Ctrip Makes Offline Store Push in China as Its Profit Margins Rise

Ctrip has debuted brick-and-mortar travel agencies in China in its latest push to gain a foothold in elusive second-tier cities.

Ctrip created two types of franchised store: Ctrip-branded stores aim at the mid-to-high end of the market, which primarily means the country’s largest cities. Qunar-branded stores aim at second-tier cities.

Since the start of the year, Ctrip and Qunar have opened more than 400 retail stores in city centers, with about 200 more in the pipeline.

Separately, last autumn Ctrip acquired a controlling interest in offline travel agency Traveling Bestone. That brought nearly 5,500 stores, also with the franchise model, into its portfolio.

Speaking Thursday morning Beijing time during the company’s second quarter earnings call, Ctrip chief executive Jane Jie Sun said, “We plan to have 6,500 stores in operation by the end of this year.”

Shop owners bear the labor and rent costs and pay Ctrip a franchise fee. Sun said Ctrip provides the technology, branding, and product, while the shop owners apply their knowledge of a local market to reach new customers with the right products.

After only a few months, these stores are averaging revenue of about $300,000 a month, Sun said. It’s “possible” the stores will be at a break-even stage for the parent company within a year, she added.

This year the company has run marketing campaigns in second-tier cities. This, combined with the opening of stores, has led to gains in customer acquisition and user engagement. Executive chairman James Jianzhang Liang said, “In the second quarter, user traffic in the second-tier cities increased 50 percent year-over-year.”

Ctrip isn’t alone in seeing that offline shops can be a route to amplifying an online travel group’s goals. TUI Group’s chief marketing officer noted when he was speaking at Skift Forum Europe that bricks-and-mortar retail still matters to tour brands.

Profit Expectations

Offline moves won’t be enough to help in the short-term to enable the parent company to attain Priceline-level operating margins — a key expectation of investors over the next year.

Ctrip still lags behind its U.S. counterparts in terms of its operating profit margin. But Skift Research expects, in the long-term, “meaningful margin expansion for Ctrip through a combination of operating leverage (expenses growing more slowly than revenue) and synergies from the Qunar and Skyscanner acquisitions.”

Ctrip is already making progress, having boosted its operating margin from the single digits in 2015. It reported a 15 percent operating margin for the first quarter of the year. On Thursday, it reported an operating margin of 18 percent for the second quarter of 2017.

But there is still room to grow. Those figures are still only about half of the operating margin of approximately the mid-30s for the Priceline Group, the U.S. and European-based travel giant.

Sun said she is confident the company will “bring the operating margin to the 20 percent to 30 percent level in the next one to two years.”

Revenue growth remains relatively strong. In the second quarter, Ctrip reported net revenue of $945 million, representing a 45 percent rise from the same period a year earlier. The company attributed the gains to growth in particular to “organic businesses” and air ticketing.

Ctrip executives did not mention possible acquisitions during the call. But, in May they told the Wall Street Journal that they are “actively looking” for opportunities in China and abroad. The travel giant is sitting on an approximately $5 billion cash pile.

In sum, Ctrip dominates online travel in China and is pushing more into the lucrative offline and outbound markets. For context, earlier this month, Skift published its in-person Q&A at the Beijing headquarters with CEO Jane Jie Sun about these trends.

For more insight on the company, Skift Research released provided a new research report this summer: A Deep Dive Into Ctrip and the China Online Travel Market 2017.