This rise of startups has been phenomenal in India recently. VCs are literally willing to invest in any company that has a good idea and consequently a lot of stratups have popped up in India recently. A lot of these startups focus on offline to online business models which means providing a service online which was previously done offline. Ola, Oyo rooms, Food Panda,Grofers are some prime examples of these startups. In this post I'll cover the positive and negative aspects for O2O market in India.
1. Positive aspects -
1.a Rise of smartphones -
Smartphone prices are falling rapidly in India. Any lower middle class person can afford to buy a smartphone these days. This is very crucial for these O2O startups since smartphone is their primary medium to reach the customers. The better the smartphone penetrartion, the wider the audience they can reach. Currently smartphone penetration in India is just 10-15% which is growing at a blistering rate. India is registering 40-50% growth in smartphone shipments Y-o-Y and will continue to do so for quite some time given the low penetration. This is encouraging for these O2O startups since growing smartphone sales means a growing audience which means a growing scale. It also encourages new competitors to come in since so much of the market is yet to be tapped.
1.b Replacing existing markets -
Although many people say for a stratup to succeed it should create a new market rather than replacing an exisiting one I believe the other way round at least for India. The thing with Indians is that most of them have very low disposable income. Most Indians have a particular spending budget. They may spend lower than that budget but hardly do they spend more than that budget.
Its very difficult to convince Indians to spend on new things but you can convince them to spend on the same things in a different way. Most O2O startups in India are asking people to spend on the same thing in a different way. Lot of people already hailed autos/taxis to work, Uber/Ola lets them do that with the click of a button. People already ordered food to their homes, Food Panda lets them do that with the click of a button. People already bought groceries, Grofers lets people do that with the click of a button.
Most O2O startups in India are only replacing the method by which a service or product is already bought in India. They aren't trying to convince people to spend on new products/services and that's a good thing. I mean instead of providing rides if Uber/Ola provided Wifi on already exisiting taxis and autos at a particular charge, how many of us would have considered paying them only for Wifi?
1.c Recurring revenues -
This is yet another strong point in favour of these O2O companies. A lot of them have recurring revenue. Most of the O2O companies are currently operating at a loss, they are selling the product or service at a cost lesser than what it takes to produce them but the benefit here is they are selling products and services that have a recurring revenue pattern. So even if say Ola/Uber are subsidizing your rides today, they are doing so to gain scale and get you addicted to their service. Once people are addicted to their service and they have a large enough scale, increasing rates in future for the same service might help them acheive a small margin and this small margin multiplied with the huge scale would result in massive profits.
d. Marginal assets & Marginal costs -
Most O2O companies in India don't own anything and accordingly their costs are also low. Take Ola or Uber for example. They don't own cars nor do they employ drivers. Ola and Uber do indluge in financing the costs of vehicles for drivers but all these financing options ultimately let the driver own the car completely -
A. Costs are low -
A traditional call taxi service in India has to own a fleet of cars and employ drivers. The fleet of cars owned by them needs to be serviced which is once again the cost of taxi company. Apart from this, these call taxi companies need to employ thousands of people in call centers to pick calls and place orders. Owning a set of cars leaves moments when cars lay idle and drivers do nothing when the demand is low.
Ola/Uber on the other hand don't own any cars. All their rides is placed through the app which almost eliminates the need for call centres to process ride requests. Since they are an aggregator and not a supplier owning anything, they don't have to face a situation where because of low demand, some "asset" of their is remaining idle.
B. More profit per person -
As mentioned above a traditional call taxi company has to own a fleet of cars, call centres, employ drivers and car servicing costs.
Ola/Uber don't face much of the costs mentioned above and even if they do face any of the above costs they face it at a much smaller level. This means that a lot less people need to work at Ola/Uber. Primarily these companies need engineers to maintain their apps along with some more staff for other activities but the number of permanent staff is significantly lesser than that of a full fledged call taxi company. In such a scenario assuming similar earnings, people at Ola/Uber can earn vastly more. Alternatively having such lesser people can help Ola/Uber compete at much lesser margins. Or they can strike a balance between both margins and earnings and have their employees earning a little more despite them operating at a little lower margin.
2. Negative aspects -
2.a Profitability ?
As mentioned above most of these O2O startups aren't profitable. They are burning through VC money and raising rounds after rounds at increasing valuations. Although investors seem to be pouring cash beliving scale is more important than profitability as of now, the problem is acheiving monopoly. For the current model to work there should be only one company in a particular sector for them to operate profitably. But the reality is that the same sector is having two or more competitors wanting to acheive monopoly.
Take Uber and Ola for example, both companies are wanting to have the same ride hailing market. In their bid to acheive scale both of them are subsidizing rides and incetivizing drivers. Subsidies and incetives means they are losing money on every ride. No one company can afford to stop subsidies/incetives since if the competitor keeps its subsidies and incentives active the company which stops subsidies/incentives is prone to lose its market share to competitors. This seems to have created a prisoners' dilemma, it would benefit all companies to stop subsidies, but doing so risks losing customers to the company that continues to subsidize. So in the end, everyone continues to lose money until cash runs out.
Same is the problem with India's e-commerce where Flipkart, PayTM and Snapdeal are burning through VC money and Amazon is also subsidizing products in a bid to gain market share. At the end of the day who gains the monopoly in the particular sector remains to be seen.
2.b Loyalty -
This yet another problem for O2O startups in the Indian market. Although convenience and tech have their roles to play, the biggest reason why people in India have being using these O2O startups is because these companies provide deep discounts, however subsidies cannot continue forever and at one point of time people would have to pay the real price for a service or product, at that time it would be interesting to see if people really pony up to pay the premium for convenience.
As mentioned above there's a constant fight amongst startups to provide subsidies/incentives to lure customers. Lets assume that finally some time down the line a particular startup does indeed end up acheiving monopoly. To make up for the subsidies/incentives it provided people in the past, it starts charging more to finally start earning a profit, will users still stick on to it ?
I mean yes I do use Uber now as its considerably cheap and lets assume after 5 years Uber is the only player in the ride hailing market and starts charging me extra/a premium, but if I don't feel like paying the premium I can always travel around with my own bike.
I'm seeing this happen with the mobile data market. Earlier when telecom companies had rolled out 3G many of them were providing 3G at 2G rates to gain customers but then they slowly started to hike fees. As a result I gradually saw some of my friends stopped subscribing to data packs completely citing the extra cost wasn't worth it. Indeed recently the telecom operators in India hiked 3G data rates to 300/GB in several circles but were forced to bring back the old rates of 250/GB.
The thing is its not known for sure how many people are using these O2O services for discounts and how many for the convenience. Many are using them for both but what remains to be known is if people will stick with them in case the discount part is removed from the equation. Given the price sensitive nature of Indians this can be a real issue. If many people are using these O2O startups just for discounts then the 020 startups have a real problem in their hands.
2.c Regulatory issues -
Although tech changes at the blink of an eye, governments often don't work that fast. A prime example of this is Europe where Uber has tried very hard to make in roads but has frequently been stuck because of regulatory issues. In India a similar thing happened when a Uber rape case had led to all ride hailing apps being temporarily banned in Delhi. This was one incident and there's a big chance that more such clashes between O2O startups & government would come as time passes by.
Conclusion -
Some say we are in a bubble, some say we aren't. I'm not gonna comment upon that but whatever it is make use of these benefits provided by O2O startups as long as they last ;) .
1. Positive aspects -
1.a Rise of smartphones -
Smartphone prices are falling rapidly in India. Any lower middle class person can afford to buy a smartphone these days. This is very crucial for these O2O startups since smartphone is their primary medium to reach the customers. The better the smartphone penetrartion, the wider the audience they can reach. Currently smartphone penetration in India is just 10-15% which is growing at a blistering rate. India is registering 40-50% growth in smartphone shipments Y-o-Y and will continue to do so for quite some time given the low penetration. This is encouraging for these O2O startups since growing smartphone sales means a growing audience which means a growing scale. It also encourages new competitors to come in since so much of the market is yet to be tapped.
1.b Replacing existing markets -
Although many people say for a stratup to succeed it should create a new market rather than replacing an exisiting one I believe the other way round at least for India. The thing with Indians is that most of them have very low disposable income. Most Indians have a particular spending budget. They may spend lower than that budget but hardly do they spend more than that budget.
Its very difficult to convince Indians to spend on new things but you can convince them to spend on the same things in a different way. Most O2O startups in India are asking people to spend on the same thing in a different way. Lot of people already hailed autos/taxis to work, Uber/Ola lets them do that with the click of a button. People already ordered food to their homes, Food Panda lets them do that with the click of a button. People already bought groceries, Grofers lets people do that with the click of a button.
Most O2O startups in India are only replacing the method by which a service or product is already bought in India. They aren't trying to convince people to spend on new products/services and that's a good thing. I mean instead of providing rides if Uber/Ola provided Wifi on already exisiting taxis and autos at a particular charge, how many of us would have considered paying them only for Wifi?
1.c Recurring revenues -
This is yet another strong point in favour of these O2O companies. A lot of them have recurring revenue. Most of the O2O companies are currently operating at a loss, they are selling the product or service at a cost lesser than what it takes to produce them but the benefit here is they are selling products and services that have a recurring revenue pattern. So even if say Ola/Uber are subsidizing your rides today, they are doing so to gain scale and get you addicted to their service. Once people are addicted to their service and they have a large enough scale, increasing rates in future for the same service might help them acheive a small margin and this small margin multiplied with the huge scale would result in massive profits.
d. Marginal assets & Marginal costs -
Most O2O companies in India don't own anything and accordingly their costs are also low. Take Ola or Uber for example. They don't own cars nor do they employ drivers. Ola and Uber do indluge in financing the costs of vehicles for drivers but all these financing options ultimately let the driver own the car completely -
A. Costs are low -
A traditional call taxi service in India has to own a fleet of cars and employ drivers. The fleet of cars owned by them needs to be serviced which is once again the cost of taxi company. Apart from this, these call taxi companies need to employ thousands of people in call centers to pick calls and place orders. Owning a set of cars leaves moments when cars lay idle and drivers do nothing when the demand is low.
Ola/Uber on the other hand don't own any cars. All their rides is placed through the app which almost eliminates the need for call centres to process ride requests. Since they are an aggregator and not a supplier owning anything, they don't have to face a situation where because of low demand, some "asset" of their is remaining idle.
B. More profit per person -
As mentioned above a traditional call taxi company has to own a fleet of cars, call centres, employ drivers and car servicing costs.
Ola/Uber don't face much of the costs mentioned above and even if they do face any of the above costs they face it at a much smaller level. This means that a lot less people need to work at Ola/Uber. Primarily these companies need engineers to maintain their apps along with some more staff for other activities but the number of permanent staff is significantly lesser than that of a full fledged call taxi company. In such a scenario assuming similar earnings, people at Ola/Uber can earn vastly more. Alternatively having such lesser people can help Ola/Uber compete at much lesser margins. Or they can strike a balance between both margins and earnings and have their employees earning a little more despite them operating at a little lower margin.
2. Negative aspects -
2.a Profitability ?
As mentioned above most of these O2O startups aren't profitable. They are burning through VC money and raising rounds after rounds at increasing valuations. Although investors seem to be pouring cash beliving scale is more important than profitability as of now, the problem is acheiving monopoly. For the current model to work there should be only one company in a particular sector for them to operate profitably. But the reality is that the same sector is having two or more competitors wanting to acheive monopoly.
Take Uber and Ola for example, both companies are wanting to have the same ride hailing market. In their bid to acheive scale both of them are subsidizing rides and incetivizing drivers. Subsidies and incetives means they are losing money on every ride. No one company can afford to stop subsidies/incetives since if the competitor keeps its subsidies and incentives active the company which stops subsidies/incentives is prone to lose its market share to competitors. This seems to have created a prisoners' dilemma, it would benefit all companies to stop subsidies, but doing so risks losing customers to the company that continues to subsidize. So in the end, everyone continues to lose money until cash runs out.
Same is the problem with India's e-commerce where Flipkart, PayTM and Snapdeal are burning through VC money and Amazon is also subsidizing products in a bid to gain market share. At the end of the day who gains the monopoly in the particular sector remains to be seen.
2.b Loyalty -
This yet another problem for O2O startups in the Indian market. Although convenience and tech have their roles to play, the biggest reason why people in India have being using these O2O startups is because these companies provide deep discounts, however subsidies cannot continue forever and at one point of time people would have to pay the real price for a service or product, at that time it would be interesting to see if people really pony up to pay the premium for convenience.
As mentioned above there's a constant fight amongst startups to provide subsidies/incentives to lure customers. Lets assume that finally some time down the line a particular startup does indeed end up acheiving monopoly. To make up for the subsidies/incentives it provided people in the past, it starts charging more to finally start earning a profit, will users still stick on to it ?
I mean yes I do use Uber now as its considerably cheap and lets assume after 5 years Uber is the only player in the ride hailing market and starts charging me extra/a premium, but if I don't feel like paying the premium I can always travel around with my own bike.
I'm seeing this happen with the mobile data market. Earlier when telecom companies had rolled out 3G many of them were providing 3G at 2G rates to gain customers but then they slowly started to hike fees. As a result I gradually saw some of my friends stopped subscribing to data packs completely citing the extra cost wasn't worth it. Indeed recently the telecom operators in India hiked 3G data rates to 300/GB in several circles but were forced to bring back the old rates of 250/GB.
The thing is its not known for sure how many people are using these O2O services for discounts and how many for the convenience. Many are using them for both but what remains to be known is if people will stick with them in case the discount part is removed from the equation. Given the price sensitive nature of Indians this can be a real issue. If many people are using these O2O startups just for discounts then the 020 startups have a real problem in their hands.
2.c Regulatory issues -
Although tech changes at the blink of an eye, governments often don't work that fast. A prime example of this is Europe where Uber has tried very hard to make in roads but has frequently been stuck because of regulatory issues. In India a similar thing happened when a Uber rape case had led to all ride hailing apps being temporarily banned in Delhi. This was one incident and there's a big chance that more such clashes between O2O startups & government would come as time passes by.
Conclusion -
Some say we are in a bubble, some say we aren't. I'm not gonna comment upon that but whatever it is make use of these benefits provided by O2O startups as long as they last ;) .
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