When you compete with larger players, you sometimes need to ignore the conventional wisdom if you want to avoid getting crushed. That’s the view of Despegar, an online travel agency in more than 20 Latin American countries.
Since he became Despegar CEO in 2017, Damián Scokin has charted a distinctive course. Scokin has ignored the playbook used by global online travel players whenever their methods haven’t suited regional dynamics. He has improvised even though Expedia Group holds a 14 percent stake in the Argentine company.
Scokin believes his approach is paying off. Despegar forecasts growth. In December, executives predicted their company would double its annual gross bookings within five years.
Not everyone is as optimistic. After the presentation, Brian Nowak, managing director of research at Morgan Stanley, didn’t change his model for the company, and his model assumes it will take Despegar longer than five years to double its bookings while also widening profitability. One hesitation is that Latin America’s pace of economic growth has been volatile.
Despegar faces well-capitalized competitors, despite being ranked by Euromonitor as the largest travel intermediary in Latin America.
Its top regional rival is CVC, Brazil’s biggest travel agency that has mostly had offline sales, which has acquired Almundo, an online travel agency based in Argentina. (For details, see our story on Almundo.)
CVC already sold about as much travel offline as Despegar sold online in Brazil. CVC’s acquisition of Almundo signifies its first big push in e-commerce in multiple countries.
Despegar is small by global standards. In the year through October 2019, Despegar processed about $4.6 billion in travel reservations, adjusted for the ups and downs of currency exchange. In comparison, the global giant Expedia Group handled about 20 times as many gross bookings during the same period.
Here are a few ways Despegar’s strategy stands out from the approach of global behemoths.
The conventional wisdom is that online travel agencies should focus on what they do best, which is online bookings. Yet Despegar has seen offline sales as a path to growth. Roughly 5 percent of its total sales come from old-fashioned call centers, which it opened in late 2015. Scokin expects that the share of offline sales in contributing to revenue will keep rising this year.
Scokin said some consumers remain comfortable with using the phone. He believes his company can shift customers from offline competitors. Then, once it has them via call centers, it can coax them into using online tools.
“We haven’t observed any cannibalization of online sales,” Scokin said.
In developed markets, online travel agencies focus their acquisitions on agencies that can fill gaps in either geography or product.
Yet Despegar has eyed acquisitions differently.
In April, Despegar paid about $25 million in cash to run the travel sales at Falabella, one of the largest retailers in Chile. The Falabella business has been mostly offline.
In the last three months, Despegar introduced a new customer relationship management system. The tool lets its call center agents type in a customer’s email address and see their recent activity, such as searches and purchases. It also offers agents with relevant advice on how to help the customer more efficiently.
Make More and Smaller Acquisitions
Global travel players often only consider large acquisitions, at least for other agencies. But Scokin prefers small deals. He believes those have a higher chance of success for Despegar, which has about $300 million in cash to spend. Economic turmoil has knocked down the prices of potential acquisition targets.
Despegar has a narrow focus for acquisitions, Chief Financial Officer Alberto López Gaffney said. It looks for “sizable” travel agencies with both online and offline businesses that Despegar believes it can make more efficient and profitable.
Consider how this strategy affects how Despegar evaluates potential acquisitions. The next most significant player online in Brazil is ViajaNet.
ViajaNet takes a pure-play online approach. It has raised about $19 million from investors like General Catalyst. So it may not meet Despegar’s criteria for companies with an offline presence and a discounted price.
“We look for M&A opportunities all across Latin America, and Brazil has some attractive opportunities,” López Gaffney said. “Our two key markets are Brazil and Mexico.”
Limit the Addiction to Free Google Referrals
Since early November, Expedia Group and TripAdvisor have underperformed. Their executives have blamed Google, among other reasons. They said Google is sending them fewer free referrals from search users than before.
You might assume that a small agency like Despegar would be even more reliant on gaming Google’s search engine than global giants. Yet Despegar only relies on Google for only 12 percent of its site traffic, Scokin said. Despegar is most likely less dependent on Google for free customer referrals than companies like Expedia and TripAdvisor, though those latter companies don’t break out their numbers. That freedom reduces its exposure to Google’s rising cost for advertisers.
Despegar said it has worked hard at boosting other forms of unpaid traffic, such as brand advertising that encourages consumers to download its mobile app and book directly.
Expedia, which holds a minority stake in Despegar, could, like other Western travel brands, learn from Despegar’s modest exposure to Google. In the past two years, Despegar’s overall marketing costs as a percentage of all gross bookings have dropped.
Emphasize Mobile Usage During a Trip
Every travel company says it can drive direct, repeat bookings by encouraging people to download its mobile app. Yet the efforts to encourage consumers to install an app and then repeatedly use it are more easily desired than achieved.
Many companies struggle to get consumers to use their apps after the shoppers have booked flights or hotels. Not so with Despegar, Scokin claimed.
“Out of 100 travelers, about 35 open up the app during their trip, which is a high number as an industry standard,” Scokin said.
The company doesn’t offer tours and activities yet, though it will add it in the next few quarters. “It’s a huge opportunity,” Scokin said.
Despegar has recently added services that make its app useful during trips, beyond flight and hotel bookings. It offers regionally relevant services that global players have broadly overlooked, he said.
For example, Despegar lets users buy some destination services while using the payment methods of the customer’s home country. In 2018, it added a button that allows users to call a Despegar agent for free via voice-over-internet or Wi-Fi in case they need help.
Two-thirds of Despegar’s traffic comes from mobile web or its mobile app, underscoring the mobile-first behavior of many Latin American online consumers. More than 35 percent of its bookings come through mobile web or mobile app.
To boost bookings, Despegar has run sales that are only available via its mobile app. It has also run promotions, like an “app week” of deep discounts for Brazilians, that have boosted app installs.
Innovate in Loyalty
While many loyalty programs in Western markets are narrow, Despegar’s is flexible, suiting Latin American preferences.
Scokin’s team has been rolling out a loyalty program, Pasaporte. It works with co-branded cards with local banks. It began this year in Brazil. Unlike in the loyalty model in many developed markets, Despegar lets users merge points across family members into one account. It also makes it easy for consumers to “double-dip” and earn points in an airline’s program and Pasaporte, too.
Despegar will launch Pasaporte in Argentina in the first half of 2020, with Mexico by the first half of 2021, Scokin said.
Critics Push Back
Despegar faces some modest skeptics.
Despegar charges consumers a fee for making bookings online, something the global giants don’t. It accounts for about a quarter of the company’s so-called “take rate,” or revenue derived per booking. That fee may not be sustainable as competition heats up, undermining its forecasts for revenue growth.
Wild cards include how well Despegar keeps its marketing expenditure efficient as it tests branding campaigns. Other potential headwinds are building customer service centers and automation technologies, managing the cost of installment payments, adapting to possible changes in how airlines distribute and charge commissions for airfares, discovering ways to spend more efficiently on brand marketing, and the unknown costs of debuting new products and services, such as vacation rentals, opaque rates, and a loyalty program.
Despegar also uses installment payments with 0 percent interest as a lever to raise consumer sales. It does so much more than U.S. and European online travel companies have done to date, though installment tech company Uplift bets that the U.S. will catch up. The company said its contracts with financial partners minimize its financial risk.
Despegar also needs to move faster in making package sales a majority of its business, some analysts said. Packages account for about 20 percent of its business, while Latin Americans spend between 40 and 70 percent of their leisure travel dollars on packages offline and online.
To be fair, some online travel brands in developed markets have also struggled at selling packages to mobile-first customers.
Despegar has decided not to offer a paid subscription service for added benefits the way MakeMyTrip has with its Double Black program, where users can avoid cancellation fees for bookings by paying an annual fee. Given the potential for subscriptions in travel, as smaller European player eDreams has shown, that might prove to be a mistake.
In other words, too many Despegar customers can’t afford to buy their trips outright. That fact, combined with how Despegar has significantly changed its cost model and revenue model, may make it trickier to predict how future economic turmoil might impact the company.
Payment’s Path to Painless
Scokin retorted that such critiques mischaracterize the Latin American market, and he said Despegar is better differentiated than both regional and global online players when it comes to offering the most breadth in ways for consumers to pay.
“The breadth of our payments beats everyone else’s,” Scokin said. “We have about 90 banking partners, and also more convenient ways to pay. OXXO is a convenience store with 17,000 outlets in Mexico, and last July, we added the ability for its customers who lack bank accounts, or have limits on their banking accounts, to pay in cash at a store for their online Despegar travel purchases.”
“Whether it’s letting customers pay for travel with more than one credit card or debit card, with bank transfer or deposit, with cash payment at a store, and via a consumer loan, we have the most options, which makes us stand out and helps sustain word-of-mouth marketing for our brand,” Scokin said.
“In the past three years we’ve embraced a tremendous breadth of new initiatives, from adding call centers to doing M&A to building a loyalty program, to bringing in new talent at all levels, to adding payment methods, to building a new engineering center, etc.,” Scokin said.
“Everyone is really tired,” Scokin said. “But I’m proud of what we’ve accomplished because it’s given us momentum ahead of everyone else in a dynamic market.”
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