Australian Online Market for Short-Lets and Holiday Rentals: Interview with Occupancy.com joint-CEO Justin Butterworth Part 2

A deal merging two of Australia's online short let/holiday rental distribution companies to form Occupancy.com has prompted a series of posts here are the BOOT. In part 1 of this series I shared with you my discussions with Occupancy co-CEO Justin Butterworth (pictured) on the size and mechanics of the market. In this part 2 I will share my conversation with Butterworth on the merger deal itself and what’s next for the sector.

The deal

The deal to merge TakeABreak and rentahome.com.au, two of the four main players in the Australian holiday rental accommodation market, was hatched in Nov 2009 and signed in December. Butterworth is not talking how much but has admitted that the deal was all share deal (no capital raising). An assessment was made between the two companies as to relative size and grow rates to determine how much of the combined entity each would get (again not disclosed). Rentahome has maintained its office in Sydney's Moore Park and Butterworth's co-CEO Craig Davis will stay in the TakeABreak office in Canberra.

They have completely integrated the back end systems to allow for on inventory platform system to cover all 20,000 properties. The interest twist to their integration is that they have maintained the different login screens and supplier interfaces. Different inputs but one system. Butterworth told me that there was less than a 10% overlap between the two brands. The limited cross over was because Renathome had focused on the short let metro market whereas TakeABreak was focused more on regional and rural holiday accom.

SEO rankings drove the deal as much as inventory. Butterworth told me that SEO marketing is the “cornerstone of the business”. He told me that cross linking between the two brands is expected to drive a 30% uplift in SEO traffic for the combined group. Once the email lists are deduped he expects the combined group of subscribers to be greater than 400,000.

What’s next for the company and industry

This deal has not generated the press that it probably deserved. Though the bulk of the booking value and revenue remains with the properties, my calculations on the online short let/holiday rental market size show that Occupancy number 2 in terms of bookings generation in a battle that includes subsidiaries of Fairfax, News Corp and Yahoo7!. The specific challenge for Occupancy will be to achieve number one spot in the face of this competition.

For the whole of the online short let/holiday rental sector there are three general challenges:

1. Live vs non-live: Consumers are looking for instant confirmation when they book online. Occupancy is the online one of the majors that offers live inventory but only on a proportion of its properties (Butterworth is not saying what percentage). It is clear that this is a challenge for all the players;
2. Product certainty when no uniform standards: Star rating systems in the hotel sector are constantly open for criticism for bias and lack of uniformity. The position is much worse in the short-let/holiday rental sector. There is no uniform independent service that customers can go to for comparing the quality of different properties. Butterworth and Occupancy are trying to deal with this through their Rental Guarantee. This outlines the checks that they do on a property. It provides a validation on the details in the description matching the property but the industry is still missing an easy mechanism for property comparison (hence challenge 3); and
3. Building profiling and recommendation engines: you would have seen me write often on the future of online travel being around targeted and individuated recommendations (my EveryYou concept). This is particularly the case for a sector like this where there is such a variety of product is some many secondary rural and regional destinations. The challenge is to be build a combination of technology and human solutions to help guide people to the right properties and destinations.

That all said, the variety and uniqueness of the product offerings within the short-let/holiday rental sectors goes a long way to compensate for theses challenges and is the reason for the growth of a health intermediary market in Australia.

Australian Online Market for Short-Lets and Holiday Rentals: Interview with Occupancy.com joint-CEO Justin Butterworth Part 1

A war is brewing in the alternative accommodation sector in Australia. It is a war that generates a lot less press and pundit attention than the OTA and online hotel battles that consume so much of my time. But the battle for supremacy in online distribution of holiday homes, short term rentals and B&Bs is getting exciting. The latest salvo was the announcement that online corporate/short term rental specialist rentahome.com.au and holiday rental merchant TakeABreak merged to form Occupancy.com.

I had lunch recently with former rentahome.com.au boss and now Occupancy joint-CEO Justin Butterworth (pictured)to talk through the deal, the market and what's next for the online accommodation industry. In part 1 of this post I will share with you our discussions on the online market for short-let/holiday rentals in Australia. In part 2 we will look into the deal and what’s next.

The online short let/holiday rental market

It is a gross but reasonable generalisation that the online accom market is broken up into three sectors. Three sectors that overlap in sharing customers and suppliers but are distinct enough in their offering to be treated differently:

1. Mainstream Online Hotels Market: Led by Wotif but with HotelClub/Orbtizdisclosure), Expedia, Agoda/Bookings and Chain supplier direct sites making for a very competitive business. Online hotels market in Australia is between $1.5-2 billion a year and growing 15-30% (depending on the research firm);
2. The Holiday Park market (please don't call us trailer parks, you wont like us when we are angry): This market is dominated by supplier sites. Big4 is an example. Late to online we have heard claims of 25% of the business is online but no research on market size; and
3. The Holiday Rental sector: After this deal there are now four major players in Australia competing in a $500mm market (see below). The newly formed Occupancy group, the Fairfax owned Stayz . the Realestate.com.au (REA.AX) owned Realholidays.com.au and (at the listing level) the Yahoo7! owned TotalTravel.com.

The short let/holiday rental market is dramatically fragmented compared to the hotel market – goes without saying. Butterworth mentioned that a BIS Shrapnel report on the Holiday Home market in Australia which estimated 500,000 holiday home properties in Australia. Around 200,000 of those are available for regular short let. The rest being private holiday homes that are not regularly rented out.

Butterworth and I tried to figure out the size of online short let/holiday rental market. From our lunch time back of the envelope work we put the size of the Australia online holiday rental/short let market at between $450-500mm. This makes it a quarter to a third the size of the online hotel market. I have arrived at this number through combining two calculation methods – top down and bottom up.

Top down – start with the size of the total market and work downwards

We started with the 200,000 in available stock and assumed an average weekly rent of $1,000 and occupancy at 50%. This sets the full market size based on inventory story is $5.2 billion. Butterworth thought that around 10% of the market is online making a market for short let/holiday rentals of around $500 million.

Bottom up – start with the bookings generated/referred by the major players and work up

Here is what we know about the top players. I had to make a series of assumptions but I think the range is reasonable.

Player	Bookings Generated For Listed Properties	Source/Calculation
Stayz.com.au (Fairfax)	$160mm	At NoVacancy told us they were generating 160k bookings per year (assuming $1,000 per booking). In 2008 told us $100mm
Occupancy	$150mm	Occupancy joint-CEO told me they are generating $300mm in enquiries to properties per year but is not disclosing the percentage that are confirmed. Will assume 50%.
Realholidays.com.au (REA/News)	$45mm	Real holidays is 1% of REA’s AU revenue (pdf). AU revenue ~$150mm per year (pdf). Therefore Realholidays revenue $1.5m per year. If this was a hotel business, $1.5mm in revenue would mean $15mm in bookings generated. Sounds low so times 3. In 2009 claimed 359 paid subscribers and 22,304 listings (pdf)
Others including TotalTravel (Yahoo7!)	$90mm	Assume top 3 have 80% of the market
Total bottom up estimate	$455mm

Combining the top down and bottom up approaches gives us an online short let/holiday rental market size in Australia of $450-500. With the merger putting Occupancy.com’ estimated $150mm year putting them at #2 in the market to Stayz’s $160mm but not by much. Butterworth told me that Hitwise traffic data would put Stayz further ahead of Occupancy than my booking estimates would argue. He believes that Stayz has a lower conversion rates from enquiries. This would make sense as Stayz is likely to get much more unqualified traffic than Occupancy due to the referral of traffic from Fairfax Digital properties.

Much like online hotels, there are different models in the short let/holiday rental sector. The Stayz model is the listing model. Properties pay to be listed on the site. Occupancy.com operating on a booking fee model. Occupancy.com collects net rates and grosses up by the booking fee. Guests can process payment with Occupancy or pay the property direct (who remit booking fees to Occupancy.com). It is clear that the vast majority of the bookings are being paid offline with the property.

The market sizing proves that the online short let/holiday market in Australia is a substantive and growing market. The Occupancy merger puts a lot of pressure on Stayz as the combined volume has closed the gap to Stayz. But Fairfax, News Corp and Yahoo7! are tough competitors. I am looking forward to seeing how they respond. If the war wasn’t intense already, foreign players also have their eye on the market. US giant HomeAway (more on them here) have put up an Australian holding page at HomeAway.com.au – a clear indication of a push into the market. Expedia’s TripAdvisor have bought another holiday rental firm (Holiday Lettings) to add to Flipkey (already in their stable). No surprises. With a $500mm market to fight for, it is to be expected that many more companies will join Occupancy in this battle for short-let/holiday rental customers.

Jump On It raises $1.3 million, joins group coupon war and is targeting $15-20mm in revenue per year

An idea poached from a US mega star star-tup, a business plan and a history of building and selling companies are the pieces that Colin Fabig put together to raise $1.3mm to launch Australian based Groupon clone “Jump On It”.

A press release hit my inbox announcing the raising by Jump On It and caught my interest because I have been thinking a lot recently about the group coupon model boom and how it might impact online travel. Not just because the barely 16 month old Groupon raised money at a valuation of $1.2/1.3b, not just because Jump On In is joining Spreets and Scoopon in the Australian group coupon push and not just because between Groupon, Living Social and BuyWithMe have raised a combined $225mm and counting. Though those are reason enough. The reason is that I am interested is that between the buzz around group coupon systems and zing around the private sale companies like Jetsetter and VoyagePrive I am wondering if there is something new happening in travel and activity distribution. Wondering if we are starting to see another piece in the move toward the deal targeting and recommendation systems we have been talking about here at the BOOT.

On the business model

Jump On It is running a typical group coupon/Groupon model. In case you don’t know the group coupon business model, it involves a retailer/advertiser offering a discounted product or service via a voucher. Consumers sign up to buy the discounted product or service. But there is a minimum sell order/threshold that as to be met before a voucher can be issued. For example a restaurant offers $100 worth of food and drink for $50 so long as 50 people take up the offer. The deal is normally time limited (maybe also the voucher). The marketing company (Groupon/Jump On It/etc) takes the credit card number up front but only charge the card when the participation threshold is met. Usually one deal per city/area is offered per day. Jump On It makes money by charging the retailer a booking fee (built into the voucher price). Fabig admitted that the booking fee may be the whole amount of the voucher meaning that the retailer sometimes makes no money on the voucher – seeing the whole process as a customer acquisition tool.

On raising funds

It is impressive that Fabig and partners Adam Rigby and James Gilbert managed to raise a sizeable angle sum by Australian standards off the back of a business plan and CVs - with no product live. Money came via investment house/deal shop Nextec and from serial Australian investors Roger Allen and TotalTravel founder Malcolm Baker (NB Yahoo bought TotalTravel in 2009)

On competition

Fabig is not worried about the competition from US companies that might enter or the AU players that have already started. He is convinced that the successful coupon players will be those that only offer one deal a day per city not a mass of deals. Means that he sees room for 3 or 4 players to be successful. The Americans don’t worry him. He believes they are a while away from caring about the Australian market by which time Jump On It will have established a foothold.

One of the companies vying to be one of "2-3 players" is Spreets.com.au. Spreets CEO Dean McEvoy is looking forward to battle with Jump On It. “Game On!” McEvoy said in our chat. Spreets has closed a round of it's own (amount undisclosed) and is glad to hear that Jump On It is also in the market as it “keeps you sharp and validates the opportunity”.

On marketing and using Facebook to kick off the business

Fabig sees the challenge in growing the business as a marketing and execution one, not a technology one. He says that the technology is not complicated. Success it is about executing well, building the viral audience. They have been very active in using Facebook as a customer recruitment tool, starting well before the launch. In an impressive display of social media marketing they set up a series of city fan pages (ie I [heart] Sydney]) and claim to have attracted 100,000 fans to use as the initial marketing database.

On scale

The biggest challenge I see is scale. Targeting 1 deal a day per city and focusing on Australia (and maybe NZ) means a target deal market of 10 maybe 12 deals per day (assume six cities in AU, four in NZ, maybe two regionals in Australia or splitting Melbourne or Sydney into two). Groupon is in a market where 72 million people live in the top 200 largest cities (2004 data). Fabig is not worried about this, believing that even with a market of just 10 cities he can build scale and a business generating $15-20 million in revenue per year.

My take

If the US can do it, then no reason Australia can’t. Viral and marketing will be a challenge but nothing that good execution can't fix. The challenge will be scale. Making a one deal a day per city business big enough in a market with so few cities.

Want to read more

If you want to read more on this model I suggest the following posts

1. SmartCompany: Venture capital veteran Roger Allen invests in Australian coupon site

2. TechCrunch: A TC Teardown: What Makes Groupon Tick

3. TechCrunch: Interview with Groupon CEO Andrew Mason

thanks to bixentro's for the photo via flickr

Tnooz: The blurring lines between transactional and non-transactional sites

My latest post for Tnooz has is live. Title of the post is "Non-transactional travel sites are chasing the online agents on unique product hunting – but can it work?". I write about how content sites are starting to negotiate directly with suppliers for unique product offerings, trying to directly challenge the major online travel agents. Mentioned in the post are Kayak Private Sale, TripAdvisor Business Listings, Voyageprive, Jetsetter, Dealbase and Totaltravel.

You can read the full post here.