Can Airbnb India beat GoIbibo & MakeMyTrip?

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India – Not a priority market for Airbnb till now?

Whether the hotel industry likes it or not, Airbnb will only become much bigger over the next decade – possibly becoming more important than any other travel company in the world. The Silicon Valley darling has been operating in India for the last 3 years but India probably has not been a focus market for it till now. Airbnb is reportedly looking at India at some interest and will undoubtedly foot the accelerator at some point – maybe they are waiting for “critical mass”. Airbnb has a small staff in India and is majorly expanding in South East Asia at the moment. It continues to run important functions like technology from Singapore and the US.  One of the few stories about Airbnb India in the digital media does not have a lot of details about their strategic plans – Airbnb in India

Domestic Travel Industry is abuzz with activity

Meanwhile, the domestic Indian hospitality sector is abuzz in 2015– room aggregators like Oyo Rooms, Indian booking engines (Makemytrip, Goibibo, etc) and even Airbnb clones like Stayzilla are all vying for a piece of the pie. Add to the mix niche players in the conventional hotel segment like Roomstonite. Sitting on the sidelines is payment giant Paytm, looking to grab a chunk of the huge transaction volume (est USD 70 Billion Annually) which is primarily cash and card right now.

So what does the future hold? Possibly one of two scenarios…..

  • The conventional, alternate and other travel sub segments consolidate. All these Airbnb clones fold / get acquired over time leading to a Uber / Ola duopoly kind of situation in India? Airbnb could bide its time like Amazon and make a huge splash soon taking away large market share
  • The market remains highly fragmented along the alternate stay, branded hotel, room aggregator lines. At least a few of the segments remain highly profitable and immune to global companies like Airbnb – which continues to remain a big but not dominant player

I believe that for couple of years we will see heightened activity in each travel sub segments as companies try to “build perceived differentiations” and “maintain strategic moats”. But the situation will change after 4-5 years and lead to a Flipkart/Amazon or Uber/Ola Duopoly situation in India – with Airbnb as one of the players. There are a few strong reasons for this…..

Alternate Stay market Vs Conventional Hospitality – The lines are blurred in India

In developed economies, branded hotels are already contemplating what to do about the threat from the sharing economy. India is a slightly different market – one could take the view that the conventional hospitality market in India ends at the so called “star hotels”. Given the apathetic attitude that the government has to hospitality regulation, India is pretty much a “Self branded” market outside the star hotels. As state, city, local rules differ dramatically, there are no common measures of what constitute “hospitality establishment”. Even 100 room properties in India run without any overarching regulatory body. There have been fits and starts to regulate the sector with food quality recommendation, tourism guidelines, building regulations – but most remain difficult to implement and hence on paper only. One of the critical unifying forces (surprisingly) is the taxation rules in India which require taxes to be collected for “services rendered”. It is hoped that the proposed Goods and Services tax (GST) will better define the hospitality sector– but this is albeit a hope.

Given this background, India is indeed a very large potential market for Airbnb – it would not only get business from the alternate stay market (undoubtedly large and interesting) but also the conventional stay market which is truly huge (estimates USD 80 Bn a year). In other markets, large establishments sell rooms on Airbnb and this may well be the future of Airbnb in India.

Room aggregators – Solving problems or creating them?

In India, the room aggregators now seem to be devolving into quasi “booking engines” and hence would view Airbnb as a huge threat to their business. The mathematics is simple for the business owner – Airbnb charges 3-4% commission while the room aggregators take away 12-25% (depending on their bargaining power). All this without changing their mother brand name – which is an issue for SME / small players in the hospitality segment as it leaves them with no brand recall.  The biggest problems that non tech savvy hosts face in India are

  • Updating content on multiple websites – Online Travel Agents and their own sites
  • Lack of technical staff on premises to handle online queries, payments, etc

Hence the Indian hospitality owner may never be able to focus on more than 2-3 Online Travel Agents. The choice boils down to booking.com, airbnb and domestic OTAs like Makemytrip and Goibibo. There are new ones like Oyo Rooms that promise to make life easier by “buying inventory”, “Co-branding” – unique experiments that haven’t been tried elsewhere in the world. Whether they are able to navigate issues like confused branding, no operational control on site, inconsistent stay experiences is something that only time will tell. For now, they are discounting rooms using investor money in order to get “market share”.

Why has Airbnb not focused on India till now?

A good case study to answer this question would be Amazon – a company that stayed away because of difficult rules on multi brand retail, complicated taxation and a fragmented market. But they took the leap in India in 2014 – and what a leap it has been. In a similar vein, Airbnb will need experts in taxation, local regulation and tweak its app to make it work seamlessly in India.

The hospitality tax regime remains complicated – luxury hotels must be luxury taxes, while homestays are exempt. The lines are blurred as some states charge additional taxes from hospitality companies while some don’t. It would therefore be prudent to incorporate this on their app – for now they are charging service taxes directly from the user and depositing on behalf of the host.

The average commission for India works out to be far lower than in the West where the average rental would be USD 70. The average rental in India would be USD 30 – which is just 40% of the US. Also Indian users are just getting used to the concept of paying a “service charge” for their booking. Of course, for volumes to pickup, the Indian user needs to become comfortable with these aspects of booking an accommodation.

Major difference between Indian and overseas travelers –

  • Higher service levels are expected – Indian hotels have a fairly high level of service and Indian guests expect this. A completely self catered accommodation would not be a great selling idea.
  • Experiences are important but cost trumps all – Cost differential and not necessarily the experience of living in “someone else’s home” drives some users to use Airbnb.

Then why would Airbnb succeed in India?

There are some well published reasons why Airbnb could succeed in India – hotels are expensive, they don’t have the personal touch and more importantly the tax/cost structure is heavily loaded against large organized players. Smaller players have a large cost advantage and additionally are more nimble in their pricing which is controlled by the host. But the single largest factor that may drive Airbnb success in India is – TRUST!

It’s a well known fact that staying in unbranded hotels in India is a bit of “pot luck”. There is little standardization and a very heavy reliance on the host, rather than any pre defined processes. The problem with anonymous models for booking (so called “aggregator”) a hotel is the lack of trust, reliability and information. In a country like India, where safety is a major concern, there are doubts whether pure online aggregation systems that de humanize the stay process will work. Consider the following facts

  • Room aggregators do not allow exchange of information before the stay. How would one fix accountability in the absence of a human face?
  • Room aggregators do not send the correct address before the stay date – they are afraid that the guest will cancel the booking and go direct to the host. This is especially important as they don’t provide any great value add during the stay besides the booking process.
  • Genuine reviews are not allowed on room aggregator sites as bad reviews would essentially kill the business of some hotels. Hence guests must rely only on neutral review sites like Tripadvisor and now more importantly Airbnb.

Airbnb puts the host front and center as the point of contact. Not only does this solve the security issue, it also creates a sense of responsibility as guest reviews are public. The reviews are all of genuine travelers and the verification system goes a long way in ensuring that only genuine hosts thrive in the Airbnb eco system.

Who is the typical Airbnb user in India?

Airbnb is still a concept that the Indian user is getting used to. The issues for a lot more Indian users to become paying clients is two fold

  • Indian users are not too thrilled about paying service fee upfront – we are too used to paying bundled fees – Airbnb transparency policy is sort of self defeating here!
  • Some Indian users hesitant to pay upfront to secure a booking. They would rather book a single day and pay the balance on checkout. The “Book now, Pay Later” booking.com culture is becoming popular.
  • Payment mode for many listing is still in dollars and that is a deterrent. A simple tie up like what Uber had with Paytm could fundamentally change this for Airbnb

How is the Indian market different from other Airbnb markets?

An average Airbnb host in developed countries is

  • Successful career person with 2-3 vacation homes – These homes would be un catered, or at best semi catered
  • Semi retired person with 3-4 properties that he would like to let out and make extra income – typically would stay in the same city and would cater to guests themselves
  • Small companies specializing in renovating and letting out properties or even selling them as “high yield Airbnb investment homes”

In India, the typical Airbnb host would tend to be far more focused on hospitality as a primary source of income source than as a “side business”. The average host has an established business as hosting is a rather serious business in India! I am no management consultant, but I see a few clear strategic steps that Airbnb could make in India

  • The payment system issue – This is an easy one to fix, including adding flexibility of various mobile payment systems (wallets)
  • Dedicated Airbnb Hotline – Specifically aimed at security and hygiene. A real time reporting system could help them weed out “problem properties” early on
  • Segment hosts on the basis of track record and highlight the same to guests – This could go a long way in addressing any niggling “trust” issues
  • Host Service Team – This last one is a little bit left field but a service team that can assist hosts sort our issues related to quality may be a winner. Yes, it hasn’t been tried anywhere else, but look at Uber – they have a completely different model of operation in India with a dedicated legal team as well!

I see a Airbnb as a major player in the Indian space in the coming years. They may have been slow off the block for reasons best known to them – but expect to see a lot more in the near future. For hosts, this is probably a good thing as they will be spoiled for choice from a wide number of travel websites, helping them market their rooms to a worldwide audience.

Reader comments & thoughts on the topic are most welcome! I can also be reached at kunal@theperch.in

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6 Comments

  1. Nice blog Indian market different from other Airbnb markets

  2. Thank you Aditya. Please do reach out for any specific questions

  3. Hi
    I am a research analyst covering the Travel and Leisure space in India. Found this article really insightful. Keep up the good work, Kunal.
    -Aditya

  4. I’m reading your posts and an excellent way to promote your content came to
    my mind. Search in google for: Roman’s Tips – SM Traffic

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