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Southeast Asia’s inbound tourism industry has grown by an annual average of 7.9% since 2005 and the region now accounts for over 30% of international expenditure in this sector.

But as high-end and mid-market hotel brands strive to attract a greater number of tourists to fill up their rooms, they might be missing out on an emerging demographic: the domestic Asian millennial traveler who is more likely to opt for a budget hotel.

According to E&Y, millennials and millennial-minded travelers are far more cost-conscious and experience-focused than their predecessors.

This view is augmented when you consider travel preferences in Asia. The top three requirements for travelers looking for recommendations within the region are to help them save money, make travel more comfortable, and to save time.

Preferences of APAC travelers. Chart: Amadeus

Millennials are increasingly likely to ditch glitz and glam for minimalism and function. And with travel within APAC democratized by the likes of no-frills carriers such as Air Asia, it’s only a matter of time before complementary industries start riding this wave too.

The budget hotel industry has certainly witnessed greater investor interest in the past couple of years looking to solve a key problem – standardization. It’s often that travellers booking online even after combing through ratings & reviews are commonly surprised upon arriving at the hotel.

The idea to club together existing hotels, upgrade their facilities to ensure safety & comfort, and bring them under a unified brand was popularized by India’s OYO Rooms. The startup has raked in US$450 million in funding primarily by Softbank.

Since 2000 the Chinese tourism industry has also witnessed a surge in budget hotel franchises, aiming to address the historical issue of lack of standards, safety, trust, and reliability. Franchises like the China Lodging group and 7 Days Inn are now worth billions.

ZEN Rooms is another startup that operates on a similar model and was brought to Asia by German startup incubator Rocket Internet in mid-2015. It’s now present in seven countries across Asia, namely Indonesia, Singapore, Hong Kong, the Philippines, Malaysia, Sri Lanka, and Thailand.

At the time of launch, the company pointed to the expanding nature of regional travel as a critical factor in its decision.

“…in terms of accommodation and travel, Southeast Asia behaves like one big country. There is a lot of inner-country travel. Indonesians travel from Jakarta to Bali, Malaysians from one city to another. There is a lot of inter-region travel, from Jakarta to Singapore to Bangkok to Kuala Lumpur, for example,” said co-founder Kiren Tanna while speaking to TechCrunch.

Most travelers in Asia like to journey closeby. Source: Euromonitor

In 2017, ZEN Rooms received a fresh capital injection of US$4.1 million adding further credence to its business model. New investors joined the party, namely Redbage Pacific and SBI Investment Korea.

And the Rocket Internet-backed startup isn’t the only contender in this space. Companies like Reddoorz, Nida Rooms, and Tingall have all propped up aiming to cater to an ostensible gap in the market. Cumulatively they’ve managed to attract US$10 million in funding so far.

Another competitor is Goldman Sachs-backed Red Planet. Its model is slightly different; rather than partnering with existing budget hotel operators, it chooses to own and operate its own properties. The company has over US$200 million in funding purportedly because it’s not an asset-light model, but is trying to solve the same pain points of uniformity of service.

“The [budget] hotels in Southeast Asia lack efficiency in many aspects and that eventually translates into substandard customer satisfaction,” explains ZEN Rooms co-founder and global MD Nathan Boublil to ecommerceIQ. “That’s the difference between Southeast Asia and the West. We want to improve the budget hospitality market with better sales and distribution, technology, and lowering the cost of procurement.”

“The Southeast Asian market is largely made up of small “mom-and-pop” hotels with no structural efficiency, which penalizes both guests and the hoteliers themselves. In the end, prices have to go down and the service level has to go up so that domestic and regional travelers can fully access travel,” he adds.

The Philippines in focus

The Philippines has rapidly emerged as one of ZEN Rooms’ largest growth areas.

Nathan says the dominant budget hotel chain before them only had 11 hotels on board which his company has surpassed since, although he declines to disclose the total number of partners they have.

11 certified budget hotels compared to the 6 million international tourist arrivals in the country in 2016 presented a large gap in the market and existing infrastructure – a fact alluded to by Domingo Ramon Enerio, Chief Operating Officer of the Philippines Tourism Promotions Board.

“We ended 2014 with 4.8 million tourists; this year we’re hoping to reach 5.2 to 5.5 million. We estimate that the demand for Philippine tourism is in excess of 10 million – meaning these are people who want to visit the Philippines but couldn’t for several reasons, whether it’s flights or not enough rooms or information,” he explained to Philstar in 2015.

The government has also aggressively promoted tourism in the island-drenched nation under the “It’s more fun in the Philippines” banner.

Hence according to official estimates, there’s still a gap of about 4 million inbound tourists who would like to visit the country but aren’t able to do so. This doesn’t factor in domestic tourists who might be put off by similar challenges of finding suitable rooms. So the total number is likely to be higher.

In the Philippines, ZEN Rooms first piloted a project to bring serviced apartments under its banner in addition to regular hotels. This has grown to be immensely popular with the category running at 95% occupancy and an average customer rating in excess of 9, according to Nathan. There’s 200 such budget serviced apartments in Manila alone with plans now to introduce the category in Kuala Lumpur.

Domestic travelers account for 50% of ZEN Rooms’ customers, with regional travelers making up an additional 30%.

In the Philippines itself, domestic travel is being fueled by an emergent middle-class, strong GDP growth, and a larger number of households with young children.

A larger number of households with young children are fueling tourism in the Philippines. Source: Euromonitor

The push towards branded serviced apartments does bring ZEN Rooms in competition with property owners on Airbnb but Nathan says they’re succeeding due to economies of scale and lower prices.

Typically Airbnb owners can’t offer things like late night check-ins or daily housekeeping unless they partner with a management agency like GuestReady. This also drives up costs as the agency will typically charge a commission.

Nathan points out that ZEN Rooms’ existing operations drive synergies between the two business units. As they’re already helping improve the level of service in budget hotels, the team can leverage its expertise and manpower towards serviced apartments. This helps facilitate things like late check-ins and quality controlled daily housekeeping.

The French entrepreneur is taking a long-term view of the market.

Really, we’re just starting our expansion in Southeast Asia, the region is huge and inter-country travel is growing very fast,” he notes.

Southeast Asia is, in fact, the world’s fastest-growing travel region according to the World Travel & Tourism Council.

And there’s little doubt about a palpable sense of optimism engulfing the region: 80 million new consumers came online via their phones last year, representing a 31% increase as compared to 2016. Asian millennials are also addicted to social media, internet shopping, and increasingly rely on the web for travel & tourism research.

It’s time for no-name, obscure hotels to partner up with players like ZEN Rooms in order to gain more exposure, efficiency and latch on to emerging millennial travel needs.

THE BACKGROUND

Popular travel site Expedia had its humble beginnings as a travel booking division by Microsoft in 1996, known as Microsoft Expedia Travel Services. The goal was to provide a groundbreaking method for customers to research and book their trips.

In the early 2000s, American media and internet company, IAC took over Expedia and what followed was a string of other ecommerce site acquisitions: Hotels.com, Hotwire, TripAdvisor, and China’s eLong.com.

“Buy, not build” would become the company’s repeated business strategy. Five years later in 2005, Expedia was listed on Nasdaq.

“We are always opportunistic,” commented Mark Okerstrom, Expedia’s then CFO. “The M&A team is never closed for business. We are always on the hunt for interesting opportunities and we’re fortunate to have an incredibly strong core business, which gives us the confidence to go out and do some of these acquisitions that are a little bit more intensive.”

Expedia Southeast Asia

Source: Expedia

THE CHALLENGE

Technology, as with most industries, has disrupted the travel business at a blink of an eye, shaping the expectations of travelers. New forms of “travel tech” such as fare comparison, travel design and emerging business models like Airbnb’s share economy, shook an industry that relied on travelers thinking only “where do I sleep?”

The internet granted people the luxury of a hassle free travel booking; best location, best hotel, best flight all for the best (lowest) price on one platform.

The arrival of Airbnb in 2008 changed the mindset of travelers – mainstream hotel chains no longer attracted them. Travelers sought property in remote, funky neighborhoods and relied on the local know-how of their host to explore destinations. Could Expedia compete with its traditional hotel offering?

Expedia Southeast Asia

Source: Phocuswright

THE STRATEGY

In order to cope with the volatile industry, Expedia did what it does best – opened its wallet for another acquisition. The company added Airbnb competitor HomeAway to its portfolio for a price tag of $3.9 billion in 2015.

Expedia Southeast Asia

Source: Nikkei Asia

The acquisition helped Expedia increase market share but is still behind Airbnb. In Q2/2017, Airbnb captured 15% of the global home-sharing market while Expedia and Priceline secured 12% and 9%, respectively.

Expedia, already with a stronghold in North America, realized that it needed to focus on emerging markets where 50% of the world’s millennials live and where its competitor, Priceline, established a leading position via Agoda.com and Booking.com.

Asia’s travel industry is expected to rise with a 12% CAGR during 2015 – 2020 to reach sales of $434 billion.

Asia Pacific is expected to remain the main driver of this performance, registering a 20% CAGR over the next five years, as internet adoption picks up in the region.

Expedia Southeast Asia

Source: Skift.com

In an attempt to compete with Priceline’s popular Booking.com, Expedia made a recent investment of $350 million into Indonesia-based Traveloka to bolster its presence in Southeast Asia as the company services six of the region’s primary markets.

“The US used to be the driver of our global strategy and other areas would follow,” expressed Dara Khosrowshahi, then CEO of Expedia in June 2017, only months before embarking to Uber. “But Asia is now driving our strategy.”

Unsurprising as the region’s internet economy is expected to grow from $31 billion in 2015 to $197 billion in ten years time. Travel is estimated to account for 45 of that, according to Google and Temasek.

“Our target is to at least double our share of the online travel marketplace in Asia[-Pacific]. I think we are on our way,” said Dara Khosrowshahi.

More specifically, Dara expected to increase gross number of bookings from its non-US businesses from the current 36% to two-thirds. It’s quite possible with Traveloka as an aid because Expedia can capture more of the 168 million Muslims expected to go abroad by 2020 as Indonesia is home to the world’s largest Muslim population.

Before his departure, Dara said there are two keys to winning Asia:

  1. Understanding Asian consumer habits
  2. A mobile-first attitude

To achieve this, the company operates Expedia Innovation Lab in Singapore where it uses sensor technology to understand how users feel while browsing Expedia-branded websites in 14 Asia-Pacific markets, including Australia, China, Thailand and Singapore, most of which have larger traffic volumes coming from mobile users.

Expedia Southeast Asia

Expedia Innovation Lab uses sensor technology to understand how consumers in Asia interact with its websites and services. Source: Nikkei Asia

THE FUTURE

The company is trying to fight for a stake in the fast-growing home-rental industry in Southeast Asia, where home rentals are still illegal as regulations have not caught up to the “share economy” while expanding its core hotel-booking business.

The company already has formed strong alliances with powerful players in the region such as AirAsia. Expedia acting as an official distributor through its agency AAE Travel can bundle AirAsia flights with hotel packages. But in a nascent market such as Southeast Asia, strong discounts are only the beginning as consumers have a plethora of travel agencies to choose from.

Good news? No single company occupies over 23% market share in any major Southeast Asian country.

THE BACKGROUND

Named after the biblical strongman Samson, travel luggage manufacturer and retailer Samsonite was founded in Denver, United States in 1910 and since been renowned for its high-quality and durable luggage.

With over 100 years of experience, the company is known for its high-quality and durable wide selections of innovative luggage. Samsonite also owns several other popular brands including American Tourister, High Sierra, and Lipault, making it the global market leader for travel luggage.

Samsonite Southeast Asia

Global market share of travel luggage in 2015. Source: Quartz

The company has changed ownership a few times, counting former Louis Vuitton’s CEO, Marcello Bottoli, as one of its past owners. In 2007, Samsonite was bought by private equity firm CVC Partners for $1.7 billion and the company raised $1.25 billion in an IPO in 2011 in Hong Kong.

But no company is without its own struggles to the top.

THE CHALLENGE

Samsonite counts Asia as its biggest market as China alone contributed to a quarterof the group’s sales ($124 million) in the first half of 2016. However, that number was 5.2% lower than the same period last year due to an economic downturn, and the shift to ecommerce.

Samsonite Southeast Asia

Samsonite sales in China are not growing as fast as it was before.

“In many of our key markets, our traditional channels of distribution have begun a painful process of adjustment to the shift in business online, and the implications for scale and type of retail estate,” said Samsonite’s Chairman, Timothy Parker.

Working with third-party platforms also proves to be tricky for the company as it attempts to protect its brand value by limiting the discount tactics used by ecommerce platforms to entice buyers to shop.

“We don’t want to grow ecommerce at the cost of our current model,” explainedSamsonite International CEO Ramesh Tainwala.

“We have to explain to the ecommerce players that they are offering enough advantages to consumers through convenience, through range shopping.”

The company is also aiming to double its luggage market share, where 50% of the volume is dominated by private label and unbranded sellers, by diversifying its portfolio and shed its stiff luggage manufacturer image.

“It’s [Samsonite] synonymous with luggage but we’re diversified into business backpacks, casual backpacks, and accessories. But we haven’t done a good job of telling that story,” said Stephanie Goldman, Senior Director of Brand Communications. Samsonite needs to find a better strategy for its marketing and distribution channels.

THE INNOVATION

“Consumers are spending, but they are spending more carefully, and looking for value. And one place that value is available is online,” said Samsonite’s Chairman, Timothy Parker.

Using China’s favorite messenger app WeChat, Samsonite utilizes social media to drive traffic to its brick-and-mortar stores and offer discount coupons to its followers. The initiative has succeeded in boosting 5% in offline sales.

Samsonite Southeast Asia

Samsonite joins a list of other global brands that utilize WeChat to attract consumers in China. Source: FashionChinaAgency

The company launched a marketing campaign with a tagline “We Carry the World” where it featured travelers using Samsonite products to show audiences its universal definition of “travel gear”.

Working with Connelly Partners, Samsonite USA also featured various influencers to advertise its business bag collection in its #WorkNotWork campaign and chose individuals with unconventional jobs like athletes, chefs, artists, and fitness gurus as brand ambassadors.

“Work nowadays can look much different from a typical 9-5, and we demonstrated the love that people actually have for their craft, and the hard work they put into it on a daily basis,” said Alyssa Toro, Chief Creative Officer of Connelly Partners.

Samsonite Southeast Asia

The ads for Samsonite’s campaign ‘We Carry The World’.

And in terms of corporate management?

“Samsonite has no head office — I am a CEO but I have no head office. I just have a room everywhere I go. Our business is not top-down. Our business in Japan is headed by Japanese and 100% of employees are Japanese. Our business in China is run by Chinese, 100% Chinese. We never move people from one country to another. So it is only myself — I am an Indian and work everywhere,” tells CEO Ramesh Tainwala to Nikkei Asia Review.

THE STRATEGY

To boost its digital retail distribution in Asia, Samsonite launched what it called a “three-pillar” strategy.

The company works with popular third-party sellers in the region such as Tmall and JD.com – these platforms now account for 60% of Samsonite’s online sales in China. In Southeast Asia, the company is selling its product in the region’s biggest marketplace Lazada. The company also selling through the digital outlets of shopping malls and department stores.

The third phase of its strategy is to further expand its own direct channels so more consumers in Asia can shop directly via the brand. As of right now, the company’s online channel only available in developed markets such as North America, European countries, Australia, and Japan. In June 2017, the company has acquired eBags, a Colorado-based online bag retailers, for $105 million to accelerate its direct-to-consumer plan.

“We are finding more and more that the online and offline shopping experience for consumers is getting blurred,” Samsonite CEO Ramesh Tainwala says. “eBags is strategically the most important acquisition for Samsonite over the past 20 years.”

Samsonite Southeast Asia

eBags platform

Through eBags, the company will expand to Europe and Asia and launch in India next year.

“At present, we have over 350 stores in India. We plan to open additional 50 stores by the end of this year. We are expecting a 12-15% growth in sales. This will be in line with our past growth trends,” said Samsonite President, Asia Pacific, Subrata Dutta.

Not only does omnichannel seem to be in Samsonite’s cards, the company has been busy acquiring other brands as acquisition seems to be the company’s favorite strategy to grow its portfolio.

Last year, Samsonite acquired luxury bag maker Tumi in its biggest deal to date for $1.8 billion following its acquisition of Hartmann in 2012.

“When we acquire a brand, it must have a very clear DNA, clear story and clear strength of its own,” said CEO Ramesh Tainwala.

THE FUTURE

The American major is expecting a 20-25% sales contribution from its ecommerce channel in the next few years as it undergoes the same business evolution that many traditional retailers have faced in the age of Amazon.

It’s also looking to emerging markets such as India and the Philippines.

“The Philippines is the No. 1 growth market for us. They all speak English, they travel abroad and their income level is increasing. Their governance has improved, and that makes people more confident to spend. That’s helping our business a lot,” said CEO Ramesh Tainwala.

The company has clearly demonstrated that it isn’t afraid to try.

Samsonite Southeast Asia

Lipault, Samsonite’s 2014 acquisition to appeal to more women.

By owning brands that speak to a variety of consumer segments such as luxury travel, everyday work bags and a line dedicated to offset its masculine brand and attract females, Lipault Paris, Samsonite is very likely to grab even more market share, especially seeing as there is no close competition in sight.