Stock pick: An investor's must-know guide to The Priceline Group (Part 3 of 7)
Priceline has witnessed strong growth in its international business, especially in hotel booking services, driven by Asia Pacific, South America, and Europe. According to the company, high growth of travel overall in these markets and rapid online and mobile adoption remain tailwinds for the business. For 2013, the company generated 85% of its gross bookings from international operations, especially Booking.com. Fourth-quarter bookings were up 38.8% year-over-year but down 15% sequentially.
International operations contributed full-year gross profit of $5.02 billion, a 41% increase versus the prior year, and achieved significant year-over-year growth in gross bookings, which were up 42.5%. “Gross bookings” refers to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by Priceline’s customers. Bookings increased due to growth in accommodation room night reservations and in rental car day reservations. The company believes, given the size of its hotel reservation business, its year-over-year growth rates will continue to decelerate, though the rate of deceleration may fluctuate.
Priceline international growth has been further boosted by the acquisitions of Netherlands-based accommodation reservation service Booking.com in 2005, Asia-based accommodation reservation service Agoda.com in 2007, and UK-based rental car reservation service TravelJigsaw (now known as Rentalcars.com) in 2010. As of February 18, 2014, Booking.com worked with over 425,000 properties in over 190 countries and territories, compared to about 275,000 properties in 2012.
Booking.com operates under an agency model, and Agoda.com operates primarily under a merchant model. Booking.com, which was acquired for $135 million, has added properties in its core European market as well as higher-growth markets such as North America (which is a newer market for Booking.com), Asia-Pacific, and South America. An increasing amount of Priceline’s business from a destination and point-of-sale perspective is conducted in these newer markets, which are growing faster than its overall growth rate and its core European market. The company said Priceline.com agency hotel reservations benefited from the integration of the growing number of properties on the Booking.com extranet.
Booking.com recently launched its first European brand campaign called Booking.yeah, starting with the UK, “Due to increased buoyancy in the UK market.” The site said it’s experiencing increasing demand from domestic and international consumers looking for accommodation in the UK. The Booking.yeah campaign saw a successful launch in the U.S. market early last year and was then rolled out to the Australian market.
According to a new PhoCusWright European and Global Edition report, Priceline’s Booking.com and Expedia (EXPE) increased their share of Europe’s fragmented online travel agency (or OTA) market to 64% in 2012, up from 60% in the previous year. Booking.com commands over 30% of the region’s OTA market. The report estimated that after surging 16% in 2012, OTA gross bookings are projected to sustain double-digit growth through 2015, “driven by fierce competition among global heavyweights.” An article on Hospitality.net said Europe’s online travel market is expected to expand at a quicker pace than the entire travel market, and will average 8% growth annually through 2015. A Morgan Stanley analyst said last year, “The fragmentation of Booking.com’s supplier base has served as an important competitive advantage,” and added that Booking.com expanded its share in Europe despite the launch of Expedia’s Expedia Traveler Preference.
Expedia (EXPE) too cited PhoCusWright in its annual filing and said that in 2013, approximately 61% of U.S. leisure, unmanaged, and corporate travel expenditures happened online, compared with approximately 50% of European travel. The company said online penetration in the emerging markets, such as Asia Pacific and Latin American regions, is lagging behind that of Europe, estimated to be approximately 27% and 21%, respectively. These penetration rates have increased over the past few years and are expected to continue growing. This significant growth has attracted many competitors to online travel, especially in the form of travel acquisitions made by search engine companies such as Google (GOOG) and Microsoft (MSFT). Expedia said in 2013 that approximately 44% of its worldwide gross bookings and 47% of worldwide revenue were international points of sale, up from 22% for both worldwide gross bookings and revenue in 2005.
Priceline peer Orbitz Worldwide (OWW) too generated 27% of its net revenue from international operations in 2013. It said its overall growth was affected by declining air sales as a result of aggressive price competition in the market, reflecting the ongoing challenging macroeconomic conditions in Europe. Orbitz said in its filing that in Europe, OTCs or online travel companies represent just 38% of the online market, but OTCs are growing faster than online supplier direct bookings. While OTCs account for only a third of the Asia Pacific online travel market, OTC gross bookings surpassed $30 billion in 2013, Orbitz noted.
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