Off the Record – What’s up with Grab? – Questions Answered

Momentum Academy’s Off the Record: What’s up with Grab? was a big success last Friday with close to 400 registrations.

We discussed Grab’s strategy, why they focused on being a super app, and how they managed to acquire Uber. We also deep-dived into the key elements needed to build a super app and Grab’s people and leadership.

You can watch a replay of the event here.

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We received a lot of questions from you guys during the talk, which we have compiled and answered below.

Grab’s business areas

1. What would be the impact of rising fuel prices on ride-hailing in ASEAN? Would drivers be able to earn as much as they do now?

In the short term, the costs are rising for drivers and riders – which they either have to absorb or pass down the value chain. 

However, geopolitical shocks and their lasting effects are complex. The current uncertainties do not only impact drivers but also affect every other part of Grab’s ecosystem, including consumers, merchants and the supply chain. 

The true consequences of the impact will probably take at least one to two quarters or even until the end of the year to become apparent. 

2. Before the government’s intervention on Grab’s take rate in food delivery, their numbers were higher than Meituan’s. Why? 

The cut that Chinese platforms are able to charge merchants has typically been quite low (with the notable exception of commercial real estate). The issue is historical, social and political. For example, the MDR (merchant discount rate) charged by mobile payment players has been around 0.6% for offline use cases. 

In other ways, platforms in China and Southeast Asia have very different starting points as far as take rate is concerned. 

However, things might eventually converge – so platforms like Grab will need to continuously and more aggressively improve their volume, density, and operational efficiency. 

3. Is Grab’s entry into financial services the right move for them?

Yes, it is. All large consumer tech players in Southeast Asia list digital financial services as a key business area. The question is how they can execute it well and navigate the diverse, complex dynamics in different countries across Southeast Asia. 

Compared to many other regions, Southeast Asia’s banks, traditional financial institutions and large retailers are stronger and more capable to respond to external challenges. Grab has been doing great in building partnerships and joint ventures. It however needs to build more coherence in its diverse set of financial products/services. 

Grab’s financials

4. Is there a path to profitability for Grab in Indonesia? Though they have the major market share, they can’t raise prices and even a marginal player can cause them to burn cash. GoTo is burning cash, so Grab is likely to be burning cash as well. 

Indonesia is a market that is still relatively under-penetrated across all services. That fact, coupled with the relatively lower per capita income and elevated level of competition, means that it is a market where players need to be patient and be prepared to invest for a longer period of time. 

In the beginning of 2021, we mentioned that the Grab-Gojek merger would make a lot of sense. Unfortunately, this did not happen, and we are in a situation where competition in on-demand services continues in Indonesia. 

5. In simple terms what is the difference between Grab’s base and excess incentives? In which markets is Grab focusing their incentives for deliveries?

You can find the definitions in their quarterly result documents, but here you go: 

Base incentives are “the amount of incentives paid to drivers and merchant-partners up to the amount of commission and fees earned by Grab from those drivers and merchant-partners”. 

Excess incentives are “the amount of payments made to drivers and merchant-partners that exceed the amount of commission and fees earned by Grab from those drivers and merchant-partners”.

We presume that the deliveries incentives are concentrated in markets with high competition, especially those where ShopeeFood has been aggressively trying to expand market share. 

We also presume that Singapore will constitute a significant part of Grab’s mobility incentives. 

It is worth noting that GoTo did not distinguish base and excess incentives (probably because they were not required to by IDX). So GoTo and Grab reported revenue numbers are not actually comparable. 

6. Taking into account Grab’s massive war chest of around $7 billion, do you think the current valuation of $13 billion is an undervaluation?

The valuation of growth tech companies in the US equity markets is under a lot of pressure lately. Probably makes sense to wait for 2-3 quarters until the whole cycle about interest rate hike stabilizes to see what valuation the market is willing to assign to Grab, or any of its counterparts. 

Competition

7. As GoTo is going public, Tokopedia will certainly burn more money in Indonesia. Who would win in the end – Shopee or Toko. Why?

As it stands, Shopee seems to have a stronger team, but things can evolve. With more cash liquidity after public listing, Tokopedia can and should definitely upgrade its product offerings, people and organization. 

8. Is Tokopedia going to drag GoTo down when competing against Grab?

The two businesses are still pretty separated now. Anyway allocating resources effectively in a conglomerate can be tricky. Definitely when both Tokopedia and Gojek are under competitive pressure, the combined management of GoTo will need creative strategies and execution to win. 

9. From the managing team and organizational perspective, who is better – Goto vs Grab vs Sea? Why?

This is a huge topic which will probably deserve a whole session on its own. We will get that organized. 

10. What are your thoughts about DiDi? Despite having a large market share, they are unable to have much influence on pricing. Moreover, the competition has been pressing their margins and all this is despite DiDi starting off with 80% market share.

Didi has been facing tough times in different parts of China. Maybe it has something to do with their culture, something to do with how they started and something with the way they managed government relations. Regardless, they do face a lot of pressure.

Didi has been wanting to diversify its business beyond mobility, into food delivery, community group buy, digital financial services and others. However, they seem to have struggled with any service that has a supply chain element in it. 

China is a very competitive market where each vertical that Didi wants to expand into has strong incumbent(s). Many such players also actively try to encroach upon Didi’s core space of mobility, leveraging their large consumer base and more frequent use cases. 

We do think Didi has great potential outside China. However, there are strategy, people, organization and product issues the company needs to navigate in order to score a win overseas.