strategy in action - expedia

By Andrii Protsiuk | Chemsi Boulajouahel | Oyihoma Saleh | Sabrina Gheissari1

Agenda

1.Industry Analysis • Supply Chain

• PESTEL Analysis

• Porter’s 5 Forces

• Industry News & Events

2.Expedia Analysis • Company Overview

• CompeCCve Strategy & Landscape

• Financial Performance

3.RecommendaEons • Choice Hotel & Synergy

• Sabre + Synergy

• CompeCCve PosiConing2

Industry Supply Chain

Hotels

Airlines

Car Rentals

Cruise Lines

Travel Agencies

Leisure Travelers

Business Travelers

GDS

GDS

GDS

GDS

*Global DistribuCon System (GDS)3

• MonopolisEc market structure

• Decline in brick and mortar travel agencies and an increase in online travel agents (OTAs) due to internet penetraCon

• ShiQ in business model of travel agents from vendor commissions to service fees

• 60% of industry revenue is derived from sales of internaConal travel packages to US residents

$35.3bnIndustry Revenue

2.3%Annual Growth

17.4%ConcentraEon RaEo (4)

Industry Overview

4

PESTEL Analysis

PoliEcal & Legal Factors• Travel PromoCon Act of 2009 (TPA): promotes leisure, business, and scholarly travel to and

within the United States

• Airline industry is widely regulated in relaCon to passenger safety, internaConal trade, tax

policies and compeCCon

• Issues like war, terrorism and diseases also impact the industry

Economic Factors• US consumer spending throughout past 5 years experiencing growth • Significant decline in oil prices reflect on airline industry • Increasing GDP creaCng more disposable income

Sociocultural Factors • Increasing preference of consumers and businesses to make their travel purchases online • Online reviews play a stronger role in influencing consumer-purchasing decisions • Growing embracement of the sharing economy (Airbnb, Uber, etc.)

5

PESTEL Analysis

Technological Factors• Internet has revoluConized the industry

• Decline in number of brick and mortar travel agencies

• Mobile devices are driving online booking

Environmental Factors• Pressure for airlines to improve fuel efficiency and reduce noise

polluCon of their aircraQs

• Water and Sewage regulaCons on Hotels (West coast)

6

Porter’s Five Forces

Rivalry Among CompeEtors - HIGH• Low degree of seller concentraCon (CR4 = 17.4%)

• Low industry growth (CAGR=2.3%)

• Low switching cost and product differenCaCon

• Low capital requirement

• Intense price war


Threat of Entry - HIGH• Low brand loyalty

• Easy access to distribuCon channel, favorable locaCons and

raw materials (Website and Internet)

• Minimal experience needed to enter industry

• Low capital requirement7

Threat of SubsEtute - HIGH• Hotels, airlines etc. are driving consumers to make bookings

directly on their website

• IntroducCon of home-rental market (Airbnb)

• AlternaCves are offering compeCCve or lower prices in a

market with high price elasCcity

Bargaining Power of Supplier - HIGH• Higher concentrated industries (excluding hotels)

• Few subsCtutes for supplier inputs

• Forward integraCon already taking place

• Some price discriminaCon is possible


8

Bargaining Power of Buyers - LOW

• Less concentrated industry

• Low volume and relaCvely low frequency of purchases

• Lack of financial capacity to backward integrate

• They can easily find subsCtutes (e.g direct booking, Airbnb)

• Usually price sensiCve consumers


9

Recent News & Events

Marrioe InternaConal reached agreement to acquire Starwood Hotels & Resorts.

Airbnb raised $1.5 billion in latest funding round bringing its valuaCon to $25 billion.

Suppliers SubsEtutes

10

Hotels Airlines Car Rentals Cruise Lines AdverEsing

Travel & Hospitality Services

#1Travel Agency in USA

9.5%Market Share

$6.6bnGlobal Earnings 2015

14KEmployees

$16bnMarket Cap

53%Revenue from US market

11

Revenue Distribution

70%

13%

9% 8%

Revenue Mix

Hotel CarRental&Cruise Adver3sing Airlines

70%

13%

9% 8%

Revenue Mix

Hotel CarRental&Cruise Adver3sing Airlines

12

Mission & Growth Strategy

13

“RevoluEonize Travel Through the Power of Technology.”

New Channel PenetraEonGlobal ExpansionProduct InnovaEon

Growth Strategy

Passionate InnovaEve Enterprising

Core Values

Analysis of Competitive Strategy

Generic Business Strategy - DifferenCaCon Strategy

Product Bundling DealsExpedia + CiE Rewards Card Expedia Mobile Apps

Bases of DifferenEaEon:

• Complements (Rewards card & Mobile app)

• Product Features (Bundling deals)

14


Corporate Strategy• Horizontal IntegraEon (AcquisiEons) + Product-Market DiversificaEon

• Reduce excess capacity

• Reduce compeCCve intensity and increased profitability

• Increased differenCaCon strategy by widening product offering

• Operates in 60+ countries offering mulCple travel and hospitality services

15


Cost Leadership

DifferenEaEon

2016

2016ProducCvity

FronCer

ProducCvity FronCer 16


COGS/Sales

SGA/Sales

Net Profit Margin

Market Share ROA ROE ROIC

19.63% 57.70% 11.46 9.50% 6.23 23.00% 14.66%

6.85% 52.53% 27.66 5.40% 15.77% 29.39% 19.24%

private private private 1.60% private private private

Industry Avg. - - 15 - 6.84% 12.88% 8.43%

CompeEEve Profile

Expedia vs. Priceline• Priceline COGS benefited from reversal of Hawaii travel transacCon taxes worth $16.4 million • Decrease in Priceline’s Name Your Own Price® reservaCon services.

17


V R I OBrand ✓ ✓ ✓ ✓ Sustainable

IT System ✓ ✘ ✘ ✓Supplier

RelaEonships ✓ ✘ ✘ ✓Ecosystem of

websites ✓ ✓ ✓ ✓ Sustainable

Economies of scope ✓ ✘ ✘ ✓

HomeAway ✓ ✓ ✓ ✓ Sustainable

Expedia VRIO Analysis

18

SWOT Analysis

Strengths • Brand Awareness/ReputaCon

• AcquisiCons - strong brand porpolio

• offers a broad range of travel and

hospitality services

Weaknesses • Dependence on search engines

• Dependence on suppliers

• Pressure to grow shareholder value

OpportuniEes • Growing internet penetraCon

• Demand from emerging markets

• Mobile technology

• Increasing availability of complements

Threats • Sharing economy (Airbnb)

• Hotels and airlines increasing efforts of

direct booking

19

Financial Performance

2013 2014 2015 2016 2017 2018 2019 2020

Sales $4,771,259 $5,763,485 $6,672,317 $7,869,998 $9,282,663 $10,948,900 $12,914,228 $15,232,332

COGS $1,038,034 $1,179,081 $1,309,559 $1,470,897 $1,652,111 $1,855,651 $2,084,267 $2,341,049

SGA $3,151,043 $3,919,856 $4,785,243 $5,897,230 $7,267,620 $8,956,458 $11,037,746 $13,602,681

DepreciaCon + Other OperaCng Expenses $216,122 $146,784 $163,949 $147,235 $132,226 $118,746 $106,641 $95,769

OperaCng Income $366,060 $517,764 $413,566 $457,648 $506,428 $560,407 $620,140 $686,240

Taxes + Interest and Other Income $133,210 $119,667 ($350,899) $356,858 ($362,917) $369,080 ($375,347) $381,721

OperaEng Income amer taxes $232,850 $398,097 $764,465 $100,790 $869,345 $191,327 $995,488 $304,519

Expedia 5-Year Financial ProjecEon (‘000s)

$102.92Stock Price (Apr. 8)

137,780,456Shares Outstanding

$6bnAcquisiEons

11.48%WACC

20

RecommendaEons

21

Future of Expedia

Threat of SubsEtute (HIGH)

Own SubsEtutes

22

Future of Expedia

Bargaining Power of Supplier (HIGH)

ACQUIRE

23

12Hotel & Motel Brands

6,300+LocaEons

35+Countries

$860MGlobal Earnings 2015

500K+Rooms

$3bnMarket Cap

Brand Porrolio

24

Porter’s Five ForcesPorter’s 3 Tests

1. AsracEveness - LOW• Despite low switching costs, industry is saturated and some

firms are consolidaCng to increase profitability and reduce

compeCCon

2. Cost of Entry - HIGH• Capital intensive industry with a high proporCon of fixed costs

to total cost and Incumbents with experCse are at advantage

as well as access to favorable locaCons low

3. Beser-Off Test - HIGH• Industry players hold strong bargaining power and have forward

integrated in an effort to increase direct booking and eliminate

need for OTA. Expedia must react to threats

1

2

3

25

Financial Performance

2013 2014 2015 2016 2017 2018

Sales $724,650,000 $757,970,000 $859,878,000 $980,260,920 $1,117,497,449 $1,273,947,092

COGS $407,646,000 $412,637,000 $488,717,000 $557,137,380 $635,136,613 $724,055,739

SGA $111,700,000 $121,400,000 $134,300,000 $153,102,000 $174,536,280 $198,971,359DepreciaCon + Other OperaCng Expenses $9,056,000 $9,365,000 $11,542,000 $13,080,447 $14,823,954 $16,799,856

OperaCng Income $196,248,000 $214,568,000 $225,319,000 $256,941,093 $293,000,601 $334,120,137Taxes + Interest and Other Income $83,532,000 $92,437,000 $96,389,000 $103,587,297 $111,323,159 $119,636,734

OperaEng Income amer taxes $112,716,000 $122,131,000 $128,930,000 $153,353,797 $181,677,442 $214,483,403

Choice Hotels Financial Strength

Stock Price (Apr. 8) $52.24

CAGR 14%

Industry CAGR -1.06%

WACC 9.96%

COGS/Sales 56.83%

SGA/Sales 15.61%

ROA 18.64%

26

Porter’s Five ForcesExpedia + Choice Hotels Synergies

Sales GrowthSynergies that increase sales growth:

• MonopolisCc compeCCon over Choice Hotels (and

HomeAway)

• Control to differenCate product

• Lower prices and travel packages

• Cross-industry adverCsement

Cost of Goods SoldSynergies that decrease COGS:

• Economies of Scale + Economies of Scope

• Decrease in licensing fees and booking fees

Synergies that increase COGS: • CoordinaCon costs - Operate solo

27

NPV Analysis

2013 2014 2015 2016 2017 2018

Sales $5,495,909,000 $6,521,455,000 $7,532,195,000 $9,292,771,763 $10,920,167,972 $12,833,989,917

COGS $1,445,680,000 $1,591,718,000 $1,798,276,000 $2,080,744,598 $2,432,451,396 $2,844,239,405

SGA $3,262,743,000 $4,041,256,000 $4,919,543,000 $5,797,296,119 $6,831,863,243 $8,051,288,512

DepreciaCon + Other OperaCng Expenses $225,178,000 $156,149,000 $175,491,000 $160,315,870 $147,049,645 $135,545,964

OperaCng Income $562,308,000 $732,332,000 $638,885,000 $1,254,415,176 $1,508,803,688 $1,802,916,036

Taxes + Interest and Other Income $216,742,000 $212,104,000 ($254,510,000) $460,444,912 ($251,594,254) $488,716,846

OperaEng Income amer taxes $345,566,000 $520,228,000 $893,395,000 $793,970,265 $1,760,397,942 $1,314,199,190

IniEal Investment $1,953,044,145

Net Cash Flow $29,228,092,594

Discount Rate 12.68%

Present Value $11,518,275,180

Stock Price (Apr. 8) $52.24

Shares Outstanding 56,389,126

Premium 30%

Equity Purchase 51%

Expedia + Choice Hotels

28

• Sabre CorporaCon is a travel technology company based in South-lake, Texas

• Founded by American Airlines in 1960 (Spun Off)

• Largest Global DistribuCon Systems provider for air bookings in North America.

Hotels

100K

Airlines

70

Data TransacEons

85K/sOperaEons

About

29

Porter’s Five ForcesExpedia + Sabre Synergies

Sales GrowthSynergies that increase sales growth:

• Complete backwards integraCon • Strong bargaining power • Complete control over supplier network • Stronger control to create monopolisCc compeCCon • Only OTA to completely verCcally integrate

Cost of Goods SoldSynergies that decrease COGS:

• Greater decrease in licensing fees and booking fees

Synergies that increase COGS: • CoordinaCon costs • CoordinaCon costs - Cannot operate solo, will have to

integrate plaporm

30

2021 2022 2023 2024 2025

Sales $21,442,259,829 $25,210,628,614 $29,644,147,237 $34,860,631,963 $40,998,826,138

COGS $20,846,641,500 $24,510,333,375 $28,820,698,702 $33,892,281,075 $39,859,969,857

SGA $4,552,977,852 $5,328,288,644 $6,236,894,900 $7,301,900,962 $8,550,443,291

DepreciaCon + Other OperaCng Expenses $13,179,999,778 $15,534,165,738 $18,309,274,327 $21,580,656,525 $25,437,133,273

OperaCng Income $110,459,129 $104,950,683 $100,770,501 $97,885,373 $96,279,094

Taxes + Interest and Other Income $3,003,204,741 $25,210,628,614 $29,644,147,237 $34,860,631,963 $40,998,826,138

OperaEng Income amer taxes $3,242,916,475 $2,988,552,188 $4,403,760,074 $4,319,215,347 $5,993,295,480

Sales post Choice AcquisiEon 0.05

Sales post Sabre AcquisiEon 0.08

COGS -0.01

Synergies

Expedia + Choice Hotels + Sabre

NPV Analysis

Expedia + Choice Synergies $11,518,275,180

NPV

Without Synergies $6,510,890,597

Total Synergies $13,105,589,74831


V R I OBrand ✓ ✓ ✓ ✓ Sustainable

IT System ✓ ✓ ✓ ✓ Sustainable

Supplier RelaEonships ✓ ✓ ✓ ✓ Sustainable

Ecosystem of websites ✓ ✓ ✓ ✓ Sustainable

Economies of scope ✓ ✓ ✓ ✓ Sustainable

HomeAway ✓ ✓ ✓ ✓ Sustainable

Expedia VRIO Analysis

32

New Expedia Supply Chain

Leisure Travelers

Business Travelers

Full Backward Vertical IntegrationHorizontal

Integration

33

QuesEons?

34