Airbnb, the hostess with the mostess
Why Airbnb comes out of 2020 ahead
It’s been a wild few months with almost every tech company (or really any company) filing to go public with an IPO, or the new buzz word: a“SPAC.”
Airbnb, the behemoth online vacation marketplace, is one of the largest tech companies preparing to soon go public. Now, you may be thinking: “Isn’t it bad timing for a travel company to go public during a time when traveling has essentially come to a standstill due to COVID-19?” However, it seems that Airbnb may be onto something. In this week’s edition of the Squeeze, we’ll explore why Airbnb may come out of 2020 stronger than other peers in the hospitality industry, despite revenue plunging nearly 67% in Q2 2020.
Traditional Hospitality Has Some Extra Baggage
Airbnb has a major benefit compared to other major hospitality brands, like Marriot and Hilton, which is that it doesn’t own its vacation properties. For example, looking at the Marriot Group Q3 2020 financials we see that revenue dropped 54% while operating costs dropped 40%. Whether the revenue exists or not, Marriot Group still needs to pay a minimum amount for the upkeep of hotels and properties owned by the brand. On the other hand, Airbnb has the ability to scale down its revenue very quickly since the properties are not owned by Airbnb. Instead, Airbnb can scale its most expensive cost: their employees. Interestingly, 90% of Marriot’s properties are franchised so whether it is the franchisee (that are hurting under this cost structure) or the franchise — there are costs to maintain the assets.
So, who’s paying the late charge?
When things get better — and on a long horizon they will — Airbnb will be able to allocate its revenue into acquiring new customers and offering new products, while not having to worry about servicing the additional debt of its properties. This will give the business a significant edge over traditional hospitality brands. In the meantime, Airbnb will just lose less.
Travel is not dead, it’s different
Although travel feels only like a distant memory that we can flip through on our phone’s photo album, it will return— it just might be a little while and it’ll likely be different. Airbnb is uniquely positioned, unlike hotels, to respond much more quickly to shifting consumer demands. For example, when globe-trotting became no longer available, Airbnb quickly pivoted their focus to local stays. The Airbnb home page highlights this by telling to me travel local, while the Marriot App just pushed a notification to me to travel to Hawaii.
Airbnb also provides a potentially safer environment for travelers. Hotels experience a higher volume of travelers who are all staying in one space, while Airbnbs provide a single space only for the individual(s) that have booked the vacation rental. Other factors, like the lack of business travel and the global recession, have had a significant reduction in demand for traditional hotels. For Marriot, this is apparent by looking at the occupancy numbers for their luxury hotels (~30% of their properties), which are down by nearly 73%, versus the cheaper longer-term stays, which are down by approximately 52%. Simply put, there are changes in supply and changes in demand.
Airbnb fits into both the supply side and the demand side. As customers demand long term stays — suppliers (the homeowners) will provide them and Airbnb will monetize. Hotels, on the other hand, will need to invest in existing money-losing properties and convert them to meet customer demands. Hotels will miss the new trends in travel, while Airbnb will monetize.
Airbnb has the extra amenities
When I type Airbnb into my browser, the prompt clearly states that the business is not just about travel. Airbnb is about finding: “adventures nearby or in faraway places” with access to unique homes, experiences, and places around the world.
Over time, Airbnb has accumulated insights about where people book, how they book, the experiences they want, their preferences, and much more.
It’s not clear how much money the shift to being an experiences business has made, but if people are willing to pay for a masterclass or another online offering, why not pay for something like a cooking class from a local through Airbnb? Revenue streams outside of overnight stays exist for Airbnb and they are thriving. As an adjacent market, Masterclass just increased its valuation to $800M after doubling sales year over year.
The five-star experience on a budget
The past year has been interesting in the world of venture capital and going public. Growth came first, often fueled by Softbank, dumping unlimited money into companies so that they could become whales (see reference below). Becoming the biggest sounds enticing, except that the term profit was completely forgotten from this equation and a number of these companies, most noticeably WeWork, absolutely exploded.
Airbnb also had big plans, including an airline, but those ideas have been shelved in the immediate future with the company focusing on its most efficient growth and financial bets.
More money for the travel jar
Gross margins for Airbnb are strong, and likely nearly 70%, but not quite as high as the 80%+ margins seen at other tech companies. Focusing on what matters most for Airbnb rather than throwing the kitchen sink at growth will allow it to maintain financial stability on a product with already pretty good margins.
Ready to check-out?
There is not a doubt in my mind that Airbnb will be significantly impacted both financially today and for future growth as a result of COVID-19. However, while the business will hurt in the short-term, traditional hotel competitors will hurt much more. Over time, Airbnb will be able to come out ahead in the marketplace, as long as the company maintains its discipline and stays true to both its product offering and customers. More immediately, despite whatever noise we see in the next few months, I am looking forward to seeing if the Airbnb IPO is something that does indeed add value.
