Postcards from London

Greetings from London! We have just spent two weeks vacationing in London. It seems like everyone had the same idea and chose the UK for their summer holidays. According to stats from VisitBritain, in the first four months of 2017, visitor arrivals are up 11% while spending is up 14%. In addition, in this post, we share some of our new economy impressions on car services, shared accommodation and cord cutting.


Greetings from Sunny London!

For some strange reason, I’ve always been very fortunate with getting great weather whenever I visit London. During this recent trip, it only rained for one out of the 14 days that we were there. And as you can see from the various photos, we are talking about clear blue skies and the need for 50+ SPF sunscreen.

Although I have been to London many times on business before, this was our first family vacation there in like 20 years ago.

In keeping with our Postcard series (e.g. Tokyo and Causeway Bay), here are some takeaways from this trip.

  • (1) Cheaper currency really drawing in the tourists – Tourist arrivals up 11%, spending up 14%
  • (2) New economy experiences – Impressions on Uber, AirBnB and cord cutting

Cheaper currency => Tourist arrivals up 11%, spending up 14%

Chatting with family and friends, it seems like everyone is heading to London this summer. Although we didn’t ask why they were vacationing in London this year, I suspect the cheaper Sterling probably had something to do with the decision.

In order to find some data to back up this gut feel, this was what I found from the VisitBritain website. In the first four months of 2017, the number of visits is up 11% YTD and the total amount of Spending is up 14% YTD to £6.2bn. On a rolling twelve month basis (from May 2016 to Apr 2017), the number of arrivals and the total spend are up 6% and 5%. Both are at the highest levels on record.

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As to be expected, the increase in arrivals was mostly driven by higher tourist arrivals. Those travelling to Britain for holidays were up 26% in 4M 2017  while those visiting friends and relatives were also up 7%. Conversely, given the uncertainty caused by Brexit, the number of business travellers decreased by 4% in 4M 2017.

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Among the various regions, the cheaper currency appears to draw those from the furthest away. Travellers from EU countries only grew 7% in 4M17, North American visitors rose by 16% while those from the Rest of the World was up a whopping 24%.

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Since the visitor data is only released 7 weeks after the end of each month, it would be interesting to see if our impression of strong tourist arrivals is born out for the summer holiday months (June-August).

Implication – UK retailers may surprise on the upside.

New economy experiences – Impressions on Uber, AirBnB and cord cutting

One of the other key notables from this trip is our first time trying AirBnB. Although we had known about AirBnB for some time, in the past, we had always shied away from it for family vacations. I always had this recurrent worry that we would show up with kids in tow only to find accommodation cancelled at the last minute.

Well this time, we gave it a try. To a large extent, this decision was driven by costs. London hotels prices are outrageous. With AirBnB, we were able to cut our hotel bill by 50%.

Are we sold on AirBnB? I’m not sure. While the savings are substantial, every member of our family was very happy when we transited back to the hotel at the end of the first week. We are not talking about a fancy hotel like a Four Seasons but just a solid 4-star hotel. So what did we like and what did we not like about the AirBnB experience?

  • Pros – Savings. Get to see and experience a nice residential neighbourhood. Full working kitchen. Access to washing machine.
  • Cons – You have to really scrutinize the specs. Our assumption that the place will have a TV and A/C was wrong. Cleanliness – it was tidy and neat but it just did not feel as clean as a hotel. We all wished for disposable slippers. The neighbours – As the flat is being used by all sorts of people, we could feel some grumbles directed from our neighbours partly due to the previous occupiers’ behaviour.

Incidentally, during our stay, I read an article that AirBnB is readying a Premium Tier to try to attract higher paying travellers who prefer the amenities guaranteed by fancy hotels (Bloomberg article here). This point definitely resonated with us but I can’t help but wonder what is the right price point for this service. If the savings for this Premium Tier is just 25%, would it be enough to draw higher paying travellers from hotels? I’m not sure.

Ubers, car services and taxis

Relative to AirBnB, I am more sold on Uber. For one, the commitment level is much lower. If one were unfortunate enough to get a bad driver or a bad car, you just have to suffer through the car ride. Rather than being on the hook for thousands of dollars, we’re only talking about tens of dollars.

During our stay, in addition to Ubers, we also rode on taxis and/or booked a car service when possible. From a cost perspective, I was surprised that the cheapest option was actually the car service. Taxi’s were the most expensive option, especially since we usually ran into traffic and what was supposed to be a 15-20 minute ride often took twice the amount of time. Comparing the three, if it costs £20 for the cab ride, the car service would cost £11 while the Uber would be slightly more expensive at about £12. Using another example of a trip to Heathrow, the car service costs £48 whereas a taxi would have cost around £70.

In terms of ease of use, the car service’s app is very similar to that of Uber. You can also track your driver and settle all payments through the app. The only draw back is that it needs a longer lead time (around  20-45 mins) if you want your car. Whereas for Uber, you can usually find a car that is just minutes away.

Implication – If Uber and AirBnB were both to list, I think I would be more positive on Uber than AirBnB.

Cord cutting and unbundling

The last takeaway from our London vacation is “cord-cutting”. Since our AirBnB flat did not come with a television, so for one week, we did away with traditional television. Instead, since the flat had wifi, our family turned to their respective iPhones and iPads for entertainment during those early morning jet-lag hours.

The conclusion is that one really does not need the traditional cable subscription. YouTube and the other streaming service offer more than enough entertainment. Even if one were to be seriously addicted to sports or some premium TV shows, it may be more cost-effective to get a subscription to Netflix or get an NBA/NFL league pass. Rather than spending HK$580/month on a Sports/Entertainment bundle where one only watches 2-3 channels, it makes much more sense to unbundle and pay for what you want.

Implication – Cut cable TV subscription.

To finish this Postcard, I like this quote from our visit to the Harry Potter Warner Brothers Studio Tour – “No story lives unless someone wants to listen.”



Mass Consumption Part 2 – The best travel deals around

There are Chinese tourists everywhere. Whether you are in Sydney, Hong Kong, London or LA, I think that statement holds some relevance. Well, the fact is that in 2016, Chinese outbound tourists numbered 135mn and with only 4% of its population holding a passport, that number is likely to rise further. In this second part of our mass consumption series, we look into the economics of the online travel agency business and see where the best travels deals are.

China is big. It’s 1.3bn population makes any kind of consumption trend a potential huge opportunity. However, as we illustrated last week in Part 1 of our Mass Consumption series, the winners might not be the obvious candidates.

In this second instalment, we look into the economics of the travel business, specifically, the online travel business. I’m not sure whether travel falls into the (i) education and recreation services or (ii) transport and communications but these are the second and third fastest growing spending categories for the typical Chinese consumer.

Average spending by Chinese population

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(Source: National Bureau of Statistics)

While China does have a rapidly ageing population, those between the age of 14-64 had been one of the fastest growing segment that currently number nearly 1bn persons or 73% of the overall population.

Chinese population between 14-64

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(Source: World Bank)

4% of Chinese hold a passport vs. 37% of Americans

According to the United Nations World Tourism Organization, Chinese tourists spent US$261bn overseas in 2016, up 12% y/y, while the number of outbound tourists rose 6% y/y to 135mn. Although those numbers are big, they could get even bigger since the percentage of Chinese that hold a passport is only 4%, compared to 37% for Americans (source: China Daily).

The spending by Chinese tourists on things like cosmetics and luxury goods have been well documented but what about the very act of travel itself?


Say what you will about commercial jingles but I think they are effective. To this date, when I think about online travel portals, I usually think of trivago or Expedia.

Travel agencies were among the first industries to be disrupted by the internet. Nowadays, for anyone planning a holiday getaway, their first port of call must be to comparison shop with an online travel agency (OTA). While most of these sites come with some sort of price match guarantee, exactly how good are their deals? And how do they make money?

Travel – a US$1.3trn market with 50% online presence

As I read up on the OTA industry, I came across a couple of interesting findings.

First, let’s check out the current OTA landscape. According to a presentation from Expedia, the total travel market is estimated at US$1.3trn in 2017. Of this EMEA (Europe, Middle East and Africa) is the largest market at US$456bn, followed by Asia Pacific at US$392bn and the US and Canada at US$383bn.

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(Source: Expedia presentation)

But if one were to consider the online penetration, the US is the most advanced at 67%, followed by Europe at 50%. Asia Pacific and Latin America are at 37% and 34% respectively. For the overall market, online penetration is at 50%.

Multiple brands, different niches

The second detail that I found interesting was how the brands are affiliated. I don’t know whether it was because of historical mergers and acquisitions but many of the big travel websites are owned by the same parent.

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(Source: Company data)

In the case of some of the Priceline websites, the company actually does a good job of explaining how each company fits into the different geographic niches. For instance, Priceline is a leading site in the US, whereas agoda caters primarily to consumers in Asia Pacific.

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(Source: Company data)

From a market cap perspective, Priceline is the largest one by far. But despite having a market cap that is 3x that of Ctrip, its price-to-earnings ratio is the lowest at 42x (still quite punchy by non-internet standards. Note: No PE for Ctrip as it made a loss in 2016).

How much commission do they charge?

In terms of amount of business, Expedia is currently the leader with about US$72.4bn of gross booking done in 2016. Over the past three years, Expedia and Priceline have actually been very close while Ctrip has begun to catch up with 2016 GMV at around US$63.2bn. For Ctrip, it targets total GMV to surpass US$150bn by 2020 or even a year or two earlier. If this is met by 2020, this would suggest a CAGR of 24%. If this is met by 2018, then the CAGR would rise to 54%.

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(Source: Company data)

Perhaps due to their different business and geographic mix, the three companies’ commission rate (i.e. gross revenue divided by  gross booking) vary quite a bit. At first glance, Priceline appear to have the highest take at around 15.1% of gross bookings. Expedia is around 12% but Ctrip is very low at only around 4.6%. Since some of the overall gross booking numbers are not broken down by segments, this could be a case of a higher transport-to-hotel mix for Ctrip dragging on the overall gross commissions rate.

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(Source: Company data)

I won’t go into the full details but the companies do report on their revenues slightly differently depending on whether they run a merchant or agency model. In the case of Priceline, there is little difference between its gross profit and its gross revenue whereas for Expedia and Ctrip, their gross profit margin range from 67-82%.

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(Source: Company data)

Advertising and marketing eat up 30-50% of overall revenues

As the OTA are a service based business, there is hardly any significant costs of goods sold. Instead, the key costs are those related to advertising, sales and marketing which help to differentiate these very similar product offerings.

Of the three, Expedia spends the most on advertising and marketing at around 50% of overall revenues. Priceline is also high at around 40% of overall revenues. Perhaps due to less competition within China’s on-line travel market, Ctrip only spends about 30% of revenues on marketing and advertising (Note: Ctrip also spends about 30-40% of revenues on Product Development).

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(Source: Company data)

With advertising eating up nearly 30-50% of revenues, it is little wonder that those travel deals keep popping up on the banner ads on various websites.

Net margins explain reason behind Priceline’s high valuation

Net of all the other personnel, depreciation and miscellaneous expenses, Priceline’s operating margins stands heads and shoulders above the other two. For 2016, Priceline had written off US$941mn in goodwill. Excluding this amount, Priceline’ operating margin would have been around 37%.

Screen Shot 2017-05-31 at 3.59.40 pm(Source: Company data)

A bird in hand or two in the bush

So, where are we going on this? I think the bottom line is what is the better deal?

If one were to simply consider the profitability issue, there is no comparison between Priceline and the other two operators. It’s operating margin of 37% is just that much higher. And if we assume that top line revenue growth can be translated into profits, Priceline should be in the best position. That said, we are also confronted with the reality that over the past three years’, Priceline’s fully diluted EPS had been fairly stable, fluctuating between $45.67 to $49.45 to $42.65. The other two operators also do not seem to have fared much better. Clearly, somewhere along the line, the very strong top-line growth in bookings and revenues have not translated to bottom line earnings.

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(Source: Company data)

On the other hand, if we were to take a more forward-looking perspective, one could argue that Ctrip may have greater potential. The Asia Pacific market is already the second largest travel market after EMEA, yet it has the third lowest online penetration at 37%. Furthermore, with Ctrip’s commission rate of only 4.6% versus Priceline and Expedia’s 15% and 12%, there is the potential for this to converge with the other two operators.

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Now for the end user. If you are still  planning your summer or Christmas holidays, you better try to lock in the lower rates before Ctrip starts raising its commission levels from the current 4.6% and you wind up paying more.