Yahoo Finance These Two E-commerce Platforms Are Bringing Forward Their Breakeven Timeline
Technology companies within the Southeast Asian (SEA) region have enjoyed remarkable growth in the past few years.
Yet, a combination of headwinds such as rising interest rates and global inflation threaten to stifle the meteoric rise of regional technology companies.
Since their IPO, the share prices of Grab Holdings Limited (NASDAQ: GRAB) and PT GoTo Gojek Tokopedia Tbk (IDX: GOTO) have tumbled by 77.1% and 72.8%, respectively.
A chief concern among investors is their persistent lack of profitability.
The ominous outlook showed signs of reversal as both companies brought forward their breakeven timelines in their recent 2022 earnings report.
Grab’s encouraging guidance
Grab is moving forward its breakeven on an adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) basis from the second half of 2024 to the fourth quarter of 2023.
This revised guidance shifts the breakeven timeline forward by nearly a full year.
Let’s focus on the strategies that Grab intends to employ to achieve this.
The first strategy is to reduce the cost-to-serve.
One way of cutting costs involves optimising incentives offered to consumers, drivers and merchant partners.
Consumer incentives are discounts and promotions offered by Grab to consumers, whereas those given to partners refer to fee payments for the services rendered by drivers and merchant partners.
Since these incentives reduce Grab’s revenue, cutting the amount of incentive that Grab pays relative to the commissions and fees it receives for its services should improve its profitability.
Another method is to reduce overheads such as discretionary spending, marketing, and employee expenses.
The second strategy is productivity improvement.
Some concrete illustrations of this include reducing the waiting time of delivery partners at merchants when collecting food, improving the number of trips per transit hour, as well as increasing fulfilment rates.
These productivity improvements in Grab’s existing fleet are predominantly driven by GrabMaps.
This enterprise service was launched in June last year and confers significant intelligence capabilities to boost service efficiency.
The third strategy is product innovation to target new user segments.
New options centre around affordability such as the GrabShare service in Singapore along with cheaper delivery options that cater to value-conscious customers who are grappling with soaring inflation.
GoTo’s accelerates its breakeven target
Similar to Grab, GoTo stated that its adjusted EBITDA will turn positive by the fourth quarter of 2023, helping to bring forward its profitability target by one year.
The strategy is heavily focused on cost reduction driven by corporate restructuring.
Divesting non-core businesses helps to shrink headcount, which is further supported by reducing a variety of expenses such as software, travel and entertainment.
The other profitability lever is to target higher value users who deliver higher margins.
GoTo can charge these users higher take rates, essentially a fee for facilitating transactions, thereby allowing the company to achieve higher revenue and profitability.
Plans have been outlined to justify the disbursement of fewer incentives while minimising customer attrition.
The first is to augment existing use cases and launch new ones for all parties such as smoother payments for consumers, dynamic pricing and mapping technology for drivers, and pricing recommendations and market insights for merchants.
Next, GoTo can acquire high margin users by expanding into new segments that are less price sensitive.
For existing consumers, enhancing the user experience and increasing convenience allow GoTo to convert them into high-quality consumers.
Growth vs margins
A conundrum that plagues most companies is the trade-off between growth and profitability.
Both investors and consumers prioritised growth over the past decade.
Technology apps typically offer services such as ride hailing, food and groceries delivery, financial services, and ancillary enterprise services like advertising.
Therefore, their growth is most visibly captured through metrics such as gross merchandise or transaction value, total payments volume, and the number of transacting users either on an annual or monthly basis.
The growth of these metrics is usually attained by dispensing incentives that reduce revenue and profitability.
But when faced with an economic downturn, the focus shifts towards profitability, especially among Southeast Asian investors.
To placate stakeholders, both Grab and GoTo’s narratives and strategies have changed accordingly.
Bearing in mind the relationship between growth and profitability, investors ought to be wary of companies that blindly chase either one.
Simply promising or even exhibiting the ability to attain either does not make a company a worthy stock to buy.
Ultimately, the purpose of investing is to generate consistent returns over time and studies have shown that profitable growth is highly correlated to shareholder return.
This implies there is a need to balance growth and profit margins.
Not all strategies are equal
Although the strategies adopted by Grab and GoTo are largely similar, differences nonetheless exist.
One of the similarities is to decrease costs by reducing incentives and/or headcount.
While necessary, this is not an ideal method over the long term.
Cutting incentives hurts growth and laying off employees can be detrimental to long-term profitability.
A better way to boost profitability is through innovation that introduces new solutions and improves current initiatives.
For example, targeted incentives have been found to promote desirable behaviour of merchants, elevating service excellence and efficiency.
Additional use cases enable the expansion of an app’s target customer segments to capture more users.
Onboarding more users into the ecosystems not only boosts operational metrics but also facilitates data collection.
This creates a positive cycle since data is imperative in this business model.
The bottom line is that innovative companies are generally more profitable.
Thus, even though both companies have brought forward their breakeven timelines, their approaches differ.
Besides considering the sustainability and quality of strategies, investors can also compare the different characteristics of each platform.
For instance, GoTo heavily focuses on Indonesia while Grab is the market leader in Singapore.
Formulating different views on all these factors will affect one’s investment decision.
Due diligence should be conducted by assessing all relevant factors as doing so maximises the chance of making smart decisions.
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Disclosure: Tan Ke Xuan does not own shares in any of the companies mentioned.
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