds to an already impressive growth path driven by the move from offline to online travel in China that is reminiscent to the early days of OTAs in the U.S. and Europe.

Domestic Travel

According to the Chinese State Council, industry domestic bookings were $564 billion in 2016 while Travel China Guide estimates inbound at $57 billion. The vast majority of this is from leisure travel where the WTTC pegs it at 80% leisure and 20% business travel.

The chart below shows that from 1994 to 2015, the number of trip occurrences for individuals grew from 524 million to 4 billion as travel increased and many people take multiple trips.

Source: National Bureau of Statistics of China

With 10%+ growth every year since 2009, it seems likely that this pace can continue. If we assume a 10% CAGR through 2025, we would hit 10 billion occurrences.

Source: National Bureau of Statistics of China

Looking at it from an expenditure perspective, we can see that growth has been even stronger. Using Ctrip’s year-end exchange rate to normalize currency (just under 7 RMB/USD), spending has gone from $15 billion to almost $500 billion from 1994 to 2015. Assuming maintaining a 15% growth CAGR through 2025, domestic travel could hit $2 trillion in spending.

Source: National Bureau of Statistics of China

Source: National Bureau of Statistics of China

MACRO LANDSCAPE HAS SPURRED DOMESTIC TRAVEL

WEALTH EFFECT

The growth of the middle class in China has been dramatic. According to the Boston Consulting Group, over the past twenty years, hundreds of millions of people have moved from poverty to emerging middle class, which BCG defines as annual disposable income of $10,001 to $16,000, and the middle class, $16,001 to $24,000. As people no longer were worrying about where there next meal was coming from, they could experience some leisure travel in their own country.

More recently, upper-middle class growth has picked up and is a factor on not only the volume of trips, but the increase in spending on those trips. According to BCG:

“China is entering a new era. Consumption growth will be driven by the dramatic rise of upper-middle-class households ($24,001 to $46,000 in annual disposable income) and affluent households (more than $46,000). We project that by 2020, the number of upper-middle-class and affluent households will double to 100 million and account for 30% of all urban households, compared with 17% today [December 2015] and only 7% in 2010. Furthermore, upper-middle-class and affluent households will account for 55% of Chinese urban consumption and 81% of its incremental growth over the next five years.

Consumption among upper-middle-class and affluent households is growing at 17% per year and, by 2020, will account for $1.5 trillion in incremental spending in urban China. That compares with a 5% growth rate among emerging-middle-class and middle-class consumers. Even though their share of urban consumption will drop from today’s 48% to 39% in 2020, such households will continue to make up a market that is too enormous to ignore. Because more of today’s low-income households will enter the lower rungs of the middle class over the next five years, these segments will still account for roughly half of urban households. The emerging-middle class and middle class will remain the biggest consumers in many categories, particularly such fast-moving consumer goods as personal-care products and detergents.”

BCG also notes that the emergence of a new generation or the “Young Generation” is driving more spending. People older than 35 in China tend to be more frugal as they loved through periods of uncertainty. BCG’s data indicates that people falling in the upper-middle-class category that are under 35 spend 40% more on average than older people with the same income level. BCG found that Young-Generation Chinese are eight times more likely to be college graduates and travel overseas twice as much.

Going forward, we expect continued economic growth and better quality of life in China to continue to push up both the frequency and the amount spent on travel within China.

SEASONALITY

Domestic travel in China tends to be more seasonal than in other parts of the world. The two peak periods are referred to as “golden weeks”. The National Day holiday is the first week of October and the spring festival holiday, which is based on a lunar calendar, falls sometime between January and mid-February. Chinese citizens get ten days off on average, but with so many people traveling at the same time, this creates logistical issues.

For reference, below is the holiday calendar in China.

Source: Travel China Guide

The China National Tourism Administration shows the following popular cities as of 2015 via the EUSME Centre.

Source: CNTA, EUSME Centre

TRANSITION FROM OFFLINE TO ONLINE IS A MULTI-YEAR DRIVER FOR CTRIP

Ctrip does not explicitly provide bookings in its filings each year, but the company did comment that GMV or gross market value, which is essentially gross bookings, were 430 billion RMB in 2016. We use a few different sources to estimate a rough market share and opportunity size for Ctrip.

If we use data from iResearch, a leading Chinese research firm, online sits at only 12% of total GMV with Ctrip online share at almost 80% (including all of its brands).

The chart below uses a constant exchange rate for USD.

Within the pie, air ticketing is the largest with the major airlines being government owned and having an online presence versus the fragmented hotel market where many hotels do not have online booking sites yet. We expect the hotel part of the pie to continue to grow and airlines to decline somewhat. That trend will help Ctrip and other OTAs given the much higher profitability of hotel bookings versus air.

Next, we estimate the opportunity for increasing online share of the travel ecosystem by adding industry inbound, outbound, and domestic revenue and then using Ctrip’s OTA market share range to estimate online bookings as a whole.

In the following chart, outbound is $261 billion and based on WTO numbers; inbound is $57 billion and based on Travel China Guide estimates; domestic is $564 billion according to the Chinese State Council.

Source: Skift Estimates, Company Filings, WTO, Travel China Guide, Chinese State Council

We note that these are not “market penetration” numbers in the traditional sense, but rather how much of the travel ecosystem is booked online for domestic, outbound, and inbound travel. The difference is subtle, but makes the denominator different than what some may expect based on other penetration numbers in the market at around 30-40%. We do not dispute those, but instead, we are focusing on the opportunity to increase travel related revenue for Ctrip.

Regardless of how you view the denominator, there is a long way to go with the move from offline to online travel. That, combined with more people travelling broadly, are tailwinds that will help Ctrip grow at 20%+ per year through the end of the decade.

Outbound Opportunity Is Very Large and Growing

According to the United Nations World Tourism Organization (UNTWO), “2016 was another strong year for outbound tourism from China, the world’s leading outbound market. International tourism expenditure grew by US $11 billion to US $261 billion, an increase by 12% (in local currency). The number of outbound travelers rose 6% to 135 million in 2016. This growth consolidates China’s position as number one source market in the world since 2012, following a trend of double-digit growth in tourism expenditure every year since 2004.”

The leaders were as follows:

China $261 billion

USA $233 billion

Germany $81 billion

UK $64 billion

France $41 billion

Departures have grown steadily over time. Data from the World Bank shows that Chinese departures have doubled since 2010. The rapid pace has matured, but it is still growing in the neighborhood of 10%. That, plus increased affluence, should keep the value of these departures growing well above 10% into the end of the decade.

Source: World Bank

Source: World Bank

EXPERT INSIGHTS

Given the uniqueness of the China market, we felt it was important to team up with local experts to gain insights into the outbound travel opportunity.

Dragon Trail provided extensive research into industry trends and best practices for attracting visitors.

B-Sm@rk uses a personality driven approach to gauging what the Chinese traveler is looking for.

Finally, Hyatt discusses the risks of what happens when the Chinese government opposes a country or region.

Insights From Dragon Trail Interactive

The following section is the combined efforts of the Dragon Trail team. They have provided Skift with the following research and insights and all opinions below are Dragon Trail’s.

GEORGE CAO, CO-FOUNDER & CEO, DRAGON TRAIL INTERACTIVE

George Cao leads the Dragon Trail team with more than 20 years of experience in the travel and technology industries in China and in America. An accomplished entrepreneur, George previously co-founded two travel meta-search engines, including Mountain View, California based Search Party and Beijing based Go10000.com. Previously in Silicon Valley, George worked for WorldRES, one of the early B2B hotel distribution platforms and Talus Solutions, a leading revenue management solutions company based in Mountain View, California and Atlanta Georgia.

As a recognized expert in digital marketing and Chinese outbound tourism, George is often interviewed by the media and invited to speak at international conferences. He holds a master’s degree in hospitality management from Ithaca, New York based Cornell University, School of Hotel Administration and speaks Chinese and English.

ROY GRAFF, MANAGING DIRECTOR, EMEA, DRAGON TRAIL INTERACTIVE

Roy Graff brings over 20 years of experience working in and with China in the tourism, hospitality, luxury retail and digital marketing sectors, where he held a series of executive roles in business development, marketing, distribution, sales and e-commerce. Roy is the author of the book “China, the Future of Travel” published in 2015 and frequently serves as a media commentator and public speaker at leading travel and tourism conferences.

Prior to joining Dragon Trail, Roy has provided strategic advice and market entry support, as MD of ChinaContact which he founded in 2005, to some of the most trusted travel organisations including Skyscanner, VisitBritain, PromPeru, Eurostar, Tourism Ireland, Peninsula Hotels and Resorts among many others. In the early 2000s, he spearheaded Gullivers Travel Associate’s development of the independent travel business in China in the early days of Chinese outbound tourism.

Roy has a bachelor’s degree in Chinese and Economics from the School of Oriental and African Studies (SOAS), University of London and is a fluent Mandarin speaker.

MICHAELA MENTASI, MARKETING DIRECTOR, DRAGON TRAIL INTERACTIVE

As the Marketing Director of Dragon Trail Interactive, she is responsible for the agency’s marketing activities including its branding and digital communication strategy, research into China’s outbound travel and digital landscape and support to sales and country representatives to reach sales targets.

Prior to this, she led the Victorian Division of the Australia China Business Council, where she was responsible for promoting the bilateral trade with China and managing high-level relations with corporate and government stakeholders in China and Australia. As a consultant for the Italian Tourism Board, she contributed to the successful implementation of marketing and promotional strategies.

Skift: Can you provide an intro to Dragon Trail?

Dragon Trail Interactive:

Dragon Trail is an award-winning travel technology and digital marketing agency that helps travel and tourism businesses reach and engage with affluent Chinese consumers.

Our exclusive focus on travel, digital and China allows us to deliver effective digital marketing strategies that bring brands visibility, distinction and fans. Committed to best marketing practices, Dragon Trail places great emphasis on innovation, driven by developments from our in-house tech-team and industry experts.

The company has been widely recognized through various awards for its innovative approach in the design and execution of Chinese campaigns for clients, ranging from tourism boards, to international hotel brands, airlines and attractions. Dragon Trail also continuously develops proprietary technological applications and platforms licensed to travel companies, including a range of digital B2B solutions designed to add long term value to travel company’s trade marketing efforts in China.

Dragon Trail has strong working relationships with China’s most influential internet companies, leading travel agencies and travel media. Co-founded in 2009 by entrepreneur George Cao, the company has offices in Beijing, Shanghai, Xi’an and London. Some of our clients include: Destination Canada, Los Angeles Convention and Tourism Board, Visit Europe, Small Luxury Hotels of the World, Preferred Hotel & Resorts, Leading Hotels of the World, Hertz, Norwegian Cruise Line, Virgin Australia Airlines and Hard Rock Café.

For more information about Dragon Trail Interactive visit www.dragontrail.com.

Skift: What has changed from a policy perspective where outbound travel is becoming much more important?

Dragon Trail Interactive:

Visa simplifications, more direct connections, the use of technology and greater consumer spending power are all key factors contributing to the growth of the Chinese outbound tourism. However, in a country where the driven economy co-exists with state control, the government uses its influence to shape tourism development so that it is in line with the country’s overall agenda. Therefore, in order to fully benefit from the potential of China’s outbound tourism market, destinations need to understand not only the consumers’ needs, but also China’s tourism policies and politics.

Below are the policies contributing to China’s growing outbound tourism market:

THE 2013 TOURISM LAW
‘The Outline for National Tourism and Leisure (2013-2020)’ issued by the government of China set the ground for the redefinition of tourism development and management in the country, including a strong support for outbound tourism.

  1. China National Tourism Administration (CNTA) issued regulations against price slicing and “free of charge” travels, making shopping commission by tour guides and tour leaders’ illegal and compelled operators to employ tour leaders full time rather than relying on freelancers to lead groups. This has led to an increase in the price of group vacation packages and by comparison, FIT trips became more affordable. For instance, in October and November 2013, arrival numbers to New Zealand dropped by 12% and 16% YoY respectively, with short-stay holiday group visas down by 41%, whilst long-stay group holiday visas were up 14% and individual visitor visas up by 70%.
  2. Sufficient time for national tourism and leisure
    The government enforced regulations on statutory paid annual leave entitlements for Chinese workers. Increasing the number of ‘rest days’ available to the population lead to Chinese citizens wanting to spend their time and money on travelling.

TOUR GUIDES CAN NOW WORK INDEPENDENTLY – After a period in which CNTA tried to eliminate “zero-dollar tours”, by enforcing that all tour leaders be employed full time by a travel agency and paid regular salaries, CNTA opened up the tour guide profession, allowing them to work independently. As a direct consequence, there has been an increase in the number of personalized travel solutions aimed at Fully Independent TRAVELERs (FITs), as well as of vendors specialized in this offer. An example is Zhinanmao, a travel start-up that aims to provide a trip-planning tool for travel customization, bringing together free-lance travel experts creating tailored travel itineraries based on each individual client’s needs.

ADDRESSING TRADE DEFICIT – The Chinese government is encouraging outbound travel as one way to adjust trade imbalances with other nations, as Chinese consumers spend foreign currency abroad and offset some of the deficit that trading partners have with China. China’s increasing services deficit has been mainly driven by overseas tourism – related consumption.

TOURISM AS SOFT DIPLOMACY – According to Professor Dr. Tony Tse of the School of Hotel and Tourism Management (SHTM) at The Hong Kong Polytechnic University, the Chinese government uses tourism as a form of ‘soft diplomacy in its dealings with other countries”. By exerting control and influence over the development of outbound tourism, the government links tourist flows to its political priorities by both offering support to and imposing sanctions on other countries. Given the sheer size of the Chinese outbound tourism market, this has the potential to have significant effects at both the economic and political levels around the world.

  • The South Korea Example

On 2nd March 2017, Beijing announced it would ban all group travel to South Korea as part of its response to South Korea’s decision to deploy the U.S. Terminal High Altitude Area Defense (THAAD) missile system. In addition to banning travel agencies from sending tour groups to South Korea, the National Tourism Administration warned individual tourists heading to South Korea to “carefully select” their destination. A number of airlines including Spring Airlines, China Eastern Airlines, Okay Airways and South Korea’s Eastar Jet have cut flights to South Korea’s Cheongju and Jeju and cruise lines Norwegian Cruise Lines, Carnival’s Costa Cruises and Royal Caribbean Cruises cancelled all South Korean port visits by their China-based cruises.

Tourist arrivals from China fell 66.6% to 227,811 in April from a year ago, 40% in March and early estimates indicate that South Korea could lose $9.63 billion in tourism revenue and a 70% decrease in the number of Chinese arrivals. South Korea received over 8 million Chinese visitors in 2016, making up for almost 50% of all foreign visitors.

Belt & Road Initiative
China is the leading advocate and sponsor of the Belt and Road Initiative, which aims to promote economic exchanges in the area. Tourism exchanges have already exceeded 25 million trips, according to the China National Tourism Administration. Among the economic support that China is pouring into the region to promote tourism is better connectivity. Xi’an Xianyang International Airport is planning to handle 50 million passengers and 5 million international passengers by 2020 and Gansu province, with counts more than 1,600 kilometers of the Silk Road, in 2013 planned to invest 46.2 billion yuan ($7 billion) to complete 24 key aviation projects. As part of the Belt & Road initiative, China is also funding the opening of international cultural centres promoting the Silk Road. In Kathmandu, the China Culture Centre recently hosted a calligraphy exhibition entitled “Charm of the Silk Road”.

CHINESE OVERSEAS INVESTMENT IN TRAVEL – Chinese companies have been heavily investing in overseas travel assets to capitalize on the huge opportunities of the Chinese outbound market, as well as a means to diversify in overseas assets (particularly Chinese insurance companies as a way to mitigate potential risks of a downturn in the Chinese economy). Underpinning the rise in overseas investment by Chinese groups are looser regulations on outbound finance. The government lifted the review and approval process required by the Ministry of Commerce of the People’s Republic of China (MOFCOM) for transaction above $100 million.

Investment in companies such as Skyscanner by Ctrip further increase Chinese travelers’ choice and convenience. It is also speculated that Chinese investors will go to greater length to cater to Chinese consumers’ needs. For instance, after the purchase of Waldorf Astoria New York by Anbang Insurance Group for $1.95 billion, Chinese investors incorporated a restaurant serving Chinese haute cuisine.

Skift: How is leisure versus business doing?

Dragon Trail Interactive:

  • In 2014, 31% of trips were for business and 69% for leisure (Euromonitor International). According to a survey conducted by Hotels.com in 2016, leisure accounted for 93% of all trips taken, business for 40% and Visiting Friends and Relatives for 16%. Data might be hard to read, as millennials in particular, often mix business and leisure, and travel for multiple purposes – leisure, rest, investment, networking etc. China also lacks a mature TMC sector, so many SME use a variety of channels to book and therefore fail to identify as business travel.

Figure 1- Hotels.com 2016 Report

  • For the leisure segment, CNTA estimated that in 2016 group travelers accounted for 40%, and individuals for 60%. First time travelers, from second, third and fourth-tier cities prefer travelling in group as they are less experienced. Customized trips increased by 400% and themed programs by 250% in 2016.

Skift: What are the top markets for outbound travel?

Dragon Trail Interactive:

According to the China Outbound Tourism Research Institute (COTRI), for the first-time last year, more Chinese travelled to the Rest of the World than to Greater China (Hong Kong, Macau and Taiwan). Greater China accounted for 66.7 million trips (-5.2% yoy) as opposed to 70.1 (+11.7% yoy) million trips taken to the rest of the world.

We have already seen a drop in Hong Kong and Macau in 2016, which normally make up the lion’s share of Chinese international departures. Not surprisingly most of the top destinations are all in Asia, as the proximity and looser visa policies make such destinations more attractive. However, top performers Thailand and South Korea are seeing considerable drops in the first few months of 2017: South Korea saw 66.6% drop of arrivals in April from a year ago and 40% in March, and Thailand experienced 7.5% decrease in arrivals in the first 4 months of the year as it tries to crack down on zero-dollar travel packages. The USA was the most visited Western country. According to the European Travel Commission, in 2016, Europe welcomed 10.6 million tourist arrivals from China (+ 1% yoy increase) and is the continent attracting the greatest number of Chinese travelers after Asia.

Top 10 destinations in 2016
COTRI Jingdaily – data taken from individual NTOs
Country Arrivals in Millions Country Arrivals in Millions Yoy %
1 Hong Kong 42.8 Hong Kong 35.4 -8.2%
2 Macau 20.5 Macau 16.9 -0.4%
3 Thailand 8.8 Thailand 7.7 +16.5%
4 South Korea 8.1 South Korea 6.9 +39.5%
5 Japan 6.4 Japan 5.5 +28.7%
6 Taiwan 3.5 Taiwan 3.1 -11.7%
7 USA 3.1 USA 2.6 +14.8%
8 Singapore 2.8 Singapore 2.4 +38.2%
9 Vietnam 2.7 Vietnam 2.2 +55.2%
10 Malaysia 2.2 France 1.8 -29.6%
11 Malaysia 1.7 +23.1%
12 Germany 1.1 -5.6%

Skift: What platforms are most important for outbound bookings, in online is it comparable to general share trends with Ctrip dominating?

Dragon Trail Interactive:

DIGITAL TRAVEL SALES – Digital travel sales in China are projected to total RMB726.6 billion ($109.4 billion) in 2017, up 20.6% over the previous year, according to data from iResearch Consulting Group. According to eMarketer, by the end of 2017 digital will account for 1/5 of all travel sales in China. Mobile is the main channel for digital travel sales with 44.5% share in 2014, and projected market share of 75% in 2016.

OTAs – Unfortunately, we have been unable to find 2016 figures for the OTA market share. In 2015, Ctrip was dominating with 25.5% of market share, and this percentage would have only increased with the acquisition of Qunar. In terms of the outbound travel packages, Tuniu leads with 24.2% market share, followed by Ctrip.

Figure 2- Iresearch 2017

MOBILE & TRAVEL BOOKINGS

All data is from “2016 China Mobile Travel Market Data Report-Penguin Intelligence” 2016 report. Data is from 2015 and 1H 2016.

As for mobile bookings, Ctrip and Qunar were the first OTAs to establish a mobile presence. As of today, they have nearly 70% of the market share. Ctrip has an absolute advantage in terms of user activeness and growth.

MOBILE BOOKINGS

Figure 3- Penguin Intelligence Report 2016- data from 2015 and 1H 2016

Ctrip and Qunar are the most used apps for reading travel guides for domestic destinations, followed by Mafengwo and Meituan. Outbound travelers prefer to use guides published by Mafengwo, Qyer and TripAdvisor.

Nearly half of the respondents use Ctrip and Qunar to book hotels domestically and overseas. In this category, we see the use of foreign companies Booking.com, Agoda and Airbnb to book accommodation among outbound travelers.

Nearly half of the respondents share their travel experiences on social media such as Weibo and WeChat. Only 10% of netizens write an online travel guide after their trips.

Skift: Do you see WeChat becoming a more important platform for booking travel on its own or a tool for OTAs, airlines, and hotels?

Dragon Trail Interactive:

  • Tencent’s interest in travel: China’s internet giants, also known as BATs (Baidu, Alibaba and Tencent) all have investments in online travel, but among the three, WeChat’s parent company Tencent is a late comer and finds itself sharing ownership of its travel assets with the other two giants. It shares stakes in eLong, OTA LY.com, and is linked to outbound/packaging OTA Tuniu (via JD.com). Ctrip, which is now aligned with Baidu, has investments in both Tuniu and LY.com. Tencent also shares investment with Alibaba in taxi-hailing app (Didi Chuxing) and group-buy site and restaurant review Meituan-Dianping, which in 2015 also happened to sell the second largest number of hotel rooms (primarily focused on domestic).
  • WeChat is a crucial tool in travel for the key roles it plays in customer engagement and customer service. Luxury brands are among the most sophisticated users of WeChat, as they often have dedicated sales assistants replying to enquiries, they send customized messages to the followers and have WeChat payment.

WeChat mini programs, launched by Tencent in January this year, have been designed to play a key role in customer service, and particularly in bridging the gap between the offline to online. By scanning a QR code, users can immediately access a mini app without having to download it, so it is perfect for low frequency users. Mini apps offer greater versatility that developing API on WeChat brand accounts, and have the convenience of taking up very little memory space, unlike Apps.

Chinese hotel Huazhu and OTA Ctrip have already launched mini programs, with Huazhu allowing for booking, payment and room check in. Even if mini apps have not yet taken off in China, it is speculated that Tencent will promote them hard in the future, as it is trying to identify new ways to grow and bring value to its users.

  • WeChat is key to search travel information and share travel experiences: WeChat is already a key source of information for Chinese outbound travelers. According to the World Tourism Federation, in 2015 WeChat was used by 45.1% of survey respondents to search for information about city destinations, only behind destination official Chinese websites (60.4%) and according to iResearch, WeChat in 2015 was the most used platform to share travel experiences, used by 62.9% of travelers, followed by Weibo at 45.6%.

WeChat is improving its “Search” functionality, allowing users to enter keywords and search for relevant information. Priority is given to the content published on the app, providing a “walled garden” approach to search. With more content than ever published on WeChat by bloggers, brand accounts and online media, WeChat has plenty of content to search from and could in the foreseeable future become a threat to traditional search engine Baidu. This would make WeChat even more key for the inspiration, search and planning of one’s trip.

  • WeChat Wallet now features hotel booking (provided by eLong), air and rail tickets (LY.com) and taxi hailing (Didi Chuxing), allowing users to conveniently book their travels without ever leaving the app. These services are mainly for the domestic market, and it is unclear how the percentage of users accessing these services through WeChat Wallet rather than the service providers’ apps.

Brands like AirAsia have been greatly successful in gaining high exposure with its WeChat weekly articles (getting over 100,000 page views on its top article alone most weeks – WeChat stops counting page views beyond this number) and in converting high traffic with a smooth booking and payment experience. AirAsia is quite unique in having developed a mini-site specifically for WeChat and has also set up WeChat Payment. After reading about a 300-400 RMB offer, AirAsia WeChat account followers can quickly book and pay for a trip without ever leaving the app. So, purchasing a ticket becomes almost an impulse purchase.

WeChat is being used by travelers and travel brands at each stage of the traveler’s consumer journey, and if WeChat will be successful in popularizing its payment system in foreign destinations, then it will become a much more prevalent platform for Chinese travelers and therefore, a key platform for travel overall. So far WeChat has not shown signs of wanting to become a platform for booking travel, and it is hard to speculate if it will in the future.

Skift: Since the US visa policy changed, have you seen a heavy increase in U.S. outbound travel?

Dragon Trail Interactive:

The US 10-year multiple entry tourism and business visas were introduced in November of 2015. In 2015, tourism from China grew 18 percent year-on-year with 2.6 million visitors and spent $30.1 billion, with an average spend around 7,200 USD per trip. According to COTRI, arrivals to the USA were 3.1 million in 2016 and according to Jingdaily, 2.6 million. It is hard to say whether the increase in visitors’ number was driven by the 10-year visa alone, as most countries experienced a growth in the number of Chinese outbound tourists, but the visa should have had positive effects on encouraging repeat visits of high-spending Chinese tourists, as well in boosting the number of FITs as opposed to group travel.

Skift: What are the unique challenges in the Chinese market that destinations need to understand?

Dragon Trail Interactive:

  • Tight Competition for Chinese Consumers’ Attention: Chinese outbound tourists went from having very few pieces of information available in Chinese about overseas destinations to information overload and being spoilt for choices. Competition is growing more intense amongst destinations that now all have an urgency to be present in the market, so standing out is becoming harder. Countries such as Australia, Canada and New Zealand were among the first destinations to market in China, first promoting group travel and now reaping the benefits of high spending FITs. Australia did a wonderful job in creating a clear brand positioning and it often ranks as number one destination for Chinese outbound travelers to visit.

It is still possible for late comers to make their mark in China, as Chinese travelers are looking for new destinations to explore. However, their marketing efforts need to be more informed and targeted. Peru, which has just started to promote itself more actively in China, has decided to focus on luxury travelers with a keen interest in an active lifestyle, a trend confirmed in the 2017 Hurun Report.

  • Rapid Market Evolution: The travel market is still evolving and consumer habits change at a much more rapid pace than in other markets. In the past 15 years, China has gone from 10.5 million international trips in 2000 to 136.2 million in 2016 (COTRI data), so the meaning and role of travelling is constantly changing for consumers. The first Chinese outbound travelers used to pack 7 countries in 10 days in one trip, then travelers evolved to seeing travel as a form of investment to learn new skills, a new language, to an opportunity to enhance one’s status first through shopping and of late through unique experiences shared and validated with friends and family and the wider online community.

The most experienced Chinese travelers and millennials are not too dissimilar from Western peers and see travelling as an escape from the busy city life and an opportunity to relax, enjoy the experience and learn about different cultures. Citizens from lower tier cities in China have yet to go abroad and 1st tier cities dwellers tend to be more travelled. So, the gap among Chinese travelers’ segments is huge and destinations need to understand what type of Chinese traveler is currently visiting their countries and ensure their marketing efforts are specific to them or to the segments they want to target.

It is important to understand how the target audience perceives the destination and if there are misalignments, destinations need to take ownership of their stories and communicate it with Chinese consumers. Finally, destinations need to adapt their China strategy at a much faster pace, because the travelers of today might look quite different from the travelers of 3 to 5 years’ time from here.

Rapid evolution is an issue when it comes to marketing as well, and digital in particular. The Chinese digital landscape has completely different players (most western social media and Google are blocked in China) and it takes a while for organizations to learn more about native platforms and how they can leverage them. I.e. if you do not live in China, it is hard to understand the extent to which WeChat is used, beyond its communication layer, because there is no equivalent to WeChat in the West. The consequence of this is that destinations might take long to convince headquarters about the need to be on new platforms, losing precious opportunities in the meantime. Brands which created an early presence on WeChat or any other platform had a better chance at standing out and gaining more fans, when platforms were not as crowded. And generally speaking some more traditional destinations fail to understand that they need to shift from traditional to digital media, or again, that they need to use richer media (videos and images) to speak with consumers.

  • The China Market Requires a Long-Term Approach: Destinations do not necessarily have to start from exuberant budgets to promote themselves in China, but the market requires a certain level of commitment and a long-term approach for destinations to be successful. At the minimum level, destinations need to translate all or part of their content in Chinese. Even if a growing number of affluent outbound travelers speak English, they prefer using Chinese when planning their trips. Companies then need to carefully evaluate how to distribute their budgets between digital and traditional channels, and between their B2B and B2C marketing.

With regards to trade marketing, destinations in China spend a great part of their efforts in training travel agents, as often they are selling a destination they have never been to, and are still quite inexperienced travelers themselves.

And finally promoting a destination in China, often means working hard with all the stakeholders to ensure that a destination is easy to reach (connectivity and visas) and in destination products fit the market (work with local travel businesses to ensure that they are China ready to ensure a satisfactory in destination experience and that they are properly connecting with travel agents in China).

Skift: Do you have WeChat data you share with us?

Dragon Trail Interactive:

  • 8 million monthly active users as of Q1 2017
  • 60% of WeChat users in China are aged between 16 & 35 years of age
  • Since 2015 WeChat is the most used app in Chinese netizens’ mobile phones
  • Users spend more time on WeChat than they did to in the past > 33% spend more than 4 hours on the platform on a daily basis and the number of contacts has also grown considerably, with 45% of users having more than 200 contacts as of the end of 2016.
  • As of the end of 2016, 600 million WeChat users have WeChat Payment (at the end of Q4 2016, TenPay had a market share of 37%, vs market share of 54% of Alipay). The number of transactions under 500 RMB have decreased from 65% to 40% and 10% of users do transactions above 5,000 RMB.
  • WeChat counts 12 million official individual and brand accounts posting over 700,000 daily posts. Even though 80% of users follow WeChat accounts, it has been increasingly hard for brands to gain their attention.

At the start, brands used WeChat primarily for brand awareness through content marketing and campaigns, but now the real value brands can extract from WeChat is to increase customer experience by providing customer service. Luxury brands and some airlines have a dedicated person replying to customer enquiries. Payment is another key component to customer service and so is the O2O gap WeChat can help brands close. For instance, at a museum, users can use their WeChat account to scan a QR code, follow the museum’s WeChat account, and be directed to a map of the venue. Visitors can click on each painting highlighted on the map and can conveniently listen to an audio explanation.

  • WeChat is widely used for work: According to the China Internet Network Information Center, in 2016 email usage rate dropped by 36.7% in China and for 90% of users WeChat is a major work communication tool. “Actually, WeChat is Email. It’s a short fast email, but because it’s so fast you don’t think it’s email.” Pony Ma- CEO & Co-Founder of Tencent, WeChat’s parent company.
  • WeChat & Travel – According to the World Tourism Cities Federation, WeChat is the second most used channel for travelers to research information about destination cities, consulted by 45.1% of users, just behind official Chinese websites (60.4%). According to iResearch in 2016 62.9% of travelers shared their travel experiences through WeChat.

WeChat can be analyzed through 4 different layers:

  1. WeChat is born as a communication layer and now is the number one tool for family, friends and colleagues to communicate in China. Similarly, to WhatsApp, it allows for one on one conversations or group chats. It now supports voice & video calls.
  2. One level up is WeChat’s social layer which allows users to share photos, articles, status updates and songs on their “Moments Wall”, just like on the Facebook Wall. This can inspire friends to travel to a certain destination.
  3. The marketing layer has been designed for organizations and individuals to create a presence on the platform by setting up an official account, where they can market goods and services, just like brands do on Facebook and Twitter.
  4. What really distinguishes WeChat from Western social media is the service layer which turns it into a mega app, or into a “Swiss-army knife” app as it has been widely called. This layer allows the integration of e-commerce solutions through WeChat Payment. So, users can call a taxi, pay for their utility bills, book a hotel on eLong or pay for a Coke at the corner shop, all without ever leaving the app.

Q1 Ranking reveals the keys to success for travel brands on China’s WeChat
Since the start of 2017, Dragon Trail Interactive has been compiling weekly data on the 20 best performing WeChat public accounts for overseas tourism boards at the national, regional and city level. From Chinese New Year (28 January), data on airlines and cruise lines was also added.

While there are a great number of domestic and foreign tourism organizations with an active presence on WeChat, it is difficult to truly understand and analyze the results of these social media efforts without a set of objective industry benchmarks. These new rankings reveal what strategies are working best when it comes to running a popular WeChat account, with particularly important insights for the travel industry.

Approximately 73 percent of Chinese outbound travelers regard social media as the key channel to researching and gathering information about traveling, and of all the different social media in China, WeChat leads the way – half of its 899 million monthly users spend over 90 minutes a day on the platform.

Account categories and overall results

There are two different ways that organizations and companies can run their WeChat accounts: One is a subscription account, which allows for daily posts. The other is a service account, which has more functions for users, but only allows a maximum of four content posts every month – companies with service accounts tend to publish a weekly newsletter with four or five different articles. Airlines and cruise lines are more likely to have service accounts, as they are more sales-driven, while National Tourism Organizations (NTOs) and Destination Marketing Organizations (DMOs) all focus on content through subscription accounts.

Airlines receive the most traffic of the four categories included in the data, with the best performing Air Asia’s weekly article receiving over 100,000 page views for seven out of the eight weeks tracked (Air Asia did not publish any articles during the Chinese New Year period), though the numbers are much smaller for other airlines. Cruise lines received around 2,000-10,000 views per post, with less variation among them. NTOs were similar, usually in the thousands but rarely over 10,000 page views. There was much more variation for DMOs, with many struggling to get 1,000 views per week, but other destinations – such as Hong Kong – regularly getting over 10,000 views.

Skift: What makes for successful accounts?

Dragon Trail Interactive:

In all of the four categories, there was little variation among the top performers, with the same accounts dominating the top spots for the whole of Q1. For NTOs, the Tourism Authority of Thailand – Beijing Office (the Tourism Authority of Thailand has five different WeChat accounts managed by regional offices) had the most post views in total, with some competition from Destination Canada (disclaimer – Dragon Trail manages this account) and the Japan National Tourism Organization. Hong Kong was at the top of the DMO list nearly every week. Air Asia topped the airline rankings, and Royal Caribbean was the number one cruise line for eight out of nine weeks.

What is the secret to these accounts’ success? For NTOs and DMOs, it’s mostly about content, as well as frequency. While Thailand’s posts might not get the most views individually (the average number of post views was 6,410, lower than for Australia, New Zealand, Tunisia, USA, Japan or Canada), they post more than any other NTO, with eight posts every week.

Imagery
With an average of four or five posts a week, Canada doesn’t post as often as Thailand does, but its content gets a higher number of views. Here, imagery is very important, as the most popular posts all promoted Canada’s natural beauty – one included images of the Northern Lights, another was a reposted National Geographic article on must-go destinations in Canada, and the other most viewed post was an announcement about free entry to Canadian national parks to mark the country’s 150th anniversary. A study conducted by Kantar Media revealed that all of the top 100 most popular articles on WeChat contained images, videos or even music, with none being text only. Destination Canada picked up on the importance of visuals early on, and was one of the first (NTOs) to focus on video-marketing.

Australia is another destination that posts less but whose posts get a high number of views. Showcasing images of cute Australian animals seems to be one of Tourism Australia’s core content strategies for the three-month period that we have tracked the account – one article on the different varieties of Australian kangaroos gained over 28,000 page views, making it the most popular article of the week among NTOs. The success of Tourism Australia’s post views is also due to a recent weekly engagement campaign, which sees readers answering questions about the weekly article to win small prizes.

Another example of using image-driven content to attract views, DMO Tourism Tasmania had the most-read article of the week from the 20th to the 26th of March, with 10,000 page views, when they posted about the unusual natural phenomenon of bioluminescence at Preservation Bay in Tasmania, which gave rise to a spectacular glittering of the ocean.

The most-read NTO post of the quarter came from Japan in early February, recommending the best places to watch the sakura (cherry blossoms). The article got nearly 45,000 views, when NTO articles get an average of 10,000-20,000 views. Here, the content was visually beautiful, tied into an activity that is also popular in China, and allowed enough lead time for tourists to plan a trip to Japan for cherry blossom season.

Practicality
For DMOs, Hong Kong achieved the number one spot for nine out of the 12 weeks, and was in second place for two of the other three periods. One explanation for this is Hong Kong’s established popularity as a Chinese tourist destination and its proximity to China. This contrasts with other popular accounts that post much more content but are far away, like Dubai and Los Angeles (disclaimer: Dragon Trail manages this account), and also with Macao, which is geographically close but less popular among tourists – the city received only 16.96 million Chinese visitors in 2016, as opposed to 35.44 million to Hong Kong, according to their respective national tourism board. In terms of WeChat content, Hong Kong tended to produce practical, activity-related posts like a list of Chinese New Year activities published at the beginning of January, an article on attractions for children (as recommended by a popular film star), and a guide to the city’s best street art.

News about visas was another popular topic. In late March, New Zealand published the most-read article of the week with nearly 40,000 page views – the headline read: “A five year multiple entry visa has arrived, come and travel to New Zealand”. The Tunisian National Tourist Office made it into the top 20 ranking (9th place) just once, with an article announcing visa-free entry, which garnered over 11,000 views.

Celebrity
The effect of Key Opinion Leaders (KOLs) is well established in Chinese outbound tourism marketing. Hong Kong’s recommendations for activities to do with children came with a celebrity endorsement from movie star Wang Minde. The week of 20-26 March, Royal Caribbean International published the most read article among cruise lines, announcing the appointment of Taiwanese artist Lin Zhiying as their new brand ambassador. One of New Zealand’s most popular posts (week of 16-22 January) was an article called “Follow Me from New Zealand to a Lifetime Together”, featuring KOL Xiao Lujiang in New Zealand landscapes, leading an unknown man by the hand.

Romance
Posts with a romantic theme resonated well with the WeChat audience – though this topic may have come up more often during this period because of Valentine’s Day. Thailand’s most popular posts centered on the country as a wedding destination. One week, their most popular post showed nine different couples’ weddings in Thailand, and the next week they published an article on underwater weddings. Dubai also reached the top ranking for DMOs the week that they posted about activities for couples. For airlines, British Airways rose to second place in terms of post views, and got a whopping 511 new followers, for its video about a long-distance relationship.

Deals
The British Airways video aside, airlines and cruise lines tend to be much more sales and promotion-focused than the NTOs and DMOs. Their posts on discounts and deals normally receive most page views (for example, Air Asia’s most popular article, with over 100,000 page views, was about 0 RMB tickets), although they also publish brand related content, information on new itineraries, tips such as how to sleep on the plane and articles about activities at destinations.

Conclusion
Apart from content, the popularity of airline and cruise accounts also relates to how well know the brands are and how early on they started to have an online presence – Royal Caribbean and Costa, the only two companies to get the number one spot in the last nine weeks, have operated in China for longer than other cruise companies, and they were also the earliest cruise lines to have a WeChat presence, which allowed them to accrue a strong following early on, before the platform became more crowded.

Though data collection and analysis on outbound travel-oriented WeChat accounts is only just getting started, some trends are already clear – these numbers, and understanding the kind of content that is driving them, provide valuable insights for those in the tourism industry who want to maximize the reach and impact of their Chinese social media content.

Skift: What are your tips for the industry on succeeding in the outbound China market?

Dragon Trail Interactive:

  • As with any other market, it takes time to build awareness and reputation, so start one action at the time
  • Engagement starts offline, leverage word of mouth and make sure to convert it and make it visible “online”
  • WeChat is not just for brand awareness but increasingly important for customer service and B2B marketing
  • Leverage less crowded and emerging social media platforms to stand out and to enjoy the first mover advantage

The China outbound tourism market has already become the largest in the world and continues to grow rapidly, so it’s no surprise that everyone wants a piece of the pie. But understanding how to reach this large, diverse and unique market is no easy task. To avoid wasting time, effort and marketing budget, it’s important to get to know the market, and make sure you pay attention to a number of key factors.

  1. Understand your market

There’s no such thing as one kind of Chinese tourist, and you won’t be able to market successfully to the entire outbound travel market at once. It’s important to understand what segment or segments of the market your destination will be most attractive to – for example, Thailand attracts mature travelers, from 1st and 2nd tier cities and willing to spend more on their travels, but also first-time travelers from 3rd and 4th tier cities. On the other hand, niche, up-and-coming destinations like Israel or South America are more likely to attract affluent, mature travelers from 1st and 2nd tier cities. If your destination is well established as a Chinese tourist destination, you may expect to even see a decline in numbers of travelers from 1st and 2nd tier cities, who have already visited and now want to explore further – 2016 saw a slow-down in growth to places like Hong Kong, Macau and Taiwan.

The activities visitors are interested in also change based on the audience you want to target. First-time visitors are more likely to want to see famous sites and go shopping, while more experienced travelers will be looking for more in-depth, unique experiences. If you are a niche destination, or looking to attract fully independent travelers (FITs), you should focus on 1st and 2nd tier cities, and also keep in mind that the average FIT is also much younger than counterparts in Western countries: the post 90s and millennial segments account for 56 percent of all outbound travelers.

Finally, don’t forget that the market changes quickly, and it’s important to keep up to date with which kinds of Chinese travelers you should target and what they are interested in.

  1. Offer Chinese-friendly services

Make Chinese guests and customers feel at home by offering Chinese-language information, Chinese-speaking staff, accepting UnionPay card and other Chinese payment systems, and providing certain amenities such as Chinese breakfast items, slippers and electric kettles in hotel rooms. There are also a number of companies now offering official ‘China friendly’ accreditation for hotels, restaurants, museums and other businesses, which can be displayed on websites and physically in the entranceway or lobby – for example, Spanish-based Chinese Friendly and the Russian equivalent, China Friendly.

  1. Offer something unique

2016 was the first time in many years that Chinese outbound tourism had only single-digit growth. But this was due to declining interest in the kinds of destinations that Chinese usually visit on their first trips abroad, such as Greater China (made up by Hong Kong, Macau and Taiwan, which all experienced a decline last year). On the other hand, long-haul and new destinations like Canada and Israel enjoyed massive growth. As Chinese tourists become more sophisticated and better traveled, they will grow tired of package tours to major landmarks, so it’s important to learn how catch niche markets – for example, the growing nature and adventure tourism market – and add value with unique experiences.

Enticing the audience with signature experiences is a good strategy for first- and second-time outbound travelers, but eventually destination marketing needs to progress to promoting ideas that go beyond renowned places. This is especially relevant for younger demographics. According to a study conducted by Airbnb last year, 94% of Chinese millennials say that they are always looking for unique experiences and 93% of them also state that the best way to really learn about a place is living like a local, well ahead of British and American counterparts. However, it’s important to keep in mind that group travel is still going strong, and that this is especially relevant to emerging destinations – mature Chinese tourists who might never consider joining a group to visit Western Europe would be much more willing to travel with one to a far-flung place like South America.

  1. Don’t act alone

The importance of working with partners cannot be stressed enough. Although we will discuss new kinds of partnerships in the next section, traditional partnerships with travel agencies, tour operators, airlines and local governments are still crucial. Connectivity with airlines is important, as flight convenience and price are often key in determining a holiday destination. Working together with national tourism boards and immigration to lobby for easier and faster visa-application processes also has a very significant impact on tourism numbers. Destinations need to work closely with tourism operators in their countries or origin to educate them about Chinese outbound travelers’ cultural differences and preferences in order to ensure that the on-location experiences match expectations. Partnering with Chinese tour operators is no less important.

Despite China’s growing trend of FIT travel, many people still look to travel agencies for information. B2B marketing is one of the most cost-effective ways to reach the Chinese market for new destinations or small businesses without much existing traffic among Chinese tourists. You can meet Chinese travel agents at industry events, or reach them through new channels such as the China Travel Academy run by Dragon Trail on social media platform WeChat.

In terms of offline marketing, think about the digital and physical journey of your customers when considering partnerships – for example, you may want to put QR codes in in-flight magazines or in the arrival area at an airport. Partner with other travel players from your region, such as an NTO or airline, as together you will have more visibility, and the costs of putting together a marketing or advertising campaign will come down.

  1. Find even more partners

Even if you already have good working relationships with traditional partners, you should be thinking of creating new partnerships, too. Dragon Trail CEO George Cao’s number one piece of advice for 2017 is: “look for new partners, train them, leverage their networks and monitor how they do.” Think beyond trade partners and big media companies – there are lots of start-ups and media entrepreneurs creating inspirational content, and though they might focus on lifestyle over travel, their impact is large. Think about working with concierge travel providers that serve a high-end market – the pool of customers might be small, but they are likely to be influential and affluent.

Don’t forget to also leverage local Chinese communities in countries with lots of overseas students and local communities, such as Australia, Canada, the UK, and USA. Not only are they likely to explore the country where they are living, but they can amplify your message to Visiting Friends and Relatives (VFRs). Consider partnering with a digital marketing agency or someone who knows the market well and can update you on the changes, and continue to attend events, expand your network, and speak to multiple people to get different views and info.

Finally, Key Opinion Leaders (KOLs) are another effective way to raise awareness for destinations, as their followers range from hundreds of thousands to millions, and they can therefore influence a large audience. The term ‘KOL’ can include celebrities, travel journalists, or regular travel bloggers who have managed to get the audience’s attention through engaging posts, which are usually paid for as a form of PR.

  1. Maintain a strong web presence

With 80 percent of prospective Chinese travelers searching for information about destinations online, it’s vital to have a strong web presence. Having a Chinese-language website that is hosted and maintained in China and showing your brand has a .cn site showcases commitment to the Chinese market and builds trust, as smaller companies do not have the money to do this. Moreover, as foreign websites risk being blocked by government regulators, load very slowly and do not rank as highly on China’s most widely used search engine sites such as Baidu (Google is blocked in China), a China-hosted website is still a good way to provide information, which can be linked to your brand’s WeChat account. Finally, as 95.1% of Chinese netizens access websites on their phones than via a desktop computer, it’s important for websites to be mobile friendly.

  1. Master social media

With most Western social media platforms, including Facebook, Twitter and Instagram, blocked in China, it’s imperative to market to Chinese using Chinese social media. This is especially relevant if you are trying to court a younger, more urban, FIT traveler. WeChat is a must – as of June 2017, the chat and microblog app now has 937.8 million monthly users – but this platform continues to evolve, so even if you are already using it, you’ll need to make sure you’re up to date. Running an official subscription account with regular newsletters is a good start, but WeChat is now used more for customer service, including taking payments; offline to online services, such as QR codes at a museum that can be scanned via WeChat to give you information about a certain object; and dealing with customer queries with a live customer service advisor during business hours and automated reply system outside them. WeChat also started a new small app program in 2017 that will make app development much easier for non-tech companies, and has recently upped its search functionality, with the potential risk of posing a threat for well-established search engines such as Baidu.

Weibo has increased its number of monthly active users in the past year, mainly driven by the integration with its live streaming platform Yizhibo and short video platform Miaopai. But users tend to be more passive on this platform. That said, Weibo can still work very well for luxury brands, as people follow how celebrities on Weibo endorse those brands, as well as big celebrity KOL campaigns. New emerging platforms can also offer more opportunities, as they are more targeted to their core audience and also have fewer brands on them at the start, so it’s easier to stand out. For content-rich brands, one such platform is ‘Today’s Headline’, a mobile app and media platform that provides users with curated news feeds. They now claim 68 million daily active users, and in terms of time spent using the app, they claim to be the second largest mobile app after WeChat, with a daily average of 60 minutes. As this platform continues to grow, there may be opportunities to target niche interest markets with specially created content.

  1. Try video marketing

Video and live streaming were the media darlings of 2016 and continue to be so this year. Even in 2015, it was reported that 81% of Chinese watched short video clips on a weekly basis, as opposed to 69 percent in the US. Content from NTOs that include video content are especially well received, with a multimedia approach proving very successful for raising audience engagement. The challenge here is adapting existing resources to the Chinese market, without having to invest a lot of money for China-specific videos. One option to save time and money is to use short-form videos on up-and-coming platforms like Meipai and Miaopai, as well as leveraging user-generated content.

Q1 WeChat Statistics

  1. WeChat Top Three Positions Tally Q1 2017
  1. Top Account for each week of Q1 2017
  2. Cumulative Results for Q1 2017

Insights From Nicola Farronato, CEO and Founder, B-Sm@Rk

B-sm@rk is an Italian/Irish company based in Dublin that provides research and technology based on consumer behaviour and marketing automation for travel, hospitality and commerce. Nicola provided Skift with insights to his ongoing study in the section below. All opinions and insights are his.

The company was founded in 2011 in Dublin, has raised >1million Euro in funding, and has received a number of awards for R&D, tech and marketing innovation with a focus on emotional and behavioural marketing on the MySmark project.

Mysmark is the customer experience platform containing all the services developed by the company, they are divided into two macro areas, research and technology, both linked to the concept of emotional marketing.

Nicola Farronato, CEO and Founder of B-sm@rk, has a sales-marketing B2B background, 10 years in manufacturing export, 8 years in SMEs and startups, and is a social entrepreneur.

  • About Destination Personality research & the Chinese outbound focus

Our research focuses on Brand & Destination Personality for different audiences, residents and tourists. We also offer research insights about consumer behaviour with marketing automation in order to help travel companies to provide tailored and personalised content/offers to consumers.

Brand & Destination Personality is the application of human characteristics to a brand or place. A typical process that people incur when buying and travelling is that they may already have in mind an idea of the brand or place and its features, but a picture still needs to be authenticated through their direct experience.

A distinctive and emotionally attractive Brand & Destination Personality is shown to leverage the perceived image of a brand/place and influence consumer behaviour. Moreover, it can be helpful to measure the gap between identity and image, measure customer satisfaction/experience and indirectly predict re-visit intention and promotional behaviour.

The practical way to measure it is based on a tailored market research which gathers insights and data from consumers / TRAVELERs, online and onsite, and … what they think about the visited place (destination) and a brief interview about who they are. Linking these two parts we look at developing an emotional connection between TRAVELERs and destination., consumers and brands through insights, destination marketing, recommendation and personalisation.

In this research, we use different personality models from science, about humans (BIG5)-brands (Brand personality scale) -destinations (destination personality scale).

According to the European Travel Commission, China is the World’s leading outbound travel market, during 2016 more than 10 million of Chinese visitors came to EU, predictions show a double-digit growth trend and travel business are in need of improving their capacity to connect with this audience. From this trend, opportunities and challenges arise for Europe about choosing the right way to attract, engage, convert Chinese people.

Starting from these considerations we decided to start a new project of destination personality with the focus of Chinese outbound tourism in Europe, and a first pilot destination: Ireland.

The main goal of this first research is to understand how Chinese people perceive the destination and brand personality of Ireland and how we can build some consumer behaviour models leveraging personality data feature to connect consumers and destination experiences.

We have selected two complementary approaches for data collection:

  1. approaching Chinese tourists at the Guinness Storehouse in Dublin (the #1 tourist attraction among Chinese visitors in the country);
  2. distributing digital surveys through Chinese social media (WeChat, Weibo, QQ), also through the collaboration with an official Chinese guide based in Ireland.

Data collection has been targeting Chinese Tourists and Residents in Ireland. The survey focus has been given to: Main destination (Ireland) and four Macro Areas (Dublin, Wild Atlantic Way, Ireland’s Ancient East, Northern Ireland)

  • Research sample is identified as follows:
    • 47% have already been in Ireland (Group: Been in IE), while 53% have never visited (Group: Never in IE);
    • Gender: females are keener to be engaged in the research, ca 2/3 of the sample;
    • Age: 21-45 range is collecting the 75% of the sample.
    • Personality: we have adopted the Big5 human personality model and have verified an average balance among the two groups (Been in IE, Never in IE).
  • The measurement of the Destination Personality has been achieved proposing a short destination personality scale (sci-ref: Hultman & Skarmeas’ Destination Personality scale). The five key traits proposed have been: “Responsible, Active, Aggressive, Simple, Emotional.”

Our research shows that people who have visited Ireland tend to give a lower score on traits “Active” and “Simple” than people who have never been to Ireland. With this data, we can argue that it can be necessary to do a deeper analysis on visitors’ experiences.

  • The measurement of the Brand Personality has been achieved proposing a short brand personality scale (sci-ref: Geuens’ Brand Personality scale). About brand personality our survey doesn’t underline specific differences between the two groups, who have been in Ireland and who never visited. Both groups, in fact, give high scores (btw 4-6 out of 7) in each trait analysed. They recognize Ireland as “Responsible, Active aggressive, simple and emotional. “
  • We also evaluated the motivations that are key drivers in attracting Chinese tourists in Ireland. We focused on “Culture, Pleasure and Fantasy, Relaxation, Sport and nature”, key motivations of our previous research about Ireland. Our results suggest that “Culture” is the most relevant difference between the two Chinese groups of our research sample.
  • That means “Culture” looks like the key factor for attracting Chinese people to visit Ireland.
  • BRAND/DESTINATION PERSONALITY OPPORTUNITY:

Brand & Destination Personality Research can help Europeans better understand Chinese consumer’s behaviour and automate marketing actions to optimize the Chinese audience profile and the destination inventory available, experiences, offers, itineraries, travel brands, etc.

SOME MORE HIGHLIGHTS:

Based on the work, the Chinese TRAVELER in Ireland has the following qualities:

  • People that have been in Ireland mainly visited their destinations with friends. People that have never been to Ireland are looking to visit Ireland more with their family.
  • Chinese nationals look for natural places and little villages much more than cities and archaeological areas;
  • 1-3 nights is the most common period of staying in Ireland for the Chinese guest;
  • Guinness Storehouse, the top Chinese tourist attraction in Ireland is known to the Chinese public via Chinese social media and blog, and less through suggestion by tour guides or tour operators;
  • 21-40 is the most common age range segment of Chinese people who have visited/will visit Ireland;
  • Chinese females who have never been to Ireland are the most engaged target group of this destination, in terms of their interest to take part of the research and get a travel incentive;
  • Bachelor degree is the most common educational level of people interested in visiting Ireland;
  • Married, white-collar worker, civil servant are the most common status and job of the Chinese travelling to Ireland.
  • The highest scores in personality traits of Chinese people who are visiting or interested in visiting Ireland are:
  • Open to new experiences and agreeableness. That means in particular people who like art, emotions, curiosity and variety of experiences, who tend to be collaborative.

South Korea – A Case Study In Opportunity and Risk

South Korea inbound travel from China had been flourishing in 2016 with average monthly growth in the 40-50% range and share of travelers at 45%. However, on March 2, 2017, China stated it would ban group travel to South Korea in response to South Korea deploying the U.S. THAAD missile system. South Korea views it as a deterrent versus North Korea, but China was concerned about having radar near China.

After this happened, travel to South Korea from China plunged with it down 40% and 67% in March and April. The Korea Tourism Organization (KTO) has not yet released data for May and June, but we suspect a similar pattern of steep year/year declines.

There is justifiably a lot of excitement about the outbound China travel opportunity. As a whole, it is immense and growing, but individual destinations must be careful relying on China for sustainable growth as a macro or geopolitical shock can change things quite quickly. The opportunity should be pursued, but investments should be made carefully in sustainable and variable cost areas.

GLORIA LU, AREA DIRECTOR OF SALES AND MARKETING, KOREA, HYATT

As part of our trip to Asia, we also had the chance to meet with Gloria Lu from Hyatt in Seoul, South Korea. We discussed how China’s policies massively changed the trajectory of travel to Seoul. The Grand Hyatt, where we met, is far more international and local (South Korean), so the share of Chinese guests was much lower than the country as a whole, but the pattern was the same; travel from China has dropped dramatically post the THAAD-related policy decision.

According to KTO data, inbound travel to Korea is 85% from East Asia and the Pacific, 6.5% Americas, 5.5% Europe, 1.1% Pacific, 0.3% Africa, and 2% Koreans from abroad. For outbound travel, there were 22.4 million people in 2016, which was up 16% year/year. This number is a fraction of inbound tourism, but is certainly a large enough market that other countries should look to target.

Google is used somewhat for search, with 7% market share, but Nayer dominates with 75% share. The site acts as a portal, keeping traffic in the ecosystem versus Google clicking off to other sites. Localizing to Nayer would be important to attract the Korean consumer in the same way localizing on WeChat in China would be.

Inbound Travel

Inbound travel, broadly speaking, is not really growing much from a visitor perspective. 2016 picked up a bit, but that was only in the 3-4% range. Prior to that, 2015 grew 4%, 2014 was down slightly, 2013 was down 2.5%, 2012 was down 2.2%, and 2011 was up 1%. For Ctrip, we believe the inbound opportunity is more focused on the Chinese speaker living outside of China versus an English-speaking person from the U.S. or Europe that is much more likely to use a company like Booking.com or Expedia for the trip. The increased importance of China as a business hub should push business travel up, but we do not expect large growth here with low to mid-single digit growth the most likely path.

 

Source: Travel China Guide, 2016 Data is only through H1, Skift uses the year/year growth rate to estimate the whole year number.

Within the inbound market, certain trends are emerging where guests are more open to tours and activities. For insights on this, we spoke with Varitrip during our time in Shanghai. Varitrip is building out a GDS platform targeting inbound tours and activities into China.

DYLAN ZHANG, CEO, VARITRIP

Born in Xi’an, China, one of the most popular tourism designations in the nation, Dylan grew up with strong influences from his friends and family who were involved in the travel industry.

He studied in the U.S. from a young age. After college graduation, Dylan helped a startup which focuses on tours & activity booking system for the U.S. market and connecting the local offerings to the Chinese FIT outbound market.

2015, Dylan Returned to China and secured investment for Varitrip. Dylan is now based in Beijing with his team.

Interview With Dylan Zhang, CEO and Thomas Griffiths, Director Of Distribution, Varitrip

Thomas was born in France and studied in London at SOAS with a focus on Economics and Politics in China. After briefly trying out in a finance start-up in France, he moved to China, Beijing, in 2012 as part of the founding team of a tours and activities OTA called Haiwan and was in charge of building the global supply chain. He then joined Varitrip and is in charge of distribution.

We spoke to Varitrip about trends in China inbound travel. Varitrip is building out a GDS platform targeting inbound tours and activities into China.

Skift: Can you talk about what you guys are doing at Varitrip?

Thomas Griffiths: We are a GDS with our primary focus on inbound travel to China. There’s a real need for consolidation, especially when we’re talking about bookings and access to different products. When you look at the players who tend to provide the best experiences, they tend to be too small to actually have the means to do all the distribution and get all the technology. We started in inbound, which sometimes is overshadowed by the outbound market. We see inbound as having a lot of potential and it is already a huge market. It’s growing at a healthy rate of about 10% according to CNTA.

We’re building a developed product to help with distribution. And by distribution we don’t just mean bookings and what traditional GDS companies do. We are looking to do more than that, with things like content, pricing and other things that are difficult for OTAs and suppliers to maintain.

Skift: Are you building out a GDS from scratch or partnering with say Amadeus or Sabre?

Dylan Zhang: Sabre and Amadeus don’t have destination services, and destination services are just too different from air tickets and hotel. We are building a GDS from scratch but not without advice. We have advisors and experts who had a lot of experience in the field. We also have previous experiences on implementing PMS/booking systems for in destination services operator as well as handling aggregation and distribution. We are currently working with lots of online distribution partners and we are constantly expanding the network.

Skift: How much of your bookings are business versus leisure?

Dylan Zhang: Right now we deliberately picked our fight. We wanted to be in the leisure part at the start. The Chinese tourism market is going through a revolution, as well in the outbound than the domestic and the inbound. New players are emerging with more modern experiences fit for this type of travelers.

Thomas Griffiths: It’s because we’re doing the experience side.

We do get, especially in the context of China inbound, a lot of people coming to China for business. If they’re good business people they know that they need to understand more about China to make it work.

Maybe also more personally, this is what we’ve realized over the last year is that we shifted with the big outbound flows coming from China that the world knows less about China than China knows about the world. That’s what we want to improve. We think it is very important for the world just seeing how China is growing to understand China better.

Skift: In which markets are you seeing the most traction?

Dylan Zhang: For now the traditional markets are still strong the U.S., Germany, and a lot of neighboring Asian countries.

In Asia, it’s a very fragmented market. You have to multiple versions for the same product to fit the Japanese market, Korean market, Indian market, etc.

Thomas Griffiths: You also have to price them very differently.

Skift: Do you work more with OTAs or traditional offline agents?

Thomas Griffiths: Mostly OTAs, actually. Our clients tend to be Viator, Get Your Guide, Expedia, etc. We work with other partners who have already a strong consolidation of offline agents to reach that segment.

Skift: Do you work with a Ctrip?

Dylan Zhang: What they’re trying to do is now is build packages between the flight and the hotel. Later on, they’re probably going to add more destination services. We have had talks with Ctrip and are exploring how to work with them.

Skift: How would you envision Varitrip working with Ctrip?

Thomas Griffiths:

The challenge with them is the same as with any OTA, tours and activities sector is fragmented. Each OTA has come up with its own vision of how it’s supposed to design their IT system this part on the receiving end of all the content and all the information. On top of that, capturing the traffic for destination services, the behavior is much different comparing to air and hotel. Working together can bring up the efficiency for the entire value chain.

Skift: Who are you guys competing with directly?

Thomas Griffiths: Directly, nobody has built this out.

Dylan Zhang: In China, technology has improved the customer acquisition process, desktop, especially mobile. However there hasn’t been a lot of projects focuses on the supply side. Especially in our niche. Traditional Chinese operators needs to overcome a huge barrier to work with the players in online space, especially to gap the last-minute gap for operators and distributors. We want to continuously cultivate this market.

Skift: Are you still building out the proverbial pipes or are you actually in revenue mode?

Dylan Zhang: We have some pipes already.

Thomas Griffiths: Well we think it’s safer to always be in some form of revenue mode.

We don’t have the ambition to go splashing the cash.

Key Competitors

After Ctrip made its investments in Qunar and eLong, aggressive price competition (coupon wars) has subsided. While Ctrip dominates the Chinese OTA market, leading internet players remain a threat for various parts of Ctrip’s businesses.

We start with the BAT (Baidu, Alibaba, Tencent) companies in China, then discuss some smaller entities, and finally the U.S. OTAs/metas.

Baidu

According to China Internet Watch, Baidu dominates the China search market with 76% share followed by Shenma at 9% and 360 Search at 8%. Baidu’s travel business reminds us of Google in the U.S. and Europe where it derives ad dollars from online travel companies as well as hotels and airlines. When looking at the travel.baidu.com or lvyou.baidu.com, there are links to air tickets and hotels as well in a type of meta model. From our conversations with travel companies in China, our understanding is that this is a very small factor for Baidu, where revenue is driven by more traditional advertising rather than meta. It is worth noting that almost all links direct to Ctrip, in which Baidu has a 20-25% stake.

The direct competition with Baidu is more at the start of planning on search and on reviews. Ctrip would prefer the customer go directly to Ctrip rather than to Baidu (or Google outside of China) to perform research. Directly going to Ctrip reduces ad spend and increases the likelihood of conversion.

We do not expect Baidu to push aggressively into the OTA or metasearch business directly. If it wished to pursue that option, it is more likely that it would acquire Ctrip outright rather than compete with an entity that it owns over 20% of. Baidu also has co-investments with Ctrip in Tujia and Make My Trip.

Alibaba

Alitrip launched back in October 2014, replacing the TaoBao travel brand, and was subsequently renamed Fliggy or “Flying Piggy” two years later in October 2016. The new branding was meant to target outbound millennial travelers with a more playful logo. The business model is “Amazon-like” with storefronts rather than being a traditional OTA or meta site. This more direct relationship should attract suppliers, but it remains to be seen if it matters to consumers.

The unit is still in its early days and bookings are likely a fraction of Ctrip’s, but Alibaba as a company certainly has the financial resources to make a greater push here. That being said, we would not expect Alibaba to engage in aggressive couponing as its core businesses successes would be offset by losses in travel if it did so. When Qunar did this, they were losing money consistently and pursued revenue at the expense of profits. For Alibaba, the company generated $7 billion in operating profits on $23 billion of revenue in FY’ March 2017 (30% operating margin) while the stock sits near all-time highs.

We expect Fliggy to grow with the broader online travel market, but do not see it taking meaningful share from Ctrip in the lucrative hotel business. For flights, we can see government owned entities pushing more bookings to diverse sites, but the profitability there is extremely low. Much like Amazon’s travel business in the U.S. was shuttered despite theoretically being expected to take share from OTAs, pushing customers to change behavior on where they book is difficult and takes time. We see a sensible push for travel at Alibaba with the potential for some acquisitions or partial stakes in major players like Ctrip.

Tencent

As previously discussed, Tencent’s main influence in travel is through WeChat where it is not trying to become an OTA, but gain valuable ad dollars and keep consumers in the ecosystem and use WeChat constantly. We do not see Tencent moving to the OTA model directly. It does however invest in eLong (15% stake along with Ctrip at close to 40% and Baidu at close to 10%), LY.com (along with Ctrip) and Meituan (15% stake).

Meituan-Dianping

Meituan-Dianping was created in October 2015 after the merger of Meituan (a “Groupon-like” business backed by Alibaba) and Dianping (a restaurant review app backed by Tencent). The business model is online-to-offline where price conscious consumers purchase discounted “coupons” to things like restaurants, hotels, and movies and then contact the entity directly to book it themselves if there is availability.

In May 2017, the company officially announced the launch of Meituan Travel. It offers accommodations, domestic travel, outbound travel, and transportation. As a company Meituan-Dianping has 240 million active users. The travel group partners with more than 340k hotels in China and 200k overseas. Meituan is the largest online domestic attraction and excursion package ticketing platforming China with 67 million tickets sold in 2016.

Compared to Ctrip, the average price point on hotel rooms would be much lower. It is also a much different process than the ease of using an OTA. It certainly has its appeal, but it is a different consumer using Ctrip versus Meituan. However, it is worth noting that Meituan also bought Kuxun.com from TripAdvisor in 2015 as TripAdvisor pursued an outbound strategy rather than domestic metasearch (Kuxun). This gives Meituan technology to move more into the meta/OTA model. The more direct competition threat within Ctrip would be the Qunar brand versus the Ctrip brand, which is more upscale.

There is speculation the Ctrip may look to acquire Meituan-Dianping down the road. This is certainly possible given Ctrip’s desire to own the entire traveler journey. Last year, its round of funding valued it at $18 billion.

LY.com

Ctrip and Tencent are co-investors in LY.com, which is the largest OTA outside of the Ctrip owned brands. The offerings are of a full-service OTA, but it is known for local attraction ticketing. When Ctrip took its stake back in 2014, James Liang, Founder, and CEO of Ctrip at the time, stated, “We are very pleased to establish a strategic relationship with LY.com. We are increasingly positive about the potential of the travel industry in China. LY.com is the leading player in the local attraction ticket segment and we will support the independent operation of LY.”

TechInAsia sums it up nicely where the note that “LY.com allows users to search for places of interest at the local and city levels. For example, if you are interested in visiting zoos or gardens around Suzhou, LY.com pinpoints the right spots within a few clicks. Every place of interest comes with user reviews. If users are satisfied with the reviews, they can purchase tickets directly on the site.”

Our conversations with Ctrip indicate that Ctrip provides hotel and air ticket inventory as they seek to maintain a healthy ecosystem.

Priceline

Rather than moving aggressively and directly into China, Priceline took a more pragmatic approach and partnered with Ctrip. Much of the relationship terms are private, but the most important thing to know is that Booking.com provides international inventory to Ctrip and brings the outbound Chinese guest to Booking.com. Ctrip benefits from Booking.com’s global and massive inventory while Booking.com gets the localized expertise and client base of Ctrip. This partnership should prove lucrative for both sides.

Priceline holds slightly more than 4% of Ctrip’s equity. When adding in its convertible debt stake, that stake hits 9%. The current agreement allows Priceline to own up to 15% of Ctrip. For part of the debt, the conversion price is quite high, implying no conversion unless a very large increase in the share price (possible over time) or an acquisition by Priceline at a premium.

We expect a partnership to continue rather than Priceline outright acquiring Ctrip, especially with Baidu also owning 20% of Ctrip.

Source: Company Filings, Skift Estimates

Expedia

We previously discussed Expedia’s eLong divestment in our 2016 Expedia Deep Dive, As a reminder, Expedia had been in China since 2005 through a stake in eLong. This stake grew to 62.4% until it was sold on May 22, 2015 for $671M. This was a shift in strategy for Expedia, but should be viewed favorably as eLong was losing money and the capital invested there could be better deployed to Expedia’s other segments.

The buyers included Ctrip, which took a 37.6% stake. As part of the deal, Expedia and Ctrip “agreed to cooperate with each other to allow their respective customers to benefit from certain travel product offerings for specified geographic markets.” The degree of this partnership is still somewhat uncertain, especially with Priceline having a large stake in Ctrip. It seems that Expedia is only partnering on non-hotel specific bookings rather than how booking.com provides international hotel inventory. This makes sense as booking.com is almost entirely lodging-driven (for now).

With Priceline being a large shareholder in Ctrip, our best guess is that Ctrip retains Priceline for its key hotel partnerships and partners with Expedia for air travel and non-hotel packages.

Expedia still has China business through its own branded sites. This is especially the case with inbound travel where people from the U.S., and to a lesser extent Europe where Booking.com dominates, travel to China and book the trip through Expedia.

Tripadvisor

TripAdvisor is pushing to capture the higher-end outbound traveler rather than the domestic China travel market rather than attempting to compete aggressively in all parts of the travel ecosystem in China.

DANIEL PAN, CHIEF OF STAFF, CHINA, TRIPADVISOR

Daniel serves as Chief of Staff for TripAdvisor in China. Prior to this he oversaw brand strategy, traditional brand marketing and media buy, consumer and trade PR, social platform operation and commercialization, user engagement programs and CRM, strategic co-branding and integrated customer marketing solutions.

Skift: For TripAdvisor in China, is it the same business model as in the U.S. with both meta and instant booking?

Daniel Pan: Yes, the TripAdvisor China business, in terms of our revenue model, is very much like our global business.

In terms of really how IB (Instant Booking) is doing in China versus how meta’s doing in China, I guess our product work is never done. It’s very important for us to really always test and learn and iterate our revenue products. As you know, we would do a lot of pushing and pulling with our IB, as we noted in the last year. The same thing in China. We have a revenue strategy market by market. In China, is all about finding the right mix.

Skift: Can you discuss the TripAdvisor rebranding in China.

Daniel Pan: So that was like two years ago, where we did a couple things. We would bring our name, our current name, which is Mao Tu Ying. I’ll elaborate a little more on this name, because it’s actually a play on the Chinese name of Mao, which is a logo, the mascot.

We replaced the wall of the character with the Chinese character for travel. So, it sounds like Mao, but it also carries a hint of travel. So that’s the new brand name. And quite coincidentally, if you look at all the Chinese travel companies, they all use animal mascots.

So that’s on the branding level. On the product side, we also did a few changes. First, from a strategy perspective, we started to really focus on serving our travel population. I’m confident to say today the vision for travel to China, the vision for the Mao Tu Ying brand, is all about helping the Chinese outbound travelers to take their journeys abroad more comfortably.

On the product side, we did a lot of things, including localization efforts, helping the Chinese outbound travelers to read our review, to understand our content easily, with language support, and also, we had established our regional account and we improved our user ability by allowing searching.

We did a lot of things to make sure the new brand is aimed at Chinese outbound travelers.

Skift: In the U.S. and Europe, revenue is very much skewed towards hotels. I’m assuming it’s the same here. Is that the case?

Daniel Pan: Hotel is absolutely our core business. I will not say it’s the only part, but it’s a very core business for China. For the other product lines, like airlines or restaurants, we’re constantly trying to improve the product to provide a better overall experience for Chinese travelers.

Skift: Are there censorship issues on the reviews or no?

Daniel Pan: It is actually a question in China we tend to get. First, all the reviews submitted by the Chinese user to the Mao Tu Ying app are subject to the same review processing guidelines as other countries. So, it’s the same guidelines, same team, same mechanism. Having said that, we do not allow personal insults, smear campaigns, and things like that. So far, we’ve been in full compliance with Chinese laws, local regulations, and we’re looking to do that.

Skift: In China, it seems like everyone uses mobile and WeChat. Do people here use TripAdvisor in the same way they would in the U.S. and Europe?

Daniel Pan: You are right. Actually, if we look at the entire Chinese traveler market, the outbound population and the domestic travelers are quite different in terms of education levels and income and so on. When we talk about this outbound traveler population, we target the free independent travelers.

I have to highlight that a key difference versus a Western country is that they have higher need for information. We see travel blocks, or tour blocks that are pretty big in China in terms of continental needs. We also launched our own structured travel block product in our ad, again for the Chinese travelers. Review content is also very important. Usually the next step after they figure out the itinerary based on travel block, then they will look into specific restaurants and hotels. Reviews are also important for them.

Skift: Operationally, how integrated is TripAdvisor into corporate? Is it kind of siloed?

Daniel Pan: We work very closely with Singapore and headquarters in the U.S. It’s really part of a family.

Skift: What trends are you seeing for adoption of TripAdvisor in China?

Daniel Pan: I think the drivers behind our adoption in China is twofold. One is the FIT segment, which is our core market, is leading the cross-border travel market in terms of trips taken and travelers.

As personal income grows and the economy improves, people are getting more sophisticated about travel. A large percentage of the travel market is becoming outbound, and a big group of outbound is becoming FIT. But that’s sort of the fundamental driver of our adoption, and also in the segment, we’re getting share.

We have made a lot of product improvements over the past two years along with better content to make sure we are a better product for the Chinese consumer. By doing this, we will triple our mobile app users and MAUs.

So, in the US, TripAdvisor and all the other online travel sites, some people use Google to drive traffic. In China, how is it a similar thing with Buye, where you guys are bidding for clicks, or is it a different type of market? What are the other sites out of the live view?

Skift: TripAdvisor just announced that they’re going back to T.V. advertising. Would any of that be for China? Or probably not?

Daniel Pan: When you look at that, you have to understand that in the U.S. and in China, we are totally different in market positioning, because in the U.S. you should find that most people travel.

In China, it’s a very targeted segment, although it’s a premium segment. We need to target our marketing efforts. We’re thinking about the media, advertising channels that the Chinese people really use quite frequently. That’s why we’d be doing actually a lot on social media. We’re pretty much focusing our efforts on mobile. China has been leapfrogging into mobile options, so we want to make sure we really focus our limited resources on mobile.

Skift: What are some of the biggest difference that you see in the Chinese travel market versus other parts of Asia?

Daniel Pan: FIT has very high growth potential. I point to the fact that less than 10% of the Chinese population has a passport. So, as you can imagine, with disposable income levels growing, this percentage, which fundamentally is a pre-requirement of airline travel, will go up. It’s a huge market out there.

Second, a lot of behaviors are advanced in terms of mobile adoption. Mobile is now the first screen versus the other screens at your home. The China consumer is tech savvy and very fast in picking up with new services. They are also young and a lot of them are white collar employees and only four to five years into their job. But they’re really adventurers where rather than spending all their money on other consumer things, they’re really starting to think more about travel and enriching their life experiences.

Skift: When you look at Tencent, Alibaba, and Baidu, how much of a threat do you see them as?

Daniel Pan: We think we occupy a unique space in China. We don’t really dare to compete with the “BATs”, as you mentioned those three companies, we call them the BATs. Instead, we see them as valuable partners who sort of own the important traffic and uses the assets to where we can.

These companies also take stakes in Ctrip and other travel partners, which we are already in partnership with. So, it’s an ecosystem, and we’re contributing our assets differently, our brand, our global positioning, and our global contents will be really helpful for also their consumers who want to go outbound. Its figuring out how to work together.

Hotel Perspectives On China

Interview With Lawrence Ng, Vice President, Sales & Marketing For Greater China, Marriott International

Lawrence is in‐charge of the Sales and Marketing for the JW Marriott, Marriott, Renaissance, Courtyard by Marriott and Marriott Executive Apartments properties within Greater China, including Taiwan and Macau, with offices located in Beijing for North China, Shanghai for East China, Hong Kong for South China, Hong Kong, Macau and Taiwan.

He graduated from University of Hawaii, Manoa with a Bachelor Degree in Business Administration (B.B.A.); Major in Travel Industry Management, specialized in Hotel and Restaurant Management.

Lawrence joined Marriott in 1995 and has extensive sales &revenue experience. He held various leadership positions in Sales & Marketing and Revenue Strategy for markets including China, Hong Kong, Malaysia, Vietnam and Philippines. He has commitment to build a World Class Sales & Marketing Organization in Greater China through talent acquisition, strategic thinking and innovative leadership.

Skift: What are some of the trends you’re seeing in China?

Lawrence Ng: For outbound travel, China now number one. At Marriott, we are eager to attract and to take care of Chinese travelers both domestically and internationally. It is a phenomenal opportunity to have even more destinations and different brands that can cater for the needs of the Chinese travelers, so we are extremely excited about it.

We now have over 30-plus leisure and resort destinations within China. I think that when we look at the domestic travel, especially on the leisure side, the families and also the couples, and also some of the younger demographics, they travel together.

For China as a whole, leisure travel, and specifically resort destinations, is one of the key focuses this year for China in terms of sales and revenue strategy. We are opening a lot of great hotels.

Leisure is the focus, our brand portfolio localizing the story is another key focus, and of course the last piece is really on the distribution strategy. The OTA is one platform, but I think the company vision is continuing to drive more direct, whether it’s a loyalty program, SPG Marriott Rewards and Ritz-Carlton Rewards, or direct booking through the brand’s dot com.

Skift: Can you discuss the relationships with Ctrip and the other OTAs in China?

Lawrence Ng: Ctrip is definitely one of our OTA partners. We don’t necessarily define OTA partnerships based upon brands, because I think it’s more important the consumer is going through different channels where we can have a presence, so that we can showcase and demonstrate all brands, different price points to cater for the purpose of the travel.

Today, someone may travel on business, but tomorrow, they could bring their family for leisure. I guess that is the beauty of sales channel. We can diversify.

Skift: What about Baidu?

Lawrence Ng: When you look at Baidu as SEM, for the first four months in Greater China, our revenue actually grew by 70%. For us, it’s a very good partnership in the sense of opening another channel that we can reach out to the consumer.

Skift: For China, how much of your business is direct?

Lawrence Ng: Well, we’re looking year-to-date April, when you look at just the gross booking mix for example, direct actually represents 74% while the indirect channel represents 26%.

Skift: Oh, so direct is actually higher in China than the rest of Marriott?

Lawrence Ng: Yes.

Skift: What’s the main driver for why it’s higher in China?

Lawrence Ng: Well, we have a high percentage of property direct. Consumers still call the hotel for placing the reservation. Property direct still represents a high percentage of the direct channel, and then the next two, of course, is our brand.com, and then we also have a call center in China.

Skift: Is Marriott pushing to grow outside of the top tier cities?

Lawrence Ng: We already have some great presence in tier one, two, three, or even four, cities.

So, going back to your question, yes, we are actually continuing to drive and look into cities where the consumers are going. We will continue to drive and pursue growth to that direction.

Skift: How do you use WeChat?

Lawrence Ng: WeChat is a great communication and social platform. WeChat has booking functionality. It’s really just not only to enhance the booking experience but also put in a functionality like restaurants.

Skift: What is your main ownership model in China?

Lawrence Ng: We are primarily still a managed company. In the past, franchising was done more outside of China. I think the right partners can help us to build and grow the pipelines are crucial to our success.

One of the biggest franchise partnership that we have is to build and to grow the Fairfield brand.

Skift: Having Marriott become such a strong brand in China, is that helping fuel outbound travel for the company?

Lawrence Ng: Yes, it comes back to the power of brand. Especially for outbound travelers, when people are going to a destination that they may not be extremely familiar with, I think brand comes into the picture to provide the security, the guarantee, and also the experience.

We still have things to do and definitely need to do more on outbound travel, but certainly, I think the distribution and brand portfolio are absolutely important.

Skift: What percentage of guests are Chinese travelers versus international ones?

Lawrence Ng: If we look at year to date through, the Mainland China represents close to 60% of our nationality mix, followed by the United States at 11%. After that is Hong Kong then South Korea, Germany, and Taiwan.

Skift: Is there anything else we should know?

Lawrence Ng: Our loyalty program, is phenomenal. We have three excellent loyalty programs becoming one big program. SPG has a very unique loyalty program in the sense that it’s not just look at only our points and rate, but they actually create experiences.

Interview With Frank Sanders, General Manager, Shanghai Marriott Hotel City Centre

Frank Sanders is from The Netherlands. His hospitality career spans over 15 years throughout various regions and countries since he first joined Marriott International in 1999, including China, Spain, The Middle East and Vietnam. He most recently served as General Manager of JW Marriott Hotel Chongqing from 2011, where he delivered a successful performance. Prior to his tenure in Chongqing, he was the opening Resident Manager at Renaissance Tianjin as well as managing the Tianjin Marriott Executive Apartments. The extensive experience in the hospitality industry gave Mr. Sanders the expertise and leadership depth to head up JW Marriott Hotel Zhengzhou. Since November 2015, he has been the GM at the Shanghai Marriott Hotel City Centre.

Skift: What percent of guests here are from China versus international?

Frank Sanders: 30 percent.

Skift: Is the other 70% more from the rest of Asia, the U.S., or Europe?

Frank Sanders: More from the U.S.

A lot of people fly into Shanghai, stay a couple of days, and then go somewhere else in China, come back and fly out again.

Skift: So, is it more business or leisure stays here?

Frank Sanders: It’s about 80 percent business.

Skift: What is different about bookings in China versus the U.S.?

Frank Sanders: One thing that is maybe more unique for China than it probably is in the U.S., is that I still have a lot of business coming in directly through the hotel’s own reservations department. When people are making a reservation, they want to know the particular room they are getting and it is a lot more personal. They say, “Oh my boss was here last month and he said the room was really nice. Can he get the same room?”

China is also very last minute for local business. We have people calling for tomorrow, people calling for today, we still get a lot of that.

International travelers, they book well ahead and they won’t call us. They use Marriott.com a lot, we usually see likes of Booking.com and Expedia as well. Ctrip for instance has a very short window, while Booking.com is typically much longer.

Ctrip is maybe five days, six days ahead while Booking.com and Expedia would give us maybe a month. So, it’s very different.

Skift: How does the management agreement model work here?

Frank Sanders: In China, we don’t do much franchising, we have management agreements. A real estate company out of Hong Kong owns this building. They sign the management agreement for us to manage it and provide returns, and that’s it.

Skift: Why do you think we see more franchising in the U.S. than in China?

Frank Sanders: I think it’s about control. In the U.S., the hotels have probably been managed for a very long time, and the management team is very stable. They can move to franchising and save a little bit of money, and basically the standards will stay at the place as they are.

That being said, Marriott will be starting to franchise with Fairfield in China.

Skift: I met with Wyndham and they noted that the same brand in the U.S. will be higher scale in China despite having the same naming convention. Is that the same here?

Frank Sanders: It is the same here. China is still very brand conscious.

Skift: Are you seeing leisure travel accelerate?

Frank Sanders: Yes, especially over the national holidays.

We see a huge influx for two or three days, and we think that’s combined with Disney one day, downtown one day, and then they leave. \

Skift: What is your occupancy rate?

Frank Sanders: High 80’s, year-round.

Skift: Year-round? That’s impressive.

Frank Sanders: It’s very stable, which is nice to see. Shanghai has been able to attract a lot more tourists. But I think if you were a tourist coming from outside of China, Shanghai, it’s maybe nice to see, but you’d probably want to go to Beijing. But within China, Shanghai is a great city for people to check out.

Skift: How much influence does corporate have on pricing?

Frank Sanders: We set our own pricing based on what we think is right to charge at this point in time. There are so many factors impacting it, it would be very strange for Marriott to say that’s the range.

Skift: Among the OTAs, who brings you the most business?

Frank Sanders: They’re fairly equal among the three big ones for us in Booking.com, Expedia, and Ctrip. Expedia and Booking.com are typically international and Ctrip is very much domestic.

It’s actually surprisingly easy to work with them. We just want to make sure that we have the right pictures, the right wording, etc.

Ctrip’s changed a lot in the last couple months. They’re also becoming more IT savvy, really relying on their systems rather then, you know, personal relationships. So, it made work for us much easier.

Skift: We estimate that metasearch drives anywhere from three to five percent of bookings in the industry. Is that comparable here?

Frank Sanders: Yes, I think that’s about correct.

Interview With Rieko Kibe, Director Of Marketing, East China, and Cecilia Lui, Regional Director Of Communications, China, Peninsula Hotels

Japanese-born Ms. Kibe began her hospitality career at the two Hyatt properties in Hong Kong before joining The Peninsula Hong Kong in 1994 as Assistant Director of Sales – Japan. After successive promotions within the hotel, she was appointed Director of Sales – Japan in 1996 and Director of Sales in 1999. She was Director of Marketing at The Peninsula Bangkok since 2007 prior to joining The Peninsula Shanghai.

Ms. Lui began her hospitality career in 1990 at the Hotel Nikko in Hong Kong as Assistant Public Relations Manager. She held various public relations appointments with The Regent Hong Kong, The Excelsior Hong Kong and Holiday Inn Worldwide before joining The Peninsula Beijing in 2001 as Director of Public Relations. Most recently, she was the Director of Communications – China based at The Peninsula Beijing before transferring to The Peninsula Shanghai in January 2009.

The following was a written interview with the answers jointly prepared by the Reiko and Cecilia.

Skift: Can you discuss the trends you are seeing at the higher end of the market in China for occupancy and rates for both domestic travelers and international ones into China?

Peninsula: Undoubtedly there is an upward trend of high end market demand in China for both domestic and international travelers and that could be substantiated by the drastic surge of hotels in China. But even so, it may not necessarily drive occupancy and rates as the competition across the nation is very intense. All international operators one can think of have already established their presence in China, not to mention the emerging high-end niche domestic brands entering into the market. Guests are now given a very wide range of choice but it does not translate into most desirable business volume. For example, with respect to non-gateway cities, the average earnings per capita still remain on a relative low level. The economics of these provinces or cities is not strong enough to sustain or drive high rate business.

Skift: On distribution, can you discuss your relationship with Ctrip and others? Is it collaborative in driving bookings or is there a push to drive bookings without traditional and online travel agents?

Peninsula: OTAs in China are growing to be important to drive bookings. And amongst all the OTAs in China, Ctrip is probably the most powerful one. That said, the approach adopted between Ctrip and hotels are more on a collaborative basis because the traditional travel agents, especially the reputable ones, are still in control of a good number of accounts which OTAs are not able to completely take over at this point.

Skift: Outside of China, hotels and OTAs use Google to help drive traffic to their websites and ultimately convert into bookings. In China, do hotels and agents use Baidu in the same way as other locations use Google? What about television advertising, how important is that?

Peninsula: It is a very good question. In China, likewise, “conversion by search optimization’ is also one of the tactics being employed and this is particularly popular amongst hotels. Baidu is usually the medium in this context. Nonetheless, a trend has already been in the making that social media, especially WeChat, has been developing so fiercely that has already played an important role for brand building and business drivers. Conversions through mobile sites are definitely on a rise and in the near future, it is expected to become the most influential medium. Title sponsors on prominent television programs could still be found in China every now and then. But the investment is huge by doing so and the effectiveness on its ROI is always in doubt.

Skift: How do you use WeChat? Is it for communications or payments or bookings?

Peninsula: We use WeChat primarily for brand building promotion broadcast, and most importantly, to constantly communicate with guests through one-on-one chat or “Moments”. It is also one of the popular payment methods but is not the key function for hotel by using WeChat.

Skift: What are some of the main differences between the Chinese hotel market versus other parts of Asia?

There are two major differences. One is the scale of the market. China’s market is so big that most of the Asia’s cities are not even near. There are still a lot of untapped cities and resorts in China. Second is the demographics. International or regional travelers accounted for most of the business of Asia hotels. As opposed to China, domestic travelers are main feeder market for all hotels, irrespective international or domestic hotel operators.

Skift: Are hotels typically franchised in China the same way as in the U.S where large brands are essentially just franchisers?

Peninsula: In this regard, China is quite similar to that of U.S. There are very few such as The Peninsula, which still insists on owning and operating at the same time.

Skift: Can you discuss some of the unique nuances of the Shanghai market versus Beijing for example?

Peninsula: The average rate in the Shanghai market is generally higher. The average length of stay in Shanghai is 1 – 2 days less than Beijing. Relative to Shanghai, Beijing has more business from sectors of government (foreign delegations), entertainment and high-tech corporations.

Skift: The Chinese government has opened up China in the past decade where we see many international brands coming in. At the same time, the most successful ones partner with local entities. This can even be seen with Disney at Shanghai not going at it alone. Is this a trend that you expect to continue? What your ownership structure in China?

Peninsula: Managing for local partners or even only franchising the brands are most common way of operating the hotels in China and that is expected to continue to be the way to go. But for The Peninsula Shanghai, it is very different as Hongkong and Shanghai Hotels, Limited, parent company of The Peninsula Hotels, is the owner and operator of the hotel entity and this is considered a very exclusive business model in China.

Skift: How much of your occupancy is from Chinese travelers versus international? What about business versus leisure?

Peninsula: Approximately 45% of domestic travelers are accounted for in the occupancy of The Peninsula Shanghai and the hotel is running on a proportion of about 65 leisure versus 35 business.

Skift: As we look into the next decade, what will be the cities outside of Shanghai and Beijing that could have strong growth for travel and the hotel industry?

Peninsula: A lot of second and third tier cities have been growing rapidly besides Beijing and Shanghai. The best examples are Chengdu, Chongqing, Sanya, Guangzhou, Hangzhou, to name but a few. The next decade will possibly see increasing luxury resorts at remote areas of China, which resonates the growing trend of developing eco-tourism in the country.

Skift: Are Chinese travelers more likely to book a local brand or once you get to an international well regarded one, it becomes a non-factor?

Peninsula: With the growing maturity of Chinese travelers, local brand is no longer a factor of choosing one hotel over another. Irrespective of the brands, service qualities have emerged to be the determining factor for the guests to decide their choice of stay.

Skift: In the US, there is a big push in alternative lodgings and the potential threat to hotels gets discussed often. How is that dynamic playing out in China?

Peninsula: Yes, alternative lodgings also exist in China. But the impact to the industry, relative to that of the U.S., is not as significant. There are two main reasons for it. 1) the quality of the alternative lodgings in every aspect is generally disappointing 2) the average room rate in China is very competitive and that is good enough to keep the guests to stay on the choice of hotels but not the others.

Skift: What review sites are the most important for the Chinese traveler?

Peninsula: Review underneath each hotel on the hotel listing under ctrip.com / TripAdvisor.

Skift: Do you see consolidation occurring for Chinese hotel brands?

Peninsula: Consolidation for Chinese local brands are not seen as forthcoming as other international brands.

Skift: At the property level, how do you build brand affinity? Much of the hotel conversation is often on loyalty through points and rates, but to us, it is more about a unique stay.

Peninsula: Absolutely, The Peninsula Hotels is Asia’s oldest but small hotel company. It is focused on curating unique experiences to every visiting guest to reinforce the brand affinity.

Interview With Jin Qian, Area President, Greater China and Mongolia, Hilton

Mr. Qian Jin has been President for Greater China & Mongolia at Hilton, Inc. since April 18, 2017. Mr. Jin has extensive experience in the hospitality industry, having served as president of Wanda Hotels & Resorts. Mr. Jin served as the President of Greater China at Starwood Hotels & Resorts Worldwide Inc. from July 2012 to July 2015. Previously, Mr. Jin served as Senior Vice President of Operations for China & Taiwan of Starwood Hotels & Resorts Worldwide Inc.

In his career, he was the first Chinese citizen to be identified for talent development at Starwood. He began his career at Starwood in 1986 as Deputy General Manager of the Hua Ting Sheraton and has held various assignments in Fiji, Malaysia and Singapore, before returning to Shanghai in 2001 to establish Starwood’s regional office for China. Mr. Jin is credited with building Starwood’s operating business in China and is the natural choice for this newly created position. He is an MBA graduate of Bond University, Australia. He earned his Doctorate degree in Business Administration from Victoria University.

Skift: Can you give an overview of the China market for Hilton?

Jin Qian: China is Hilton’s largest market outside the US for Hilton, when combining trading hotels and those under development, and is one that has huge in-market and outbound potential. In April, we celebrated the official opening of our 100th property in Greater China, Hilton Quanzhou Riverside, and now also have 275 hotels in the pipeline (as of March 31, 2017).

Our growth in China has been focused on developing the right brand, in the right location, at the right time and in working with the right partners. Currently, we have six of our category killer brands operating in China, including Waldorf Astoria, Conrad, Hilton, DoubleTree by Hilton, Hilton Garden Inn and Hampton by Hilton.

As with most parts of the world, we seek to attract both business and leisure guests and have a mixture or urban and resort hotels. While China does have one of the world’s largest populations of young, affluent travelers, we aim to appeal to as wide a demographic as possible, providing as much choice as possible.

In 2016, Greater China had a banner year with nearly 60 deals (more than 12,000 rooms) signed, including the first two Curio – A Collection by Hilton and Canopy by Hilton hotels (Curio by Hilton in Sanya and Canopy by Hilton are slated to open in 2017). Hampton by Hilton opened seven hotels and signed 30 hotels in China through its partnership with Plateno Hotels Group.

Skift: Can you discuss the trends you are seeing at the higher end of the market in China for occupancy and rates for both domestic travelers and international ones into China?

As referenced, there is a large population of affluent travelers in China. We are seeing the demand for the luxury segment expand beyond the traditional tier one cities to second tier and inland cities.

In line with this trend, we are expanding the geographic footprint of our luxury brands to where consumers want us to be, including the upcoming opening of Waldorf Astoria Chengdu.

Skift: On distribution, can you discuss your relationship with Ctrip and others? Is it collaborative in driving bookings or is there a push to drive bookings without traditional and online travel agents?

Jin Qian: While it’s not appropriate to disclose details of our individual relationships with OTAs, Hilton is committed to selling where our customers want to shop, and in this context, OTAs and other intermediaries are an important part of the hotel booking landscape.

At the same time, promoting direct booking is also important, as it enables us to maintain and build upon our relationships with guests. We want to build meaningful relationships with our guests to serve them better with each stay.

Skift: Outside of China, hotels and OTAs use Google to help drive traffic to their websites and ultimately convert into bookings. In China, do hotels and agents use Baidu in the same way as other locations use Google? What about television advertising, how important is that?

Jin Qian: In China, 8 out of 10 Chinese Internet users go online with their mobile phone and 91 percent of Chinese people book their rooms online. Among them, 6 out of 10 will use their mobile phone to do so.

Search is definitely an important channel is driving traffic and conversion. According to China Internet Watch, search engines revenues in China reached about 105,500 billion RMB in 2016. The main search engine, with 79% of market share in China is Baidu.

With regards to television, the different brands in our portfolio appeal to different demographics and consumer preferences. Our strategy is to leverage channels that can achieve more targeted reach, hence television advertising is not a priority for us.

Skift: How do you use WeChat? Is it for communications or payments or bookings?

Jin Qian: The proliferation of WeChat means that it is becoming a key channel for Hilton to stay connected with our guests. Many of our brands and hotels have official accounts on WeChat members to latest news and information (booking and payment inclusive) with their followers. We are continuing to explore further ways to utilize the many functions of WeChat.

Skift: What are some of the main differences between the Chinese hotel market versus other parts of Asia?

Jin Qian: China is Hilton’s largest and fastest growing market in Asia.

With its scale comes a hugely diverse landscape, with more than 100 cities with a population of over one million.

That creates huge opportunity for the mid-scale segment in our industry and why we see there being such enormous potential for brands like Hampton by Hilton and Hilton Garden Inn. For Hampton, we signed an exclusive license agreement with Plateno Hotels Group for more than 400 properties in China – and already have 11 open and 98 under development.

Being successful in China requires a deep understanding of the culture and the ability to adapt your business to be relevant.

Skift: Are hotels typically franchised in China the same way as in the U.S where large brands are essentially just franchisers?

Jin Qian: For the most part, our business in China is driven by management agreements. The large proportion of both our trading estate and pipeline is managed hotels and we continue to focus on acquiring management contracts.

There is certainly the opportunity to expand the franchise model and it has to be with the right partner with the expertise and experience to operate hotels successfully. In October 2014, Hilton signed an exclusive franchise license agreement with Plateno Hotels Group for more than 400 Hampton by Hilton properties in China.

Skift: Can you discuss some of the unique nuances of the Shanghai market versus Beijing for example?

Jin Qian: As the economic center of China, Shanghai is the most concentrated area with finance, industry and commerce, attracting a lot of business travelers.

Beijing is the capital of China, as well as a historic city rich in historic sites and attractions, and hence attracts a more diverse mix of business and leisure travelers

Skift: The Chinese government has opened up China in the past decade where we see many international brands coming in. At the same time, the most successful ones partner with local entities. This can even be seen with Disney at Shanghai not going at it alone. Is this a trend that you expect to continue? What is the ownership structure for your hotels in China?

Jin Qian: Across the world our business model is founded on working with strong local partners. That is as relevant in China as anywhere else and will remain the case.

Over the years, we have forged and deepened partnerships with many leading owners, who offer valuable local knowledge and connections as we expand our geographic footprint in the market.

Skift: Does having a strong brand in China help for outbound travel to other branded properties?

Jin Qian: Most definitely. China’s importance to our business goes beyond the inbound and domestic market, but also the potential of outbound Chinese travelers.

MasterCard’s Future of Outbound Travel report indicated an average growth of 8.5% each year between 2016 and 2021. China’s rising middle class, earning between US$10,000 and US$30,000, is tipped to spur outbound tourism in the coming years. McKinsey & Company also predicts that more than three quarters of the population will be considered middle class by 2022.

For the growing number of outbound Chinese travelers, we have the Huanying program, which establishes a set of amenity and service standards uniquely designed to make them feel at home abroad. The program is now available in more than 125 hotels, in 33 countries and 75 cities, including Hong Kong, Singapore, Phuket, Bangkok, Tokyo, Seoul, London, Paris, New York, San Francisco and more.

Skift: How much of your occupancy is from Chinese travelers versus international? What about business versus leisure?

Jin Qian: The large majority of our business in China comes from domestic travel. As we continue in grow in China, we are very much a brand for the Chinese traveler. As previously mentioned, the ratio of business to leisure travel is very location specific and our resort locations naturally attract more leisure travelers.

Skift: As we look into the next decade, what will be the cities outside of Shanghai and Beijing that could have strong growth for travel and the hotel industry?

Jin Qian: China has a population more than four time larger than the U.S., but only one quarter of the hotel rooms, indicating huge potential for growth.

We see growth potential in the many cities and urban centers that have commercial, industrial or political significance, as well as locations with potential for developing resorts.

An example is Chengdu, the capital of Sichuan Province, which has rich tourism resources, and is also developing as a popular BT MICE destination and a hub for Southwest China. So far, Hilton has operated the following hotels in Chengdu:

  • Hampton by Hilton Chengdu Waishuangnan
  • Hilton Garden Inn Chengdu Huayang
  • Waldorf Astoria Chengdu
  • Hilton Chengdu
  • DoubleTree by Hilton Hotel Chengdu Longquanyi

Skift: Has there been any issues with overbuilding in the hotel industry?

Jin Qian: As mentioned, the supply of hotel rooms versus a market like the U.S. is much lower.

Having just celebrated the official opening of our 100th property in Greater China, we have another 275 hotels in the pipeline, so we are definitely upbeat on the market potential.

As the competition inevitably gets more intense and the market becomes more sophisticated, what’s most important is for brands to focus on delivering the best and most differentiated guest experience. Those that do so will be the ones that succeed.

Skift: Are Chinese travelers more likely to book a local brand or once you get to an international well regarded one, it becomes a non-factor?

Jin Qian: We don’t see any particular preference that Chinese travelers have towards local brands. That said, international brands need to invest in raising brand awareness and familiarity, as more consumers enter the growing middle-class segment.

Skift: In the U.S., there is a big push in alternative lodgings and the potential threat to hotels gets discussed often. How is that dynamic playing out in China?

Jin Qian: While the prominence of home sharing sites is not as prevalent in China, our position is the same here as every other market in the world.

Home sharing, and short-term rentals are a valuable way to allow homeowners to earn extra income. However, we have seen in many locations that unregulated commercial operators are taking advantage of short-term rental platforms to run illegal hotels without public health or safety rules.

At Hilton, we take pride in offering our guests consistent, safe, and secure accommodations, on top of exceptional hospitality.

Skift: What review sites are the most important for the Chinese traveler?

Jin Qian: Ctrip, with more than a billion downloads, is the most utilized site/travel application in China.

Skift: Do you see consolidation occurring for Chinese hotel brands?

Jin Qian: Consolidation is a global trend, not just in China. At Hilton, however, we are focused on a clear strategy to achieve organic growth and to develop our own brands.

Skift: At the property level, how do you build brand affinity. Much of the hotel conversation is often on loyalty through points and rates, but to us, it is more about a unique stay?

Jin Qian: In the service industry, people are always the most important. On a property level, having quality Team Members who deliver best-in-class service is core to delivering our brand promise on the ground. This is why we invest heavily in training and development for our team members in China. e.g. Hilton University. We are proud to have built a strong reputation as an employer of choice in the hospitality industry. Just last year, Hilton was named one of the top companies in the Best Companies to Work For® in Greater China list by Great Place to Work Institute, for the second year running.

At the same time, we shouldn’t discount the importance of innovation in enhancing the guest experience. To this end, Hilton has introduced the following innovations:

  • Mobile Room Select: A first in the hospitality industry, digital check-in and room selection technology is now live across our portfolio spanning 14 brands worldwide. It gives guests unprecedented choice and control across their entire stays.
  • Digital Key: Hilton Honors members who book direct will continue to receive an exclusive member discount, free Wi-Fi, the ability to choose their own room and unlock the door using a Digital Key, and earn Hilton Honors Points that they can redeem for unique events like exclusive artist experiences and hotel concert events featuring the talent you love hosted by Live Nation®, or race experiences with the McLaren-Honda racing team.
  • We have also rebranded the Hilton Honors program to provide more flexibility, more value, and more ways for Honors members to use their Points

Interview With William Zhao, VP, Development & Strategic Alliances, and Helene Xu, VP, Marketing, Wyndham Hotel Group

William Zhao is the Vice President of Development & Strategic Alliances in Wyndham Hotel Group, Greater China. He is responsible for the overall development of 19 WHG brands and developing strategic alliances with key partners in the region. Moreover, he plays a leading role in Greater China’s growth by strongly developing business and driving development strategy to increase the size and scope of WHG portfolio in the region. Meanwhile, William is also responsible for building lasting and profitable relationships with external stakeholders including government institutions, investors, advisors, financiers and hospitality communities. So far, Wyndham Hotel Group has achieved the opening of over 1360 hotels in China taking up the greatest market share in the region, and strategically alliance with multiple partners within and beyond hotel industry to provide integrated hospitality service solutions to owners and customers.

William comes to Wyndham with about 20 years of Travel, Aviation & Hospitality industry experience in HNA Group. He was most recently the Chairman of HNA Club Vac Vacation and leaded the company listed on the New OTC Market. William earned his master’s degree in tourism and hotel management from Hong Kong Polytech University and he is currently studying for D.HTM at the Hong Kong Polytech University.

Skift: Can you discuss your roles at Wyndham?

William Zhao: My team is responsible for business development and strategy alliances. The majority of my time is spent communicating with potential owners of our brand not only for the franchise model, but also for management contracts with our owners. In the past, China was predominantly under the most basic model of full service management, but now more owners want to look for the new ways to cooperate with the hotel group, so the franchise model is more popular than ever.

Skift: Is it previously constructed hotels moving to that model or more about new construction?

William Zhao: New building with franchise is more popular. Part of this is that the real estate industry is changing from booming to more normalized growth. Owners want to reduce the cost they pay for the management fee to the hotel management company. We want to look for innovative ways to cooperate with our owners and establish a new platform for strategy alliances. This is why my second role is to build or to set up the strategy alliances with owner.

We have led the industry in the number of signings in China.

Helene Xu: My focus is on marketing in mainland China, Hong Kong, and Taiwan. My team does brand marketing, digital marketing and distribution.

Skift: Can you discuss the trends you’re seeing in China?

Helene Xu: Wyndham has 19 brands worldwide. Right now, we have eight brands already operated in China; with three new coming. Among these 11 brands, we have budget hotel brands, such as Super 8, and middle scale and the upscale as well. The iconic brands for the middle scale, are Ramada and Howard Johnson. For some of the brands, we have a different positioning in China. For example, we have 70 Howard Johnson hotels and they are all four stars.

Skift: Really?

Helene Xu: Even five stars. The positioning is different.

We positioned our international brands more towards the higher end versus the same brand in the U.S.

For upper scales, we have the Wyndham and Wyndham Grand, under the Wyndham families umbrella. Wyndham Grand is positioned as most upscale.

In terms of the occupancy and the rate, it really depends on the performance of each market. For the budget hotel, like Super 8, we have a lot of local competitors, such as “7 Days”. For the middle scale brand such as Ramada, we also have some competitors in China. Thus, competitions really vary base on different destinations.

Skift: Does success here, help push outbound bookings to Wyndham properties elsewhere?

Helene Xu: One of my major responsibilities is to enhance and to strengthen the brand awareness for Wyndham’s brands.

For an example, we are communicating with various other international Wyndham Hotels, to bring in business and awareness for them via our local WeChat platform.

Skift: On the distribution side, can you discuss your relationship with Ctrip and the other OTAs?

Helene Xu: Ctrip is the dominant OTA in China. For all the properties, including our managed and franchised hotels, they must create a connection with Ctrip before or during appointing the process.

Wyndham Hotel Group and Ctrip Group are discussing a global cooperation. The CEO of Ctrip, Jane Jie Sun, has visited our principal office and spoke with our Chairman and CEO.

We are expecting more collaboration with Ctrip, to bring in better traffic.

Skift: How important is Baidu to driving traffic in China?

Helene Xu: We do a lot of SEM in Baidu. It’s the main channel to increase our brand visibility.

Skift: Is Baidu where you spend most of your digital ad dollars?

Helene Xu: On both Baidu and WeChat.

For our company, we have opened our first WeChat account two years ago. We have been sharing messages, news, stories, and brand essences. Starting from last year, in August of 2016, we upgraded the “subscription account to the service account. With this service account, we opened up to booking and payments.

Skift: How important is WeChat for bookings versus for branding?

Helene Xu: I think both are important.

Skift: How many loyalty members are in China right now?

William Zhao: Nearly two million.

Skift: What does your development pipeline look like?

William Zhao: We have the clear target that by the end of 2019, we will have over 2,000 properties in China. Right now, we have about 1,360 properties in China. We have been opening up about 300 per year.

Endnotes and Further Reading

  1. China to Surpass U.S. as World’s Largest Aviation Market by 2024, Bloomberg, October 2016
  2. China Eastern Becomes Third Major Airline to Pull Its Flights From Qunar, Skift, April 2016
  3. Two airlines restore business with major online travel agency Qunar, ChinaDaily.com.cn, June 2016
  4. China’s Ctrip Makes Strategic Investments in 3 U.S. Tour Operators, Skift, October 2016
  5. Statistical Report on Internet Development in China, CNNIC, January 2017
  6. Breaking: Ctrip to Acquire Skyscanner for $1.74 Billion, Skift, November 2016
  7. Ctrip Needed and Wanted Metasearch, So It Got Skyscanner, Skift, November 2016
  8. China tourism revenue grows fast in 2016, The State Council of The People’s Republic of China, January 2017
  9. China Inbound Tourism in 2016, Travel China Guide
  10. The New China Playbook, BCG Perspectives, December 2015
  11. The Tourism Market in China, EUSME Centre, September 2015
  12. The Rise in Chinese Tourism and Its Effects on the Balance of Payments, Federal Reserve Bank of St. Louis, December 2016
  13. Chinese Tourism and Hospitality Investment in the United States, U.S.-China Economic and Security Review Commission, July 2016
  14. Q1 Rankings Reveal the Keys to Success for Travel Brands on WeChat, Dragon Trail Interactive, April 2017
  15. A Row With China Over U.S. Missiles Is Devastating South Korea’s Tourism Industry, Time, April 2017
  16. China search engine market share in Apr 2017, China Internet Watch, May 2017
  17. Alibaba’s Alitrip Rebrand Reveals Big Bet on Chinese Millennial Travelers, Jing Daily, October 2016
  18. China’s Meituan, Dianping Merge To Create A Mega Online-To-Offline Service Platform, Forbes, October 2015
  19. Meituan-Dianping Cements Its Market Leading Position in the Travel and Leisure Industry with the Official Launch of Meituan Travel, CISION PR Newswire, May 2017
  20. China’s Ctrip invests over $200 million in an online ticketing site, TechInAsia, April 2014