Ctrip’s Lowered Pace of Revenue Growth Reflects a New Normal

Ctrip, China’s largest online travel agency, faces multiple factors pressuring its pace of revenue growth and profit.

In the three months to June 30, revenue rose 13 percent year-on-year to $1.1 billion, or 7.3 billion renminbi. That growth rate was roughly a third of the 45 percent growth rate the company reported a year earlier.

The group’s net income from operations in the second quarter was 9 percent of net revenue, down slightly from 10 percent in the year-earlier period. But the company is almost unprofitable after stock-based compensation is taken into account.

The company prefers to exclude share-based compensation charges and uses its own method of measuring operating margin, which it said was 18 percent in the second quarter of 2017— up significantly from 4 percent for the same quarter in 2016. The company said that its measure showed improvements in operating efficiency and synergies across the company’s business units.

Dampers on Growth

Two factors hurting Ctrip’s revenue growth took the company by surprise.

Last fall, videos circulated online that seemed to show teachers at a Shanghai pre-school for children of Ctrip employees being physically abused. That appeared to tarnish the brand’s reputation, even though it was an external company providing the pre-school service.

Last winter, new government rules blocked companies like Ctrip from the practice of automatically adding ancillary products, like trip insurance, to customer’s online shopping baskets when buying flights or hotels. Executives said Wednesday that “domestic ticketing process adjustment” pinched the company’s operating profit.

The most significant long-term factor hurting growth, however, is competition. The biggest challenger is Meituan, a restaurant review and delivery giant that has increasingly expanded into travel sales. Meituan, which this week filed to list as a public company, has used investor cash to try to gain market share. Its disregard for profitability appears to be causing Ctrip to have to engage in selective discounting, particularly to expand in the budget end of the hotel market where it’s weakest.

Analyst Ken Sena at Wells Fargo recently predicted that the elevated levels of competition between Ctrip and Meituan would continue for some time. There’s been a 41 percent increase in hotel property overlap, year-over-year, through spring 2018, between the two online booking sites, according to research Sena requested from analytics firms Yipit and Questmobile. In other words, the companies are increasingly trying to sign up the same hotels, which creates conditions for a price war.

One bright spot is that the prospect of a trade war with the U.S. and coinciding uncertainty in China’s domestic economy has not significantly impacted outbound Chinese tourism booked through Ctrip, according to the company.

Unfavorable currency exchange rates may have modestly affected the choice of countries that Chinese travelers visited.

Uphill Climbs

Ctrip may have already collected a lot of the low-hanging fruit of relatively price-insensitive, high-income, internet-savvy, frequent travelers who are core to its customer base.

As the company moves to attract customers who have average incomes and less familiarity with booking online, it faces increased expenses.

The company has boosted its sales and marketing expenses to 31 percent as a share of revenue in second-quarter 2018. That’s up notably from 22 percent as a share of revenue in the second quarter of 2013, as part of a sequentially higher trend over time.

Some of the company’s promotional efforts included the recent creation of a loyalty program for its users for access to discounts at “tens of thousands” of domestic Chinese hotels.

To stand out from competitors and improve its brand reputation with consumers, Ctrip upgraded its service guarantee for several products. This year it began to promise a full refund for visa and related air ticket fees in case customers’ visa applications are denied for international travel. It also began to pledge free cancellation of hotel bookings due to flight delays and cancellation, even when it’s not contractually Ctrip’s responsibility.

Hotel Oversupply

China has a hotel oversupply problem, particularly among properties in the mid-tier and budget segments. It has about a dozen times the number of hotels overall relative to the U.S. while having only four times population, according to Wells Fargo estimates.

That oversupply leads to lower average occupancy levels. Lower occupancy means it could be less lucrative, typically, for Ctrip to onboard a mid-tier hotel in a second-tier market than it had been to add international and luxury hotels in the country’s largest cities during the company’s early years.

Ctrip also faces the difficulty of marketing more often to segments of the population not familiar with online booking. Chinese consumers still book three out of four hotel reservations offline, the company said.

In response, Ctrip and its sister brand Qunar have opened hundreds of bricks-and-mortar stores, mostly in smaller cities, in the past two years. The stores aim to build brand awareness and eventually convert customers into online shoppers.

Skyscanner Growth

On a call Wednesday, executives told investors that the company had chosen to trade off short-term profit to invest in diversifying its business in ways they believe sets the group up for long-term growth.

Ctrip’s 2016 acquisition of travel price-comparison service Skyscanner continued to pay off. Skyscanner’s total revenue had year-over-year growth of approximately 30 percent in the second quarter, driven largely by robust traffic growth.

The biggest gain has been that Skyscanner added instant, or facilitated bookings, for Ctrip. That enabled customers to book travel with the agency’s sister brand Trip.com while remaining within the familiar Western user interface of Skyscanner’s website or mobile app. The streamlined experience has increased the number of bookings Skyscanner feeds Trip.com.

About 4 percent of Skyscanner users now book via Ctrip’s internationally-facing Trip.com brand, launched in November 2017, directly through the Skyscanner site and app.

CEO Jane Sun said the company aims, over several years, to go from 4 to 20 percent or more of Skyscanner users choosing Trip.com airfares in the search results. The implication would be that Trip.com’s product would become more competitive over time and its brand better recognized, not that Skyscanner would bias how it presented its search results to users.

Sun also noted that Trip.com offers other products besides flights, such as airport transfers, rental cars, and tours. She hinted Trip.com could upsell these profitable products to ticket-buying customers. That’s important because Trip.com only averages a 1 to 2 percent commission on flights.

To support Trip.com, the company this year opened a customer service center in Edinburgh, Scotland, close to the Skyscanner offices. That and similar investments modestly pinched the group’s profit margins, said Cindy Xiaofan Wang, chief financial officer.