They are still growing strongly, but Priceline and Expedia
are increasingly reliant on marketing spend to drive expansion and this could
leave them with vulnerabilities, finds EyeforTravel’s new reports into the two
companies.
Both Priceline and Expedia continued to post some impressive
growth numbers in their Q3 results, with double digit rises in gross bookings
but these increases appear to come at an ever-increasing cost and concern is
rising among investors. EyeforTravel’s new reports into both Expedia
and Priceline
finds that investors are right to be concerned as this is a potential weakness
for both companies that empowers potential
Both companies saw soaring costs in 2016 continue into 2017
and appear to be trapped in a competitive spiral, focusing on matching
increases in the other’s marketing spend for fear of falling behind. In 2016,
Priceline increased its brand advertising spend by 8% and performance
advertising by 27%, whilst Expedia saw selling and marketing costs rise
by 29%. Through the first three quarters of 2017, marketing spend by Priceline has grown by 22%.
In percentage terms this matches a 22% increase in the broader ‘selling and
marketing’ element of Expedia’s costs across the same time frame. For
the latter, selling and marketing costs now make up more than 55% of the
company’s overall costs, whilst Priceline's combined selling and advertising costs make up 70% of overall costs.
There can be little doubt that the majority of this spend is
heading over to Google, with Priceline appearing to be the more reliant on the
search giant currently. Around three quarters of search engine traffic to
Booking.com is generated via paid advertising, as compared to around half for
Expedia. This also comes despite Expedia paying less in advertising than
Priceline but is nonetheless a concern for both companies as Google continues
to relentlessly but quietly ramp up its travel products.
Not only are the
two facing pressure from each other and the online travel agency market, but
increasing pressure from their suppliers as well, as they try to recapture
market share through book direct campaigns. Most of the major chains have
initiated these alongside a broader consideration of what loyalty means in the
industry. Combine this with a more combative regulatory environment in Europe,
with wide price parity agreements being eroded, and what they will get is more
competing forces for keywords and users’ attention across a wider number of
search terms.
This has caused ripples on Wall Streets, with analysts focusing in
on the growing costs and their effect on the bottom line as profit expectations
are missed. After Q3 2017 earnings call for both companies, stocks plummeted,
falling nearly 16% for Expedia the day following the call on 27th
October and 13% for Priceline on 7th November. For Priceline this
mimicked a similar stock drop following the Q2 earnings call, highlighting
investor concerns.
Investor concern is unlikely to dissipate as these two are
reaching such gigantic proportions that their growth is likely to slow
naturally anyway and there doesn’t seem to be a way out of the marketing spend
increases on the near horizon, with search engine marketing critical to their
business models. Indeed, currently their ability to outbid almost any other
player when required and their vast data regarding search term effectiveness
currently makes this arena a competitive advantage for both players.
Nonetheless, the question remains, at what cost? It will be
critical to continue to monitor marketing spend for both over the coming years
to see what the limits of sustainability and effectiveness are. As the
competition intensifies across the digital travel space and tech giants eye
travel
To preview and buy EyeforTravel’s Expedia report, click
here, or here
for the Priceline report. These are part of the Future of the Online Giants series, which will cover Expedia,
Priceline, TripAdvisor, Ctrip and Google. Keep a look out through EyeforTravel On Demand for
the rest of these reports.