China is a complicated market. Even for Priceline
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Direct participation in China continues to be a tough proposition for foreign brands. Yes, there has been consolidation, but new companies continue to emerge and existing non-travel companies have decided they want to get in on the action, too.
China has proved an obscure proposition even for US tech giants time and again, and in the travel sector too, was riddled with challenges.
In this context, the Priceline Group has stood out for its collaborative approach here. The team never rushed into any strategic alliance, and took its own time to settle down.
“We don’t commit to a huge number of strategic transactions, be they acquisitions or strategic alliances, but our track record in this area has been good so we are pleased with our pace. And while business developments and technology changes do seem to happen more rapidly in China, we do not feel those issues by themselves necessitate changes in the way we operate,” Glenn D. Fogel, the six-month-old CEO and President of the Priceline Group, said.
Fogel went on to add that China certainly has some unique aspects, such as the size of the market, the pace of growth and innovation, the fact that the market over indexes in mobile payments, and a message-driven culture, but the group does not see any of these as hurdles.
“The China travel market is one of the most competitive markets in the world with substantial price discounting, both explicit and implicit, still going on,” shared Fogel. “It may not be at the level it was a few years ago, but rest assured that price is still incredibly important and because companies want to try to build their customer bases now, there continues to be substantial price competition. Throw on top of this access to very low-cost capital and young companies feel it is their interest to grow the top line much more than achieving profits which contributes to the discounting environment.”
Fogel points out that the fast-growing markets are characterized by high losses during the early part of development.
“Chinese travel is growing very rapidly and there are many people who want to be part of it. Yes, there has been some consolidation, but new companies pop up regularly and existing non-travel companies have decided they want to get in on the action, too. There is an abundance of low-cost capital, so there is fuel to continue funding loss- or low-profit companies which might have died or been merged out of existence under more normal capital market situations. So given these facts, while we are pleased with our results, we are aware that there may be significant volatility in the space for some time to come,” explained Fogel.
“While our domestic business is not on the same scale as some of the local players, we like our growth in this area as well,” he said. “We will continue our strategy of building our organic business, which means our inbound, outbound and domestic businesses, co-operate with our partner, Ctrip, the leading travel player in the space, and continue a willingness to explore other ways to further build our efforts. We are not dogmatic about anything.”
Also, a core aspect of setting up a brand in China relates to understanding unique ecosystems – Baidu, Alibaba and Tencent. These local ecosystems control data, capitalize on network effects, just like Facebook, Apple, Google etc. outside China. The impact of offerings like WeChat, Tmall, Facebook Messenger etc. in travel e-commerce is being scrutinized closely. As advertisers, groups like Priceline rely heavily on performance advertising, and work closely with such sources of traffic generation. If we compare the last two years, the group’s performance advertising budget rose to USD 3.5 billion in 2016, from USD 2.7 billion over the previous year.
As a parting comment, when asked how the group has overall managed risk associated with foreign ownership restrictions in China, Fogel said all investments come with risk. “The important thing is to try to understand the risk, employ experts in areas in which one is not competent to measure risk by oneself, and compare the risk to the expected return. So whether the risk is a regulatory risk or some other risk, the process is the same.”