Ride-hailing grows up for Grab, Gojek, but no longer driving super app’s future

The latest moves and news by ride-hailing players suggest that the decade-old transportation business model may finally be seeing signs of stability. But don’t launch the ride-hailing comeback tour in Southeast Asia just yet.

Industry observers say ride-hailing is unlikely to reclaim the wheel for regional giants Grab and Gojek, instead remaining in the backseat to play a crucial but supporting role as the super app players rely on food and financials to drive growth.

Cruising speed

Just over 10 years after Uber launched the ride-hailing revolution, the business sector known for its aggressive spending on market share acquisition has started to rein in its subsidies, and the results have not been terrible.

Uber reported in February that its ride-hailing business made $2.1 billion in 2019 in adjusted Ebitda, a metric that excludes stock-based compensation and other items that the company deems to be unreflective of ongoing operating performance. That was a 34 per cent growth from the year before. Ride-hailing was also the only profitable part of the business for Uber, which had a total adjusted Ebitda loss of $2.7 billion and a total net loss of $8.5 billion in 2019.

Lyft, which has eschewed the food delivery business to focus on rides, said net loss adjusted for stock-based compensation narrowed to $651.8 million from a year-ago $888.7 million. Unadjusted net loss widened to $2.6 billion from a year-ago $0.9 billion, but Lyft said it remained on track to post a quarter with a positive adjusted Ebitda by end-2021.

“We continue to believe the risk/reward in owning the leader in mobility as the sector matures and steadily works towards profitability is favorable, particularly given the demonstrable resilience in consumer demand as the company raises prices and reduces incentives,” Goldman Sachs wrote in an analyst’s report about Uber.

In Singapore, a Grab spokesperson confirmed to DealStreetAsia earlier statements that the company is profitable on an earnings before interest, tax, depreciation and amortisation (Ebitda) basis in the mature verticals in some markets. Market sources have mentioned speculation that Grab’s Indonesia-based rival, Gojek, has achieved some level of limited profitability in its more mature businesses as well, although Gojek as a matter of policy has never commented on the profitability of its various businesses.

Those hints of improving metrics come as the players are cutting subsidies. Grab has raised the cost of redemptions for its rewards programme. Gojek on Monday announced a new surcharge on rides in Singapore.

“They’ve managed to tweak the unit economics to reach this stage,” Vertex Ventures managing partner Chua Joo Hock said of Grab. Vertex was an early investor in Grab.

Speed limits

But achieving stability is not quite the same as driving future growth, especially for businesses like Grab and Gojek that have to support multibillion-dollar valuations.

Despite the improving metrics, ride-hailing remains plagued by numerous challenges that have conspired to keep margins extremely low. For instance, transaction values tend to be low in ride-hailing compared to food, so the amount that Grab or Gojek makes per ride, before subsidies, tends to be lower than it makes per food delivery trip.

Ride-hailing has also become a minority contributor for the super apps’ businesses. Grab had earlier told DealStreetAsia that the majority of the company’s gross merchandise value (GMV) now comes from non-transport sources, including food and financial services and payments. Gojek’s former CEO Nadiem Makarim told the Nikkei Asian Review in 2019 that ride-hailing formed less than a quarter of the company’s overall GMV.

The regulatory environment does not help either. Competition watchdogs in Singapore, Malaysia and the Philippines have trained their focus on Grab’s share of those markets, limiting the ability of Grab to leverage its market dominance. In Singapore, plans for a licensing regime could raise the compliance burden for Grab and Gojek.

On top of all of that, a ride-hailing player may never be free from the threat of losing market share, said marketing professor Chu Junhong at the National University Singapore, a market expert who has studied the ways of transportation and delivery startups.

“Suppose you take Grab,” she said. “What’s the cost of switching to Gojek on your next trip? It’s zero. Every single trip, I can switch. Then you look at the drivers. What’s the cost of driving for Grab versus driving for Gojek? Many Gojek drivers in Singapore used to be Grab drivers. The business is very unstable.”

For Prof Chu, the ride-hailing business has not been able to differentiate itself enough from the traditional players.

“They’re not bad, but they’re just cash-rich companies,” she said. “The technology doesn’t do much more. The matching definitely can improve efficiency, but (Singapore taxi operator) ComfortDelGro also has an app.”

ABI Research analyst Lian Jye Su is taking the financial metrics with a pinch of salt.

“Positive Ebitda and ride growth have, in my opinion, never been an issue for ride-hailing companies, be it Uber, Grab and Gojek,” Su said.

On Uber specifically, he added: “The concerns remain the same for long-term sustainability. Unless the company can show it can reach profit through cost control or a diversified portfolio, which the company is still struggling with, the concerns will remain.”

Supporting role

With those limitations, ride-hailing will never be able to carry a billion-dollar company on its own.

“Players realised that ride-hailing services can’t be the long-term play for the business,” Insignia Ventures Partners managing partner Tan Yinglan said. “Gojek played to their strengths from the beginning and focused on a motorbike ecosystem of services, rather than cars or ride-hailing per se. Grab optimised matching efficiency and rule-setting on their platform, while at the same time experimented with other services, eventually hitting gold with food delivery.”

And while it is true that a super app does not need to be anchored by ride-hailing – China’s messaging-rooted WeChat being the prime example — for Grab and Gojek, the ride ecosystem has become the foundation of their user and merchant networks.

“Ride-hailing was a key service to drive the technology market in the region, as it brought users onto a technology platform in an unprecedented way,” Tan said. “It was a high-frequency, compelling market need, and venture-backed startups like Uber could back then afford to set aside the high costs of operation as it allowed them to build the user base they needed to pull in more cash to grow bigger.”

That support for the ecosystem comes on two fronts. First, by the sheer number of people that enter the ecosystem from rides; and second, by the frequency with which those people interact with ride services.

Vertex’s Chua explained: “Why do people want to use the app? It has to be something that’s frequently used, and low-value so that people use it frequently. If it’s a few thousand dollars each time, people might only use it a few times a year. Then it’s not an everyday service.”

Grab’s spokesperson described ride-hailing as an “entry point” that allows the company to on-sell services. The majority of Grab’s gross merchandise value (GMV) comes from users who use more than one service, and those form more than 40 per cent of Grab’s total users, the spokesperson said.

“We are able to scale our GMV faster while keeping our customer acquisition costs lower for our other services,” the Grab spokesperson said.

Gojek international communications senior vice-president Darragh Ooi said that the riders and drivers on the network in Indonesia are also able to facilitate other services such as a private-hire driver doubling as food delivery.

“Ride-hailing is a key vertical within an ecosystem that consists of over 20 services connecting millions of consumers across the region with over 2 million driver partners and over 500,000 merchants,” Ooi said. “Although payments and food are our largest businesses, all of the elements that make up our platform are interdependent, with each one supporting the other.”

Ride-hailing, being among the oldest verticals for Grab and Gojek, may also show the path to profitability for the super apps’ newer verticals.

“There has to be an endgame somewhere,” Vertex’s Chua said. “You can’t keep subsidising.”

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.