Stock pick: An investor's must-know guide to The Priceline Group (Part 2 of 7)
Priceline and Expedia
Priceline earns the majority of its revenues from the agency model, under which third parties such as hotel suppliers set the rates while Priceline earns a commission on the transaction. This simple low-margin model has helped Priceline grow in international markets, especially Europe, via Booking.com. The merchant model, where transactions are finalized on Priceline’s own websites, offers higher margins. In 2012, peer Expedia (EXPE) led the U.S. OTA market with a 40% share, while Priceline had a 16% share. Priceline has been recently growing its share in the domestic market, with management claiming on the recent earnings call that “for the first time in 2013, the United States became Booking.com’s largest destination.” Priceline expects U.S. gross bookings to grow 15% to 20% in the first quarter of 2014.
Agency gross bookings for 2013 were up 40.3% year-over-year to $32.6 billion in 2013 due to growth in Booking.com accommodation room night reservations, as well as growth in Priceline.com’s retail airline ticket and rental car services. Merchant gross bookings increased 25.7% to $6.5 billion, driven by Agoda.com, Priceline.com Express Deals room reservations, rental car day reservations, and Name Your Own Price. In 2013, agency revenues were up 40.3% to $4.410 billion, merchant revenues were up to $2.211 billion, and advertising accounted for $171 million due to the inclusion of KAYAK.
Priceline’s domestic gross bookings increased 15.5% in 2013, primarily due to an increase in Priceline.com’s retail airline ticket service, the Express Deals hotel reservation service, and retail rental car service. The growth was partially offset by a decline in its Name Your Own Price opaque hotel reservation service.
Priceline pioneered the market for opaque online sales with the launch of Name Your Own Price, which offers consumers considerable savings on travel. Under this program, the company offers a proprietary pricing system that allows consumers to specify the price they’re prepared to pay when submitting an offer for a particular travel service such as accommodation, rental cars, and airline tickets. Priceline then goes through its databases, where participating travel service providers file secure discounted rates generally hidden from the public, to determine whether it can fulfill the consumer’s offer at the price designated. This service uses consumers’ flexibility to enable travel suppliers to accept a lower price in order to sell their excess inventory without disrupting their existing distribution channels or retail pricing structures.
Priceline revealed in its annual filing that it saw a decline in the opaque accommodation reservation services, in which Priceline.com’s U.S. business is a market leader, due to competition. Priceline believes Expedia makes opaque accommodation room reservations available on its principal website under the name “Expedia Unpublished Rates” and has supported this initiative with steeper discounts through lower margins. Priceline added that offerings such as Expedia Unpublished Rates have adversely impacted the market share and year-over-year growth rate of its Name Your Own Price opaque accommodation service, which began to experience a decline in room night reservations in the third quarter of 2011.
In 2012, Priceline.com launched Express Deals, a merchant semi-opaque accommodation reservation service that allows consumers to see the price of the accommodation prior to making a reservation but not the identity of the travel service provider. Hotwire.com, a subsidiary of Expedia, is also engaged in similar services, but it uses a fixed price model compared to Priceline’s bidding model. Hotwire saw challenges last year due to competition from Priceline’s Express Deals. Expedia said on its fourth quarter earnings call, “The environment for Hotwire remains challenging but the teams seems to have found its footing and we believe that they can deliver stable results in 2014 while setting the foundation for long-term growth.” Room 77, which has a software licensing agreement with Google (GOOG), is also reported to be using the opaque pricing model. Travelocity has a similar service with its Top Secret Hotels. The China-based Qunar (QUNR), which is owned by Baidu (BIDU), also said it offers users a last-minute sale program and opaque booking program for hotel reservations.
Comscore said that in 2012, U.S. travel e-commerce sales reached $103 billion, an increase of 9% versus the prior year. Expedia led the online travel agency group with a 31% market share, followed by Priceline (PCLN) and Orbitz Worldwide (OWW).
According to report by World Travel & Tourism Council (WTTC) titled “Economic Impact 2014,” Travel & Tourism’s contribution to world GDP grew for the fourth consecutive year in 2013, helped especially by strong demand from international travellers. Visitor exports, the measure of money spent by these international tourists, rose 3.9% at a global level year-over-year, to $1.3 trillion. In the U.S., the direct contribution of Travel & Tourism to GDP was $450.2 billion (2.7% of total GDP) in 2013, and this figure is forecast to rise 3.5% in 2014 and 3.7% per annum from 2014 to 2024, to $671.5 billion (3.0% of total GDP) in 2024.
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