Why Online Travel Companies Are Buying Restaurant Reservation Operators
Lately, increased M&A activity has been observed in the online restaurant reservation space. TripAdvisor (NASDAQ:TRIP)—the world’s largest travel review company—acquired French site LaFourchette for $140 million last month. LaFourchette is one of the leading Internet and mobile restaurant reservation systems in Europe, with over 12,000 participating restaurants. In a similar move this month, Priceline (NASDAQ:PCLN)—the world’s biggest online travel agency by revenues—acquired North America’s leading restaurant reservation service, OpenTable (NASDAQ:OPEN), for $2.6 billion. OpenTable caters to about 24,000 restaurants in North America.
Both the deals were made fully in cash, and Priceline paid a premium of 46% to acquire OpenTable’s shares, suggesting that the travel giants see tremendous growth potential in the online table reservation category. Below we analyze the factors that justify online restaurant reservations as a good long-term bet by the online travel agencies.
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Increasing Adoption Of Online Reservations By Diners And Restaurants
The percentage of restaurant bookings occurring online is at low single-digits in nearly every international market, with the exception of U.S. where it is 20%. [1] However, diners are increasingly using the internet to make restaurant reservations due to the convenience and discounts offered online. We expect the proportion of diners who book tables online at full-service restaurants to increase in the future. A similar trend was witnessed in the online travel industry in the last decade, when people switched to the Internet to book flight tickets and hotels. Currently, about 40% of all travel sales worldwide occur online. [2]
Restaurants are also increasingly adopting online booking models as they help fill up empty tables, offer more convenience and enhance the efficiency. Online restaurant reservation operators usually install a software in the restaurant’s computer system that helps them effectively manage seating capacity by controlling the flow of guests, record preferences and other details about regular diners, collect reviews from the diners, and allow guests to book tables even when the restaurant is closed.
Slowing Growth Of Digital Sales In The Competitive Travel Market
Online sales as a percentage of total travel sales are expected to increase by only 600 basis points, to 46% by 2016, according to research firm eMarketer. The competition has also intensified in the industry since the recession. Many hoteliers have moved to online bookings due to the slump they witnessed in occupancy rates, thus fueling the rise of many online travel agencies. For these reasons, the industry veterans—Priceline, Expedia, Orbitz and Tripadvisor—are tapping the underpenetrated but faster growing markets such as mobile bookings and meta-search, and now restaurant reservations. Online restaurant reservations open up gates to a new revenue stream for these travel giants. Specifically, we believe that there is good scope for cross-selling and cross-promotion of products and services between travel and table reservation websites.
Absence Of A Global Leader In Restaurant Reservations
OpenTable and LaFourchette are the market leaders in the U.S. and Europe, respectively. However, unlike Priceline and Expedia (NASDAQ:EXPE), which dominate the global online travel market, neither OpenTable nor LaFourchette has a global presence as formidable. OpenTable’s business is highly concentrated in North America, where it has nearly three-fourths of its participating restaurants; likewise LaFourchette operates primarily in Europe.
TripAdvisor’s website averages 260 million monthly unique visitors, while Priceline and Expedia sell more than 22 million and 12 million hotel room nights per month. These companies also have a strong global presence. Since many travelers are also diners, these online travel giants can convert a huge chunk of their traffic into diners to gain dominance in the table reservation industry.
Enhanced Profitability Of Acquired Companies Due To Cost Synergies
Profitability is a concern in the restaurant reservation industry. While Opentable posted a net loss of $3.6 million in Q1 2014, LaFourchette turned profitable only last year. Selling, general and administrative (SG&A) expenses comprise the highest proportion of total costs for these companies. OpenTable had to spend over 60% of its gross profit on SG&A activities in 2013.
However, if a travel company integrates the restaurant reservation site’s technology with its own offerings, it could help cut millions in the latter’s operating costs. These companies can leverage their existing sales forces to market the reservation service, both in the U.S. and internationally, thereby driving a significant reduction in SG&A expenses of the reservation business. From the travel brokers’ standpoint, cross-promotion and cross-selling can help generate higher sales while also lowering marketing costs.
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Notes:- TripAdvisor’s (TRIP) CEO Stephen Kaufer on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 6, 2014 [↩]
- Online Travel Sales Explode in Latin America, eMarketer, November 20, 2013 [↩]