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Russian Travel Startups - a bubble waiting to burst?

0 September 2013

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 tend to share the following features. 

1: It is possible to pay for the services offered electronically.

2: The relationship with the providers of services (hotels, airlines, tour companies, etc) is based on commissions (4-20%), not on profit sharing. 

3: A serious investment in marketing is required. 

4: They have little or no concrete assets against which they can offset their expenses. 


Why did Russian travel startups get off to a good start?


Travel startups in Russia have been booming since 2011. In the last couple of years startupers and investors Russian decided that Russian internet users were ready for new services made available by the spread of the internet, and they have largely been proved right. The internet has spread rapidly through Russia, with the proportion of the population connected to the net growing at the fastest rate among the BRICS and fast approaching Western European levels. 

By the end of 2012 the 'population' of the Russian internet was 61 million, six times more than it was nine years ago. By 2016, it is predicted to have grown to 92 million. Of these, more than three quarters say that they depend on the internet on a daily basis. 

As well as the spread of the net, the travel sector has also been boosted by 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 be worth $5.5 billion in 2012 (according to Datainsight), an 45% increase on 2011. In comparison, the US online travel sector grew by just 6-12% in 2012, while in China it grew by 25%.

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. This is probably due to another important statistic uncovered by Datainsight -that the average single spend on travel sites is around $1100, compared to just $400 for traditional online stores. Trust in online payment systems tends to develop over time, and so only those who have been using the net for a long period are willing to make the larger payments typical on travel sites. 

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. 

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 has 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. Travel sector purchases tend to be expensive ($1100 compared to $400 for regular retail sites), and so this is a particular problem for the sector. 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. 


Conclusion


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. 

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