Travelzoo’s Hotel Booking Feature Can Help Drive Big Growth

With the introduction of the hotel booking option on its websites later this year, Travelzoo (NASDAQ:TZOO) will mark a shift from its existing business model. Offering deep discounts to its users, Travelzoo is primarily an Internet media company that provides travel and entertainment companies as well as small businesses, the ability to efficiently reach out to consumers to sell their services and products.

Believing that its hotel search offerings was not meeting the needs of users and hotel owners, Travelzoo has been investing to build its own hotel booking platform. The hotel booking platform will enable users to book hotels directly via Travelzoo’s website or through mobile products, allowing suppliers to promote deals in a more flexible manner; e.g. loading a last minute rate for a hotel will become much easier compared to Travelzoo’s current solution.

We believe that Travelzoo’s entry in hotel bookings is a good long term strategy as it opens up an additional revenue opportunity for the company. It recently appointed Steven Rubin as its Vice-President to spearhead the initiative. Steven has over 15 years of hotel sales and revenue management experience working with Swissôtel in New York, Kimpton Hotel and Restaurant Group and Commercial Director of YOTEL Limited.

In this article we discuss key features of Travelzoo’s upcoming booking platform and how it can accelerate the company’s growth rate in the future.

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The hotel booking feature is currently being tested on Perfect Escape’s website, which was acquired by Travelzoo last year. Travelzoo earned $400,000 in gross bookings in Europe and North America in Q1 2013. The booking feature will initially be offered on Travelzoo’s websites, but the company intends to roll out the platform across all products by the end of 2013.

Segmenting Its Subscriber Base

Travelzoo plans to operate its booking platform in a close booking environment by offering the option to a set of VIP subscribers only. The company will invite a select group of travelers who are an affluent demographic and most engaged and interested in travel from its 26 million subscriber base for an exclusive access to the booking platform.

Additionally, Travelzoo intends to showcase only select hotels which rank high on its subscriber reviews. The company is undergoing a stringent screening process to arrive at a list of hotels to partner with. The initial group will include 600 hotels, which will extend to 3,000 globally in the medium term (the company has not specified a time period). Travelzoo aims to aggressively ramp up the number of hotels and deals offered in the latter part of 2013.

Possible Increase In Gross Bookings And Take Rates

Travelzoo’s robust growth in its hotel business so far has been primarily driven by the launch of its Getaway hotel offering. Getaway is a voucher model which is gaining popularity among medium and small size hotels as it provides them with an opportunity to stimulate incremental sales. The Getaways deals usually include a night or two at a hotel or resort within a two-hour drive or short flight from subscribers’ homes and includes a fine dining experience or resort credit, plus other extras. Travelzoo registered 50% growth in its Getaway platform in 2012.

With the launch of the booking platform, a user can book a hotel room for any specific date throughout the year. Hotel voucher sales have increased by approximately 48% in the last year, and we believe the introduction of the booking feature can accelerate the growth momentum in the future.

Historically, Travelzoo has seen a continuous decline in its take rate, which is the percentage share of deal value earned by the company. In its Q1 2013 earnings call transcript, the company highlighted that it continued to witness declining take rates due to increasing competition in the market. Despite a rapid increase in gross booking on the Getaway platform, the company claims to be earning low take rates from this business.

We believe that the hotel booking VIP program could help stabilize the decline in Travelzoo’s average take rate. The company promises to provide its booking platform subscibers with a good travel experience at the best available price. While this might not necessarily mean the cheapest deals, Travelzoo believes its VIP customers will be willing to pay more for a high-end experience.

Our price estimate of $23.32 for Travelzo0 is at a discount of over 10% to the current market price.

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