India’s largest online travel company was born earlier this week.
According to the deal structure, MakeMyTrip will own 100% of Ibibo Group, another Gurugram based firm. In return, the current owners of Ibibo—South African internet company Naspers and Chinese investment firm Tencent—will hold a 40% stake in the merged venture. China-based Ctrip.com, which invested $180 million into MakeMyTrip earlier this year, will also own a 10% stake in the merged entity. The entire transaction is expected to be completed by December this year.
The big focus will be on the hotels business, where margins are more robust compared to the air travel segment. The company eventually plans to do away with the deep discounts offered to online customers in the Indian travel industry, currently worth some $30 billion.
On Wednesday (Oct.19), Deep Kalra, founder of MakeMyTrip and executive chairman of the new company, spoke to Quartz about the acquisition and the company’s plans. Edited excerpts:
What made MakeMyTrip buy Ibibo?
Firstly, MakeMyTrip, at the end of the day, will own 100% of Goibibo and 100% of RedBus as well as some smaller assets.
In return, the parent of GoIbibo, Naspers, will get 40% in our company. So, I would look at it more like a merger, simply because we are also looking to poach the talent. We believe that there is excellent talent on the other side. We are excited with the prospect of merging those teams together and seeing the best we can get from both.
Why is this merger important for the Indian market?
We have been playing the market for a long time. The last year or so has become hyper-competitive. Now the air travel market has kind of stabilised for a while and we have a nice market share there. But then, in the air business, there is not much margin. When you look at the hotel market, there is good margin and good money to be made. So everybody out here is excited to get into the market. In the hotel business, one can argue that deep discounting was started by Goibibo, and then for a while, we (MakeMyTrip) did resort to discounting. But it’s not the right way to win the market.
Now, either it could keep going on like that. Or we could look at a consolidation move.
So the hotel business is the focus?
Absolutely! We think hotels are a very exciting space. If you look at the organised hotel market, it is around $8 billion. With unorganised hotels, that might even grow to $12 billion. So it’s a pretty big market.
With the e-commerce boom in India, there has been a habit of deep discounting. Are we going to see that change in the travel industry now?
Honestly, I think it is inevitable over the long term. The purpose of any business is to make money, not to lose money. And you cannot keep discounting forever. So it’s inevitable in the long run that there is going to be rationalisation, and consolidation is frankly the first step to that.
What is your sense of the “me-too” companies that are being built in India?
In every sector and in every vertical, it won’t matter whether they are Indian or foreign. What matters is, do they understand the multilayered, multicultural market that India is? And do they have a nuanced approach to those different customer segments? Despite having great technology, do you get India? Are you willing to actually have an approach and different shades for India rather than lumping all of India as one? That’s the key.
Naspers, Ctrip, and Tancent will now own 50% stake in MakeMyTrip. Are you still an Indian company?
MakeMyTrip has always been an Indian company from our point of view (because of the fact) that the promoters have been here.
But which Indian company has not raised money overseas? Everyone raises funds from overseas. It all depends on how you look at it. I think it depends on which ecosystem will gain. So when companies do well, wealth is created, where will it come back? Where will the ecosystem be?
So if MakeMytrip does very well, then all the people who have interest in MakeMyTrip will make their own investments in many, many startups in India. But when Expedia or Booking.com does very well in India, that money is not coming to India. That money will then obviously go overseas.
How do you think the acquisition will change the Indian travel industry?
We can keep discounting till the cows come home. But that isn’t necessarily the right way to go ahead. I think the right way to go is to build a business around customer experience. The kind of thing Amazon does. Why people stay with Amazon is not because they are the cheapest. People stay with Amazon because it is the most convenient and the most easy way to purchase something. There are cheaper things out there, but there is a reason why Amazon has a large share of the market. Going forward, that is where we are going to focus on. That’s what I call sustainable growth.
Where are the opportunities in India?
I think in the tier II and tier III cities, there is a huge opportunity… for Indian companies to address. Because an international company will not understand or appreciate that.