Be the leading provider of on-line travel services in Latin America. we are towards the end of 1999 the internet is changing the way business is done

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1 AGENDA Current situation How the idea was born What is Despegar.com Strategy / business model Economic outlook for Latin America Competitive Environment Proposed Solution 1

2 The Vision Be the leading provider of on-line travel services in Latin America. Current Situation we are towards the end of 1999 the internet is changing the way business is done Five MBA graduates (3 from Fuqua) are developing a business plan for an on-line travel agency to serve Latin America Their objective? To become one of the first Latin American e-ventures to be financed by US Venture Capitalists 2

3 E-TRAVEL: AN OPPORTUNITY IN LATIN AMERICA Successful business models Expected market growth (Internet, Tourism, LatAm) Industry structure: Geographically disperse Information intensive buying process No dominant players Substandard customer service High transaction costs Lack of transparency E-TRAVEL IS THE MOST IMPORTANT ON-LINE COMMERCE CATEGORY IN THE USA Airplane tickets PC soft/hard Gifts Entertainment Books Groceries Apparel $44 $316 $414 $562 $518 $636 $1,085 $1,355 Total 98 online spending: $4,390 MM CONSUMER COMFORT WITH BUYING ONLINE Cigars Insurance/Financial Services Computer Software/Hardware Travel Books Magazines Music/Videos Flowers/Gifts Automobiles Toys Office Products Specialized Sporting Goods Consumer Electronics/Appliances Apparel Groceries/Food General Sporting Goods Tools/Home Repair Home Furnishings Source: NUA Internet Services Content US$ MM Source: Morgan Stanley Dean Witter INTERNET BUSINESS OPORTUNITY 3

4 Expected on-line travel market in Latin America 50 Internet Users (MM) Internet Ticket Sales (MM) $1, $1, $ $ $ $- Expected on-line ticket sales in Latin America (in $ million) $- $100 $200 $300 $400 $500 Brazil Mexico Argentina Chile Colombia Venezuela Peru Others $69 $21 $9 $145 $13 $144 $9 $124 $3 $85 $20 $10 $89 $ $405 4

5 STRATEGY BASED ON 5 CONCEPTS REGIONAL EXPANSION NEW SEGMENTS LOCAL PRESENCE SERVICE OFFERING BRAND AWARENESS REGIONAL EXPANSION ENABLES SCALE AND OPERATIONAL SYNERGIES NEW SEGMENTS REGIONAL EXPANSION LOCAL PRESENCE SERVICE OFFERING BRAND AWARENESS Scale Synergies Access to 120 M consumers with buying power similar to USA/Europe 9 M internet users in Latin America in 1999 Travel market worth over US$ 16 billion REGIONAL EXPANSION Development of a brand with regional presence Cross selling of products between countries Regional alliances Larger base to support start-up costs 5

6 LOCAL PRESENCE PROVIDES COMPETITIVE ADVANTAGES NEW SEGMENTS REGIONAL EXPANSION LOCAL PRESENCE SERVICE OFFERING BRAND AWARENESS Better understanding of the market Access to better fares Customer service DESPEGAR ALLIANCE MANAGER DESPEGAR INC. COUNTRY MANAGER PRINCIPAL ADVISOR Payment method adjusted to local regulations Content adjusted to local market requirements MGT. TEAM CALL CENTER TRAVEL AGENCY ARGENTINA BRAZIL Increased control over operations MEXICO BRAND AWARNESS IS CRITICAL TO THE GENERATION OF TRAFFIC NEW SEGMENTS REGIONAL EXPANSION LOCAL PRESENCE SERVICE OFFERING BRAND AWARENESS TRAFFIC Online and Offline advertising campaigns Alliances Brand & Product TV Radio Magazines and newspapers Billboards Banners Links Public Relations Press coverage Special events Travel suppliers Internet sites Co-branding promotions 6

7 ONE-STOP-SHOPPING SHOPPING LEADS TO INCREASED SALES AND CUSTOMER RETENTION NEW SEGMENTS REGIONAL EXPANSION LOCAL PRESENCE SERVICE OFFERING BRAND AWARENESS Service Offering Content Community Convenience Customer Service Commerce Travel guides Professional reviews Weather Airport real time scheduling Destination video clips Maps Chat Bulletin Travel log Customer reviews Photo Album Meeting Place Self service 24-7 Home delivery Pick-up locations e-tickets Quotes by request Local 800 call center Fare alerts Fare finder Trained travel agents VOIP Chat service Loyalty programs Flight, hotel and car rental Vacation and cruise packages Travel guides Insurance Travel mall Travelers checks... FOR THE DIFFERENT MARKET SEGMENTS NEW SEGMENTS REGIONAL EXPANSION LOCAL PRESENCE SERVICE OFFERING BRAND AWARENESS Potential markets: Spain, Brazil, Argentina, Mexico, Colombia, Chile, Venezuela and Uruguay;and US Hispanic B2C (LEISURE) Leading E-travel provider with a recognized brand, consumers top of mind Additional possible services: solutions for budget/young travelers (Despegar Joven), thematic solutions for special interest groups (ski, soccer, honeymoon, etc.), rich editorial content, planning tools, and community features B2B (CORPORATE) Main target: small companies with limited travel sophistication Potential key partnerships: Accor Corporate Services and Carlson WagonLit Travel 7

8 Latin America: Positive outlook for 2000 Forecasted GDP growth: 4% Positive factors Sound fiscal & monetary policies Low expected inflation (few double digit inflation rates) Negative factors US economy growth is expected to slowdown Uncertainty on stability of economic policies Economic indicators Argentina a b 2000 b 2001 b GDP ($ bn) GDP Growth (%) Inflation (%) Population (m) External Debt ($ bn) Exch. Rate (avg./$) Country Rating c a: From The Economist Intelligence Unit. Country Report: Fourth Quarter b: Estimates, except for Institutional Investor Country Rating c: Institutional Investor Country Rating. September of each year. Chile a b 2000 b 2001 b GDP ($ bn) GDP Growth (%) Inflation (%) Population (m) External Debt ($ bn) Exch. Rate (avg./$) Country Rating c a: From The Economist Intelligence Unit. Country Report: Fourth Quarter b: Estimates, except for Institutional Investor Country Rating c: Institutional Investor Country Rating. September of each year. 8

9 Economic indicators Brazil a b 2000 b 2001 b GDP ($ bn) GDP Growth (%) Inflation (%) Population (m) External Debt ($ bn) Exch. Rate (avg./$) Country Rating c a: From The Economist Intelligence Unit. Country Report: Fourth Quarter b: Estimates, except for Institutional Investor Country Rating c: Institutional Investor Country Rating. September of each year. Mexico a b 2000 b 2001 b GDP ($ bn) GDP Growth (%) Inflation (%) Population (m) External Debt ($ bn) Exch. Rate (avg./$) Country Rating c a: From The Economist Intelligence Unit. Country Report: Fourth Quarter b: Estimates, except for Institutional Investor Country Rating c: Institutional Investor Country Rating. September of each year. On-line competitors Viajo.com Main on-line competitor in Latin America Offers tickets, complete tourism packages, language translation, extensive travel content Operates both on-line and off-line stores Regional portals Terra and Star Media have entered alliances with agencies US on-line travel agencies Expedia and Travelocity have launched sites for markets outside the US 9

10 The Threat & The Opportunity THREAT OPPORTUNITY Similar portals in development Mexico Despegar Network in place Simultaneous deployment in LatAm First-mover advantage The Timing is NOW The Venture Capital Despegar.com needs 8 M$ to accomplish a Regional Roll-out Despegar.com will be financed by 100% Equity (all VCs) Management team is presenting its Business Plan to the 1 st Round of US Institutional VC Investors 10

11 Questions... Case Key Learnings ❶ ❷ ❸ ❹ Identify Project s Risks Affect Cash Flows Affect the Cost of Capital Set up Cash flows Sensitivity Analysis Real Options 11

12 ❶ Project s Risks Cash Flow Implications RISK CAUSE ADJUSTMENT Pre-Completion Resource Availability NO - - Technology NO - - Timing HIGH Strategic Advantage Reduce Marketshare Completion NO - Post-Completion Market HIGH Adoption rate & Commissions Reduce Web Adoption & Comm. Supply/Input MEDIUM Marketing & Brand Issues Reduce Marketshare Throughput MEDIUM Technology Problems Reduce Penetration Speed Operating Costs MEDIUM Lack of Experience Increase Expected Oper. Costs ❶ Project s Risks Cost of Capital Implications Calculator Adjustments Cost of Capital Averaged Brazil Argentina Mexico Venezuela Colombia Chile Macroeconomics Political/Legal Force Majeure Financial Risks Weighted Per country Gross booking 12

13 ❶ Project s Risks Cost of Capital Implications Argentina Brazil Chile Colombia Mexico Venezuela Cost of EquityCapital ( calculator ) Industry beta adjustment * 22.80% % 25.45% % 16.4% % 22.10% % 20.53% % 26.81% % Operational- Sovereign Risks Macroeconomics % % % % % % Political/Legal % % % % % % Force Majeure % % % % % % Financial Risks % % % % % % Adj. Project Cost of Equity: 24.81% 25.58% 16.07% 25.36% 17.46% 30.70% (*) Industry Beta adjustment corresponds to Travel and Tourism, Internet effect is considered in Cash Flows. ❶ Project s Risks Cost of Capital Implications Re = 23.47% Despegar s Capital Structure: 100% Equity, no Debt 13

14 ❷ Cash flow Setup % Internet users Share Of Travel POPULATION % Online buyers COUNTRY E-TICKETS BOOKINGS Share Of emarket COMPANY E-TICKETS BOOKINGS Spending p/person Untapped Mkt ❷ Cash flow Setup REVENUES Ticket Bookings Commissions Others: Rental Car + Hotels Advertising Corporate Expenses IT Personnel Operations Operating Countries Expenses Marketing Costs NPV = $ 50 M 14

15 ❸ Sensitivity Analysis SensIt - Sensitivity Analysis - Tornado Spending per person ($) 67% 125% Internet users (k) 67% 105% % online ticket buyers Share of e-market 80% 85% 105% 110% % commission (paid to travel agents) Media advertising 60% 120% 100% 80% % growth (terminal value) 2.0% 3.0% Personnel IT / website Operative 120% 120% 80% 80% 80% 120% Monte Carlo: Mean NPV = $ 25 M Untapped market potential 50% 125% -20,00-10, , ,00 30,00 40,00 Net 0 present 0 value 0 50,00 60,00 70,00 80, ❹ Real Options Delay Option Abandonment Option Expansion Option Brand or Knowledge Building Option 15

16 Thank you!! 16