Our new feature is a series of short, digestible briefings on the online travel agencies. This initial briefing reviews earnings at Booking Holdings and Expedia Group which have now both reported fourth quarter and full year 2018 earnings. Their releases give us significant new insights into the online travel market that let us update and add onto our three-part “State of the Online Travel Agency” series of reports last year.
The four most important updates we identified from Expedia Group and Booking Holdings this quarter surround alternative accommodations, brand marketing, investments in online payment platforms, and challenges on the horizon.
As of last week, Booking Holdings and Expedia Group have both reported fourth quarter and full year 2018 earnings. Their reports give us significant new insights into the online travel market that let us update and add onto our three-part “State of the Online Travel Agency” series of reports last year.
The four most important updates we identified from Expedia Group and Booking Holdings this quarter were:
- Alternative Accommodations in the Spotlight: New disclosures give us a better sense of where the race for domination of online distribution in this space stands
- Shift Towards Branded Marketing Continues: Online travel agencies continue to reorganize their online ad budgets and are putting more dollars to work in brand campaigns. We are starting to see this shift pay dividends in the form of higher direct traffic.
- Reinvestment and Reinvention of Online Platforms Is Essential … and Expensive: Just like your home utilities, cloud bills get expensive fast when you leave the lights on 24/7.
- Challenges on the Horizon — Europe and What’s Next for Growth: Brexit and political unrest put a big question mark over the European economy. Longer-term how will the online booking sites replace slowing room night growth?
Alternative Accommodations in the Spotlight
Perhaps one of the most exciting updates from this quarter’s earnings season was a flurry of updates on the race to own online alternative accommodation distribution.
Booking Holdings revealed for the first time that it generated $2.8 billion of revenue from alternative accommodations in 2018, 20% of the company’s overall revenue. For comparison’s sake Airbnb disclosed $2.6 billion of revenue in 2017, and Skift Research estimates that Airbnb may have generated as much as $4.4 billion in 2018. HomeAway, Expedia Group’s alternative accommodations division, generated $1.17 billion of revenue in full year 2018, about 10% of overall group revenue.
Booking is now undisputedly Airbnb’s biggest rival with 5.7 million vacation rental listings to Airbnb’s 6 million, both well ahead of HomeAway’s 1.8 million.
While HomeAway, which also owns and operates the VRBO brand, has a long pedigree in vacation rentals, it was historically operated as an online bulletin board that drove offline transactions. It’s taken quite a lot of time and money for Expedia, which purchased HomeAway in 2015, to move bookings fully online and into what Expedia chief financial officer Alan Pickerill calls a “true travel e-commerce player.”
We update our alternative accommodation “scorecard,” initially published in our August 2018 report on online travel agency supply, below.
Glenn Fogel, Booking Holdings’ CEO said on the earnings call that the alternative accommodations segment is, “growing faster than our consolidated growth rate and is nicely profitable.”
How much faster is it growing? Skift Research estimates, based on historical changes in Booking’s vacation rental inventory, that this business may have grown between 16% and 21% in 2018, compared to a consolidated company revenue growth rate of 15%. For comparison’s sake HomeAway grew its revenue 29% in 2018.
While Expedia still trails Booking Holdings in absolute property count, it is rapidly catching up. Expedia grew its property base by 69% in the fourth quarter of 2018 versus 37% at Booking.
Expedia’s property count growth began to accelerate in March 2015, and it has been growing at a faster clip for every quarter since December 2016. Much of that rapid expansion is coming from HomeAway’s alternative accommodation inventory. The HomeAway merger closed in December 2015.
The competition is not just about the count of properties, but also the quality and type of accommodations. Here too, we are seeing a convergence between HomeAway, which offered traditionally standalone homes in U.S. vacation destinations, and Booking Holdings, which traditionally offered condo-style units in Europe.
Fogel spoke on the earnings call about the need “to increase our properties, particularly a certain type. And that is a single home that is in the beach locations, some of the ski locations.” Booking is also trying to diversify out of Europe and into the U.S.
This goal would put Booking squarely onto HomeAway’s turf and our data indicates that Fogel is making progress.
In 1Q 2017, Booking Holdings had nearly five listings per property, indicative of, say, multiple condos listings within the same community (i.e., the condo complex counts as one “property,” but each individual unit counts as one “listing”). However, that figure has dropped to approximately 3.3 listings per property today. When we look at the marginal change of listings and properties to calculate how many listings are in each new property, we see that figure has fallen in half from 3.0 to 1.5. A value of one would indicate that every new property added by Booking.com was a single-family home.
At the same time, HomeAway is pushing back and Mark Okerstrom, Expedia Group’s CEO, highlighted plans to challenge Booking and Airbnb on their home fields. “Urban is a big opportunity for [HomeAway]. International is largely an untapped opportunity,” he said. Plus, metasearch engine Trivago (owned by Expedia) is getting into the action as well and now has 1.5 million searchable listings. “We remain focused on positioning HomeAway and Expedia Group to capitalize on the significant long-term opportunity in the alternative accommodations space,” said Okerstrom.
The battle for alternative accommodations will only continue to heat up over the coming quarters and years. The lines between the big three online players — Airbnb, Booking, and Expedia/HomeAway — are only going to blur further.
Shift Towards Branded Marketing Continues
The online travel agencies are some of the largest advertisers in the travel industry (if not the largest). Booking Holdings spent $5 billion in advertising in 2018, up 8% from last year. Expedia Group similarly spent $4.7 billion in direct marketing, up 7% from the prior year. (Direct marketing is broad category that includes performance and brand advertising, affiliate program commissions, public relations, and other costs; which we believe to be a close, if slightly inflated, proxy for advertising spend).
In our June 2018 report, Skift Research examined trends in online travel agency advertising. In that report we found that the two largest online travel agencies had run into challenges with their online performance advertising campaigns. More brands than ever are shifting online — that means more crowded search ad auctions, with a resulting increase in cost-per-click prices. Plus, hotel and airline direct booking campaigns compete for consumer attention.
The online travel agencies responded to declining ad efficiency by rightsizing their online budgets, pulling back from metasearch in particular. For instance, Booking Holdings cut its ad spending on Trivago, a metasearch site owned by Expedia Group, by EUR 100 million or 22% in 2018. Even Trivago’s sister brands at Expedia Group reduced ad buys by EUR 38 million or 10% over the prior year.
Examining the quarterly data shows that the cuts in ad dollars seem to have bottomed in the late summer of 2018 (Q2 for EXPE / Q3 for BKNG).
The online booking sites are now cautiously re-engaging in advertising campaigns, though at a lesser rate than previously and with a much larger emphasis on branded advertising. Executives hope that these campaigns will reach customers at an earlier stage of the purchase funnel, build brand awareness, and drive greater direct web traffic at lower cost.
Examining Booking Holdings’ quarterly results is one of the best ways to understand these changing dynamics as the company discloses a breakout between performance and brand advertising.
At Booking, spending on brand advertising grew 27% in 4Q 2018 and 17% in the full year 2018; by comparison performance advertising spend rose 11% and 7% respectively. It should be noted that Booking still directed 90% of its budget towards performance ads in 2018, but the pendulum is swinging back from one extreme towards a more balanced ad approach.
“Brand marketing is a key area where we’re making growth investments to drive more direct traffic to our websites and build better awareness,” said David Goulden, Booking Holdings’ CFO, during its fourth-quarter earnings call. Goulden expects that in coming quarters, brand advertising will continue to grow as a share of company revenue while performance ads will shrink.
These brand efforts are meeting success at both businesses. Booking now sees more than half of its booked room nights coming from direct channels, while at Expedia roughly two-thirds of business is from direct or proprietary channels (e.g., email, loyalty, branded SEM).
Mobile applications are increasingly an important proprietary channel that aid in driving direct business. Booking sees more than half of its room nights booked on a mobile device; at Expedia a third of all transactions are done via mobile.
Brand marketing can increase the efficiency of pay advertising channels as well. To that end, another clue to the success of online travel brand campaigns is that overall marketing efficiencies seem to be recovering.
Our preferred measure of marketing efficiency is to measure gross bookings per sales and marketing dollar spend. In 2008, Expedia and Booking Holdings were both able to book $19 of travel sales for every $1 they spent marketing (and ad budgets were almost entirely online). Today, every dollar spent marketing earns closer to $17 in bookings, a 13% decline in efficiency. Despite that long-term trend, we saw efficiencies creep up this year.
Booking saw a small tick up to $16.0 from $15.9. Expedia, however, saw a large improvement. It generated $17.3 in gross bookings for sales and marketing dollar spending in 2018, up from $16.7 the prior year.
Okerstrom attributed that success to Expedia’s sharpened capacity to “get much more sophisticated in our ability to understand what type of marketing is truly incremental versus just shifting bookings from one channel to another.” A big part of those efforts is the ability to pair performance ads with “other channels like television and digital video.”
We also believe that Expedia realized scale efficiencies in marketing new products and geographies. For instance, at HomeAway, Pickerill noted that the vacation rental platform had been facing search engine optimization (SEO) headwinds, and that it was only in recent years that it had even “stood up a proper search engine marketing team.” While there are still SEO challenges at HomeAway, we believe that this kind of performance ad investment, paired with recently relaunched TV brand campaigns, is starting to help.
We suspect a similar story is playing out in the international markets where Expedia has only acquired inventory in the last year. New online performance ad campaigns require some time to season before returns can improve.
Finally, both Expedia Group and Booking Holdings generated operating leverage from their sales and marketing expenditures in 2018, meaning that those budgets shrank as a share of overall company top line. This is a small, but important reversal from the prior trend which saw sales and marketing expense eating up operating budgets at the two big online booking sites.
Looking forward into 2019, Expedia expects to again see sales and marketing leverage for the full year. In contrast, Booking, though its management only guides for the first quarter of 2019, expects to see an overall increase in sales and marketing as a share of revenue. Increases in brand advertising as a share of revenue are expected to more than offset a decrease in performance ads spending.
Reinvestment and Reinvention of Online Platforms Is Essential … and Expensive
It is essential that these online platforms continue to reinvest and reinvent themselves as they expand, and as customers’ habits evolve. Doing this, however, is also expensive.
Expedia has shifted a large share of its server needs to the cloud, primarily using Amazon Web Services. This has a number of benefits: shifting large upfront capital expenditures to variable operating expenses and improving the technology that Expedia can offer to clients.
But Expedia, like many others, is finding out that the cloud is not a free lunch. Its cloud expenses hit $140 million in 2018, up 47% year-on-year.
Cloud costs are split among two expense line items: cost of revenue and technology and content costs. It is not a coincidence that these two expenses grew 12% and 17%, respectively, in 2018. Expedia Group’s GAAP (generally accepted accounting principles) technology and content expense was increased to $1.6 billion in 2018 and rose as a share of revenue to 14.4% from 13.8%. Looking forward into 2019, Expedia’s management expects “significant deleveraging” of both cost of revenue and technology expenses compared to the last year.
Booking Holdings is not standing still either. It is making a push to drive its own payments platform, which, it now disclosed, processes approximately 10% of its gross bookings. Fogel sees benefits from payments, “in many areas, including merchandising flexibility, a better customer and partner experience, reduced customer service expenses, and the ability to coordinate and manage integrated trips.”
This will mean that Booking will need to reinvent itself. Processing payments on behalf of suppliers means that Booking will need to take on the role of merchant of record. This will be a shift for Booking as it built its business on an agency model, where payments are collected by the hotel when the guest checks in. Booking then invoices the property to collect its commission. Today 80% of its gross bookings are done through the agency model.
We view the ability to operate its own payment platform as a competitive advantage for Booking. It will allow the company to stay nimble and accept a variety of new and emerging payment options, such as Alipay or Venmo, either of which is very difficult for an individual hotel property to implement by itself. This increased customer convenience should help drive bookings and conversions. Booking may also be able to better negotiate bulk payment processing rates from the credit card networks.
It is also helpful in the alternative accommodations space, where property managers may not have the infrastructure to run a full agency model. To this end, Expedia’s Pickerill also hit on “HomeAway’s shift to become merchant of record on more of its transactions.”
We use the differing growth rates between merchant and agency bookings as a rough proxy for the growth of Booking’s payment platform. Historically, agency bookings grew faster than merchant bookings, and the two tend to move mostly in tandem with each other. But in 2018, merchant bookings sharply accelerated to growth of 63%. In contrast, agency bookings decelerated to a meager 6% growth rate. In 2018, Booking Holdings generated $74 billion of agency bookings to $19 billion of merchant bookings.
This change is fully idiosyncratic to Booking Holdings — Expedia saw no divergence in the two payment types — indicating that it is a result of deliberate decisions by the company’s management team, not a result of a broader industry shift.
Challenges on the Horizon — Europe and What’s Next for Growth
Two challenges stand out for Expedia and Booking. Most immediately, what is going to happen in Europe?
Booking Holdings’ forward guidance for the next quarter was significantly worse than investors expected. This could indicate some brewing headwinds, though a part of the poor guidance was also mechanically related to changes in foreign exchange rates and holiday timing.
But more substantial and worrying was negative commentary around the European economic outlook. The commentary mirrors poor earnings releases from major European travel agencies Thomas Cook and TUI. Fogel said that, “January room night growth in Europe was a step down from December, and February is looking stronger than January but still below December.” In contrast though, he pointed out that, “room night growth rates in the other parts of the world are more in line with what we saw in December.”
Expedia’s Okerstrom echoed these comments, saying, “we have seen a drop-off in U.K. flight bookings, both outbound as well as inbound … so I think we are cautious on Europe.”
Political uncertainty on the continent — Brexit in the U.K. and the yellow jacket protests in France, for example — is impacting bookings. Whether these are temporary or a sign of a greater slow down still to come is not yet clear.
Secondly, and more important in the long term, is what will be the next leg of growth for the online travel agencies?
Room nights continue to grow at a nice clip, but are clearly being weighed down by gravity.
Certainly that explains the enthusiasm that both Booking and Expedia have shown for alternative accommodations. It will also lead these sites to seek out new sources of revenue, both products (e.g., experiences, restaurants) and geographies. We will be watching earnings seasons to come to see how these plans play out.