The creator of the online hotel booking service Oktogo.ru Marina Kolesnik on the virtualization of tourism and the possibilities of fighting powerful foreign competitors

Maxim Spiridonov: It’s summer — a time when the growth of most businesses slows down, or even stops altogether. But these months are the peak season for tourism companies. Today we will talk about the prospects for virtualization of the tourism segment, the readiness of the end user for this, and how to develop a hotel booking portal in the presence of a strong Western competitor. Our guest is the founder of the online hotel booking service Oktogo.ru Marina Kolesnik.

Why are your products hotels? Not air tickets, package tours, but hotels?

Marina Kolesnik: The strategic reason is that the hotel market is very fragmented. There are no large suppliers on it, like airlines, for example. If we look at the world of airline tickets, there are not many options for flying from point A to point B. There will be 10 options. The numbers speak for themselves. The largest online seller of airline tickets in Russia is Aeroflot, which, according to last year’s figures, was more than 4 times higher than the turnover of the largest player, Anywayanyday. If we take hotels, then let's choose any European capital, and we will see thousands of accommodation options. A tourist needs an intermediary who aggregates options and provides reliable information.

— You decided that if you go into air tickets, then you have to fight to the death with a player whom you cannot beat 100%, and in hotel bookings there is a chance to compete for leadership.

— As for hotels, there are no strong suppliers, except for a small number of chain hotels. It is possible to work with small hotels that are willing to pay higher agency fees. This situation will not change dramatically either in 5 years or in 10. All the same, in Russia and Europe there will be small accommodation facilities that will still use the help of intermediaries in order to bring clients to them.

— What are the reasons to assume that demand is not satisfied by the well-known Booking.com or Hotels.com, if we talk about Western players?

— Booking.com’s recognition is quite high, which cannot be said about other foreign players. So I would start with Booking.com. This is a very large and successful company from Amsterdam, owned by the American Priceline. Due to their success in all markets around the world, they behave the same way. What opportunities does this provide for local players like Oktogo? This gives us the opportunity to win consumer loyalty by localizing our service. What I mean? Our client is not only an advanced tourist who has been booking on Booking.com or Expedia for a long time, but also an average mass market who, until recently, preferred to book with agencies. Maybe he suffered from the bankruptcies of some tour operators, maybe the moment came for other reasons, and he decided why not book online. He still has a lot of uncertainty and we give him the option to book both online and offline. This happens through our call center and distribution partners, for example Russian Railways. At railway stations, we give the opportunity to pay not only by credit card, but also in cash; you can pay through Euroset or Svyaznoy, through a bank, through Qiwi, Masterbank terminals.

— Your direct competitor is not Booking.com, but offline travel agencies?

- Yes. In the airline segment, the online share is about 12%, in the hotel segment - no more than 6-7%. 93% is what we compete with, and these are agencies, large and small tour operators, corporate agencies. So far they serve most of our tourists and travelers.

— As the user grows up, in terms of more effective use of the Internet and trust in it, will you take these people into your gentle and affectionate hands?

- Undoubtedly. It also matters what type of travel they are willing to book online. This starts with short trips on business or to visit, these are trips for a couple of days to a neighboring city, to Europe, to the Baltic states. This is the first thing that goes online because the price is low. Then the types of use begin to expand, such as family vacations. Such trips are slowly moving online, although traditionally people still turn to agencies if they are planning a long trip. This trend still continues, but we see an increase in the overall average bill, which is encouraging.

— Your average bill abroad is about $300, in Russia — $200-something?

- In the summer season it is much higher - about $500.

- Amazing. We'll get back to online travel in a few minutes, but for now I'd like to talk about your biography, because it contains some interesting points for listeners. Have you been at Mail.ru since the start?

- Since the beginning of 1998. At that time, Mail.ru did not exist as a separate company; it was a small project within the St. Petersburg outsourcing company DataArt. The guys tested the technical solution to see how it withstands the load. For $500 we bought the mail.ru domain , installed several servers, made a simple Russian interface and launched mail.ru mail . And suddenly the number of users began to grow astronomically. I helped the guys write a business plan and raise money. We brought the first million dollars to the Russian Internet, or, as the newspapers wrote then, “American Jews brought the first million dollars to the Russian Internet.” At the end of 1999, a strategic decision was made to move from St. Petersburg to Moscow. The company was developing at a rapid pace, we had plans to enter an IPO on the German market in April 2000. However, the market for Internet companies began to slowly crumble, and the IPO window closed for us. By early 2001, we found ourselves in a situation that many companies found themselves in at the time. We had a lack of capital, and then we merged with the NetBridge company, led by Yuri Milner.

— At that moment did you start to leave or did you leave immediately?

— After the merger was completed, I took a couple of months to rest, because I had been working quite intensively for several years. I decided to fulfill my dream and go to Harvard to get an MBA.

— What was the name of your position at Mail.ru before the merger?

— Vice President of Finance.

— What size was the company? There were about a dozen people at the entrance. How many people were there before the crisis?

— In 2000 there were about 300 people. In mid-2001, the company had fewer than 50 people.

— Is this the result of the reduction that was made by Milner?

- Yes. We started it, and Milner continued it.

— Then you went to the USA to get an MBA? How long did it take?

- 2 years. I graduated from Harvard in 2003. I was very interested in learning how corporate America worked, so I went to work at McKinsey as a consultant. I worked there for 2 years, gained invaluable experience and realized that I didn’t want anything to do with corporate America. I returned to my colleagues at DataArt. The guys developed software for American and European clients, and I started working in the online travel industry. First, we created one online travel startup in Germany, then I began to bring businesses to England, France and America. As a business and financially oriented person, first of all, I was interested in understanding their business, understanding how they make money, what they do, what their business model is. This market interested me very much, and by 2010 I decided that it was time for me to implement my project. I began to look very closely at the Russian online travel market, which at that time was quite empty. There was already Booking.com on the market, which opened an office at the end of 2009, OZON.travel began making its first attempts, Anywayanyday started working, and there was another player iGlobe. Overall, the share of each player was insignificant. There was plenty of room for activity. My partners and I immediately noticed that Western companies would not adapt their service to the Russian client. We decided that this is the goal for us, that we are a Russian service for the Russian traveler. First we started building a team, in 2010 we built our technology, and at the beginning of 2011 we launched our service.

- Whose money did they use to build it?

- With my money and my family’s money. The first investment in a business is a personal investment. In March 2011, we closed a deal with Mangrove Capital from Luxembourg and the French fund Ventech VC.

— Why not Russian funds?

— It must be said that in Russia at that time (at the end of 2010 - beginning of 2011) there were practically no early stage investors. It was just beginning then. In addition, we were looking for an experienced investor in the online travel industry. In Russia, the e-commerce market was still in its infancy, there were no specialists, and we decided to look for foreign investors. Mangrove Capital turned out to be just that.

— Explain for those who don’t know why investor specialization is needed. According to the logic of an ordinary person, money is needed.

— Money is good, but there is the concept of “smart money”. The younger the company, the more important the investor's experience, because you not only get a co-founder who expects financial results from you. You get a partner in the business you start with. Everyone knows that about 80% of startups do not survive to the second round of investment. This is the most risky time in the life of a company, your business model has not been tested, you are just assembling a team, testing your product. There are a huge number of risks. First of all, you want to have a partner on the board of directors who understands the topic and can advise you something, because he has been in similar situations in other markets with other companies.

-What is more important? So that he can advise or so that he understands what is happening and does not panic in situations that are not worthy of panic? As you know, very often it is the nervous behavior of the investor that greatly interferes with operational activities.

- Absolutely right. The first is an adequate understanding of the situation, trust, development of communication tools so that the investor is in a comfortable position and knows that management is not hiding anything from him, that there are ups and downs and this must be dealt with adequately. Advice can also be very helpful. For example, Mangrove organizes meetings once a year for all the CEOs of its companies. People come from all over the world - from Russia, Israel, India, Europe, America. This is a good opportunity to exchange experiences. Many of the bumps that we inflict on ourselves also affect others. Some have already found solutions, others have not, so this experience turns out to be irreplaceable.

- Fine. Before we dive into the overview of your Oktogo project, let's go back and talk about McKinsey, because a lot of people are interested in how a consultant works in these kinds of companies. What is he doing? What functions does it perform? What benefits does it bring?

- This is a very good question. I was interested in it myself, so I went there. Tasks can be different - strategic, operational in nature. Even a company like McKinsey was hired for cost cutting. Expensive consultants went around and measured the cost of hamburgers in various cafeterias. I got involved in several interesting projects that were related to optimizing the company’s costs through outsourcing, assessing the pros and cons. I learned a lot. What is the benefit for the client? As always, this is a difficult question. Basically, these are consultants who give advice, but are not involved in implementation, and most consulting managers are just like that. In most cases, the project takes three to six months. The consultant surveys the market, surveys clients, management, and he begins to offer interesting thoughts. It often happens that a consultant does not tell anything new, he simply formats his idea well, makes the right presentation, and thereby helps top management sell some ideas at the board of directors level.

- Remember those things that they themselves know, they are simply too lazy to put into PowerPoint.

- Yes, including. It’s hard to say that I invited such a reputable company as McKinsey, and they advised me nonsense. For a manager, this can be a political tool. Sometimes you need to cut the bones, and someone from the outside is often invited to do this.

— If you listen to you, you might think that consultants are business terminators.

— They perform management tasks. I have come across the fact that the loyalty of the paying client is higher than professional ethics. I myself have observed situations where consultants changed the results of their conclusions based on the fact that they did not coincide with the opinion of the company's management. This also happened.

— Do they adapt to the tasks that the company sets for them, even against the benefit of the company?

- Yes, this also happens. We are talking about large corporations here, and this is a big country with its own politics.

— Would you hire consultants from McKinsey or a similar company for Oktogo?

- No, I wouldn’t hire him. Firstly, because it is unreasonably expensive. If management itself cannot solve some key problems, then we need to look for people on staff who can solve this problem.

— Is this a signal of an unhealthy company?

— Yes, or about the lack of a quality expert in the company. An external consultant will not solve this problem.

— Let's return to Oktogo. You, like Ostrovok.ru, are fighting, first of all, with the great and terrible V ooking.com ?

— Booking is our competitor due to the fact that many of our clients used the Booking.com service. We are not fighting it, we are offering a different service. I believe that our intersections with Booking’s client base will slowly diverge. There will always be guys who are ready to try different services and experiment, but there will also be a loyal audience. We already see it, it is precisely the element of localization, simplicity, and coincidence with their mentality that she values. As the share of online travel in our country grows, this segment of less advanced online users will grow in our customer base.

— It was no coincidence that I mentioned the Island. These are your colleagues who emerged around the same time and are at approximately the same level as you. What caused the emergence of two identical projects? Was it a coincidence or did they also feel the wave and trend?

— Good ideas never come to the mind of just one person. Maybe it came to someone else, but Oktogo and Ostrovok were able to implement this idea, launch a business, attract capital, and build teams. We ended up with 2 local, similar companies. It is difficult to talk about competition in the client market, because we are much smaller than Booking, many times smaller than the offline market. I think having a competitor is very good. Our goal is primarily to expand our online market share. The pie is still small, and there is no point in dividing it yet. We need to make it 10 times larger and then actively divide it.

- And then rush into battle. Besides Ostrovok, who else is the online popularizer, the portal that, together with you, leads people from offline to online?

— OZON.travel makes a lot of efforts, Anywayanyday portal. Both of these players are primarily focused on the aviation product. The hotel product is more like an additional product for those who have booked an airline ticket. As popularizers of online booking, they are certainly among the first.

- It's clear. Your home page design is rather sparse. As a product manager, this seemed unjustifiably restrained to me. There are no pictures or infographics.

- This is a correct comment. Firstly, not many people visit the home page because our business grows through online channels, primarily through search engines. More than 80% of people immediately go to other points on the site.

— Do they usually come directly to hotel cards?

— Yes, on hotel cards or city pages. We plan to continue working on the main page, but the task of the first page is to lead a person to look for a hotel. He enters the city and starts searching. Our strategy is to make the home page very simple so that people can move on to the next step without getting distracted.

— How many hotels are in the database today?

— About 250 thousand hotels.

— Is this primarily Europe?

— We have good coverage in America, Asia, Latin America, but Europe is the main destination where Russians travel. In Russia, we are faced with the fact that there is no single aggregator, so our focus is on building our own hotel base in Russia. Why is this important? We are building the entire infrastructure, we are helping Russian hotels (about 10,000) enter the new online market. According to our estimates, there are now about 3,000 hotels out of 10,000 online. We still have to work and work to attract various accommodation facilities online.

-Are you not going to go further? How do you like the apartment rental scheme? How interesting is this segment to you? How promising is it as a competitive segment for hotels?

— Of course, this segment is promising. This is promising because it provides a very good alternative for travelers. How actively will we engage in this segment? He won't be the key for us. We already have a number of apartments in various major cities, but this is not a key product for us. This product will not occupy more than 7-8% of our volume.

- Why?

— This is a different market and a different product. Since these are apartments, we must contact the property to confirm. It's a different dynamic when working with a client. Now we instantly receive information about whether hotels have available rooms or not. The client who starts the search sees only those hotels that have rooms.

— How do you connect hotels? Do your scouts travel around the country with a suitcase and a set of contracts with an offer to connect to Oktogo, or do they approach you themselves?

— When we started, 10 people gathered, went in different directions and returned a month later with a certain number of contracts. This happened month after month. Now our recognition in the hotel market is great, and many hotels come to us directly. Many people have varying degrees of experience with online products. Some have already worked with Western players (mainly Moscow and St. Petersburg hotels), and they already know everything, for some this is their first experience, and there is a lot of educational work going on about how this can work, what a hotel needs to do so that it sells better. We can put a hotel on the first page, but if the price-quality ratio is low, then it will not sell.

— Is there some kind of price-quality audit on your part to ensure that offers do not slip below the acceptable level?

“ Our people stay in most hotels.” "Cockroach" will not be sold at the price of a 3-4 star hotel. We have a department that works with hotels, warns that we need to be informed if, for example, there used to be a swimming pool, but now it is closed, if half of the hotel is under renovation, so that we can adequately inform the client. This happens a lot in the hotel business.

— You connect your software product to their reservation system, right?

- Everything is different. There is a software product that can integrate with a hotel reservation system. This applies to larger hotels. We give our system to small hotels that keep their database in a notebook or Excel, and they use it.

— Is this some kind of CRM that provides reservations?

— Yes, they can maintain their database of numbers and set prices. We do not manage hotel pricing, we can advise, but pricing is the task of hotel management.

— While we were talking, I went to your website and the websites of your competitors and entered some queries. You might be a little relieved to know that the browser froze on one of your competitors' websites, and our Skype conversation was almost interrupted. You've built a website and started making yourself known. How? How much was offline advertising, how much online?

— In online business, online promotion is 99%. Especially at the start.

— You want to bring people from offline, which means you need to go to them offline.

— People are already online, they’re just not used to making transactions there, they’re not used to buying, they’re not used to paying, but they quite actively use the Internet to search for some information. People who will go through an agency anyway, check the information and think about where to go, compare the hotels that the agencies offered them online. For us, online is the main step. Going offline does not give quick returns. The payoff that occurs immediately is working with online promotion.

- OK. How do you promote yourself online?

— First of all, these are search engines. Contextual advertising is a key channel. Turned it on and off it went. Turned it off and it stopped. Yandex and Google are equivalent for us, despite the fact that Yandex occupies a large share of the Russian market. Oddly enough, Google turned out to be very effective. Now we are starting to work with social networks, this is a new direction for us. We are also considering other online promotion channels.

— Do you have good SEO specialists who work to improve your rankings?

- Yes, of course, we are doing this kind of work.

- OK. If we imagine that today someone decided to build a project to spite you, Ostrovok, OZON.travel, what would he be forced to do? What is the investment order? Does this kind of initiative make sense?

- This happens. OneTwoTrip came out of nowhere. She vigorously entered the market and began to develop.

- We both know that he appeared and grew up cheerfully, because he became the creator of Anywayanyday.

- Yes, sure.

— The contacts, skills, team we had developed - all this transferred to OneTwoTrip, so it took off.

- Undoubtedly. If one of the existing players in the market leaves an offended manager and specialist who decides to build something of his own, then he will be able to do it. If you have already done this before, then you do not need a very large investment (up to $1 million). If we talk about marketing and promotion, then we are talking about much more significant investments. You can spend quite a lot. Competitive dynamics are also at play. For example, we watched a very active struggle between Sapato and Lamoda , where it is difficult to say who emerged victorious. In my opinion, no one. It seems to me that this is more likely not value create, but value destroy. You need to be prepared for such moments of competitive struggle. I believe that this is a young market, so someone else can enter it, and there will be nothing surprising about it.

— These one and a half to two years on the market you exist on investments. Today you earn less than you spend. How long will this last in your case? How unsafe is this in the context of the worsening global financial crisis?

— At the moment, we continue to invest in business development. One of the key lessons I learned from building Mail.ru is that the company structure must be flexible. As market dynamics change, it is necessary that this structure can be changed. It is very important to invest in the product, in marketing and promotion, and not in corporate jets, luxury offices and other things.

“I heard an idea from you that I liked.” You said that you have a certain plan X. This plan involves the possibility of reducing the company to such a state in which it will automatically become profitable.

- Undoubtedly. Regardless of plan X, we plan to reach payback in a year.

- In your full state today?

- Yes, without squeezing. If the market gets that bad, we might have to tighten up and do it sooner, but we'll be able to do it.

- This should be called the lizard plan, since I liked the image. Having such a plan is good; ideally, any large company should have one, especially a company at the investment stage.

— I believe that the main approach to business is that it is not a sprint, but a marathon. We don't build a business in a year or two. Companies such as Mail.ru or Yandex have been developing for more than 10 years to achieve the scale and volume that we see now. It seems to me that over the past year there have been too many people who want to do some kind of blitzkrieg, come, conquer everyone, chop them down, and then the grass will not grow. Stories are not always successful; they greatly spoil the entire market. They create little value, they destroy it more. Companies that are ready to dump so much that they obviously lose money sometimes shoot up. If a crisis occurs, large soap bubbles often burst.

— You said that your task is to build a “yard” company, that is, a company with a capitalization of over a billion?

" Yes, absolutely."

- For what? It'll be cool?

— We work in a huge market. There is room for several "yard" companies here. The hotel market is worth $20 billion. If this market already grows to 30% of the online share, then it will be $3 billion.

— $20 billion – is it in Russia or in the world?

— This is the turnover of Russian hotels and what Russians spend on hotels when traveling abroad.

— What is online turnover today? What has been its dynamics in recent years?

— The online share is about 6%, based on last year’s figures.

- About a billion.

- Even less.

— What is the growth over the years?

— It is the hotel segment that will double from year to year.

- How long?

— I think the next 3 years at least.

- That is, it will reach several billion, and you will be able to grab a third or a quarter and build your own “yard” company?

- Yes. We are not going to leave the market, we are not going to sell, we are going to build a player for the long haul.

- Sorry to draw your attention to one point in the conversation. There were sad notes in the conversation about possible layoffs. There is a feeling that I unwittingly hit a sore spot. Does this mean that the company is not doing very well today?

— It’s clear that we have to think about what will happen if everything collapses and we find ourselves in August 1998, everyone stops going anywhere. Then it won't be easy. The probability of this is not zero, but I do not think it is very high. What does this mean for business? This means that our marathon will take longer. We will survive these years. I believe that the strongest will survive. Those who are prepared will survive, and those who are not prepared may not survive. Any difficult moments strengthen those who are not destroyed. If there are no such critical moments, we will continue to grow vigorously and live according to an optimistic scenario.

“Listening to you, I remember my favorite quote from Churchill: “Success is not final, failure is not fatal: what matters is the courage to continue.”

" Absolutely true."

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