When Expedia announced the acquisition of HomeAway in 2015, then-CFO Mark Okerstrom called it "a huge opportunity on a go-forward basis." Today, it still is, but now-CEO Okerstrom said the short-term rental business must strive to gain "harder yards." The ground game is tougher than anyone realized.
All acknowledge that alternative accommodations is a hot category, but Expedia Group’s short-term rental business, rebranded from HomeAway to Vrbo, is cooling Expedia’s financial performance.
In an earnings call about its first-quarter results Thursday, Expedia Group CEO Mark Okerstrom said its short-term rental business of vacation homes and apartments is facing search engine optimization headwinds as it consolidates some of its brands, and because of business model changes made over the last few years.
Vrbo’s gross bookings growth of 5 percent in the first quarter pales in comparison to its 46 percent gross bookings increase in the first quarter of 2018.
Expedia Group Chief Financial Officer Alan Pickerill said “the platform consolidation and brand streamlining related to making Vrbo our primary global alternative accommodation brand contributed to continued SEO headwinds. That, along with tough comps in performance marketing channels, were the primary drivers of the deceleration from Q4 [when HomeAway’s gross bookings increased 15 percent]. We expect the slower gross bookings growth trends to persist in the near term as we work through these changes and lap the elevated performance marketing comps.”
Pickerill added that the company “expects Vrbo’s gross booking trends to improve later this year.”
Expedia Group acquired HomeAway for $3.9 billion in 2015, but the parent company announced it is changing the name of its alternative accommodations division to Vrbo, which it pronounces “ver-boh.”
Expedia said it intends to launch Vrbo-branded sites in several new markets where it doesn’t have a presence and will rebrand country-specific sites to Vrbo in phases over the next year “and beyond.” When Expedia bought HomeAway, it operated 55 local websites, VRBO, and a handful of regional brands.
For now, the HomeAway brand and its regional short-term rental brands, including Stayz.com.au in Australia and Abritel.fr in France, for example, will remain, and travelers can still book on these sites for the time being.
HomeAway, which was founded in 2005, bought VRBO in 2006. Expedia said consumers more readily remember the name Vrbo than HomeAway, and that Vrbo is easier to pronounce than the acronym VRBO. Expedia has operated both HomeAway and VRBO in the United States, and VRBO greatly out-performed HomeAway domestically, officials said.
Expedia had high hopes for HomeAway when it bought the company in 2015 with the idea to compete against Airbnb and Booking.com in alternative lodging. Along the way, as Expedia re-platormed its short-term rental business, it made a series of business model changes, such as adding a traveler fee and downplaying subscriptions in favor of payments per booking. HomeAway missed some performance targets and has proved very heavy lifting for the parent company.
The following chart shows the contributions of HomeAway, which is now called Vrbo, to Expedia Group’s gross bookings (7 percent), revenue (5.5 percent), and adjusted earnings (7 percent) from 2016 to 2018.
Vrbo’s disappointing performance in the first quarter led one analyst to ask whether the problems were because the short-term rental category has slowed in general, or if the issue was specifically Expedia’s.
Vrbo’s deceleration, Okerstrom said, is “largely company-specific factors. If you take a look at the place where we’re actually focusing our effort, which is the Vrbo brand in the U.S., this was up nicely double digits and growing healthily. And really, what’s causing the deceleration is a combination of the brand streamlining we’ve been doing, the re-platforming we’ve been doing, as well as just more difficult comps.”
Google Plays an Adverse Role
Okerstrom added that HomeAway and VRBO had traditionally been reliant on search engine marketing, and he laid some of the problems at Google’s door.
“Google is absolutely taking free and moving it to paid and moving from paid to more qualified like they’re doing in its Hotel Ads products,” Okerstrom said. “What we’ve done with Vrbo, though, of course, has been on top of that. And Vrbo and essentially HomeAway and all of the brands that they’ve had internationally have traditionally been actually quite dependent on SEO. And as we have consolidated platforms, it has changed essentially the linking structure of those brands and, ultimately, resulted in bigger headwinds for them.”
Marriott Homesharing Entry Is a Positive Thing
Commenting on the announcement that Marriott is entering the homesharing sector, Okerstrom noted that the French hotel company Accor has been dabbling in the short-term rental market, as well.
“I think it’s super interesting,” Okerstrom said, referring to hotel chains entering the alternative accommodations arena. “I think that the alternative accommodations space is one that is ripe for some degree of professionalization. If you look at the big hotel operating companies and chains, boy, they are really good at this stuff and really providing a great guest experience. So I think it generally, it could be a really good thing for the industry to add this type of professionalization to the space.”
Asked to comment on Expedia’s new distribution and marketing contract with Marriott, Okerstrom pushed back against the notion that Expedia is granting commission concessions to big chains.
He said Expedia has made it clear that it’s no longer “resetting our compensation rates” with the big chains.
“And so the dialogue has shifted away from us versus you and how do we redivide this pie towards how do we actually expand the pie.” Okerstrom said. “How do we actually create new sources of value and both participate in that in a way that is accretive to both of us.”
Expedia Group’s revenue rose 4 percent in the first quarter to $2.6 billion. Pickerill said “trends at Trivago and the Easter shift negatively impacted revenue in the quarter.” For the first quarter, Expedia narrowed its net loss to $103 million. A year earlier that loss was larger, $137 million.
Room Night Growth Slowed
Expedia’s room night growth in the first three months of the year grew 9 percent, a deceleration from 15 percent a year earlier.
Expedia-controlled Trivago and metasearch generally have “been a reasonably meaningful headwind for us on room-night growth as we’ve pulled back [in marketing spend] and as they’ve kind of reset the business,” Pickerill said. “If that goes according to plan and they start to normalize in the back half of the year, get back to growth and just by virtue of the comps that we have there, that should start to ease, and we should see some benefit from that in the back half of the year.”
Photo credit: Expedia Group's short-term rental business struggled in the first quarter of 2019. Olivia Carville / Bloomberg