Priceline doing well but feeling pressure from Expedia, margins and hotel mix

Priceline recorded a solid third quarter with gross bookings rising more than 25% and room nights climbing 36%, but many of the story lines of the past few years, including competition with Expedia, are entering a new chapter.

In the last couple of years, the tales were always about Priceline clobbering Expedia in the fight to be the top dog in the online travel agency and global hotel market.

Priceline indeed is still the king, with 245,000 hotels now in the fold, but CEO Jeffery Boyd conceded, without putting it in these words, that Expedia is no longer an also-ran.

Expedia making strides

Expedia, which saw its room nights and gross bookings jump 27% and 19%, respectively, in the third quarter, is “executing well,” as is Priceline, Boyd said, adding that it would be disingenous to say that Priceline hadn’t felt the impact.

Expedia spent the last couple of years investing in and rolling out a global hotel platform, and that initiative finally — and still tentatively — appears to be paying off.

In an apparently veiled reference to Expedia, Boyd said other online travel companies have been investing more in their businesses than Priceline has done in the past. “Some throw everything back into the business,” Boyd said, noting there are lots of possible strategies on investment.

Pinched margins

Priceline is also feeling pressure on margins, and officials said they would continue to invest in important areas such as mobile and people, even if these investments have a negative short-term impact on operating margins.

Part of Priceline’s marketing is shifting from free to paid channels and that also is tightening margins, Priceline officials said, adding that decreasing average daily rates and rising hotel cancellations from the company’s pay-at-the-hotel agency model are also impinging margins.

As Priceline has warned repeatedly over the last couple of years, its business is growing, but the pace is decelerating due to the size of the business.

Different mix of ‘hotels’

Another change is that the many of the hotels that sister brands Booking.com and Agoda are adding to their portfolios in Europe and Asia-Pacific are apartment hotels, hostels and guesthouses with fewer rooms than traditional hotels.

“There are potentially diminishing returns as you add hotels,” Boyd pointed out, although equally as important as room counts is “driving greater penetration” of existing hotels, and spurring consumer demand.

Another twist in the business is Priceline’s new hotel partnership with China online travel agency Ctrip, and Boyd said the companies are working hard to “optimize the offering.”

He said that partnership should have a “long runway” because of the anticipated surge in demand triggered by an increasing number of Chinese citizens desiring to travel overseas.

Priceline has a long runway, too, but its competitive dynamics are in a period of transformation.