Who wins in emerging online travel markets? Locals do

NB: This is a guest article by Serge Faguet, co-founder of Ostrovok, a Russian-based hotel-focused online travel agency.

If we look at online travel around the globe, we can see that the four key global emerging markets – Brazil, Russia, India and China – are showing substantially greater growth than the developed world.

And they are already have a significant share of global online travel consumption.

This is beginning to show itself in the distribution of value – out of the top five most valuable publicly traded OTAs, three are outside the US (CTrip, MakeMyTrip and eLong). But who wins in those markets, and, more importantly, why?

In this article I am arguing that local players have an overwhelming advantage versus global players, and also describing the key characteristics of the local players that end up winning.

This perspective is based on our experience building Ostrovok (an online hotel booking product for the Russian market), as well as extensive research on key winners and losers in China, India and Brazil.

Why being local is an overwhelming advantage

At first glance it isn’t clear why the market leaders in BRIC countries are local. It seems that the Pricelines and Expedias of the world have significant advantages:

• Large pools of capital
• Established global supply bases appealing to BRIC consumers
• The ability to direct significant flows of global customers to BRIC hotels
• Experience developed over many years of success.

However, those advantages aren’t as significant as they initially seem:

1. Funds

Capital isn’t an advantage against local teams that know how to raise it.

A BRIC startup can raise $100 million in venture capital to invest on the way to success; any public company executive that spends that much money to fight in a non-core market will have the shareholders clamouring for his head.

2. Supply

Global supply is freely accessible through many of the local and global market leaders that are looking to aggregate demand into their core markets via affiliate partners.

3. Customers

Global customer flow to BRIC hotels is important, but:

• Local customers eventually become the dominant source of local hotel demand
• Global customers have little brand loyalty to global OTAs: they metasearch and go to whoever has better rates/availability for the BRIC hotel, i.e. the local OTA.

4. Legacy

Experience is of dubious value. Most successful Internet companies were built by outsiders because in rapidly changing markets flexibility matters more than legacy knowledge.

For evidence of this, look no further than at how online travel incumbents struggle with exploiting new distribution channels (social/mobile).

On the other hand, local players have substantial advantages that aren’t immediately obvious:

• Local fulfillment
• Local marketing
• Local supply

Let's look at those elements in further detail:

Fulfillment

1. Local Payment Solutions.

The way people pay online varies significantly from country to country.

This is why CTrip has messengers collecting cash from people; Despegar sells a large portion of its hotels on installment plans; and Ostrovok processes payments via ATMs and mobile retailers. Global players do none of this, and lose a huge chunk of potential customers as a result.

2. Local customer support.

Consumers in BRIC countries need telephone support and transactions; help with visa issues; help learning to trust the Internet.

For example, CTrip embraces high-touch customer support, staffs its call centers with thousands of people and delivers a level of service unmatched in the West – a live agent answers 99%+ of calls instantly 24/7.

This enables the development of far greater trust with consumers.

Marketing

1. Local channels.

As the platforms through which users can be reached are substantially different in emerging markets, local marketing focus is a substantial advantage. SEM/SEO on Baidu or Yandex is quite different from CPC on Google; other channels with negotiated deals are even more so.

2. Local offline marketing.

Global players tend to be unable to stretch their organization to do offline advertising and tend not to appreciate its strength.

For example, MakeMyTrip in India or Despegar in Brazil both used TV campaigns to build much stronger brands than the global players.

3. Local culture focus. It should be self-evident that a person in another country that doesn’t even speak the local language can’t notice the nuances of cultural perception, morphology and many other issues obvious to locals.

Supply

1. Local focus.

Hotel supply is a high-touch, local business driven by relationships. As a result, over time local OTAs take the lead in terms of breadth of hotel coverage and in terms of rates and availability domestically.

This has already happened in Brazil, India and China and is happening in Russia right now.

2. Local hotel solutions.

By being attentive to the needs of local hotels, superior results can be delivered. For example, CTrip and eLong in China work with hotels in an on-request fax-based way, as well as via an extranet, and even today approximately 40% of Ctrip’s bookings are done this way.

Another example is that Ostrovok in Russia uses local-law contracts which are significantly preferred by local hotels for tax and accounting reasons.

Getting a strategy

Overall, a good way to summarize the advantages of a local player is that they are developing a custom solution for the local market, which is an easy sell against one-size-fits-all template solutions provided by global OTAs.

A final note to make here is that while the particulars may vary, the dominance of local Internet companies in emerging markets is not unique to online travel.

China is well-known for this, but the same is true in Russia, where hardly any of the Western internet companies have succeeded. Google trails Yandex with one third of its market share. Facebook is only the 4th biggest social network.

Groupon (which started as a leader in a market it has invented) has been overtaken by local player Biglion. Amazon, eBay, LinkedIn, Zynga and other global titans are nowhere to be seen.

So while many global players will attempt to compete in emerging markets, there is no reason to believe that they will be successful

What determines which of the local players will win?

Now that we have established that local beats global in the online travel industry, which of the local players actually do win?

In the process of figuring out the right strategy for Ostrovok, we have attracted investors/advisors from key global players in developed and emerging markets, and have done a lot of research on such players.

We have learned a lot about the strategies used and reasons behind the success of CTrip, eLong and Qunar in China; MakeMyTrip, Yatra and Cleartrip in India; Despegar and Viajanet in Brazil.

When we asked those players and their competitors about what determined the winners, the first factor everyone mentioned is "a very strong team".

This was too obvious and generic an answer, but when we dug deeper we found three specific unifying characteristics at the winners in China, India and Brazil:

• Prior knowledge of the local market in executive teams.
• Technical engineering ability on the team.
• Ability to raise Western capital on the team.

What was also fascinating was that those three strengths taken together worked to create significant competitive advantages. Having talented engineers brought in more talented engineers.

Having executives with local experience helped bring in suppliers. Having the technical and supply capabilities brought in more capital, which helped bring in even more talent.

Once this virtuous cycle got started, other local players were unable to catch up.

How we built our strategy as a result of this research

So when we started Ostrovok, we built our strategy versus domestic competition around these key strengths:

• We are unique amongst all Russian online travel companies in that we have a team of more than 25 people who write code (not counting QA, designers and the like), many of them from top tech companies in Russia like Yandex. Techology is always the bottleneck to all other parts of the organization, and we are planning to expand to 150 people writing code by the end of 2012.
• We used local supply expertise to build the largest hotel supply acquisition team in Russia, and grow our local hotel supply base faster than that of any other player. This was done by Andrew Pyner, who was previously CEO of the Russian office of Booking.com, led Russian supply acquisition efforts for Expedia and GTA, and worked for Radisson in St Petersburg.
• Because of the strength of the team (and the past experience of the founders as entrepreneurs in Silicon Valley), we have been able to raise more capital than all other local players combined from leading global investors – General Catalyst, Accel and a number of others.

In conclusion, our prognosis is that the winners in emerging online travel markets will turn out to be local players with strong technical teams, a deep understanding of local suppliers, and the ability to raise a lot of capital.

And, over time, today’s situation will be reversed as those younger, faster and more aggressive players will begin to compete in developed countries.

NB: This is a guest article by Serge Faguet, co-founder of Ostrovok, a Russian-based hotel-focused online travel agency.

NB2: Image via shutterstock.