Having been a fan of the ride-hailing aggregator Uber, I write this post with some cynicism keeping in mind that they are valued around $70Bn after their last round of fund raising. Yes, they have done a great job so far and created a disruptive influence (so much that ‘uberization’ may well enter into the official Oxford dictionary) but the question remains as to whether it can sustain the momentum in the long run.
Let’s address some basic facts first and I must acknowledge that they have done a lot to fundamentally change the cab-hailing industry. It has become massively simple to book a cab with the likes of Uber and Ola (Imagine the days before wherein one had to walk around the street looking for a cab with no certainty of getting one in time or haggle with the driver over the fare or being concerned with the safety of the passengers or using the expensive operators who burn a hole in your pocket), yet the long term feasibility of the service sometimes brings in mind a question or two.
I generally engage into conversations with the Uber drivers whenever I get to ride one. And have seen the optimism and excitement of the drivers gradually fading over the course of last 5-6 months. And the feedback has been across two biggest cities in India for Uber at the moment – Delhi & Kolkata. I remember the excitement few months back wherein the drivers were ‘uber-happy’ with the loads of freebies and commissions which they received. Although the ride commissions were very dynamic with changes coming almost every other week, yet the initial marketing blitz which Uber played out to acquire the riders and drivers was phenomenal. Without a single TV advertisement or hoarding, they managed to convey the message across plain and simple. Though, have a feeling that the euphoria may come to curse them if they do not play their cards well going ahead.
The early days of Uber started with great excitement with news splashes of drivers earning more than INR 125k/month in some cities. An average number which most of them admitted to was in the range of 50k-80k. That mind you, was a huge ‘surge’ over their status quo wherein most of them made around 20k-25k on a monthly basis before driving for Uber. The commissions used to be boggling with sometimes even ranging from Rs. 300-400 per trip irrespective of trip duration or amount. An average driver making 8 trips a days (with an average of Rs.150 per trip) made a cool Rs.3000-4000 per day. Adjusting for the monthly expenses in form of fuel, maintenance and EMI, most of them still managed to score a 50% premium over their past earnings. This combined with other qualitative benefits like ease of use, weekly payment being directly credited to bank accounts, no looking-out for potential customers in all made a grand proposition to the drivers. Again, with a business giving super-normal profits, it also attracted a fair number of people who wanted to cash-in on the boom and became car-owners who in turn employed easy-to-get drivers and managed to earn a decent profit right from the start.
From the customer perspective, things were rosy as well. With massive discounting (promotional offers getting as low as Rs.5/km for a sedan), big referral credits and host of other qualitative benefits one got hooked onto the service pretty soon. All you needed was a smartphone and a decent data plan! No doubt, the strategy proved to be a massive success both with the demand and supply side of the equilibrium with each rising exponentially every passing week.
The burning question which investors in Uber (as also with scores of other ‘unicorns’) is how to turn into the corner of profitability. This has to be done keeping in mind the mega expectations which have been created on both sides of its equilibrium and this is where I foresee challenges going ahead. Recent conversations with Uber cab drivers have elicited despondency with some proclaiming that things are not going well (a driver claimed that ‘acche din chale gaye’ ! J). Rapid scale-backs in commissions, imposition of specific number of rides to be mandatorily completed have lowered the enthusiasm. My last conversation with a cabbie (who was driving for an owner) revealed that the cab made around Rs. 42k last month as revenues (with expenses of around 35k including the driver charges and fuel maintenance) leaving a pittance for the owner. Also, going ahead I see the per-ride commissions completely going away with Uber standing as a provider who simply act as a demand fulfillment center via use of a technology platform. The question that would arise here is:
- In the future days, whether it would act as an incentive enough for the cab drivers (or owners) to part with 20% of their income to Uber without any commissions whatsoever (assuming a commission oriented model which they follow globally)? Or,
- Continue doing their business as usual without tagging with Uber and having the freedom to set higher fares (a la Meru or other private operators)
Coming from the demand perspective, all of us virtually know that the low pricing schemes for Uber not going to last for long. An off-hand calculation reveals that to sustain the journey over the longer term, the pricing would need to rise more than 40% over current rates. I see per/km rates to be in the range of Rs.15-25 in the longer run which would again dampen the rider enthusiasm. Specially, India being a price sensitive play, an increase in fares would definitely introduce more churn in the Uber rider demography. The question here is how Uber would handle such a scenario given that it also plans for an IPO in a couple of years’ time raising concerns around profitability and long term sustainability.
I foresee it as a gentle balancing act as they cannot afford to let any side of their driver-rider equilibrium to go out of sync. Yet, it doesn’t seem to an easy task especially with competitors virtually offering similar (or in some cases better in few cities) service than Uber.
Apart from the demand-supply balance, other relevant questions do arise as well which I am sure Uber has got their strategy teams working on:
- The metro city-play is fine and may well turn to be profitable in the longer run. How do they plan to remain profitable in the smaller Tier II and Tier III cities where affordability drops further, price sensitivity increases and cheaper options may be available?
- How do they plan to combat the ride sharing platforms that are emerging with the likes of Shuttl which offer much cheaper options to the consumer? Agreed, that they themselves have created an Uber ride sharing service but is it competitive enough? Can it cannibalize their existing business model?
- How to they plan to tackle the regulatory hurdles that they face specially with almost every state in India dictating their own? Even globally, it faces a massive backlash from scores of cities and countries each of which fight would slice away a pie from its road to profitability.
Believe there are lot of other concerns which no doubt the Uber team is working on as they go ahead in their global conquest.
P.S. Most of the above questions would be applicable to competitors like Ola or Lyft as well.
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