BELLEVUE, Wash. -- In the first full quarter that Expedia.com tilted its
business toward a merchant or wholesaler business model, the new
practice accounted for the bulk of its revenues.
The merchant model sparked about 61% of Expedia.com's revenues
in its fourth quarter, which ended June 30, according to
Expedia.com marketing director Suzi LeVine.
The travel site, which sells much of its hotel and package
offerings using the merchant formula, "is looking to apply the
model to other areas," and thereby reduce its reliance on airline
ticket commissions, LeVine said.
The Microsoft spin-off's merchant practice gives it a
significant advantage over other full-service travel sites -- and
commission-dependent agencies. The site's transactions using the
merchant model are "five times more profitable" than its sales
using the travel agency model, said LeVine.
And, Expedia.com's use of the merchant model -- which began in
September and accelerated in March with its acquisition of
Travelscape.com Inc., is largely responsible for its 10% edge in
gross profits as a percentage of gross bookings when compared with
Travelocity.com's gross profits in their respective quarters that
ended June 30, according to analyst Thomas Underwood of Legg Mason
Wood Walker.
Using the merchant model, Expedia.com acts as a wholesaler and
negotiates net prices on blocks of inventory from lodging and
package suppliers at rates that are 20% to 70% lower than published
prices.
It resells the inventory at a markup. Under the merchant model,
LeVine said, Expedia.com has no financial risk. With a put-back
provision, the inventory reverts to the supplier if it's not
reserved a week in advance.
Although the financial risk is not explicit, the company must
maintain a viable record in selling inventory so in the future it
can negotiate with the supplier for new products, she said.
Although Expedia.com edged rival Travelocity.com in
gross profit percentage for the quarter, neither company is
profitable. In their June 30 quarters, Expedia reported a net loss
of 30 cents per share, and Travelocity's net loss was 26 cents per
share.
Agencies that use the merchant model generally have added clout
because in large measure they -- and market conditions -- determine
gross profits. This contrasts with the travel agency model, where
suppliers control agencies' gross profits because they can alter
commissions at their discretion.
Among full-service travel sites in 2000, Expedia.com is forecast
to have the most revenues, $166 million, tied to the merchant
model, said Underwood.
The Hotel Reservation Network (HRN), which resells rooms over
the Web and is affiliated with Travelocity.com, along with
thousands of other sites, this year will derive even more revenue,
$308 million, from the merchant model, the analyst predicted.
"There's no close third," Underwood said, noting that no other
travel site will have more than $50 million in revenues this year
attributed to the merchant model.
Underwood added that Travelocity.com uses the merchant model
when consumers book hotels on Travelocity.com through HRN, but
otherwise the largest travel site in terms of gross bookings is
heavily dependent on commissions.
Travelocity.com declined to be interviewed for this article.
In their respective quarters that ended June 30, Travelocity.com
had $27.7 million in gross profits on $610 million in gross
bookings for gross profits of 4.5%.
While Travelocity.com did much more business in terms of gross
bookings, Expedia.com had the edge in its gross profit percentage,
which was 5%. Expedia.com produced gross profits of $22.4 million
on $450 million in gross bookings.
Gross bookings are the total value of the airline ticket, hotel
room or car rental purchases. And, gross profits are the revenues
generated minus the costs of selling the inventory.
Expedia.com's merchant revenues in the quarter ending June 30
increased to $42 million, a jump of 237% year over year and 25%
over the previous quarter. The breakdown was 61% in merchant
revenues, about 30% in agency revenues and 9% in advertising and
other revenues.