China's Tech Titans Take Their Battle to a New Frontier: Travel
(Bloomberg) -- After slugging it out in ride-hailing, bike rentals and food delivery, the battle between China’s technology giants is spilling over into the travel sector.
Meituan Dianping, which has funding from Tencent Holdings Ltd., is getting ready to spend hundreds of millions of dollars over three to five years to unseat leader Ctrip.com International Ltd., backed by Baidu Inc. Also targeting the space is e-commerce juggernaut Alibaba Group Holding Ltd.
Online travel is the latest front in a running war between China’s largest internet corporations -- Baidu, Alibaba and Tencent -- that’s spilling across the breadth of the country’s on-demand services economy. Meituan Travel wants to sell you a flight to Beijing, museum admission, a dinner booking and finally a room to crash in -- all within the app -- something a specialized service like Ctrip can’t match.
Chen Liang is tasked with leading that charge. The Meituan Travel President is declaring open season on Alibaba’s Fliggy (formerly Flying Pig) and Ctrip. He wants to build China’s largest hotel service by the middle of 2018, banking on 240 million users who already make dining reservations, schedule massages and hunt for retail discounts on its Groupon-like platform. Alibaba’s 500 million-plus customers, in contrast, mostly buy from its online bazaars, he argued.
“Meituan Travel really nicely complements our business,” Chen said in an interview. For Alibaba, “the gap they have to overcome is much larger than what we have to do, because we started out as a lifestyle platform.”
Ctrip is expanding into lower tier cities with customers seeking a “superior quality of service,” it said in a statement. Alibaba wasn’t immediately able to comment.
Meituan is one of Tencent’s standard-bearers in a war with Alibaba and Baidu. It’s a battle waged via multi-billion dollar investment deals and proxies such as the Alibaba-driven food service Ele.me, or Mobike and Ofo in cycle rentals. At stake is control over the world’s largest population of middle-class spenders, tourists and internet users. Alibaba too has said it wants Fliggy to become the leading travel service for millennials.
Both are relative newcomers to a battlefield that, unlike bike rentals, already hosts a dominant player. Ctrip, which counts Priceline Group Inc. as an investor, cemented its position by merging with Qunar in 2016, ending a costly discounting war. Before that, it bought Elong Inc., a travel agent that counted Tencent among its backers.
Meituan started life offering Groupon-style deals, then expanded into food delivery. Now it’s going toe-to-toe with Ctrip, which last year agreed to buy flight aggregator Skyscanner. Its advantage is a user base that checks the app more frequently than on purpose-driven Ctrip, though convincing someone who’s looking for discounts on a massage to also book hotel rooms may be a tough sell.
“If you want to convert them to travel users, Meituan may need to spend more on marketing dollars or give discounts, and compared to Ctrip and other travel sites the price will have to be more attractive,” said Marie Sun, an analyst with Morningstar Investment Service.
Travel is a key sector because it galvanizes a swath of consumer spending from food to entertainment. Digital sales of everything from hotels to flights could rise 28 percent to surpass $113 billion in 2017, consultancy eMarketer estimates. There’s also plenty of room to grow; internet travel bookings represented just 10 percent of China’s total tourism revenue, compared with 56 percent in the U.S., according to Phocuswright statistics compiled by Bloomberg Intelligence.
The number of rooms booked on Meituan Travel in April rose 60 percent to 17 million and the goal is to hit 20 million per month by the latter half of 2018, Chen said.
Its beach-head will be a middle-tier travel market it says is poorly served. Barriers to entry for top-shelf hotels are high because many chains are locked into Ctrip. The other end is staked out by home-rental service Airbnb Inc. and local rivals Tujia and Xiaozhu. So Meituan aims to drive into middle China: hotels with around four stars in lower-tier cities where there’s room to expand. Meituan’s edge in train and bus ticket sales better suits travelers to and from such regions, Chen said.
“What we’ve found is that domestically the online platform penetration in this industry is quite low,” he said. “Ctrip has been working on it for quite some time and Elong has been working on it for a while, but they’ve been concentrating in the top-tier cities.”
Chen’s strategy is now echoed by Ctrip’s management. They’ve stressed the potential in smaller cities whose residents are gaining a taste for travel. Rural households earn a third of what their urban peers do in disposable income, but the figure rose 21 percent between 2013 and 2015, according to the National Bureau of Statistics.
“It is not unlikely that new players will fancy their chances,” said Sanford C. Bernstein senior research analyst Bhavtosh Vajpayee. “The profitability in online hotel room models is quite high.”
But “Ctrip can start another price war and it has the resources for it. I think it’s waiting to see how big the aggression is from Meituan.”
Investors have also taken note of Alibaba’s ambitions. In November, China’s largest online mall said it’s signed up more than 200 million registered users, with 10 million daily visitors to the Fliggy app. But Chen was dismissive.
“For Alibaba, this business is just too small. Look at its logistics business, its finance business, these are all huge. They take priority,” he said.