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Business case study: Grabbing market shares

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GRAB (or GrabTaxi as it was known then) is a mobile app that utilizes smartphone cloud-based technology to provide ride-hailing and logistics services. The concept was envisioned by Anthony Tan, a great grandson of an average taxi driver in Malaysia. Together with cofounder Tan Hooi Ling, Tan created MyTeksi, which became popular in Malaysia and eventually expanded into other countries in Southeast Asia under a brand new name GrabTaxi. GrabTaxi became the Philippines’ first “e-hailing” mobile app when it was launched in the country in 2013.

Available in iOs and Android formats, the app lets the user send their booking request to the drivers — handpicked from partner taxi fleets within a three-kilometer radius. The app will then calculate which taxis are nearest to the passenger in which case the information will be sent to that taxi. Upon booking, passengers can access the driver’s name, plate number, photo, and phone number. In addition, the app also displays a map that shows the driver’s real-time location as well as the estimated distance and projected time of arrival. The estimated fare is also shown once the passenger inputs their current location and desired destination.

After the ride, the passenger can rate their driver based on a five-star system (five being the highest) as well as giving them feedback. The grade will then be averaged and then shown to other passengers as reference to the driver’s performance. Any complaint against the driver will be investigated and can be grounds for suspension. When suspended, the company will confiscate the driver’s company-provided smartphone to disable him from connecting with passengers. To ensure safety, the passenger can share their bookings through social media platforms such as Facebook and Twitter.

In 2016, the company dropped the word “Taxi” from its brand to reflect its expansion in other transport segment. Grab (which will henceforth be called as such in subsequent mentions) as a brand will cover all its services: taxis (GrabTaxi), private car services (GrabCar), carpooling (GrabShare), and package delivery (GrabExpress).

Unlike other taxi operators, Grab does not need to own and operate its own taxi fleet. Instead, their strategy revolves around bringing taxi drivers (and other private owners of cars) onto using the platform. Under this strategy, they could simply sign up with the platform without the cooperation of taxi companies or other external parties.

The fare also depends on the dynamics between the existing supply of cars and demand of passengers. To start with, the fare is based on the LTFRB’s (Land Transportation Franchising and Regulatory Board) approved meter plus a booking fee of P70, in which the meter is only switched on once the taxi picks up the passenger.

To entice people in using their product, Grab offered regular promotion codes for fare discounts as well as free rides for the passenger’s first trip. In this case, part of the strategy was for Grab to subsidize these fees. For the drivers (called “partners”), incentives are provided by way of bonuses once a passenger quota is reached for a given period. According to Grab, 80% of the fare goes directly to the driver while 20% goes to the company for the use of their platform. Part of the 20% is spent on driver incentives and passenger promos.

Electronic payments are also encouraged on the Grab platform. GrabPay, its digital wallet, allows cashless transactions between drivers and passengers. By using GrabPay, driver-partners can easily transfer payments to their Grab-linked bank accounts and withdraw cash from nearby ATMs. Conversely, they can also reload their GrabPay accounts so that they can continue using Grab, which collects a fee for each passenger pick-up.

Meanwhile, passengers using GrabPay can earn rewards points for every ride, allowing them to enjoy discounts with Grab partners such as Agoda.com and Kentucky Fried Chicken, among others, in the Philippines. Passengers can also redeem those points by availing of P50 and P100 worth of discounts for their ride. Another way of enticing them to use GrabPay is by awarding them twice the rewards points that they receive from paying in cash.

Transport network companies (TNCs) such as Grab and Uber have also expanded their services by introducing GrabShare and Uberpool wherein they offer lower fares in exchange of sharing a ride with another passenger heading near one’s destination.

And this seemed to have worked as around 19% of commuters in Metro Manila have become reliant on ride-hailing apps, which is nearly double the 10% average in other capitals in Southeast Asia according to a study by Boston Consulting Group.

Similarly, results on Uber’s internal survey conducted last 2016 points to around nearly eight out of ten Metro Manila residents leaving their cars at home due to the so-called “carmageddon” that brought the speeds on EDSA, the Philippines’ busiest highway, to slow down to 10 kilometers per hour according to estimates.

When Grab was officially launched in the Philippines, Tan told the press that they chose the Philippines because of three things: the Philippine population, the fast-growing smartphone industry, and our culture. “I personally fell in love with the country, the culture, and the people,” he said.

The Philippines is home to approximately 105 million people and as such, its demographic profile remains a fundamental strength. With 31.95% of the population composed of those aged 0-14 years old as of 2015, the Philippines has a higher proportion of young people compared to those of Indonesia (27.69%), Malaysia (25.02%), Vietnam (23.09%), and Thailand (17.71%). Meanwhile, its working population (aged 15-64) is also increasing while those of its more developed neighbors are declining.

The country’s growth story is also intact. At around 73.3% of its gross domestic product in 2017, the Philippines ranked 3rd out of 63 economies in IMD’s World Competitiveness Yearbook 2018.

Like all businesses, Grab, along with other TNCs such as Uber, has faced stiff competition not only against each other, but also the traditional players in the taxi industry. In 2015, the government released the world’s first-ever rules on ride-sharing services, thereby creating a new transport category, the Transport Network Vehicle Services (TNVS).

Consequently, the taxi companies took a hit on their earnings. The 52-member Philippine National Taxicab Operators Association (PNTOA), which has a combined fleet of around 40,000 taxicabs, saw utilization rates go down by double-digits. According to lawyer and former Quezon City councilor Jesus Manuel “Bong” C. Suntay, around 85 out of every 100 taxicabs in the industry were up and running. With the entry of these TNCs, it went down to 70%.

The new regulation also provided a shortcut to securing a taxicab franchise — something the authorities stopped issuing years ago. For instance, the ease of ride-sharing registration on Uber benefited operators of “colorum” taxis that have been running without any franchise for years.

In a span of only two years since their entry in the Philippine market, the two TNVS app providers, Uber and Grab, have grown faster than traditional taxis. Based on their financial performance in 2011-2015, the most popular taxi operators clocked in a median growth in the low single-digits. In contrast, Uber grew by at least five-fold on its second year in the Philippines, while Grab expanded at least six-fold, with either company’s gross revenue surpassing any of the traditional operators by a factor of between two to thirty depending on the taxi company.

Aside from market competition, TNCs also face regulatory hurdles. In July 2016, the LTFRB released a memorandum suspending the acceptance and processing of applications for TNCs. Grab and Uber, however, were shown to have still accepted new drivers despite the order, leading the LTFRB to impose a P5-million fine each on Grab and Uber. In February 2018, the LTFRB lifted its moratorium on acceptance of franchise applications for ride-sharing vehicles, but placed a cap on the number of cars that were allowed to drive.

On August 2017, the LTFRB issued a show-cause order for Uber, saying that they violated the July 26 Order directing TNCs to stop accreditation and/or activation of TNVS. Two weeks later, Uber was given a month-long suspension when it was shown that it violated the said order, paying a P190-million fine for the suspension to be lifted.

Come March 26 this year, Uber and Grab announced that the former has agreed to sell its Southeast Asian business to the latter. Uber will then take a 27.5% stake in Grab and Uber CEO Dara Khosrowshahi will join Grab’s board. At that time, Grab was valued at an estimated $6 billion.

This effectively puts Grab with a 93% market share in ride-hailing according to a statement by the Philippine Competition Commission (PCC), adding that only 7% of the market share will be captured by new TNCs entering the market.

The resulting transaction has also led to the notion of Grab exhibiting monopolistic practices. Based on findings from the monitoring of 27,648 booking requests and mystery shopper surveys involving 1,104 rides, the PCC’s Mergers and Acquisitions Office has noted that before the transaction, Grab prices were “flat to declining,” but weeks after the sale saw “higher fares and increased frequency of surge-pricing applied.”

The PCC also noted that the quality of services of Grab has decreased following the buyout through increased driver cancellations; forced cancellation of rides; and increased waiting times, which they said, were compounded by the loss of Uber where trips were less likely to be canceled due to features which mask a prospective rider’s destination until pickup.

“While the Office notes that there are new entrants to the relevant market, historical data show that it would take a significant amount of time and cost for these new players to grow a driver and rider base sufficient to contest the incumbent. During such period, Grab will not be constrained by any competitor, allowing it to exercise its market power in the relevant market,” it explained.

As a response, Grab had begun the masking of trip destinations in April for around 25% of drivers, mostly those with high cancellation rates. It also said it had sanctioned around 500 drivers from high rate of cancellation.

The PCC also added the new entrants in the market are “not likely to exert sufficient competitive pressure on Grab.” Nevertheless, attempts were made to encourage new players in the ride-hailing industry. So far, the LTFRB has accredited five new locally owned TNCs: iPara Technologies and Solutions, Inc. (OWTO), Hype Transport Systems, Inc, Micab Systems Corp., Golag, Inc. (Go Lag), and Hirna Mobility Solutions, Inc.

Grab has defended its pricing and said that all fares are legally approved.

Also Grab Philippines’ Brian Cu has noted that Grab’s pool of 35,000 drivers falls short of meeting the 600,000 passenger demand it receives every day. After the acquisition of Uber, only 11,000 of 19,000 Uber drivers were able to move to Grab as some of the names were not in the master list of drivers of the LTFRB. Grab has been requesting the regulator to have the 6,000 drivers on-board to closer meet the demands of the riding public.

Cu had noted that the increase in the number of TNCs does not necessarily correspond to an increase in the number of cars on the road since the LTFRB has a cap of 65,000 TNVS allowed to drive.

“Even when the 600,000 [demand] gets spread out across five different TNCs, the supply wouldn’t change,” he said.

The LTFRB has a TNVS cap of 65,000 cars allowed to drive in Metro Manila, which is supposed to meet 75% of the demand for vehicles. All existing TNCs that follow a TNVS framework would have to get from the same pool of 65,000 cars.

Another concern for the country’s TNVS industry is the entry of another big player in the market. Antonio E. Inton, Jr., founder of Lawyers for Commuters Safety and Protection and former board member of LTFRB, had noted in a BusinessWorld podcast that their group will oppose the entry of Indonesian-based Go-Jek as it would gobble up the other existing players due to the cap placed on the TNVS cars.

This sentiment was echoed by Grab’s Cu in a separate podcast with BusinessWorld: “What will Go-Jek do? Go-Jek will come in, throw promos, increase incentives. Grab, kaya makipagsabayan niyan eh, kasi we have the capital (Grab can compete because we have the capital). But can the small players say the same? Kawawa sila (They’re pitiful),” he said. -text by Leo Jaymar Uy, BusinessWorld Research


END-OF-CASE QUESTIONS

  1. Based on the current developments in the TNVS market in the Philippines, what are Grab’s current (and future) opportunities and threats? How should Grab respond to them?
  2. If you had control in any of the business decisions made by Grab, what are other things that you would like to improve upon its business model?
  3. How should Grab maintain its dominant position as an incumbent player in the market?