Priceline Group (NASDAQ:BKNG) has been watching China as a potential major market for its growing online travel agent (OTA) business. It makes sense, as China has a vastly growing middle class and an increased appetite for travel and booking travel services online. However, fierce local competition and trouble navigating the political landscape have made it hard for other internet companies to succeed in China. Here's what Priceline has done to learn the market and increase its investment in China for long-term growth.
Why the Chinese travel market looks so enticing
According to BCG analysts, average incomes in China rose 11% per year from 2010 to 2015, and those analysts expect this rise to lead to around 9% annual increase in consumer spending in the country through 2020. Even though China's overall GDP and economic growth are slowing, the middle class and their consumer spending are rising much faster than in most other regions of the world.
That rising middle class, now with more disposable income, also has a growing appetite for travel. China's travel industry grew 19% in 2015 year over year and is set to be larger than the United States' travel market by 2020, according to Goldman Sachs analysts. Even better news for Priceline is that those travelers are increasingly booking online. In 2015, travel booked online grew 26% in China year over year.
Priceline's timely investment in China
Priceline took its time to study the Chinese market before jumping right in and getting rejected, avoiding the fate of other internet businesses that are now either blocked or mostly irrelevant in the country, such as certain search and social-media companies. Instead, Priceline waited for the right time and partnership to enter China more aggressively.
Priceline has invested in China in two ways. The first is by building a local presence in the country. Priceline has opened 11 offices in Shanghai that are staffed by hundreds of bilingual customer-service representatives, and it increased its advertising in the country, particularly online.
The second way Priceline invested in China is through a stock investment in local travel-booking service Ctrip International (NASDAQ:CTRP).
The importance of the Ctrip deal
In 2014, Priceline invested $500 million in Ctrip, a growing online travel booking site with similar options to Priceline. At first, investing in a seeming competitor might sound counterintuitive. However, that investment has grown substantially, as Ctrip's shares risen nearly 30% since.
Last year, Priceline said it was investing another $250 million into Ctrip, which put Priceline's stake in the company at over 10% and put a Priceline observer on the Ctrip board. The two companies also announced a strategic partnership, in which Priceline's two major properties, Booking.com and Agoda.com, will supply much of the inventory of hotels for Chinese users to choose from when booking through Ctrip.
Then in October, Ctrip announced a merger deal with its own competitor, Qunar (NASDAQ:QUNR) -- pronounced "choo-naar," which means "to where?" in Mandarin. Goldman Sachs analyst David Jin predicts that the combined company will control 83% of China's online flight booking market and 64% of its online hotel booking market by 2017. This new company, acting like a middleman for Chinese travelers to book Priceline properties, could lead to major booking sales gains for Priceline in the coming years.
The long-term investment
China still makes up a relatively small part of Priceline's business. Management doesn't break out revenues by geography in its earnings release, but an RBC Capital Markets analysts estimated that Chinese operations will make up only about 4% of Priceline's $77 billion of expected bookings in 2017.
Still, this is only the start of what Priceline sees as a long-term growth opportunity. By the end of 2015, Priceline represented 35,000 properties in China, nearly 350% more than 2014. With the largest middle-class population of any country, and Priceline's rising partnership with the market-leader in local online bookings, China has the potential to become a very significant part of Priceline's business.