Russian Travel Startups - A bubble waiting to burst?
2011 and 2012 saw rapid development in the Russian e-commerce sector, which was worth an average of $14 billion per year. This puts it in 5-7th place in the world (depending on which research is used). Inevitably, this growth has had a knock on effect on related sectors, some of which have reaped significant gains, while others have struggled.
This report focuses on travel startups which share the following traits.
- It is possible to pay for the services offered electronically.
- The relationship with the providers of services (hotels, airlines, tour companies, etc) is based on commissions (4-20%), not on profit sharing.
- A serious investment in marketing is required.
- Travel projects, unlike traditional online stores which have at least some concrete assets against which to offset their expenses, have little or nothing with which to do so.
Why did Russian travel startups get off to a good start?
Travel startups in Russia have been booming since 2011, and the good times show little sign of ending. Startupers and investors reckoned Russian internet users to be ready for new services made available by the spread of the internet, and they have largely been proved right. It is certainly the case that the internet has spread rapidly through Russia, with the proportion of the population connected growing at the fastest rate among the BRICS and fast approaching European levels.
In the last nine years the total monthly users of the internet in Russia has increased 6 times to 61 million at the end of 2012, and it is predicted to grow further to 92 million by 2016. Of these, more than three quarters currently say that they depend on the internet on a daily basis.
As well as the spread of the net, the growth of the sector also depended on rising wages, an ever-increasing range of options and increased trust in online payment systems.
A closer look at the data
The combination of all these factors allowed the Russian travel sector to reach $5.5 billion (according to Datainsight), an 45% increase on 2011. In comparison, in the USA the sector grew at just 6-12%, and in China, at 25%, during this period. However, while one might expect the millions of new internet users to have propelled this rapid growth, the data in fact suggests that it is mostly thanks to internet ‘veterans’, who have been using the web for 7 years or more. Less surprisingly, the majority of people that use the services offered by travel startups are in the 18-35 age group. In this category the median family income is $2000 per month, enough to afford travel. The research also established that the typical travel startup client lives in or near Moscow or St Petersburg, buys one trip per year to a resort, and pays for it using a credit card.
Another interesting statistic uncovered by DataInsight is that the average single spend on travel sites is around $1100, compared to just $400 for traditional online stores.
It is also clear that travel tickets are the most popular option for travel sector consumers. This is perhaps understandable, as electronic tickets are reliable, difficult to lose and convenient.
Online tours and additional travel services - What went wrong?
While ticket and hotel booking services have flourished, companies offering packages have failed to establish a sustainable business model. Some of those which managed to secure seed funding were shut down within 6-12 months, but the majority continue to operate but are not expanding. The average investment in these projects is $3-5 million, but it turned out that this is not enough to cover marketing and product development. Most projects are therefore unable to cover their costs.
A major reason for this is the inability of tour and travel service providers to retain customers. Some online tour and travel service providers retained just 1-2% of clients, while the best achieved a retention rate of just 15%. Of those that did return, up to half were from the provinces and used the sites for business trips to Moscow or St Petersburg. This shows that these startups are failing to capture the most lucrative target audience - residents of Moscow and St Petersburg, where the majority of well-off Russians live.
Another problem for these projects is Russians’ continued preference for offline payment methods. They are concerned about their money getting lost, or fear that it can’t be returned to them online and this discourages them from making large online payments. Net users tend to only reach the point where they are willing to spend large amounts after 3-7 years making smaller purchases from regular online retailers.
Travel retailers have so far failed to come up with an innovative solution to this problem. At present, they tend to invite users to pay in a partner tour agency office, or by phone. This is both inconvenient and inefficient and holds back the sector.
These factors mean that travel package providers are targeting a very small audience - those who are well off and have been using internet retail for significant length of time. Furthermore, these users are likely to make purchases just once or twice a year. With 20 projects depending on the once- or twice- yearly purchases of this small group of people, it is unsurprising that these startups are struggling.
There is clearly potential for certain travel-related services on the internet. Ticket and hotel booking services, which tend either not to require online payment, or to be comparatively cheap, are doing well. As wages increase and the internet spreads, this is likely to continue. However, it seems like Russian consumers aren’t yet ready to book and pay for their whole holiday on the internet, and so the appearance of lots of startups in this category could well be a bubble waiting to burst.