Another week, another price war. After 360Buy grabbed headlines in September for opening hostilities with electronics retailers Suning and GOME, two of the country’s largest online travel agents are going head-to-head too.
In fact, Ctrip and eLong have been battling since July. The confrontation began when eLong started offering cash rebates on hotel bookings made through its portal. Ctrip quickly followed suit, offering steep discounts on hotel rooms booked via its own site. The company even announced that it had set aside a $500 million war chest to fund its promotions.
Other online travel providers also sprang into action. Smaller travel sites, worried about losing customers, started offering similar promotions. Mangocity.com, which is operated by China Travel International, set aside Rmb80 million in subsidies to lure customers to its online service, prompting two other players – 17u.cn and Uzai.com – to allocate similar amounts for hotel bookings made on their platforms.
Less a run to the beach, and more a race to the bottom, the price discounting is attracting consumers. Online hotel bookings jumped 70% in the third quarter at eLong, compared with a 40% increase for the number of hotel rooms Ctrip sold during the same period. But margins took a big hit, with eLong posting its first net loss since 2009.
Ctrip’s margins also suffered and it says that operating profit dropped 38% year-on-year to Rmb190 million over the period. “This is the first time we have encountered such a cut-throat price war since we set up business 13 years ago,” Fan Min, Ctrip’s chief executive, admitted. “The profitability of all the players is under great pressure, and the longer the price war persists, the deeper the consolidation will go. At the end of the day, only a few players will remain.”
Both eLong and Ctrip have been trading barbs on who will back down first. “Being profitable is not our goal right now. We are not afraid of losses. We will not stop… Our goal is very clear: we want to be the number one in the online hotel booking market. And we are willing to pay to get there,” Cui Guangfu, chief executive of eLong, told the Economic Observer. But Ctrip’s response was robust. “Our rival (eLong) wasn’t even very profitable before the price war and now with the little money that it had, it wants to throw everything in,” says Liang Jianzhang, Ctrip co-founder and chairman. Then there was a note of regret: “Personally I think this is not sustainable. In the short term, Ctrip will fight back. The result is that eLong will not make any money and Ctrip will make less money.”
Analysts say that both companies will survive the price war, but smaller booking sites will suffer. Already, Qunar has laid off staff (although the company prefers to call it “adjustment” rather than firings).
So what sparked the price war? Online travel sites are struggling to expand even though Chinese tourists are travelling more than ever. Take Ctrip. Although it dominates the online market for hotel room bookings, the company only accounts for 3% of total hotel room nights in China because most bookings are still done by traditional, or offline, agencies, says the South China Morning Post.
In fact, internet bookings comprise just 10% of travel industry sales. This is partly because many consumers still lack credit cards. But it is also because bricks-and-mortar agents woo customers by offering refunds for cancelled trips and generally going the extra mile in providing service and advice.
In spite of this, competition looks set to get more intense. In addition to newcomers like Qunar, which is backed by search engine giant Baidu, a new breed of mobile app-oriented startups like Hotel Finder and VeryZhun are also emerging.
In the meantime, Ctrip struck a defiant tone. “We’re well prepared for the price war as long as it takes,” warned one senior executive.
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