If there is one entity in the Chinese travel e-commerce category that stands out for its sustained investment, operational efficiency and profitability, then it has to be Ctrip.
While international brands struggle to establish a feasible business model, Ctrip is expanding its reach with sustained product development and sales and marketing expenditure as well as strategic alliances. Its latest deal with the Priceline Group taking up to 10% stake in a deal worth US$500 million is a case in point.
And the road ahead is filled with opportunity. “As of now, online is accounting for around 10-15% of the total transactions in the travel category in China,” said Jenny Wu, chief strategy officer of Ctrip.com International. She expects this figure to rise up to about 20% over the next 5 years. “Relatively mature markets like the US and Europe have over 40% penetration (for online transactions). There is strong potential upside in China.”
Jenny Wu: Product investments such as buses and train tickets vital to building one-stop platform
Service remains its competitive advantage
Ctrip has built its business assiduously over the past 15 years. “One of our strengths is independent quality assurance and six sigma quality management. It’s a procedure that defines our work flow. We delve deep into service issues and operational efficiency, there is no room for wastage of resources and capital. There is periodical scrutiny of each project, and the management is deeply involved inspiring teams, and different generations to work as a cohesive unit,” shared Wu.
She added, “Running an OTA business model isn’t a straightforward task, and it takes a profound vision and expertise to run a profitable OTA business. Travel service has proven to be a low-margin business, if we look at how traditional agencies operated over the years. But our margin has shown that we can deliver at a huge scale. So far we are still the only online travel player in China that has margins with all other peers being in heavy losses.”
Be it through strategic alliances or organic growth, Ctrip.com continues to work on its one-stop travel platform vision.
Take the case of how it is strengthening its transportation related offerings – optimizing the combination on air, train and bus components for travelling from one city to another. According to Ctrip, the train segment accounts for two billion tickets a year and for bus, it is 30 billion tickets a year. Even as air tickets are currently driving volume growth in the transportation ticketing services (in Q2 it was 83% year on year), the plan is to strike a healthy combination in the long-run so that Ctrip can serve customers from the start to the last mile of their trips.
Investing in product – non-air is helping brand stickiness
This year has been one of strategic investments. Its product development expenses for the second quarter of 2014 increased by 55% to RMB479 million (US$77 million) from the same period last year and 9% from the previous quarter, primarily due to an increase in IT and product development personnel related expenses.
With an extensive assortment of offerings, for instance, bus and train tickets being among the latest addition, how the volume-margin matrix is going to impact its financial results in the future is worth keeping an eye on. “Although we spent aggressively in the past two quarters in certain key areas, we still successfully achieved the industry’s leading profitability of 12% operating margins. Most of the investments we are making are more related to our long term growth targets, rather than directly associated with revenues in the current year, associated costs and expenses are partly up front-loaded and we expect more revenues and operating leverage will gradually kick in later on,” said Wu.
Yunnan: Bus tickets are helping Ctrip extend the customer journey.
It points out that the introduction of bus, train tickets or visa-related services, or new offerings like student travel is resulting in brand stickiness. Ctrip recently became a strategic investor in Beijing Mind Education which serves more than 700,000 travellers. It enables Ctrip to reach out to younger people, aged 3-18, which could help cultivate a strong habit of using the brand from an early age. The volume for booking visa applications through Ctrip’s mobile app has increased to five times its volume a year ago. Ctrip has also introduced overseas shopping service. It offers discount to Chinese travellers when they shop at overseas brand stores. The shoppers can get cash rebate from their spending overseas, and Ctrip is garnering commission from the merchants.
Also, the fact that its mobile app downloads has now reached 200 million, growing at a rate of 67% quarter-over-quarter, means the company is in a better position to personalize and capitalize on monetization opportunities, say cross-selling.
As users rely on mobile apps for planning and booking, it means Ctrip would end up with itineraries that users end up booking. This data, if utilized proficiently, can pave way for strong affiliation with the brand and the company’s offerings. Ctrip is also ensuring that mobile customers are being lured into using the mobile portfolio. For instance, customers can avail Ctrip gift cards and manage their balance through the Ctrip mobile app. These cards are for travel products offered by the OTA, as well as third-party vendors such as restaurants.
Online transactions growing but call centre remains critical part of operations
Ctrip is clear that it can’t afford to slip on the user experience, as well as after-sales service. One of the highlights of the second quarter proved to be the chunk of transactions that were booked online or through mobile channels. This accounted for around 80% of Ctrip’s transactions.
However Ctrip asserts that its call centre operations still remain a vital part of its multi-channel distribution mix. The company reckons that its call centre is more like an after-sales service avenue, and is still being counted upon as Ctrip’s key competitive advantage.
Asked about her view on Qunar.com, Wu said that it isn’t easy for any IT-oriented entity to improvise and transform into a service-oriented model. “Ctrip is profitable, and proven its expertise time and again. Our accelerated growth rate, strengthened market leadership, and stabilization of margin all indicate this,” said Wu who has been Ctrip’s chief strategy officer since November last year and before that she was the company’s chief finance officer for about two years.
Ctrip.com acknowledges the trend of OTA-meta-search strategic alliances, the most prominent one being Priceline acquiring KAYAK. But in China, Ctrip.com states that it has achieved this goal through its organic expansion, that is, by upgrading itself to a one-stop travel service platform and by adopting an open platform. “We are running the best hybrid model in China travel space, smoothly combining the best essence of both a traditional OTA model and a meta-search model,” Wu said.
However, with the adoption of so-called hybrid or open platform model, Ctrip is also facing significant challenges for quality and service control on the products offered by third parties as all bookings are still completed on Ctrip’s website or mobile app. As Ctrip is aggressively pursuing this model, the team needs to be cautious about selecting its business partners and sustaining the service standards it promises.
• Jenny Wu is scheduled to speak at the upcoming 2014 TravelDaily Conference in Shanghai (September 3-4, 2014).
