How viable is the ride-sharing model?

The news of Pathao contributing $17M to Gojek's (shareholder) $28M loss has spread like wildfire earlier in the month. Netizens did not hold back from boldly questioning Pathao's viability, following the news.

In response, Pathao promptly published a press release clarifying that the loss on Gojek's financial statement relating to Pathao was the result of a loan impairment. 

Pathao also emphasized that the impairment loss pertained to the financial year 2019.

A loan is said to be impaired when it is probable that a lender may not be able to collect all amounts due according to the contractual terms of the loan agreement. If such a probability exists, accounting treatment requires reflecting the amount deemed 'irrecoverable' as a loss.

While on the surface, such a write-off for Pathao may add a negative connotation to its performance, in reality, an impairment is very different from an operating loss.

It is common for ride-sharing companies to take a significant amount of time to make profits. This phenomenon is global and not limited to Pathao or other local ride-sharing companies.

In the global ride-sharing landscape, Uber, Lyft, Grab, Gojek, and Didi Chuxing are some of the major ride-sharing giants. However, none of them is consistently profitable or profitable at all.

2018-2019 financial year data reveals that dominant ride-sharing companies were all counting losses. 

Uber, a company operating in 69 countries and 10 thousand cities, with more than 7 billion trips completed in 2019, incurred a net loss of $8.5B.

Didi Chuxing, based in China, Lyft, based in the US and Canada, and Ola, based in India, have all posted massive losses during 2018-2019.

In response to these losses, many companies have laid off employees or divested ride-sharing businesses to add food delivery services to their portfolios instead. Therefore, analysts conclude that controlling costs is of paramount importance in this industry.

Uber's 10K paints a story about the typical costs and expenses that a ride-sharing company usually incurs.

Illustration: TBS

Cost of revenue, which includes costs such as commissions to drivers and partners, accounts for the largest share of their costs. It accounts for 35% of all costs and expenses on average (3-year average: 2017-19; See in Graph 2) 

Sales and Marketing expenses are the second-largest components of costs and expenses, accounting for 21% on average.

Other expenses stemming from administration and research also make up a hefty part of all expenses.

Uber, founded in 2009, is the first company of its kind to obtain such coverage and recognition all across the globe. They have achieved this through direct presence in regions, via investments in local ride-sharing companies, and by continuously innovating. 

However, despite such scale and innovation, Uber, the pioneer of this industry, has failed to make profits. This poses a question mark on the viability of the entire ride-sharing market altogether, especially in emerging markets like Bangladesh.

If anything, the scenario is even more challenging in Bangladesh. Here consumers are highly sensitive to prices, and demand is driven by extensive promotions and discounts.

Reducing fares to attract a wider target market will result in a surge in Cost of Revenue (largest cost component). While more discounts and promotions will result in a surge in Selling & Marketing expenses (largest expense component).

On top of these remains the need to innovate continuously by investing in R&D while trying to curb unfair practices of riders, all amidst raging local competition and a global pandemic.

Fortunately, some local ride-sharing companies have smartly pivoted into food delivery or e-grocery service models to cover for the revenues lost from ride-sharing services. 

Finally, it is without a doubt that the ride-sharing companies in Bangladesh and all over the world have redefined the way people use transportation on a day-to-day basis. At the same time, it is evident that these companies have provided livelihoods for millions of riders all across the world.

However, hidden behind this story of re-defining transportation and lives is the story of struggle, one in which ride-sharing companies, locally and globally, are struggling to prevent cash burn. 

With mounting internal and external challenges, the question remains whether ride-sharing businesses will ever be profitable and if so, when?