Amazon could enter the online travel market to boost its margins
Analyzing Amazon's key strategies to increase its margins (Part 2 of 12)
Amazon could soon enter the online travel market
According to a report from Skift, Amazon (AMZN) could enter the online travel market starting early next year. On the surface, this move doesn’t look wise for Amazon because it will be entering into yet another new market. It has already entered into or is trying to enter into new markets such as smartphone (Fire), video streaming player (Fire TV), video and music streaming ( Prime instant video ), and online advertising with little success.
However, if we analyze the matter deeply, we see that online travel could be a lucrative market for Amazon. Amazon’s operating margins have continued to decline. It took its biggest net loss in the last quarter in the last 14 years. However, the online travel market has better margins than the e-commerce market. If we compare online travel market leader Priceline’s (PCLN) operating margins with e-commerce market leader Amazon’s, we find a big difference. As the chart below shows, Priceline’s operating margins are around 46.6% compared to about -2.6% for Amazon.
Amazon could theoretically benefit immensely
The report from Skift also mentions that Amazon plans to enter into the subscale and smaller hotels market. This is a niche market. It will help Amazon avoid direct competition with Priceline and Expedia (EXPE). More importantly, it will help it upsell its travel-related products through its site, as online travel booking and purchasing travel-related merchandise go hand in hand.
Although this looks like a perfect business for Amazon to enter into strategically, the execution will be key. This is because, in the past, tech giants such as Google (GOOG)(GOOGL), Yahoo (YHOO), and Microsoft (MSFT) have tried to enter the online travel market without much success.
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