Three years ago online accommodation online market leader Wotif dismissed the likes of Expedia as “foreign interlopers” with more money than sense.
They were no serious threat to its domination of the Australian online accommodation market – or so the Wotif board felt.
Now Expedia is about to buy Wotif for $703m after it failed to adapt to the new business paradigm unwittingly flagged by that comment from Chairman Dick McIlwain in 2011.
Australia’s biggest online travel agent – still largely controlled by its co-founders with 35% shareholding – decided it doesn't have the firepower to stand alone.
“You have to eat or get eaten,” said Wotif CEO Scott Blume of today’s brutal online world, where the big are getting bigger and the small are either disappearing or getting bought up.
It follows the sale of Stayz.com.au by Fairfax Media last December to HomeAway for $220m and means Webjet is now the only major locally-owned online travel agent*.
All the other big online travel agents are global multi-nationals. They are no longer a threat but a market reality.
And now the Wotif Group – which also includes travel.com.au, lastminute.com.au, godo.com.au, latestays.com and Arnold Travel Technology – will become one of them.
Mr Blume is excited; you feel a weight has been lifted.
“It’s a slightly defensive move but a pragmatic one – this wasn’t selling off the farm,” Mr Blume said.
Asked if the past few years have been tough, Blume said: “I think the toughness gets overplayed – Wotif is still one of the world’s most profitable OTAs.
“It’s a massively successful business with A$80m in the bank.
“What’s changed is the earnings multiple not the earnings – it’s profitability.”
That is, costs are up and profit is down. Sales aren’t so hot either with the rising commission rates helping to (partially) right the imbalance.
However, despite recent declines, Wotif remains a cash machine.
It is forecasting A$43m net profit forecast on revenue of A$149m for the year to June 30.
Mr Blume said Wotif’s profit margin remains well in excess of 40%.
Expedia Australia is a minnow by comparison.
JP Morgan says the most recent accounts lodged with ASIC show a net profit for Expedia Australia of A$0.9m for 2012 on turnover of between A$200m to A$250m.
That represents a profit margin of less than 1%.
Yet it has access to enormous resources and Mr Blume said staff – of which are now 600, mostly based in Brisbane – is happy with the decision to sell.
“When the news was announced to staff on Monday morning there was a little bit of ‘that’s interesting’,” he said.
“But the vast majority seemed to feels that ‘we’ll be working with someone who gets it, they understand what it takes’.”
However, it’s difficult to look at the transaction without a degree of nationalism and wonder if this is a sad scenario – Aussie icon sold to foreign interloper – or just a fact of modern business?
The answer would appear to be a bit of both.
In fact, Wotif’s story is a classic allegory for the modern online travel industry, which is globalising faster than you can say OTA.
It was once diverse – there was much less competition – and in the beginning companies kept to their own markets.
But times have changed and now online travel, especially in western and European markets, is controlled as a handful of companies, virtually all American: Expedia, Priceline Group, TripAdvisor, HomeAway etc…
As business commentator Stephen Bartholemeusz wrote: “The A$703 million bid by US giant Expedia underscores the obvious and brutal truth about online travel services.
“They are now a price-driven commodity and in commodity businesses, scale really matters.”
And for many years scale, in the Australian context, is something that Wotif had.
It was a dream business, dominating online accommodation sales in Australia for the decade between 2000 and 2010.
Wotif made ridiculous profits with margins verging on 50% of revenue, unheard of in other markets.
The online travel world took notice, studied Wotif’s public accounts and identified Australia as a target market, planning their attack accordingly.
Meanwhile, the Wotif board took a lot of money out of the business, failing to reinvest its very significant profits.
They also mismanaged its entry into Asia through the acquisition of Asia Web Direct – a company Expedia also coveted.
There were warning signs in 2010.
But even a year later management naïvely believed the “aggressive and exuberant” marketing practices employed by international rivals could not be sustained.
Sales would start growing again.
Of course, as we know now, they didn’t.
The foreign online marketing dollars kept pouring in – the torrent became a flood – and Wotif simply wasn’t prepared for the onslaught, either here or in Asia.
Market share and room night sales inevitably fell as consumers, bombarded by non-stop digital advertising, increasingly used rival sites like Booking.com, Expedia, Hotels.com, Agoda.com, HotelsCombined and SkyScanner.
Wotif was on a slippery slope.
Its predicament was one the two big topics within the Australian travel industry (the uncertain strategy at Helloworld being the other).
What can they do to turn the business around?
Now we know – sell up and get someone else to do it.
Silly money ain’t so bad after all.
It was a shockingly pragmatic decision by the Wotif board even though on reflection it seems pretty obvious.
“This was a long, thoughtful, deliberate process and the board looked at all available options,” Mr Blume told The Australian.
“We looked at acquisitions, we looked at joint ventures, we looked at share buybacks and indeed we looked standing alone.
“We looked at a whole range of options with Goldman Sachs but in the end we felt this was the way to maximise shareholder value.”
For shareholders, read co-founders Graeme Wood (20%) and Andrew Brice (15.5%).
Mr Blume continued: “We could have stood and fought. We could have invested more in technology and marketing, but that also brings uncertainty and risks and that is what we had to weigh up.
“The reality is that our industry is consolidating.
“We either need to sell into that consolidation now while we can and I think that has been a good and courageous decision from the board at the right time to maximise shareholder value.”
That phrase again – maximise shareholder value.
Or to put it another way, cash out now while the going is still pretty good…
*NB: HotelsCombined is meta-search while the Flight Centre site is part of a larger operation.