Where Are Priceline and TripAdvisor Headed With the Restaurant Reservations Business

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. 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. 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 sees tremendous growth potential in the online table reservation category.

There are many reasons behind these acquisitions, most important of them being the slowing growth of digital sales in the highly competitive travel market and the increasing adoption of online reservations by diners and restaurants due to the convenience, efficiency and discounts offered. For a better understanding of the reasons, read our recent analysis: Why Online Travel Companies Are Buying Restaurant Reservation Operators

In this article, we briefly compare OpenTable and LaFourchette, and then discuss their parent companies’ potential future strategy for restaurant reservations.

See our complete analysis of Travel stocks: Priceline | TripAdvisor

A Closer Look At OpenTable And LaFourchette

Online restaurant reservation operators such as OpenTable and LaFourchette, generate revenue from two important sources:  First, they install software in the restaurant’s computer system that helps them effectively manage seating capacity by controlling the flow of guests, recording preferences and other details about regular diners and collecting reviews from the diners. Second, they allow restaurants to take online reservations from diners through their websites and mobile apps, thereby overcoming the inefficiencies that arise in traditional phone reservations.

OpenTable is more concentrated in North America where it caters to about three-fourth of its total customer base of 31,500 restaurants, while LaFourchette operates primarily in Europe with over 12,000 participating restaurants in countries like France and Spain. The two companies are struggling with their profitability, mainly due to high selling, general and administrative (SG&A) expenses, despite them being leaders in their respective geographies. While OpenTable posted a net loss of $3.6 million in Q1 2014, LaFourchette turned profitable only last year.

Understanding Travel Companies’ Strategy For Restaurant Reservations

To overcome the issue of low profitability, travel giants such as Priceline and TripAdvisor can integrate the restaurant reservation site’s technology with their own offerings, thus help in cutting millions in the latter’s operating costs. These companies can leverage their existing sales force 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.

Although this will be the broader strategy for both Priceline and TripAdvisor, we believe their actual strategy will somewhat vary due to the difference in the nature of their operations. Priceline is a travel deal-broker that sells more than 22 million hotel room nights per month. It will be now looking to sell tables along with hotel and airline ticket bookings, and as a part of vacation packages. On the other hand, TripAdvisor is a travel review website that gets nearly 260 million unique visitors per month. It will be looking to better monetize this traffic by allowing users to book tables. The booking feature will also attract new users and restaurants to its website, presenting an opportunity to exponentially grow restaurant reservation revenues.

Priceline And TripAdvisor Plans For The Reservations Business

Rapid international expansion through the booking.com, agoda.com and rentalcars.com brands has been one of the most important drivers behind Priceline’s growth momentum. Gross bookings from international markets as a percentage of total bookings have gone up from 55% in 2007 to around 85% in 2013. In absolute terms, while domestic gross bookings have nearly tripled since 2007, international gross bookings have increased over tenfold.

Priceline could leverage its strong international foothold to rapidly grow OpenTable outside North America.  It could promote OpenTable via booking.com in Europe and via agoda.com in Asia-Pacific. The number of OpenTable’s restaurant customers outside North America has remained around 7,700 for the last six quarters, and we currently forecast a 5% annual growth in this figure over the future. But Priceline’s strong global presence will help international growth jump to 15-20% annually in coming years. We believe that OpenTable will also allow Priceline to enhance its offerings for the North American market, a region which has been dominated by Expedia for years.

TripAdvisor does not have a global presence as formidable as Priceline’s. The company generates more than half of its revenues from North America alone. However, it has a huge database of listings and reviews of restaurants across the globe and gets over 200 million page views per month from its restaurant traffic. TripAdvisor’s primary agenda behind acquiring LaFourchette will be to better monetize this traffic by converting its users into bookers on its own website. This will also help in improving the overall travel experience as travelers frequently visit TripAdvisor while they are on the go.

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