The Big Read: Consumers feeling the squeeze as industry disruptors come under pressure to deliver profits

SINGAPORE: As a regular user of ride-hailing and food-delivery services, Mr Gabriel Goh could not help but notice how their prices have slowly but surely been climbing in recent years.

“Delivery fees have also increased. Like previously it was S$3.50 from the same place, now it has become S$4.50,” said the 31-year-old business analyst, pointing to how the increase of almost 30 per cent occurred within the past two years, far outstripping inflation over the same period.

While external inflationary pressures are pushing up the prices of almost everything in Singapore — from groceries and cooked food to petrol and electricity — it has not gone unnoticed that services once hailed as industry disruptors offering cheaper alternatives for consumers and merchants have become increasingly costly, at times even more expensive than incumbent players. 

These services include e-commerce platforms, food delivery, private-hire car booking or super apps that offer a range of similar services under one roof.

Another consumer, 33-year-old Ian Chong, noted how private-hire car trips these days seem to “always show” surge prices — referring to higher fares that factor in peak demand and low supply of cars in an area typically during busy periods.

“Once I tried to get back home in the Dawson Road area from Marine Parade, (fares for private-hire cars) were averaging at S$28, (but) flag-down taxi fare was about S$21,” said the finance industry professional of his experience on a weekend night earlier this month.

Experts have long warned that it is inevitable for late-stage disruptor companies to abandon the cash-burning ways of their earlier days and shift towards seeking profitability, but the time of reckoning has come sooner than expected.

For one, the rising cost of capital due to climbing interest rates, as well as increasing inflationary pressures, make it more expensive for companies to artificially lower the prices of their services to attractive levels.

And even though investors typically do not look at near-term profits when pouring funds into disruptor start-ups, “the point at which investors will have questions about future profitability will be brought forward by difficult market conditions”, said Associate Professor Walter Theseira from the Singapore University of Social Sciences.

“The raising of prices by disruptors generally signals a shift from growth to consolidation, and I would expect this to happen earlier for more firms now,” the economist added.

WHEN DISRUPTORS GET DISRUPTED

Tweaking prices to bolster profitability while trying to grow active users — or at the very least not haemorrhage them — is a balancing act all disruptor companies face, even for those that have risen to become global household names.

And this struggle has become more acute in recent times.

Having consistently raised its prices, Netflix has become profitable with the aim of finally achieving positive free cash flow on an annual basis this year. 

However, the video content streaming platform saw 970,000 subscribers cancel their accounts between April and June.

This was the biggest decline in the number of customers for a company that has been credited with revolutionising how people consume video content, after losing about 200,000 subscribers during the first three months of this year.

"Tough in some ways, losing a million and calling it success, but really we are set up very well for the next year," the company's co-chief and founder Reed Hastings said in an earnings presentation on the same day. Netflix had earlier warned that it expected to shed around 2 million subscribers in the second quarter of the year. 

The Financial Times attributed the loss to more cost-conscious consumers in the United States, where the streaming platform is bleeding subscribers the fastest as a recession looms and inflation soars to 40-year highs.

Netflix, erstwhile positioned as a cheap alternative to cable television subscriptions, is now the most expensive option among other streaming services, the newspaper pointed out. 

Firms closer to home, too, are grappling with tough times.

Super-app Grab, headquartered in Singapore, saw its shares tumble on its first day of trading on the Nasdaq in December last year, before generally declining further along with global stock prices this year.

All the while, the company is still operating in the red, though in May it reported that its ride-hailing and food-delivery businesses showed signs of recovery for the quarter ended Mar 31.

Mr Angus Mackintosh, an analyst at CrossASEAN Research, told Reuters then that the rebound was "promising" and that Grab's move to reduce spending on incentives has worked well from the firm's perspective. 

E-commerce giant Shopee, owned by another Singapore-headquartered company Sea Ltd, was laying off staff across its various markets, according to an internal memo in June.

This came after its retreat in quick succession from India, Spain and France earlier this year.

Food and grocery delivery platform foodpanda also withdrew from Japan in the first quarter of this year, less than two years after its entry in September 2020.

Experts told TODAY that the relatively quick market exits by these companies may point to their unwillingness to burn cash to grow their presence in these countries.

“New market entries were fuelled by cheap capital to give the perception of a company's growth in total accessible market size and hence potential valuation,” said Mr Ku Kay Mok, senior partner of venture capital firm Gobi Partners.

“Once the tide turns and they have to be profitable, such unproven markets have to go and only the core markets with any chance of real, near-term profitability, stay.”

Echoing a similar view, Assoc Prof Theseira said: “Specific firms may exit markets when they feel that they need to prioritise core markets with their limited resources and they can’t tap investors for funds to expand or sustain new market growth."

GREATER SCRUTINY BY INVESTORS

Associate Professor Lee Boon Keng from the Nanyang Technological University's Nanyang Business School said that the rising interest rates coupled with economic uncertainties make raising funds more challenging, with private equity funds probably “less tolerant of high (cash) burn-rate”.

“This means that early-stage start-ups would have to prove their viability faster, and late-stage disruptors will have to show profitability sooner,” he said. 

“In an environment where liquidity is shrinking due to tighter monetary policy around the world, the private equity funds themselves are also facing the same type of scrutiny by their investors and sponsors.”

Mr Stephen Bates, partner and head of transaction services, deal advisory, at KPMG in Singapore, noted that rising interest rates also mean that "hurdle rates are higher for investors, which could imply valuations may drop accordingly". 

He said: “This has already played out across global equity markets, and we have seen a softening in the number of deals completed in the first half of 2022 compared to the supercharged year in 2021.”

A report by KPMG and HSBC, which was published on Monday, said that the value of venture financing deals completed in the Asia Pacific region has surged from US$116.9 billion (S$162.6 billion) in 2020 to US$193.7 billion in 2021. However, the figure for the first three months of this year reached only around US$32.6 billion — less than a fifth of the total deals made in the whole of 2021. 

Singapore Management University’s (SMU)  Assistant Professor Terence Fan said that the impact of the current business climate may not be even across all firms.

“New ventures which had secured funding not too long ago and have considerable lead time for the next round may have less pressure,” he said.

Similarly, Mr Ku of Gobi Partners pointed out that mature disruptor companies are more likely to be partly funded by debt, making them more exposed to the impact of rising interest rates as compared to early-stage startups.

However, even for these young firms, investors would exercise closer scrutiny before funding.

“If you compare, let’s say, during a pandemic when capital is cheap, it’s all about market share,” he said. “Now, there’s a greater emphasis on the path to profitability.”

Mr Christopher Quek, managing partner at Trive Venture Capital, said that cash flow is one indicator that investors are looking at more closely now.

“Another new expectation is to show that the cash flow can last 24 to 30 months. This is up from the previous standard of 18 to 24 months in 2019,” he said.

“In a certain way, they are indirectly pressuring investee companies to show profitability.”

The bottom line is, regardless of which stage a disruptor company may be at, they cannot afford to burn cash as liberally as before.

“Existing investors prefer not to further commit more capital to sustain the growth and want the cash burn to be reduced,” said Mr Quek.

Mr Ku reiterated that the economic conditions have accelerated the shift in emphasis to profitability, "because otherwise without external funding, startups that burn cash to gain market share will just cease to exist".

WHAT IT MEANS FOR USERS 

Meanwhile, consumers are lamenting how they are feeling the pinch as companies make various price adjustments amid an uncertain economic outlook.

For example, a few online sellers pointed out to TODAY that e-commerce platforms Shopee and Lazada recently introduced a new commission charge of 2 per cent on all sales.

A page dated Apr 19 on Shopee’s website said the commission fees took effect for orders placed on and after May 1, for sellers who have been registered on the platform for at least 90 days.

“This commission fee is an additional charge on top of existing service and transaction fees,” the website said.

Similarly, Lazada said on a webpage dated Jun 20 that it will charge a 2 per cent commission fee for orders delivered from Jul 18, for sellers registered on the platform for more than 90 days.

The commission helps “to serve our sellers better and continuously improve the Lazada platform”, the firm said. 

While neither platform responded to TODAY’s queries regarding the new charge, some sellers are already drawing their own conclusions.

“I’m not sure why they are doing this now, but I know their parent company is bleeding money like crazy,” said a merchant who wanted to be known only as Mr Ting.

Mr Ting, who is in his 30s, has been selling office supplies for less than five years on both Lazada and Shopee.  

At the same time, frequent users of ride-hailing and food-delivery platforms are noticing not only higher prices, but fewer perks.

“They used to give out discount codes very frequently. Now, the last discount code I had redeemed for a ride was in May this year,” said Ms Nurul Johari, 29, of Grab and Gojek, the two ride-hailing platforms her family uses frequently. 

“I think by cutting costs through not discounting our rides, it’s their indirect way of trying to increase profit margin.”

Mr Goh, the business analyst who frequently uses ride-hailing and food-delivery services, acknowledges that macro forces may have contributed to part of the price adjustments.

On their part, the ride-hailing firms have attributed recent price adjustments or additional fees to various factors. 

Gojek, Grab and Tada announced a temporary fee earlier this year to help drivers cope with high fuel prices. As did ComfortDelgro, by temporarily revising its fares upwards. 

TODAY reported in June that the return of more workers to the office and some drivers leaving the job also contributed to a surge in private-hire fares.

“Sure, rising costs are one factor, and so are supply-demand concerns,” said Mr Goh.

“But I think companies have started to reduce discounts after capturing their share of the market, and now they want to start earning profit.”

In response to TODAY’s queries, a Grab spokesperson said it manages a "multi-sided marketplace" involving consumers, merchant-partners and driver-partners, each with different needs.

“Any decision to adjust pricing is never taken lightly as we need to balance all stakeholders’ interests,” the spokesperson said.

Referring to the temporary driver fee, the spokesperson added: “Ultimately, our goal is to provide sustainable earnings for our partners, while continuing to offer a good experience and meeting our consumers’ everyday needs.”

A Gojek spokesperson said the firm structures drivers’ earnings to help them “take home more organic earnings per trip, with less dependence on incentives”.

“In Singapore, we have proactively introduced initiatives to improve their earnings such as far pick-up incentives and reduced service fees (from 20 per cent to 10 per cent), until at least the end of 2022,” said the spokesperson. Service fees refer to the cut from the fare that the Gojek platform takes.

The spokesperson added: “We recognise that the external situation remains fluid, and we will continue to review our support measures and fares in line with prevailing market conditions, to ensure that our driver-partners are properly compensated for their time and hard work."

ARE USERS AT THE FIRMS' MERCY? 

While cutting costs and raising revenue earned from customers and merchants may seem like the most obvious ways to widen the profit margin, it is, in fact, a delicate balancing act, said industry experts.

“Given the increasing levels of competition and choice, consumers can be relatively price sensitive and switch platforms easily if they don’t like the price of services,” said Mr Bates of KPMG Singapore.

Asst Prof Fan of SMU added: “Delivery services that charge high fees may also face challenges as customers may choose to economise on the delivery fees by making personal visits to the shops." 

He noted that such services earn by taking a cut from the order bill, not from the riders’ delivery fees.

“As a result, their profitability would depend more on people’s continued reliance on delivery service,” he said.

Services that are now deemed discretionary or “good to have” may also face bigger problems, said the experts.

Mr Ku pointed to how content streaming services, which surged in popularity when people largely stayed at home during the pandemic, may be seen as less essential now that people are out and about for work and worrying about the rising costs of basic needs.

“It’s a consumer demand pricing game,” he said. “When (these companies) start to increase prices, the danger is actually (them) starting to lose market share.”

A case in point is Netflix, he said. The streaming platform raised its prices a number of times prior to its loss of subscribers.

On the other hand, companies that try to find solutions for problems that have cropped up since the pandemic, such as supply chain or logistical issues, might thrive in the near future, he added. 

Correspondingly, investors' funds could flow towards these firms instead. 

Mr Bates said: “Private equity and venture capital firms are refocusing their 2022 investments towards technology that will fuel industry transformation over the next ten years and beyond. 

“Fintech in the domains of climate change, supply chain, financial and crypto market infrastructure, artificial intelligence and agritech are attracting particularly high interest.”

With investments potentially harder to come by, platforms could seek to improve profit margins without necessarily raising prices or fees. 

Assoc Prof Theseira said: “For example, minimum order sizes, reducing delivery or order priority, being more selective about onboarding merchants — these are all ways that platforms can potentially improve profitability."

Companies may also seek out new sources of revenue, either in the form of a new business segment or market. Mr Ku said that diversifying may make sense if the company is well resourced and finds a high-margin business to acquire.

Given the current economic climate, he said "the new division has to be a fast track". "You cannot go, ‘Oh, I’ll go and try to build the stuff from zero’,” he added. 

Mr Quek pointed to how large unicorns — start-ups whose valuation exceeds US$1 billion each — used to seek out new markets to grow revenue.

“In the past, these unicorns could afford more budget and time to explore new markets, but now it seems trials are smaller and get cut faster. An example is Shopee expanding into India, Spain and France in 2021, but only to quickly shut (these) down in less than 12 months,” he said.

WHAT THE FUTURE HOLDS  

During its first-quarter earnings announcement in May, Sea Ltd said that it expects its e-commerce arm Shopee to achieve positive adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) in Southeast Asia and Taiwan by this year, before allocation of headquarter costs.

Its digital finance unit, SeaMoney, is “on track” to achieve positive cash flow by next year.

“With the significant scale, strong leadership and clear synergies achieved by Shopee and SeaMoney in Southeast Asia and Taiwan, our consumer Internet ecosystem in the region is naturally approaching a stage of long-term profitable growth,” said founder and CEO Forrest Li.

Over at Grab, its spokesperson told TODAY that the company’s sustainable growth towards profitability “is anchored on making our ecosystem more efficient on a long-term basis, leveraging our technology, partnerships and super-app strategy".

“For example, being a super app gives us better cross-sell opportunities, retention, loyalty, user spend and unit economics,” the spokesperson said. “And as evidenced in our last earnings update, we have continued to move in the right direction." 

While Grab places its bets on its super-app approach, its rival in the food delivery space here, foodpanda, prefers a more “focused” approach by building new segments closely linked to their core business. 

In a fireside chat with the media on Jul 19, its CEO Jakob Angele said they are “progressing very nicely” towards EBITDA positive level, with “a lot of markets” already positive today, without revealing which markets.

Responding to a question on how foodpanda intends to navigate the economic headwinds, Mr Angele said that the company has always focused on growing sustainably and is “very conscious” about how much it grows by offering discounts on its transactions.

When asked by TODAY about its further steps to enhance profitability, Mr Angele said that foodpanda will not be taking “drastic measures like adjusting fees or things like that”, but instead will “continue on the current path” of sustainable growth.

As the late-stage disruptors seek to stay viable amid the tough market conditions, experts say it is unlikely for new entrants to capitalise on the situation by copying their predecessors' playbook of undercutting prices. 

“In terms of disrupting the disruptors, yes, it’s always a concern that market gains could be eroded by a new entrant with more money,” said Assoc Prof Theseira.

“But because the market picks up an understanding of market viability over time, it’s less and less likely that new funds will be available for such entry once a market is more mature and if it’s not clear the market is highly profitable”.

Mr Ku of Gobi Partners said that new disruptors happen “only during certain windows of opportunity”.

“For example, (private-hire cars) came about because smartphones enable consumers to bypass the need to flag down incumbent taxis,” he said. “It's unlikely for a new cheaper (private-hire car) player to emerge because the fixed cost to scale and compete will be too high now that existing operators are on alert to potential new market entrants.”

Whether a future disruption will happen would depend on regulations and how alert existing operators are to new disruptors, he added.

As these existing tech platforms ponder their next moves to boost their balance sheets, end users are more concerned about the shorter-term impact that the companies’ actions have on their own pockets.

A merchant of two years on Lazada platform, who wanted to be known only as Mr Tan, said that he feels the newly introduced commission fees would affect the earnings of small sellers like himself.

“Because our volume and store reputation are lower, we have to compete more on price. These fees will eat into an already very narrow margin,” said Mr Tan.

For Mr Ting, the office-supply seller on both Lazada and Shopee, he will try to maintain his already razor-thin profit margin by passing on the extra charges to customers.

But he added: “I know e-commerce is a hyper-competitive environment, so there’s a very high chance I’ll get undercut by the next seller.” 

This story was originally published in TODAY.