Goldman-Backed Hopper Muscles Into Airbnb’s Rental Territory

(Bloomberg) -- Frederic Lalonde, chief executive officer of travel tech unicorn Hopper Inc., doesn’t want to be the next Airbnb Inc.—a company whose name he purposely avoids uttering in conversation.

“Pinduoduo,” he answers without hesitation when asked which company he’d rather emulate, citing the China-based mobile marketplace that was founded in 2015 and has since swallowed up vast tracts of Asia’s e-commerce economy.

But Hopper, a $3.5 billion company with 70 million users—which started in 2014 as an app that used machine learning to predict rises and falls in airfare prices and has grown exponentially to include car rentals, hotel bookings, and a variety of fintech products to protect customers’ investments in travel—knows it can conquer the travel e-commerce world only if it tackles the behemoth of short-term rentals. Its most recent round of funding, in August 2021, raised $175 million from investors that included Glade Brook Capital, WestCap, and Goldman Sachs Growth and Accomplice; in March 2021, it also raised $170 million in a round led by Capital One. 

On Thursday, it is launching Homes, a new service within the app that allows users to reserve any of 2 million professionally managed apartments and houses. (Think Sonder’s hotel-like apartment rentals or vacation homes maintained by known companies such as Vacasa.) The inventory covers 200 countries and more than 90,000 cities, with a slight emphasis on U.S. urban hubs. Homes will allow Hopper to compete for a slice of the short-term rental pie that’s principally controlled by Airbnb. It's a big pie: According to figures from AirDNA, a market research company dedicated to the short-term rental industry, the sector pulled in an estimated $113 billion in annual revenues around the world in 2021, up 5.3% since 2019.

“When you ask our customers, ‘What is the one thing that we should add?’ It’s always ‘homes’ that comes out first,” Lalonde says of Hopper’s motivations for getting into the space. “When you look at our competitors—the Booking.com’s of the world—they tend to have a much older audience; only about 15% of them tend to book homes instead of hotels. But our audience is much younger and they’re twice as likely to be interested in a rental,” Lalonde explains over Zoom, adding that Hopper has been tracking demand for vacation rentals on its platform since at least 2016.

Hopper’s home rentals platform is likely to attract users far beyond Generation Z and millennials. Given that this is a company that has successfully chipped away at Expedia’s long-held territory with flight- and hotel-booking products, it stands a chance at stealing market share from Airbnb.

“I honestly have never been a part of a product launch where I felt so incredibly confident that, within a short amount of time, we’re going to have a billion-dollar-plus business on our hands,” says Susan Ho, head of Hopper Homes.

Test-Driving Hopper Homes

While Ho and Lalonde are bullish, they are quick to point out that they’ve rushed Homes out as a simple, viable product that will be enhanced over time. Ho joined the team in May 2021, and Homes has since been entirely developed in eight months.

That much is clear in the beta version, released to a crop of iPhone-only Hopper loyalists for early feedback and also made available to Bloomberg for testing. (An Android update for Hopper, including the Homes vertical, will be pushed out soon, say representatives.) A search for vacation rentals in New York City for two random weeks in March turned up only a pair of listings south of 23rd Street—and none in Brooklyn’s prime neighborhoods, at least when zooming into various areas via map view. While below the map, the app indicated “765 homes available,” it was onerous to scroll down through list, which did not indication the location for each offering. A search in San Francisco was similarly empty; the nearest listing to Bloomberg’s Embarcadero office was a half-hour drive away, down the peninsula in the town of Pacifica.

More leisure-driven destinations such as Nantucket, Mass., fared no better. A few random summer dates turned up just a single listing on the island, though other results surfaced around Cape Cod. When looking for a villa in Tuscany for May, I found apartments in Florence instead—though eventually, I stumbled on some surprisingly affordable agriturismos and working farms, albeit with very limited descriptions about what to expect when staying there.

It’s not just inventory that’s a problem; presentation is also lackluster in the current state. Whereas Airbnb has ample, often professional photography to make each listing look as compelling as possible, Hopper’s limited photography and unit descriptions fail to conjure vacation idylls. With fewer amenities listed and not as many ways to filter results, it’s easy to get lost in a sea of mediocre apartments. 

Some of these problems will be fixed very quickly, Hopper says. Managed listings from apartment hotel companies with many apartments in a single building, such as those from Sonder Holdings Inc., are beautifully designed and in prime locations—but still show up under Hopper’s Hotels search rather than in Homes, where they will soon migrate. Ho says that offering choice at a budget-conscious level was most important to the Hopper user, so less-luxurious listings were the first priority; more upscale listings, she adds, will soon follow.

These issues aside, there are two noticeable upsides to what Hopper has created so far—and both speak to common Airbnb pain points.

First, every listing has a clear cancellation policy, even if it indicates that cancellations will not result in refunds or credits for future stays. And those policies tend to be favorable ones. A majority of listings that we found in major markets did offer free cancellations, often up to 72 hours before check-in, and were designated as such with a green emblem in the search results.

Second, that type of transparency extends to pricing, which shows up on listing pages inclusive of taxes and fees, limiting the sticker shock that can come when researching home rentals on competing platforms. (On one nice Nantucket property on Airbnb, taxes alone added more than $100 per night to a $750 base price). 

What to Look Forward To

Hopper’s staggering pandemic-era growth—it grew 100% in 2020 and then more than 300% in 2021, according to the company—has come on the heels of innovative fintech products, mostly related to airfare purchases. One offers cancel-for-any-reason protection for flight purchases; another lets users freeze the price of airfare or hotel stays for up to two weeks while they decide how to proceed with travel plans.

Expect Hopper to attack the short-term rental marketplace with such innovations in the very near future. Already, Ho and Lalonde have signaled an intention to offer cancel-for-any-reason rates on all rentals, which will come with a small, dynamically priced premium. And they’ve said that other Hopper fintech products such as “Price Prediction” data will be adapted to apply to home rentals as well. (That feature is Hopper’s original secret sauce—predicting with 95% accuracy whether prices will rise or fall.)

“Most of the cancellation policies you see within this space are 30- to 60-day, inflexible policies; otherwise you’re out of luck,” says Lalonde. “We’re very good at pricing risk. And by doing so, we can give our property managers an increased conversion rate [meaning, more people will feel comfortable making a booking] without taking on any risk themselves, while our customers can get the most flexibility.” 

Hopper also plans to extend its loyalty program, Carrot Cash, to Homes, essentially netting travelers 1% to 5% cash back on every booking and allowing them to instantly apply it to the next purchase they make on the app. It’s a move Lalonde emulated from Pinduoduo, which offers immediate credit it deposits into an in-app wallet. Add in lowest-price guarantees, also coming soon, and he believes it’s a winning formula that will drive loyalty.

Perhaps these are not the most glamorous points of distinction. But if Hopper straightens out its inventory issues—which should be feasible, given the vast number of niche, high-quality villa-management agencies it can partner with—it will offer a powerful combo of style and substance. 

Avoiding Airbnb’s Missteps

One thing Ho says Airbnb sometimes forgets in promoting its experiential “live like a local” drawing card is that rentals are often chosen for practicality—an area Hopper plans to emphasize. Reliability is a big part of that equation. Hopper’s stock of professionally managed properties is a way to create quality and safety assurances; by cutting out individual homeowners, it can eliminate issues such as rescinded bookings because the host needed to use their home at the last minute, and minimize such problems as customers showing up to a house with no heat or power amid inclement weather. What’s more, professionally managed properties—especially in apartment hotels like Sonder—often have built-in security, obviating some of Airbnb’s darker issues. 

“Safety and trust are the big risks in this space,” says Jamie Lane, vice president of research at AirDNA. Customer support, he adds, will be another important consideration. (Hopper so far boasts an excellent track record, insofar as airline and hotel bookings are concerned.) Lane believes that going the professionally managed route is, in fact, Hopper’s greatest point of differentiation from Airbnb.

It’s for that reason, he says, that Hopper “in reality is not competing with Airbnb—they’re competing with VRBO,” which is owned by Expedia Group Inc. (VRBO’s inventory also features around 2 million homes, many professionally managed.) And in the same vein, also posing heavy competition, is Marriott Homes and Villas, which counted about 25,000 home rentals in its portfolio in mid-2021, when public figures were most recently released—all bookable with Bonvoy points.

“It would be very difficult to unseat Airbnb as the dominant player in the short-term rentals space” Lane says. “But the reality is that we’re still in the early innings for this entire industry. Short-term rentals are booming, and there’s still so much room for the space to grow.”

©2022 Bloomberg L.P.