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Airbnb’s battle against local unicorns resumes as China’s home-sharing market recovers

Written by AJ Cortese Published on 

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The home-sharing market in China has transitioned from growth to stabilization as the impact of COVID-19 persists.

On May 5, Airbnb CEO Brian Chesky addressed his employees in a heartfelt letter, notifying them of impending layoffs impacting around 25% of staff, while forecasting revenue to be less than half of its 2019 total.

In his letter, Chesky outlined hard truths about the future of global travel: “We don’t know exactly when travel will return. When travel does return, it will look different.”

As China’s economy opens ahead of other nations, the nation’s homestay market has begun to recover from significant upheaval. Platforms are rapidly deploying new strategies in attempts to ease the crisis caused by the COVID-19 pandemic.

A host in Chengdu who operates 30 units said the pandemic cost him RMB 400,000 (USD 57,106) in losses, while he also lamented the evaporation of foreign tourists, who usually make up 40% of his income.

The travel industry has been ravaged by COVID-19. Source: JC Gellidon from Unsplash.

Airbnb views China as a strategically crucial market. Five years into operations in the country, the battle for market share is intense. Beijing-based Tujia leads the way with around 60% market share, while Airbnb and other local rivals like Meituan Minsu and Xiaozhu trail far behind.

As Chesky mentioned, the landscape of the travel industry will change, so how will this new environment reshape the competition for dominance in China’s homestay market? And most importantly, who is best positioned to capitalize on unforeseen developments?

Airbnb China: “Travel is for difference”

Despite being rocked by the COVID-19 crisis, Airbnb is said to be still mulling an IPO in 2020. Recently, the company installed Siew Kum Hong as Airbnb China’s chief operating officer (COO), creating a new role. Siew, hailing from Singapore, previously served as Airbnb’s APAC general counsel since 2012 and subsequently became a director at Airbnb for the APAC region.

Airbnb co-founder and chief strategy officer as well as chairman of Airbnb China, Nathan Blecharczyk, commented on the move, “China is critical to achieving our mission—to help create a world where anyone can belong anywhere and I’m incredibly excited that Siew Kum Hong will be a part of this important work.” Airbnb China’s CEO Peng Tao hailed Hong as “a natural gateway between China and Airbnb’s global network.”

Airbnb China has over 150,000 listings in China. Source: 36Kr.

But the reality is it has been a learning experience in China for Airbnb, with most optimistic estimates giving the American firm around 7% market share. Blecharczyk revealed on a GGV podcast that the company’s business grew 15% overnight when they added support for Alibaba’s digital payment platform Alipay in 2018—after having already been in China for a few years.

The company initially struggled to localize, as Chinese transactors are notably more cautious than those in Airbnb’s home market. Disputes arose between landlords and tenants, and users complained of a lack of readily available Chinese-speaking customer service options. This led to a revamp of Airbnb’s customer service in China, expanding to digital channels including Weibo and WeChat.

In July 2018, current CEO Peng Tao was brought in to right the ship after previous head He Gong dramatically resigned following four months of solid stewardship.

Airbnb China’s CEO Peng Tao. Source: 36Kr.

Since then, wary of the perils of localizing an international service in the Chinese market, the Airbnb team has grown to show surprising agility akin to its Chinese peers, especially in light of the COVID-19 crisis, launching its “Rest Assured Stays” program to promote listings with exceptional levels of cleanliness and high sanitation standards.

The company has been aggressively offering coupons to both guests and hosts, to re-engage its users and try to rebuild consumer confidence in the travel industry.

In addition to a receiving a USD 100 coupon, one Airbnb host in Beijing told KrASIA that the platform is waiving its four criteria to qualify as a superhost for certain users with a strong history on the platform, in turn boosting the number of superhosts and again bolstering travelers’ confidence in Airbnb products, be it stays or experiences.

However, reducing the barrier to entry for superhosts also degrades the overall value of the designation, which typifies the desperate situation home-sharing platforms find themselves in.

Despite numerous challenges, Tao is optimistic about the recovery of the Chinese market, as he told CGTN in June, mentioning that bookings in most Chinese cities had returned to pre-virus levels. From April, bookings have continued to recover from a nadir in February and March.

A survey of Chinese travelers by market research firm Kantar found that 81% of respondents were likely to consider a trip close to home, within driving distance, as people prefer personal vehicles rather than commercial flights. Airbnb’s data showed that an increasing proportion of bookings were within 200km from travelers’ homes, leading Tao to neatly categorize the shift in behavior and say, “Travel is for difference, not distance.” The demand for a change of scenery can also partly be attributed to the monotony of prolonged remote working.

However, like most offline businesses hamstrung by the pandemic, Airbnb has pivoted to develop new, web-based offerings. The company launched Airbnb Online Experiences in the wake of the health crisis, and 84% of respondents to a Kantar survey said they would be interested in trying such a service. These online experiences are live, interactive video sessions limited to small groups, where guests can interact with expert hosts. The program includes activities like up-close access to a sheep farm in Scotland, a baking tutorial, a walking tour of Prague or a live show from a magician.

The company has also signed agreements with local government tourism bureaus from Zhejiang province and Guilin city to try and recoup some lost business. Guilin is particularly reliant on tourism and has previously been hailed by the government as an example of poverty alleviation through tourism.

While these measures may stem some of the pain felt by the entire industry, Airbnb will have to be patient before it can resume its typical pace of expansion in China.

Tujia: If you can’t travel, then rent

Tujia, “the way home” in Mandarin, is the current leader in China’s home-sharing market, boasting over 1.4 million listings globally, including 600,000 in China. The platform is also backed by Ctrip (NASDAQ:TCOM), China’s largest online travel platform.

In its bid to dominate the home-sharing sector, the firm acquired rival Mayi.com, Ctrip’s homestay business, and travel platform Qunar’s homestay business in 2016. Since it raised USD 300 million in a Series E round from Ctrip in October 2017, Tujia’s valuation has doubled to over USD 3 billion, while the company harbors no immediate plans for a public offering, in contrast with Airbnb.

While Airbnb made inroads in China mostly at first with inbound international travelers and outbound Chinese tourists to places like Southeast Asia, Tujia has focused on serving a high-end consumer segment looking for domestic travel. Tujia’s main user group are affluent urban residents looking to escape China’s massive cities and enjoy leisurely countryside travel, which aligns nicely with an increased demand for short-distance trips.

Beijing-based Tujia has temporarily shifted to longer-term rentals to retain users. Source: Tujia’s website.

Even as the incumbent leader, Tujia was not immune to the COVID-19 pandemic, as the company was forced to lay off 40% of its staff earlier this year. The firm also suspended its self-operated properties in 20 Chinese cities in late April, while franchisee homestays continued normal operation.

Part of Tujia’s strategy to recover from the COVID-19 crisis has been to offer aggressive price discounts to acquire users, with the hope of retaining customers. This practice has only been intensified amid the COVID-19 pandemic, with Tujia shifting from offering mostly short-term rentals to heavily discounting longer-term rentals, in a bid to fill idle real estate for desperate landlords.

This is a significant shift in Tujia’s business model, as short-term rentals offer much higher margins and have been driving the company’s profits to the point where it doesn’t lust for the capital market funding.

Tujia’s prioritization of long-term rentals is evident by a new banner for the service on the home screen of the app, where users can find promotions like “80% off for 15 days” and “70% off for 30 days.”

Unsurprisingly, as a result, long-term rentals on Tujia have increased more than ten times since the pandemic began. Also, long-term stays on Tujia do not require the user to pay a traditional real estate agent’s fee, which is typically one month’s worth of rent in China, providing the platform with a significant advantage.

With that said, long-term rentals are merely a stopgap before the industry finds its stride again. A Tujia host in Beijing told 36Kr that although long-term rentals only generate about 60% of the revenue of short-term stays, that is enough to cover expenses and break even. The industry simply has to bide its time and focus on stability until growth can resume.

China digest

Xiaozhu: White-collar spotlight

Xiaozhu, or “little piggy” in Mandarin, is another of China’s home-sharing platforms. It has raised over USD 500 million since its founding in 2012, most recently closing its Series F round led by Alibaba (NYSE: BABA) in October 2018.

The Beijing-based platform has suffered many of the same ills as its competitors, having previously relied heavily on short-term rentals to drive revenue. Although signs of recovery are evident, as data from Xiaozhu has shown since May, the proportion of long-term rentals has begun to decrease.

The company is also looking for innovative alternatives during the pandemic. Xiaozhu has partnered with Taobao Live and Hainan province to promote livestreamed tourism events, as the island province in southern China feels the pinch of reduced tourism spending.

The firm also recently signed a cooperation agreement with ByteDance’s enterprise software platform Lark, known as Feishu in China, to promote affordable business travel solutions, undercutting hotels that rely on business travel. Searches for business travel on Xiaozhu were up 120% month-on-month in June, while business travelers comprise 36% of Xiaozhu’s users.

Given the uptick in popularity of Feishu in remote work setups, this collaboration would seek to up that proportion, as discretionary travel may take longer to recover. In the first week of Xiaozhu operating this new enterprise-facing unit, 50 companies signed up. Xiaozhu’s differentiation as a top option for Chinese business travelers may buoy its business as the market remains largely dormant, or at best stable.

Xiaozhu and ByteDance’s Feishu partnered to explore opportunities in business travel. Source: Xiaozhu and ByteDance.

China’s homestay market has been increasing consistently since 2011. However, the COVID-19 pandemic abruptly brought that growth to a screeching halt. Companies and hosts alike are now adjusting their strategies for hard times ahead, carrying hopes that shifts to digitization and unique product offerings may relieve some of the pain from the crisis. During this period of experimentation, would-be travelers might also cultivate new consumption habits through different channels, bringing new changes to the tourism industry in a post-COVID-19 world.

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