Priceline: Key Strategic Moves In 2014

PCLN: Priceline Group logo
PCLN
Priceline Group

Priceline Group (NASDAQ:PCLN), the online travel giant and the owner of Booking.com, Kayak and OpenTable, experienced a robust 2014, to judge fom what has been reported thus far. For the first nine months of 2014, the Group reported revenue of $6.6 billion, reflecting 25% year-on-year growth. This was aided by a 32% increase in the gross bookings (which refers to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by its customers) to $39.6 billion. The growth was broad-based, with increases of 29% in hotel room nights, 19% in rental car days and 17% in airline ticket volumes. The effects of the revenue growth also boosted the bottom line. The company’s net income for the first nine month stood at $2 billion, 33% higher compared to the year ago period. [1]

In this article, we discuss the most important strategic moves undertaken by Priceline in 2014. We will describe the significance of the decisions, and how these will lead to further growth in the future.

We have a price estimate of $1108 for Priceline’s stock, almost in line with its current market price.

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See Our Complete Analysis for Priceline Here

Priceline Launches Fun Rides: Aims For A Bigger Share Of The Car Rentals Market By Offering Enhanced Services

In June 2014, Priceline launched a premium car rental service named Fun Rides. Fun Rides allows customers to choose from a lineup of luxury sedans, muscle cars, sportsters, convertibles, hybrids and minis for special occasions, such as a vacation, a wedding or a road trip. The new offering has been made available at airport locations in 63 major markets across the U.S., from several suppliers including Avis, Budget, Hertz and Sixt. [2] This strategic move will have a positive impact on Priceline’s business in the following ways:

  • The First Mover Advantage

According to a survey conducted by Priceline, one in every two Americans feels that his car rental experience is not as great as the rest of his vacation. This implies that the supply of car rental services are still not fulfilling the customers’ satisfaction, maybe due to a fragmented market or a lack of good brands, and there is significant demand in this space. With its car rental service, Priceline might gain the “first mover advantage” as described by Stackelberg, i.e., by entering a marketplace with significant demand but much lesser supply, Priceline might gain a competitive advantage of being one of the first established names to tap the car rental segment in the U.S. with this service. The company can build its brand image and gain customer loyalty by catering to a segment which was hitherto denied its due importance.

  • Increased Exposure To The Growing Car Rental Market

The global car rental industry is presently valued at $36.9 billion  and is expected to grow at a compounded rate of 13.6% to reach $79.5 billion by 2019. [3] Fun Rides is expected to increase Priceline’s exposure to this industry. Although the contribution of car rentals and cruises to our valuation of Priceline is in low single-digits currently, we believe that the launch of Fun Rides will help Priceline sell more vacation packages and destination services, as car rental is an integral part of such offerings.

OpenTable Acquisition: Priceline Books A ‘Table’ In The Restaurant Reservation Business

In June 2014, Priceline announced its decision to acquire OpenTable for $2.6 billion. OpenTable helps restaurants to fill tables by offering online reservation services to diners. The acquisition marks Priceline’s entry into the online restaurant reservation business, a category in which OpenTable is a leader in North America, particularly the U.S. [4]

We believe that Priceline’s decision to acquire OpenTable is a good move, for the following reasons:

  • OpenTable Rules The North American Online Restaurant Reservation Segment

OpenTable is the undisputed leader in North America’s online restaurant reservation space, with over 50% market share. It reported a restaurant customer base of 31,583 at the end of Q1 2014, and seated a little less than 47 million diners at these restaurants in the first three months of the year. 90% of its diners were for North American restaurants. Our compiled quarterly data reveals that since Q1 2008, OpenTable has seated almost 570 million diners worldwide, with the number of diners growing at an average annual rate of 35%.

We expect that OpenTable will allow Priceline to enhance its offerings for the North American market. Since many travelers are also diners, the company could integrate OpenTable’s services with its travel products.

  • Huge Scope For International Growth

OpenTable’s business is mainly concentrated in North America, where it caters to around 24,000 restaurants out of its total customer base of 31,500. However, the scope for growth in the online restaurant reservation category is much bigger in international markets than it is in North America. While over 20% of restaurant bookings in the U.S. occur online, the percentage stands at low single digits in nearly every international market. [5] Hence, we believe that there is a high potential for growth in the international online restaurant reservation space, which Priceline can tap into, with its OpenTable acquisition.

Priceline’s Extended Partnership With Ctrip: A Formidable Alliance Between Two Online Travel Behemoths

In August 2014, Priceline strengthened its commercial partnership (initiated in 2012) with Ctrip (NASDAQ:CTRP), the biggest Chinese online travel agency (OTA),  by investing $500 million in the company. Through the investment, both the companies intend to increase the cross-promotion of each other’s hotel inventories and other travel services. Priceline now has access to Ctrip’s 100,000 accommodations in the Greater China region while Ctrip has access to Priceline’s global portfolio of over 500,000 accommodations. [6] Additionally, Ctrip has agreed to promote Priceline Group’s other services, like rentalcars.com and OpenTable, to its customer base. Apart from online travel, Ctrip’s foray in China extends to call centers, logistics and distribution. This unique sales model will offer a comparative advantage to Priceline’s products within China. [7]

  • Enhanced Exposure To China: One Of The Largest And Most Rapidly Growing Travel Market

According to a report by PhoCusWright, the Asia Pacific market overcame Europe to become the global leader in regional travel in 2012. China is expected to account for one third of the Asia-Pacific travel market by 2015. Online gross bookings in China is estimated to more than double from $14 billion in 2012 to $30.3 billion by 2015. [8]

According to the research firm iReasearch, Chinese online travel market transactions  amounted to $36 billion in 2013, displaying a 29% year-on-year growth. [9] The research firm forecasts China’s online travel gross merchandise value to total $75 billion by 2017. [10]

With a 56% share in revenues, Ctrip is the market leader in the Chinese online travel market (followed by Elong and TongCheng with a revenue share of 9.7% and 6.3% respectively) [11].

Priceline earns approximately 95% of its revenue from hotel bookings. Thus, gaining access to a wider portfolio of hotel booking in China (as a result of its partnership with Ctrip), which is the fastest growing travel market in the world, will augur well for its long-term growth potential, in our view.

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Notes:
  1. Priceline’s Form 10-Q for the Period Ending 09/30/14 []
  2. Priceline.com Gets Drivers’ Adrenaline Pumping with New Lineup of Specialty and Luxury Rental Cars, Priceline Investor Relations, June 23, 2014 []
  3. Global Car Rental Market is Expected to Reach USD 79.46 billion in 2019: Transparency Market Research, PR Newswire, June 25, 2014 []
  4. The Priceline Group Agrees to Acquire OpenTable, Inc., Priceline Investor Relations, June 13, 2014 []
  5. TripAdvisor’s (TRIP) CEO Stephen Kaufer on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 06, 2014 []
  6. The Priceline Group and Ctrip Expand Partnership, Ctrip Investor Relations, August 2014 []
  7. Expedia (and others) will be affected big-time by Priceline-Ctrip marriage, tnooz.com, August, 2014 []
  8. Deep dive into Asia Pacific online travel market, tnooz, Dec 2013 []
  9. China Online Travel Market Outlook 2014, iResearch, Feb 2014 []
  10. Enter the dragon: China online travel soars, $75 billion market by 2017, tnooz, Mar 2014 []
  11. China Online Travel GMV Grows to 70 Bn Yuan, iReasearch Views, November 2014 []