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Founded in 2012, Grab is Southeast Asia’s most dominant on-demand platform for ride hailing and food delivery. It is also one of the top fintech players in the region. Grab became a listed company on NASDAQ via a special-purpose acquisition company (SPAC) listing in December 2021. The SPAC was sponsored by the renowned venture capitalist Brad Gerstner of Altimeter Capital.
The past decade for the on-demand economy has been a rocket ship. Ride hailing and food delivery swept across the world from New York to Singapore to Jakarta, and the gig economy was in full swing. The problem? This was a heavy subsidized industry, and firms wanted to grow at any cost. Forget even revenue – for a long time the game was to chase GMV (gross merchandise value). One of our industry experts in Indonesia recounts his experience:
“It was purely a volume business…How many orders, how much GMV can I generate? Irrespective of all of the cost. It was really that high growth rocket ship dynamic.”
But with the drastic change in capital market conditions since late last year, the music stopped and the game changed. No longer can these businesses rely on an infinite supply of funding (at higher and higher valuations) to subsidize their growths. Ever since the cycle turned, Grab’s share price, and that of its publicly listed peers globally, have fallen like a rock. When we dive into this carnage, what can we find?
- Grab’s competitive positioning in the industry is still rock solid, supported by its dominant “Super App” business model. If competitors and new entrants were not able to dethrone Grab in an era when they had easy access to capital, who is going to do so now that less capital is available?
- While Grab’s share price has been severely punished, the market downturn may also be a positive turning point to catalyze more rational industry behavior moving forward.
- Incentives spending/subsidies in Southeast Asia seems to be coming down across the board. Management’s pivot towards profitability is also clear.
- Grab is a net beneficiary of Southeast Asia’s pandemic recovery which has been gaining momentum as business and tourism travel normalizes.
Why the “Super App” model matters
The Southeast Asian “homegrown” players, notably Grab and local Indonesian competitor Gojek (Gojek Tokopedia, or GoTo, after their merger in May 2021), have built their businesses around a dominant “super-app” strategy, which incorporates ride-hailing, deliveries, payments, and other consumer services. In 2021, 56% of Grab’s users have used two or more of its services. The benefits of this model for user acquisitions is clear:
“When I was running GrabFood in Indonesia and I would say, ‘Hey, we need to increase our revenue by 20% in the next three months’ little to none of that additional revenue was going to be generated by acquiring new customers on to Grab. All of it was converting users from transport to food…
Having another use case where you have a relationship and a trust and importantly, data on all of these users means that you can acquire people into the food use case really significantly easier.”
The super-app model also benefits driver utilization too, as drivers have the option to take on jobs in both ride-hailing and food delivery. As the industry is forced to move away from the past model of excessive subsidies, the staying power of the super-app model – which offers these organic advantages – may become more apparent. It remains to be seen how well pure-play food delivery platforms, such as Food Panda (owned by Delivery Hero), is able to fend off against Grab in the new competitive landscape where less subsidies are available to “buy” growth.
“I definitely see Grab Food and Gojek continuing to be the two main players. I’m honestly somewhat skeptical of the ability for other companies like Deliveroo and Food Panda and Shopee and some of the other ones that have risen and fallen by the wayside.”
Incentives spending is coming down across the board
The capital markets environment has turned into an unforgiving one for loss-making tech firms. But in somewhat of a contrarian way, this environment can also be seen as a positive turning point for the industry – particularly so for incumbent industry leaders like Grab. If competitors and new entrants haven’t been able to dethrone Grab in an era of easy money, it is less likely that they can do so now with less capital available. At the same time, the industry is beginning to show signs of rationalization as focus shifts to profitability, and away from the past cycle norm of chasing growth at all costs. Having emerged victorious coming out of years of destructive competition, can Grab finally start to reap the fruits?
Notably for the first time, all major players operating in the region are now publicly listed companies (Grab and GoTo have gone public in the last seven months, plus Delivery Hero and Sea Group which are already listed). Facing languishing stock prices and pressure to land on a sustainable business model, management teams of these companies are now strongly emphasizing profitability as the core focus. Grab’s promotional spending is already down in the first quarter this year. The same is seen at its competitors. One expert describes the situation as follows.
“We are at a market condition where cashback is no longer the main reason why users would choose which digital wallet they want to use. Because the incentives are now decreasing…starting in 2021 and until this year, in 2022, all of these wallets: GoPay, OVO, ShopeePay, are in the same level where they no longer burn a lot of cashback to the market.”
The level of promotional spend is coming down. Where the spend will eventually level off, and how fast these services can continue to grow even in the face of spend cutbacks are things that investors will be watching closely. Another expert summarized the situation succinctly.
“Growing is not that hard as long as you raise a lot of venture money. Growing profitably and ultimately reaching a sustainable equilibrium in terms of unit economics in the long-term, that’s a lot harder. I would think Grab Food and Gojek are probably the only ones that really have a shot at that.”
Grab’s founder and CEO Anthony Tan is known for being a charismatic visionary. His skills in raising money, instilling vision, and pushing people were crucial for helping Grab win the war of market share of the past decade. But what about now that the rules of the game have changed? All of these things are still relevant, but perhaps new management skills are also becoming more important. For example, it may be less about selling a vision, but more about operating efficiently. It’s less about the obsessive pursuit of growth but more about cost control. Anthony Tan is no doubt impressive as a founder. But as we enter an uncharted territory for the company, can we still anchor to the past narrative of a strong founder-led management? Time will tell.
“My view would be Anthony and specifically Ming – very smart, intelligent, strategic thinkers. Super sharp. Neither of them are day-to-day operators. What that means is there’s a huge vacuum in terms of deciding, actually, yes – let’s do the strategic vision and we want to be a super-app. But when it comes to the day-to-day decisions that need to be made – controlling a group of target and all of that stuff – there was almost a power vacuum there, when there is no clear ownership”
If you would like to read the full deep-dive report on Grab, you can visit the research page of Value Punks at https://valuepunks.substack.com/ Value Punks is an independent equity research publication focused on global equities, which uses Stream transcripts as an integral part of its research process.