Skift Take
Part of Expedia Group’s long-running profit margin gap with Booking Holdings has been structural, but a significant piece of it has been inefficiencies. Expedia’s Peter Kern is looking to bridge the great divide, but the outcome is far from assured.
Dennis Schaal, Skift
It’s been a perennial handicap in the competition between Expedia Group and Booking Holdings — Booking Holdings is a much more profitable company. But now Expedia boss Peter Kern is holding out hope that his company can at least narrow the gap.
Part of the discrepancy is that their core operations have been different: Booking was traditionally focused on hotels, while Expedia offered hotels, flights, and business to business operations, with the latter two, at least, providing lower profit margins. Expedia also hasn’t been as efficient as Booking in performance marketing.
The following chart shows the two companies’ EBITDA (earnings before interest, taxes, depreciation and amortization) margins from 2017 to 2020. You may want to disregard the Covid-ravaged 2020 numbers, when Booking was in positive territory at a 15.3 percent earnings margin, and Expedia Group was -23.6 percent.
But, as the chart shows, in pre-Covid 2017 to 2019, Booking regulatory notched a 38 or 39 percent margin, while Expedia was stuck in the 11 percent range.
Profit Margins 2017-2020
| 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|
| Expedia Group | 11.10% | 11.30% | 10.90% | -23.60% |
| Booking Holdings | 38.70% | 39.70% | 38.60% | 15.30% |
Note: The figures in the chart are EBITDA (earnings before interest, taxes, depreciation and amortization) margins
Source:S&P Capital IQ
Speaking at an Evercore ISI conference earlier this month, Kern, the Expedia Group CEO, said he thinks the company can generate margin improvements because of the cost cuts it has been making since late 2019, as well as the work it is doing to better its customer service and to make its performance marketing more efficient. Expedia has reorganized its performance marketing efforts by combining brand teams, such as those at Expedia, Hotels.com and Vrbo, which previously labored separately.
Kern also argued that its new chief technology officer, Rathi Murthy, and new president of Expedia brands, Jon Gieselman, will be difference makers.
Booking.com was a “one-stack enterprise,” meaning they primarily only needed one tech platform to market hotels, while “we had many stacks, which means many people doing many of the same things,” Kern said.
“And as we make a better product and spread that across the entire enterprise, that will give us convert — better abilities to move faster and improve conversion, and all the things that also impact margin,” Kern said.
Why Is Margin Improvement Important?
As Skift wrote in a 2012 article, How Booking.com Turned the Other OTAs Into Converts, Booking.com became the world’s lodging booking leader based on its business model and skills in performance marketing.
That efficiency in performance marketing fed on itself, enabling Booking to generate more cash to plow back into performance marketing to spur growth.
Some would argue that Booking’s performance marketing edge has been all but closed, and both Expedia and Booking deploy similar business models in the hotel-booking sphere these days.
Kern argued that performance marketing — using keywords for advertising in Google and Bing, for instance — isn’t a viable long-term strategy.
“That’s the problem with performance marketing, right?” he said. “It doesn’t really lock in long-term wins very often, at least it hasn’t in travel. So yes, we’ve been willing to give a little bit of that up, be a little more cautious.”
Losing Market Share in North America
With Booking Holdings pledging to make inroads in North America — a company goal over the last few years — Kern disparaged the notion that Expedia Group might be losing market share in North America in its core hotel business.
Instead, he said, the balance has shifted because of Covid. For example, 1.5 star hotels have become more popular over the last year, and Expedia hasn’t been strong in that bottom-rung lodging sector.
“And so when that grows, and that’s a thing we don’t have particularly good share in, the balance shifts,” Kern said. “And you see share changes, but you’re not really seeing share changes in the core.”
Kern said Expedia Group is taking a longer-term strategic approach to fixing the company these days.
“Look, I mean, as I said in the beginning, part of making strategic decisions, you have to be willing to give up on some of the little tactical stuff where you just get stuck in the same fight,” Kern said. “If I go, we have this big strategic idea, but we lost one basis point over here, everybody run over there and figure out why we lost one basis point.”
That’s a fool’s errand, in his view.