Abstract
This case unravels the market dynamics and consolidation of online travel portals in India whose strong buoyant force ushered a new era for the Indian start-up ecosystem. Several talented and risk-taking individuals followed the vestiges of global technology start-ups and found avenues amalgamating technologies and customers’ need for better services. Based on existing narratives and secondary data, this case delves deep into the decision dilemma covering a wide range of challenges such as capital crunch, market forces, and nuances of mergers and acquisitions (M&A). Furthermore, this case helps in understanding the decisions and the rationale behind them in a high growth start-up ecosystem.
The year 2005 marked the start of a new epoch for India on many different fronts. Politically, there was a change in leadership as a new coalition government made its way into the Delhi chambers, replacing a powerful incumbent with a different ideology. This new political authority took some decision that would completely overturn the way Indians used to travel. The first of those decisions would be the Indian Railway Catering and Tourism Corporation (IRCTC) opening its online portal for ticket booking. The days of spending hours in queues only to be denied a ticket would soon become a thing of the past and many adroit people were able to fathom the potential of the change that could be created with this initiative. Another important element that would complement and abet this change in the travel sector was the emergence of low-cost carrier (LCC)/airlines, mainly Air Deccan and SpiceJet.
Sensing the existing challenges and the opportunities they presented for the future, a plethora of pioneering entrepreneurs, backed by popular venture capital (VC) firms, started to populate the area of online travel portals (OTP). One of the first ones to exploit this opportunity was Deep Kalra’s MakeMyTrip (MMT), but before they could capture the first mover advantage, many indigenous players such as Yatra.com backed by Northwest Venture partners and Reliance Technology Ventures (Yatra, 2006), Cleartrip.com backed by Sherpalo ventures (Mookerji, 2006), and Travelguru.com backed by Sequoia Capital (TNN, 2020), to mention a few names among many, started to sprout in the OTP space. However, among all these competitors, the biggest rivalry for MMT would come from Goibibo.
Goibibo made its foray into the OTP market during the summer of 2009 and set the stage for the next decade with deep discounts, spending, and high growth. Soon it caught the attention of the global VC firms toward the Indian market, forever changing the way an Indian customer travelled.
For Deep Kalra’s MMT, however, the challenges were multifaceted: on one side, there were serious technological challenges that came with a portal of that size to provide acceptable levels of service, and on another side, multiple deep pocketed competitors wanting to take advantage of this massive opportunity in the Indian markets.
Turbulent Market
It is said that truly great companies are those who survive a storm by absolute focus on the product and its customers, rather than getting distracted by the destruction around them. One such storm came in the early 2000s in the form of the dot.com bubble. This had led to a global meltdown in valuations, and companies that were valued at millions were being wound overnight up due to massive cash crunch (David, 2000). It is being said that “by the end of it, the US stock market had lost more than $5 trillion in market capitalization since the peak and as of October 2002 NASDAQ was down by 78% from its peak” (Devanur, 2018).
During the same time, eVentures decided to pull out most of its investment from India and gave Kalra a choice to buy back the entire company from them. However, Kalra having already spent most of the funds raised, used his personal savings and bought back his company at a distressed valuation (Deep, 2020). This was a huge turning point in the history of MMT as Kalra and his team had the entire 100% of the company in a market that was then quite skeptical of internet-based portals. Kalra is quoted as saying, “Between 2001 and 2005, we often had operating expenses for just three months and were mostly hand-to mouth, but these tough times teach you the most” (Goyal, 2019).
However, even during those times, the team was never paranoid, and they were taking massive pay cuts themselves, all the while being focusing on customer issues and making product simpler yet faster with a more intuitive interface. Considering MMT’s efforts, Kalra said, “Spend disproportionate time on hiring to get it right. Hire people smarter than yourself and then allow them to take risks and also make mistakes. When things go right give credit to the team, when they don’t take the blame” (Sahay, 2020).
Similarly, Ashish Kashyap’s story follows a pattern that we have seen numerous times in the case of Indian entrepreneurs. Entrepreneurs in India, after earning a degree from a global university, go on to work for large firms leading their product teams before taking a plunge into entrepreneurship, Kashyap’s journey follows a similar pattern. After earning a diploma in practicing management from INSEAD, he worked with Indiatimes e-commerce business and later headed Google’s India businesses. With the backing of Naspers, Kashyap, who had initially forayed into social media business had moved, on to OTP, sensing its potential (Athulya, 2019).
Goibibo was started in 2009, and at the time there were many leading players like MMT dominating the market. However, the founding team realized there was still a window of opportunity in the flight-booking space as the competitor’s website would generally take a lot of time to load. Thus, the entire process of booking was very slow and tedious for the customer.
Vikalp Sahni, founding member and CTO, Goibibo, is quoted as saying:
We wanted to see how we could build on top of that layer, we had to give a fast and reliable platform. At that time if you would go to a website and search for flights on MakeMyTrip or Cleartrip, you would be taken to another page, which would say “hold on, we are fetching your flight details.” We then thought why am I waiting for the page? We just integrated the API, added the data, and showed the details. Whichever airline came up with the details first would have their details up first. (Kashyaap, 2018)
Thus, having a clean and fast processing website with features like go-Cash (instant checkout via online payments) and a referral program such as Go-contacts that massively subsidized the price of bulk tickets or a referral program for registered users were some of the quick-growth hacks adopted by the founders of Goibibo. While doing all these, Goibibo’s primary focus was on their algorithm, which powered their search results helping users to find cost-effective flights even for long-haul journeys (Kashyaap, 2018).
Such innovative growth hacks along with deep discounting provided them quick market share in the hyper-competitive OTP market in India. And, once they started getting massive traction on their platform, they slowly expanded into other modes of transport to finally offer hotel booking and holiday packages.
In 2013, Goibibo acquired RedBus (India’s largest bus ticketing platform; Sharma & John, 2013), which was a turning point in its rapid expansion as it firmly placed them as the biggest rival to the incumbent MakeMyTrip.
The Growing Market
The Indian travel industry has been growing at more than 11.5% year on year and is expected to reach upwards of $48 billion by 2020, with its biggest contributor, air travel, expected to grow by 15% annually to $30 billion (Boston Consulting Group, 2017).
Followed by that, the hotel lodging business is expected to grow by 13% to be valued over $14 billion by 2020 (Figure 1). With cheaper data and greater penetration, the market of online bookings is becoming bigger and bigger. Between 2015 and 2019, online sales on OTP platforms for leisure travelers increased by 74% (Figure 2) and for corporate travelers the bookings on OTP platforms increased by 75% (Figure 3). Further analysis tells that for the leisure segment, the market for airline ticket bookings on OTP platforms grew at a CAGR of 15% between 2015 and 2019. During the same period, revenues from holiday packages grew at a CAGR of 22.3% (Figure 4). Airline ticket sales by far is the biggest income source for these OTP platforms. In 2019 alone, revenue generated from sales of air tickets made up around 85% of the value, 14% coming from holiday packages and just about 1% from lodgings, for the leisure segment (Figure 5). For corporate business also, air ticket bookings grew by 16.5% CAGR, bookings of transportation (other than airlines) increased at 10.68% CAGR; and lodgings at 12.28% CAGR (Figure 6). In this segment also, the biggest revenue grosser was the sale of air tickets at 76%, followed by other transportation (other than airlines) at 23% and just about 1% from lodgings (Figure 7).
OTP Sales Distribution.
Revenue Generated from Leisure Segment.
OTP Corporate Business Online Sales.
Distribution of OTP Revenues (Leisure).
Percentage Distribution of Revenues.
Bifurcation of Sources of Revenue from Corporate Business.
Percentage Distribution of Revenues.
The Fiercest Competition
The potential in the Indian travel market was huge due to rapid increase in the income of Indian households, especially the middle-income segment. Multiple studies have shown that the rapidly growing younger population was traveling not just for business purposes but for leisure as well (Sheth et al., 2019).
All these factors, combined with an increase in the LCC’s, made the Indian travel space one of the most coveted high growth markets in the world. Subsequently, in the years from 2007 onward, India saw multiple global players such as Booking.com and Yatra.com enter the Indian markets, making deep discounting and massive price cuts the new normal of doing business (Rao, 2019). To counter these threats, MMT raised funds multiple times. However, the fiercest competition was between MMT and Goibibo. It was always Goibibo’s superior algorithm against MMT strong sales network. The former’s focus has been on the product against the latter’s large-scale inventory. But it was the acquisition of Redbus by Ibibo that truly made this battle intense and caught the eye of Kalra who until then dismissed them as a glorified discount shop in multiple forums.
Even though MakeMyTrip’s revenue grew from $228 million to $447 million with a CAGR of 14.41% from 2013 to 2017, their losses during the same time mounted from $18 million to $110 million (Table 1).
MakeMyTrip’s financial statements 2013-2020
Around the same time, its biggest rival Goibibo faced similar financial issues, having raised multiple rounds of funds and burning it in quick time.
Consolidation
Sometime in February 2016, during a cold winter month in Delhi at a farm party organized by a leading investor, Kalra and Kashyap bumped into each other. All these years of bitter rivalry had not left a deep mark on their mutual respect (Phocuswright, 2017). Both suffered from stringent government regulations involving service tax that was bleeding companies’ finances. The initial suggestion came from Kalra that the yet-underpenetrated Indian market would grow manyfold and that instead of bleeding each other, both may join hands to consolidate their position and eventually reach a stage of sustained profitability. That initial suggestion was taken further in a series of meetings, where Kashyap finally introduced Kalra and team to their lead investors at Naspers. A deal was made worth approximately $1.8 billion with mostly in-stock options, making MMT the leading shareholders with 60% and Goibibo with the remaining 40% of the ownership, respectively (Gooptu & Khan, 2018). This consolidation gave MMT over 70% of the Indian travel space with huge scope for further penetration in nascent markets. During the same period, Yatra Online Pvt Ltd grew just by 41%, Cleartrip Travel Services Pte Ltd by 13%, Cox & Kings Ltd. did not see any growth at all, and the Indian arm of international names such as Expedia India (P) Ltd and Thomas Cook (India) Ltd saw their market share contract by 7% and 15%, respectively.
New Competitors
Even though competitors did get a little piece of the growing market, their size was negligent in comparison to the industry leader. But deep-pocketed foreign players could not keep away from this lucrative opportunity for long. One of the biggest competitors that emerged in this area is Alibaba-backed Paytm. The payments app that ubiquitously became a synonym for online payments through mobile devices started setting its foot in the OTP industry and has grown astoundingly since then.
For the FY 2018, Paytm sold 38 million tickets for the airline, bus, and rail segment combined, which is twice the numbers it registered for FY 2017. Though MMT is still the industry leader and registered volume sales of 28 million tickets for the first half of 2019, competitors were closing in fast. Paytm made an investment of ₹3 billion in its travel business and had an estimated sales of 70 million tickets in FY 2019 with prospects of becoming the leader in the OTP market by the end of 2020 (Modi, 2019).
Other players like Amazon were also coming up as worthy contenders. Using its payment arm, AmazonPay, it has started selling online tickets to customers and provides various benefits and incentives to increase its market base. The most recent step it has taken is to make an alliance with IRCTC to sell online rail tickets (PTI, 2020).
With troves of capital backing these players, it remains to be seen how they use that capital to change the Indian online travel-booking market and how the incumbent MMT strategizes its moves to battles these international behemoths. in a recent statement, Rajesh Magow said, “[e]ssentially, we have been saying that the company needs to reduce its dependency on the airside and increase exposure to the non-air side of the business, which is hotels and packages” (Sanjai, 2016), suggesting that MMT has realized this threat, is fighting hard to retain its dominance, and is readying itself for yet another battle to win the hearts of the Indian traveler.
With so many players active in this market, everyone is trying to leverage on their own strengths and exploit the competitor’s weakness, and the externalities of the fight are proving beneficial for the end customers. But many pertaining questions still linger. How long will this flow of discounts and cashback continue? How long till these companies start sustainably monetizing their customers rather depending on the VCs money and how will the end users react to this change? And the biggest question of them all, when will the dust raised by this battle be settled and who will be able to endure long enough to be claimed as the last man standing!
Footnotes
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.