Coronavirus to Increase Pressure on China's Already Vulnerable Travel Sector
Trip.com Group Ltd – formerly known as Ctrip – is set to be one of the most compromised, both due to rising competition and the spread of the Wuhan virus.
China's travel industry has been flourishing over the past few decades, becoming one of the world's top inbound and outbound tourist markets. Tourism is now among the fastest-growing industries in the country. Currently, with the rise of online booking agencies, more Chinese customers are traveling within and outside of the country than ever before.
Retrospective on the industry – key statistics and numbers
An independent tourism industry did not exist in China until 1978. After reform and re-opening, inbound travel was no longer restricted to diplomatic visitors. At the same time, Chinese people started to travel abroad, mainly to visit relatives. To deal with the soaring demand of the market, a lot of tour operators appeared, but during the 1980s and 1990s, inbound tourism was still run by several state-owned travel enterprises and their branches.
In 1996 the implementation of the Management Rules for Travel Agency marked the further opening up of China's tourism market. Statistics from 1997 show that there were 4,986 travel agencies throughout the country, and the whole year's tourist volume totaled USD 701 million.
However, at that time, inbound travel to China was still in a business-to-business (B2B) model, and there was no channel for foreign visitors to directly choose a local tour operator. That led to lengthy procedures and very high costs.
In 1997, the online tour services started operating in China thanks to the rapid development of the internet. Online channels realized the contacts between travelers and local Chinese tour operators, eliminating the middlemen and drastically lowering costs.
Outbound travels also boomed in this period. China would transform into the most significant tourist source country in Asia, and tourism would gradually become a pillar industry for China's economy.
Since 2010, China has witnessed the fast development of online travel services. The world's largest domestic and outbound travel markets are located in China, while inbound tourism has also seen steady growth. Currently, there are 29,707 intercontinental travel agencies, with most of them operating in Beijing, Shanghai, Tianjin, and Chongqing – the nation’s biggest municipalities.
By the end of 2017, direct employees in the tourism industry exceeded 30 million, and the annual tourism revenue totaled USD 5,700 billion. The online travel market penetration rate had reached more than 15%, and mobile represented more than half of all online travel bookings.
This boom in the travel industry was due to several factors. As well as policy and technology, the emergence of new wealth – a rising middle class and disposable incomes – joined with increasing demand to see the world and the ease of control on restrictions for both travelers coming from and going to China all contributed to the rise in the sector.
According to an HSBC report in 2019, last year Chinese consumers were spending approximately USD 115 billion in outbound travel and USD 720 billion in domestic tourism.
In addition, the top 10 China's outbound tourism source cities in the year 2018 were Shanghai, Beijing, Guangzhou, Chengdu, Chongqing, Nanjing, Kunming, Wuhan, Xi'an and Hangzhou.
Beijing, Guangzhou, Chengdu, Chongqing, Nanjing, Kunming, Wuhan, Xi'an and Hangzhou.
Furthermore, the report showed that China's growing economy is also generating a surge in business travel. The primary business travel purposes among Chinese enterprises are meetings, trainings, different kinds of conventions and exhibitions, including project work and sales product shows.
The most popular travel destination for young Chinese luxury travelers was Europe – especially France – followed by Asian destinations like Thailand, Japan and South Korea, according to Statista. The leading international travel destinations of the mass market in China are Canada, Singapore, Australia, Japan, and the United States.
Dominant players in the market
All these developments have led China to become one of the world's most visited nations as well as home to the largest outbound tourism market and host to the second-biggest Online Travel Agencies (OTA) market after the United States – the US's OTA current market value is at USD 77.1 billion and China’s at USD 44.7 billion.
The transaction volume of the Chinese online booking market reached RMB 1.8 trillion in 2018 and expected to grow even more by the end of 2020.
Trip.com (NASDAQ: TCOM) has dominated China's OTA landscape since acquiring its top two competitors, Qunar and eLong, in 2015. With this move,Trip.com evolved into a one-stop-shop for tourists and took about 60% of market share. It still operates all three brands, in addition to Scotland-based meta-search website Skyscanner.
Founded in 1999 by former Oracle software engineer and previous Chairman of the company James Liang and three friends, the company provides comprehensive travel services, including accommodation reservation, transportation ticketing, packaged tours and corporate travel management. It has benefited greatly from China's strong economic growth over the last two decades and the rise of millennials hungry for new experiences.
However, recently China's economy has been slowing, and its consumers are increasingly cautious when selecting OTAs.
While Trip.com remains the most significant player in the market by a wide margin, competition is bringing increasing pressure. The market is getting crowded as ambitious tech giants such as Tencent Holdings and the Alibaba Group make their entry into the travel market hunting for new business opportunities.
For instance, Alibaba's Fliggy (which was previously known as Alitrip and Taobao Travel) has gained traction with a platform model that allows suppliers to create their own storefronts. Alibaba said part of the USD 13 billion it raised from its Hong Kong listing in November 2019 would go toward Fliggy.com.
Fliggy poses a significant challenge not only to Trip.com's dominance but its entire business model. With Fliggy, Chinese travel agencies found a vast marketplace where they could put their products in front of Alibaba's massive e-commerce userbase.
Meanwhile, US-based Expedia and Booking.com have increased their efforts in China, with the latter investing in a vast branding push.
Both global OTAs partner to enable bookings via social travel apps like Mafengwo, a popular source of inspiration for leisure trips.
Also, Meituan Dianping continues to try to convert its food and retail delivery customers into hotel bookers. It has recently become one of Trip.com's fiercest competitors – just five years after the food-delivery giant started dabbling in the business.
Meituan Dianping now has 47% of China's market, according to TrustData.
At the same time, Meituan Dianping is moving further into Trip.com's territory with luxury hotels, which contribute a great deal of Trip.com's revenues.
Current market situation
The travel industry in general – and Trip.com specifically – is not only suffering from intense competition at the moment. Now the threat is approaching from both the demand and supply sides.
With the spread of the coronavirus and the death toll rising to more than 80 (at time of writing) and more than 2700 infected, tourists are staying home.
Some have no choice: the government has put seven cities on lockdown and airports are stepping up screening measures. Last week, China ordered all travel agencies to suspend sales of domestic and international tours.
The shares of Trip.com have tumbled 12% since the outbreak. The company also made an announcement earlier this week that it would refund travelers who've been diagnosed or those in close touch with them.
Although there is still hope – like SARS, the turbulence will likely eventually pass – the business challenges are more significant with this strain of coronavirus.
In the background, all of Trip.com's competitors have been benefitting from diversification. Consider Meituan Dianping and Alibaba. It’s a lot easier for them to elude the downside business effects of this situation by having some crisis-proof subsidiaries. Meituan Dianping and Alibaba are not only dominant in online traveling services, but also in online shopping and delivering – as people are confined at home, they are even likely to increase spending on these platforms.
Plans could already be underway for Trip.com to diversify its business model. "Trip.com will become the largest, most innovative travel company in the world. We'll spur our progress by rapid investment in technology, and we'll keep on innovating, bringing the most innovative products to our travelers," said Jane Sun, the current CEO and one of the world's few female technology company leaders, in an interview with McKinsey.
All in all, Trip.com is facing severe domestic competition and an unexpected emergency which directly threatens its revenues due to the nature of the business.