I recall the first experience with Grab. It was in the taxi on the street of Bangkok.
The Rally for Profitability: How Ride-Sharing/Delivery Platforms found the route to profits
I recall the first experience with Grab. It was in the taxi on the street of Bangkok.
A taxi driver told me to sign up and book rides through the new ‘GrabTaxi’ app. He mentioned a 40THB discount for using it, which left me confused why a driver would willingly accept less payment. He clarified that he still received the full fare, with ‘GrabTaxi’ covering the discount. So, I inquired further. Turned out the driver had no clue and speculated it could be funding from a foreign entity possibly involved in money laundering.
In the early days, the mantra for unicorn stratups was growth at all costs. Capturing market share often meant sidelining the critical milestone of making profits. However, a shift is underway-profitability has become a priority, symbolizing stability and long-term success in the highly competitive digital economy. Pressure from economic situations after Covid-19 emerged have pushed profits into reality. I will take a closer look at Grab, Uber, Delivery Hero, and GoTo to find out how each company find its way to profits.
Challenges Hindering Profitability
Unlike conventional businesses, ride-hailing and delivery giants like Grab, Uber, and GoJek operated at a loss for a significant period. For those unfamiliar with the reasons behind this, allow me to provide the narrative that led us to our current situation.
It’s not clear of who first introduced this phrase. But it perfectly captures of the ideology adopted by unicorn startups during 2010–2019. It is used to describe strategies that focus on top-line revenue and user growth, often at the expense of profitability. This approach was driven as the way to achieve “network effects” which is a key to win the market and make it difficult for other players to compete
“The network effect refers to the phenomenon where the value or utility of a product or service increases as more people use it. This concept is crucial in various fields, including economics, business, and technology, as it can significantly impact the success and growth of platforms and products.”
Why is this a problem? In theory, the outcome should be satisfactory. Investors were not coerced. The company successfully expands, offering customers affordable services. Eventually, network effects will come into play. Investments will yield returns, and companies will become profitable. However, the issue of burning cash seems never-ending. It would have been easier if there had been just one company competing for the market. Yet, in reality, the competition is much fiercer.
Imagine three companies battling it out for the biggest market share, pouring in loads of cash billons after billons. But as these three run out of funds, a fourth player jumps in, bringing even more capital to grab a piece of the pie. Of course, the existing competitors can’t just sit back and watch as their loyal customers start to slip away.
“Uber’s growth strategy involves prioritizing expansion and market dominance over profitability. The company has been willing to burn through cash to subsidize rides, recruit drivers, and establish a global presence. Despite incurring significant losses, Uber’s approach aims to achieve critical mass and leverage its size to gain regulatory acceptance. The company’s aggressive expansion into various markets, however, has led to high operating costs.”
The focus on profitability has long been discussed, while companies are thriving for growth. However, the commitment to a specific timeline became more apparent post-Covid-19. With prolonged periods of cash burn and challenges in securing funding due to higher interest rates, businesses are now under increased pressure to turn a profit than ever before. This transition highlights the importance of sustainable growth, improved unit economics, and revenue generation as key components for long-term success. I will guide you through each company’s journey at a critical juncture, where they must pave their own path towards profitability.
Company Strategies Towards Profitability:
The playbook for profitability isn’t one-size-fits-all. It’s a mixture of revenue growth, cost optimization, marketplace refinement, and operational agility.
Ultimately, the metrics boil down to revenue minus costs. I will share my insights from publicly available sources on how each company strategizes and where they show similarities or differences.
Grab Achieved its first quarterly adjusted EBITDA positive in 3Q2023 and acheived quarterly net profit in subsequent quarter, 4Q2023 here are key contributing factors
- Optimization of Incentives Spend: Grab focused on further optimization of incentives spend, which contributed significantly to the expansion of its deliveries segment adjusted EBITDA as a percentage of GMV. This strategic adjustment allowed Grab to manage its expenses better while still incentivizing user engagement and driver-partner productivity
- Enhanced Operational Efficiencies: The company improved operational efficiencies, notably in the deliveries segment. This was achieved through measures such as increasing batching rates and enhancing driver-partner earnings for batched orders. These operational improvements not only boosted profitability but also improved service delivery and driver satisfaction
- Growth in Mobility and Deliveries Segments: The mobility segment grew as a result of improved supply, recovery in tourism ride-hailing demand, and growth in domestic demand. Additionally, the deliveries segment also demonstrated strong performance, contributing to the overall positive adjusted EBITDA. The strategic focus on these core segments enabled Grab to capitalize on market opportunities and drive overall financial improvement .
Uber achieved positive adjusted EBITDA positive early in 1st quarter 2021 but only generated positive free cashflow in 2nd quarter of 2023 here are key factors contributing to profitability
- Incentive Model Adjustments in UK: Uber’s significant revenue growth, was largely due to a beneficial business model change in the UK, enhancing the Mobility Take Rate and leading to a $1.1 billion adjusted EBITDA for the mobility segment.
- Revenue from Ads: The Delivery segment experienced significant year-on-year growth, driven by higher volumes, increased advertising revenue, and decreased marketing costs, alongside the Mobility segment’s robust growth spurred by office reopenings and a surge in travel demand.
- Supply Optimization: Uber’s focus on expanding its driver and courier base along with optimizing its service offerings and adapting to market dynamics, contributed significantly to achieving positive cash flow and adjusted EBITDA, marking a foundation for sustained profitability.
Deliver Hero achieved positive adjusted EBITDA in the 2nd half of 2023 with a breakeven free cash flow. Following are key strategies bringing the company closer to profitabiltiy, given it is facing different challenges in different markets.
- Market Maturity: The company focused on maturing unprofitable markets, leading to an increased profitable platform business generating substantial adjusted EBITDA. The unprofitable Platform business’s adjusted EBITDA margin also performed better than expected, with many early-stage markets showing significant growth and moving towards profitability
- Revenue Optimization & Growth: From Q1 2022, Delivery Hero showed promising signs towards profitability with a 52% increase in Total Segment Revenue and significant GMV growth, supported by a positive contribution margin across its own-delivery business and strategic revenue opportunities in subscription services and advertising.
- Dmart Success: Early achievement of the Dmart business was the final piece of contribution that turned adjusted EBTIDA positive as a the unit economics are healthier: healthy volume growth, larger baskets, and higher cost efficiency
The company has not disclosed full financial metrics of Q4 2023 but reported that it has achieved positive adjusted EBITDA. With track record in previous quarters, following strategies are key contributors to the success
- Strategic Cost-Cutting and Workforce Reduction: As part of its approach to navigate global economic uncertainties and achieve financial stability, GoTo implemented significant cost-cutting measures, including reducing its workforce
- Ad Revenue Growth: 14% increase in gross revenue and is significantly contributed by Ads and subscriptions which yield higher profit margins
- Product Maturity: GoTo also reported about achieving lower driver and user incentives as more products became more well-known which require less investment to build awareness in some cities
Implications: Charting the Future Post-Profitability.
The race towards profitability by platforms like Grab, Uber, Delivery Hero, and GoTo marks a pivotal moment in the economy. Moving growth-at-all-costs mantra, these companies are now showcasing a strategic shift towards financial sustainability and operational efficiency. This transition reflects a deeper industry maturity, suggesting that the path to profitability is not merely an end goal but a stepping stone towards more innovation, enhancing customer service, and securing long-term success in a highly competitive market. As these platforms adapt to this new paradigm, their journey offers valuable insights into the evolving dynamics of the tech landscape and digital economy.