Going Prime: Assessing Amazon's Disruptive Potential In Travel

April 5th, 2018

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Amazon is a force of nature in today’s convergence economy.
— Luke Bujarski

This analysis looks at the potential in-roads for Amazon into an increasingly amorphous, expansive and consolidated travel space. We take this opportunity to cover various segments of the industry - from online travel to the sharing economy - and analyze what ultimately makes sense for a far-reaching company like Amazon.

Why Amazon, Why Travel?

Travel is a US$8.3 trillion opportunity when factoring direct, indirect, and induced impacts to local economies - according to the WTTC. Amazon already profits indirectly from tourism dollars through the induced effects that travel spend proliferates. The bathing suits, shorts, luggage, and other travel items that we order with our Prime membership, the terabytes of data consumed watching travel documentaries - hosted on AWS, the snacks that we buy at the Whole Foods when visiting New York. These transactions and others all partially bankroll Amazon’s increasingly diverse mix of service and product teams.

Many now look to Amazon and question whether the company will aim to capture more direct spend across the travel value chain.

Amazon's original footprint in e-commerce and cloud storage has proliferated into brick-and-mortar grocer retailing, home security, devices, private-label home goods, voice and artificial intelligence, gaming and mixed reality, and other seemingly disparate verticals and applications. Much of these already serve as part of the fabric of modern life. Amazon sits within the realm of other large, verticalized enterprises including Apple, Facebook, Google and to a certain extent Microsoft. We already see the direct impact of these players in the travel space. Facebook and Google, for instance, capture between 70 to 80 percent of total digital ad spend. Google has also moved beyond advertising and into products and applications used by travelers to buy and experience travel.

Agglomeration Economics

This agglomeration economy is now commonplace across different verticals. Real estate search company Zillow recently announced that it would now go after supply directly. Amazon is the poster child for this agglomeration. What earthly business does an e-commerce platform have entering the grocery business? In retrospect, the Whole Foods acquisition made sense capitalizing on existing synergies in logistics and the trend toward home delivery of food. These companies are more than holding companies allocating capital to areas with the biggest profit potential. They tend to take the long view in their growth and investment strategies hedging against broader societal trends. We expect Amazon to take a similar forward-looking and synergistic approach to travel.

Contortion Across The Travel Value Chain

This consolidation has lead to an increasingly amorphous shape and size of the travel sector. Digital - i.e. web-based services and solutions, and mobile computing have expanded the travel value chain into new value-add categories, layers of connectivity, and merging business functions across the various actors operating in the space. The space was one where companies had much clearer and defined roles. Airlines, hotels, and tour operators would supply the transport, accommodation, and activities intended for traveler consumption. Travel agents would then connect the consumer. 

Suppliers have now become buried under an avalanche of cloud-based solutions, channels, and marketplaces that connect them to the consumer but also to other suppliers. Increasingly, the various actors in the travel aim to consolidate across the different meta categories across the travel value chain.

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For the incumbents, these lateral pivots tend to be defensive moves against disruptive platform players moving to consolidate this new and much more amorphous travel value chain. Google migrated from search and evolved into a marketplace model to compete with the OTAs. These in turn are now playing catch-up rushing to integrate more content across different categories to compete as a default travel utility app. Booking Holdings disrupted hospitality by quickly aggregating supply through their agency model. The big hotel brands saw the potential to grow quickly and also moved to a marketplace model by effectively flagging properties under franchise agreements. Both Expedia Group and Booking Holdings have moved into hotel solutions and enterprise technology.

Often the strategy involves capturing both the supply and a global customer base. Here, we look at Amazon in this context and ask where and how the company can leverage its strengths to move into the segment. Whether Amazon will get into travel directly i.e. as a direct supplier of travel services, or as an intermediary, distribution channel, or advertising channel for travel brands remains speculation.

    Back Into Online Travel?

    A lot has happened since Amazon shelved its Locals and Destination products in 2015. For travel, the push into mobile computing, digital marketing, the sharing (rental) economy, and platform services have utterly transformed the sector. For Amazon, its explosive growth of its Prime loyalty base, its market-leader position in voice and smart home tech, expansion into new retail verticals including grocer  retailing, the acquisition of seemingly random technology companies from artificial intelligence and gaming, to its most recent billion-dollar acquisition of home security player Ring. All of these carry some nexus with travel. Speculating on the big move to launch it into the category is exactly that.

    Linear thinking puts Amazon back into online travel and distribution. Challenges are many and inherent to the vertical e.g. heavy competition, highly perishable inventory, relatively low transaction volumes, commoditization, complicated supplier networks and back-end systems, and other barriers suggest that Amazon will not go into travel organically.

    Others have speculated on an acquisition. Assets are limited, however. Expedia or TripAdvisor are the most visible targets. Expedia would be a significant and potentially risky investment - likely much bigger than Whole Foods which sold to Amazon at approximately US$13.7 billion, the company's largest acquisition to date. TripAdvisor has a strong brand and international visitor base.

    But the company has struggled to monetize as a hotel booking platform, however. As a metasearch player, TripAdvisor is also at the mercy of its OTA partners which account for approximately 60% of its revenue. More importantly, Booking Holdings and Expedia Group supply the majority of Trip's hotel inventory. We could see a scenario where Amazon partners with the OTAs to put pressure on Google. Ultimately, Amazon would need to balance a delicate web of relationships.

    Pressure from Google Hotel Ads,  Airbnb, Marriott, Hilton, and the other big chains will also likely push commission rates on hotel bookings downward. Both Booking Holdings and Expedia also have room to stay aggressive, in the event of an Amazon entry.

    Those that work in e-commerce and host with AWS also know where Amazon's profits come from. Amazon Web Services operating margins are clipping at 25% with net sales jumping to 17.5 billion at an enviable clip of 43% from 2016 to 2017.  Overall, any move into online travel is a risky and potentially an unnecessary risk for Amazon.

    While we agree that the company intends to make a comeback into the sector, all bets remain on the table and question whether online distribution and platform marketing would be the big move launching the company into the category. 

    Here, we consider Amazon's guiding principles to scope out potential synergies and strategic priorities.

    Amazon's Guiding Principles

    Your margin is my opportunity. This famous quote from Amazon CEO Jeff Bezos points to the company's MO when moving into new verticals. In other words, the company looks for areas where it can leverage its size and economies of scale to out compete its rivals. Essentially, it takes on a loss-leader position in certain verticals, to make up for it elsewhere either with its AWS line or other retail categories via its Prime membership base. The company exposes other guiding principles in its 10-K filings. 

    Amazon is guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking.
    — Amazon's preamble to every 10-K filing.

    Guiding Principle 1: Customer obsession rather than competitor focus.

    Here we question whether Prime members would look to Amazon for their travel planning and booking needs outright, if the company were to make a sudden splash into the category. Loyalty in travel is a slippery fish. Our view is that consumers are open to "shopping around" across familiar channels, but new entrants often struggle to scale. Even established brands have had difficulty reeducating consumers of their in-roads into new parts of the travel value chain. TripAdvisor's hard-fought attempt at moving further down funnel into hotel bookings emphasizes this point.

    Guiding Principle 2: Passion for invention. Here we question . The big and formidable innovator here is Google, as it integrates further across the entire traveler journey with its Maps, Assistant, Trips, Hotel Ads, and Flights products. Google is challenging Amazon on retail and e-commerce with its Shopping Actions program but we struggle see Amazon attempting to challenge Google on travel experience through the acquisition of an OTA or TripAdvisor.

    Amazon could look to stay as a supplier for the sector by leveraging its strengths in supply chain, operations, customer loyalty, and cloud computing. The company's acquisition track record in 2017 and 2018 points to more of the 'edge' tech stuff including voice, gaming, mixed reality, and such: Harvest.ai (cyber security), Thinkbox Software (design solutions), Do.com (collaborative work solution), Souq.com (e-commerce), Whole Foods Market, GameSparks (gaming), Graphiq (voice search), Wing.ae (delivery service), Body Labs (3D modeling), Goo Technologies (now Sumerian), Blink Home (smart home), Ring (smart home).

    Expedia Group is a myriad of booking channels and brands with strong e-commerce capabilities but limited value-add for Amazon's high-tech agenda. We also factor in Amazon's growing ambitions and traction in digital advertising, and how this will impact its strategy for the sector. We see a scenario where Amazon begins to capture Google-directed digital ad revenue from the OTAs, Airbnb, the big hotel groups and other travel players heavily vested in performance marketing. Amazon customer data could likely become a trove of valuable and unique intent data used to identify consumers at varying points of their travel journey.

    Guiding Principle 3: Commitment to operational excellence. Amazon's strengths in operations, workforce management, and supply chain optimization highlights the company's track record and MO when it comes to growth and expansion into new verticals. The acquisition of Whole Food's was largely a synergistic play leveraging its experience in home delivery, logistics and warehousing - among other areas. Increasingly, the company has invested in areas where it can grow its loyal customer base, by adding value through efficiency and price competitiveness. Taking on a loss-leader role to build up its Prime membership base and then making up lost margins in other areas has come out as its increasingly contentious strategy criticized by regulatory agents and pundits. Here, we see a strong case for Amazon in the vacation rental management space, as part of a springboard and bigger strategy aimed at compounding its already formidable position in certain home-based private-labeled products and services. Current players in the space including Vacasa and Turnkey continue to acquire small-to-medium property management groups, primarily to capture exclusive management contracts with homeowners. Once secured, these relationships could offer significant cross-sell opportunity for its technology products including the Amazon Echo and home security systems via its recently acquired Ring product, but also its household private-label products that include a range of different perishables, cleansers, and health & beauty items.

    Guiding Principle 4: Long-term thinking. Here we align Amazon's potential in-roads into travel and alternative accommodations with prevailing trends in the industry. We note heavy barriers to entry and increased competition in hotel distribution among the big OTAs, Google, now Airbnb and its recent push to integrate hotel inventory, in addition to the big hotel brands favoring an increasingly asset-light strategy focused on marketing and hotel management tech. By contrast, the still nascent alternative accommodations market offers unexploited ground for consolidation and economies of scale. Discussions with insiders in the space point to significant potential for cost efficiencies in marketing, pricing, and operations. Vacasa is now the largest U.S. property management group with over 8,000 properties. In an interview, CEO Eric Breon stated that this accounts for just two percent of the total U.S. market in terms of number of properties under professional management. Vacasa has raised a total of $140 million since 2009 and continues an aggressive roll-up strategy to break into new markets. When asked about the potential for Amazon to enter the space, Eric said he sees how the company could leverage its strengths in logistics to offer greater efficiency in the space.

    The Amazon Brand & Footprint

    Amazon is massive. The company employs around 550,000 people across its various product, platform, and service divisions in the U.S. and internationally. 2017 net sales were up 30% from the previous year, reaching US$177.9 billion. To put this into perspective, combined revenues for Google, Priceline, Expedia, and Marriott Group reached US$156 billion that same year. The company continues to invest heavily in growth and expansion into new verticals. Its more recent takeover of Whole Foods for US$ 11.7 billion has left many speculating on the Seattle-based giant's ambitions in other verticals - including travel. Various scenarios are now coming into view.

    In hindsight, the Whole Foods acquisition made sense, given Amazon's strengths in logistics and fulfillment and the general direction of the grocer sector and home delivery. We expect that any move into the travel space will have similar synergistic rationale behind it. We now turn to the company's four guiding principles as a starting point for further insight into Amazon’s alignment with the existing travel ecosystem.

    Hospitality, Synergies In The Rental Economy

    No delusions, a move into hospitality and guest services would be a far cry from Amazon’s track record in e-commerce and tech. Then again, most didn’t anticipate a Whole Foods acquisition. The company's size and appetite for seemingly disjointed verticals warrants a deeper look at different scenarios and points of entry for Amazon into travel, beyond the most rational. Here we see the short-term rentals management space as an unlikely, albeit interesting angle for Amazon. Companies like Vacasa and Turnkey are making a run at consolidating the space. While management services may not be core to Amazon’s track record, we see some multiplier effects.

    Surface Synergies

    We see a scenario where Amazon could realistically scale a $1.3 billion revenue business with 25% operating margins, over the course of 5 years. At the very least, there is real money to be made in the space and points to alternate strategies beyond platform marketing.

    In its current form, we see online travel distribution and hotel bookings as a maturing and increasingly competitive space with steadily eroding margins. Is it the cash cow that it once was and would it warrant investment by Amazon given its other revenue channels

    2) Amazon's strengths in logistics and operations gives it the boots on the ground to potentially service a nascent and increasingly professionalized alternative accommodations market.

    3) Recent acquisitions in the home security space points to Amazon's intent to build a closer relationship with its Prime member base.

    4) The urban managed rentals market holds significant opportunity for long-run growth.

    5) Home-based services like housekeeping and home product delivery is a synergistic fit with its massive Prime membership base. Cross-sell opportunities with Amazon's existing private-label product and service lines including furniture

    6) The vacation rental management space remains highly fragmented with significant opportunities for economies of scale.

    Deconstructing The Rental Economy

    The short-term rentals industry can be an amorphous mix of geographic, management, and ownership configurations. All manner of configurations exist between these three access points:

     LUFT

    LUFT

    Local, Leased, Primary Residence, Resident Managed
    Commonly referred to as the sharing economy. Classic Airbnb urban rental. Resident rents entire space, private room, shared room, couch etc. Manages the marketing and housekeeping. Might have a cleaner come to deal with bathrooms and laundry.


    Local, Owned, Primary Residence, Resident Managed
    Commonly referred to as the sharing economy. Classic Airbnb urban rental. Resident rents entire space, private room, shared room, couch etc. Manages the marketing and housekeeping. Might have a cleaner come to deal with bathrooms and laundry.


    Local, Leased, Primary Residence, Professionally Managed
    Typically well-to-do residents that travel a lot. Pay a premium for someone to manage the whole process including listing, housekeeping, visitor relations. Players in the space e.g. Under the Doormat


    Local, Owned, Primary Residence, Professionally Managed
    Typically well-to-do residents that travel a lot. Pay a premium for someone to manage the whole process including listing, housekeeping, visitor relations. Players in the space e.g. Under the Doormat


    Local, Leased, Secondary Residence, Resident Managed
    Local buys or leases a second space to generate supplemental income. Does not advertise services. Might have a profit-sharing arrangement with landlord. Evolving into property manager status.


    Local, Owned, Secondary Residence, Resident Managed
    Local buys or leases a second space to generate supplemental income. Does not advertise services. Might have a profit-sharing arrangement with landlord. Evolving into property manager status.


    Local, Leased, Secondary Residence, Professionally Managed
    Typically referred to as the serviced apartment. Sometimes contentious with regulators and traditional hotel lobbies. Players in the space: Stay Alfred, Sonder.


    Local, Owned, Secondary Residence, Professionally Managed
    Typically referred to as the serviced apartment. Sometimes contentious with regulators and traditional hotel lobbies. Players in the space: Stay Alfred, Sonder.


    Resort, Leased, Primary Residence, Resident Managed

    Transplant resident camped out in a seasonal resort market e.g. beach, ski locale. Rents out his home on select weekends during peak visitor weekends for supplemental income. Rents out entire space or room. 


    Resort, Owned, Primary Residence, Resident Managed

    Transplant resident camped out in a seasonal resort market e.g. beach, ski locale. Rents out his home on select weekends during peak visitor weekends for supplemental income. Rents out entire space or room. 


    Resort-Primary Residence-Professionally Managed, Leased

    Well-to-do snowbirds residing in beach and ski towns. Might take extended leave during low or peak season. Pay a premium for someone to manage the whole process including listing, housekeeping, visitor relations. 

    Resort-Primary Residence-Professionally Managed, Owned

    Well-to-do snowbirds residing in beach and ski towns. Might take extended leave during low or peak season. Pay a premium for someone to manage the whole process including listing, housekeeping, visitor relations. 

    Resort-Investment Property-Resident Managed

    Local resort dweller. Retired. Keeps busy optimizing her properties' Airbnb listings optimized. Likes hosting guests. One shared room at her primary home and two beds at her investment property. No intention of growing. 

    Resort-Investment Property-Professionally Managed

    Second homes in beachy, snowy, scenic locales. Owners contract with property managers. Typical contract length: 12 months. Ripe for consolidation. Players in the space: Vacasa, Wyndham, Turnkey, 

    Urban Rentals Supply Management, Ownership

    Geographically, rentals generally fall into two geographic buckets: Urban and what most refer to as vacation or resort markets. Urban rentals are the more nascent category which includes peer-to-peer inventory listed on Airbnb and other marketplaces. Airbnb effectively launched this supply category causing disruption among local regulatory bodies, traditional hotel lobbies, resident and neighborhood groups, and those that actively participate in renting out spaces. 

    Main conflicts rest on issues related to land use, competitiveness with traditional accommodation offerings, tax collection, impact on property prices, local residents, and businesses. Friction is most common in highly-trafficked cities with large inbound visitor numbers. Places like New York, Paris, Barcelona, and San Francisco typically involve higher operating risks for property managers. Cities like London have taken a more proactive approach to creating collaborative initiatives where industry and local stakeholders work together to draw out the future shape and laws around these rentals. Markets will lower visitor numbers are typically less contentious.

    Lagging regulation increases risks and limits growth potential of property management groups to single urban markets. Players like Stay Alfred, Sonda, One Fine Stay, and other urban-oriented operators must work in an environment where local laws and cost factors remain in flux. These groups remain small compared to traditional hotel groups and holding companies. Urban rentals found on Airbnb still heavily skew toward resident-managed spaces. Both renters and owners can participate as hosts in this space. We believe that a significant share of supply of Airbnb inventory in cities with prohibitively high rents and property prices - e.g. New York City, are renters that side-step local laws to "share" their spaces with willing renters.

    Resort Rentals Supply, Management, Ownership

    Resort rentals include permitted homes, condos, villas and other types of properties typically located in beach, ski, mountain and other leisure-focused settings. These are typically secondary residences or investment properties managed by local property groups that work on commission to fill, maintain, and service guests.

     

    is an industry term used to account for the various supply, distribution, and operational elements of  the apartment and home short-term rentals market. The supply falls into two general geographic categories i.e. urban and resort rentals; two operational categories i.e. managed by owner and professionally managed; and two occupancy categories i.e. primary home and secondary home.

    Airbnb effectively created the urban, primary home, managed-by-owner category which includes shared accommodations e.g. rooms for rent. Professionally-managed resort rentals has existed alongside traditional hotels, but the rise of Airbnb has spurred a wave of innovation and consolidation across the entire ecosystem. Here, innovation refers to technology platforms and management structures aimed at improving the overall customer experience, implementing quality & product standards, revenue optimization, and cost reduction. Consolidation refers to the roll-up of single-market and multi-market property management groups e.g. Vacasa and Turnkey, the roll-up of marketplaces e.g. Airbnb and  HomeAway, and the roll-up of technology companies focused on integrating revenue management, channel management, housekeeping, guest services, and other business functions under one platform e.g. LiveRez.

    Companies like Vacasa and Turnkey function as property management groups i.e. they staff their operations up from the Executive team down to housekeeping. They also leverage proprietary technology stacks in addition to a booking engine to capture direct bookings rather than third-party distribution via Airbnb, Booking.com, HomeAway, Google Ad Words, etc. This is the model we see Amazon adopting and envision a scenario where Amazon acquires one of these groups as a jumping-off point into the market.


    Consolidation In Rental Management

    This is what consolidation in the U.S. vacation rentals marketplace could look like.

     LUFT Projections.

    LUFT Projections.

    Regulation - Why does Airbnb and the other short-term rental marketplaces struggle with local regulators? Because they provide the platform for property owners and lease holders to effectively run illegal accommodations. Regulation has yet to catch up to the distributed model. Hotel owners continue to lobby against hotel 2.0. Regulating the marketplaces is the current recourse. Vacation rental management companies operate within established local laws. We see this changing over time. Highly desirable cities e.g. New York or San Francisco will have the highest demand hence the highest regulation. Non-tourist cities will likely be more welcoming and open to short-term rentals to fill supply where traditional hotels ignored. Cities are getting better at regulating the  The consolidating body co 

    Property Mix

    Occupancy

    ADR

    Commissions

    Fees

     

    Rationale For Market Entry

    Recent acquisitions and entry into the home security space exposes Amazon's intent to build a closer relationship with its Prime member base. Home technologies have efficiency gains in guest conversation and improved experience by facilitating access.  The urban managed rentals market holds significant opportunity for long-run growth. The larger majority of rentals available in cities are owner-managed. The steady evolution points toward more units falling under professional management. Vacation rental property management is also a scalable business with the opportunity for a rolling acquisition strategy as a test-and-learn approach for Amazon expansion. One scenario might be an acquisition of Vacasa or other tech-integrated platform. From there, Amazon’s massive access to capital could be used to expedite the roll-up of additional local property management groups. Home-based services like housekeeping and home product delivery is a synergistic fit with its massive Prime membership base. Cross-sell opportunities with Amazon's existing product and service lines give it leverage to offer lower commissions to owners and rates to vacation rental shoppers, as part of the Prime membership. The vacation rental management space remains highly fragmented with significant opportunities for economies of scale. Amazon could use its Prime base as a supplemental acquisition channel to Airbnb, Booking.com and other third-party platforms. As Prime members grow accustomed to Amazon playing in the space, the Amazon app could start to compete with Airbnb as a cost-effective distribution channel.


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