The Curious Case Of Indian Cab Industry

When was the last time you booked a cab by calling a local cab agency? Can’t remember? Thank the cab aggregators in India who have completely changed the way we book a cab. They have made the best utilization of technology, increase in the number of Smartphone users and rise in data usage. In other words, they have revolutionized the cab industry.

Being a part of this industry for the past 5 years, I have witnessed the disruptions caused in this space by the cab aggregators. Let me trace back the path that led to this transformation and what makes it so interesting.

Nano Meets TaxiForSure
Nano Meets TaxiForSure

According to Softbank, the organized taxi sector may be worth around $7 billion by 2020. This segment has gained a lot of attention due to huge funding, highly competitive pricing, security issues and tussle with the government for license and permits.

The Pre cab aggregator era

Most of the regular cab users, mainly frequent airport travelers, might remember this as the “Meru cabs era”. Well known for its quality services, disciplined drivers and punctuality, Meru, a radio taxi provider, had garnered a loyal customer base during this time. Even though there were other radio taxi providers like EasyCabs and Mega Cabs, Meru was the undisputed king of the market despite its relatively higher pricing. But commuters looking for an economical alternative for both within city and airport commute were at the mercy of the local cab agencies.

Cab agencies ideally do not own cars. They usually pass on the bookings they receive to the cab drivers(mostly driver-cum-owners) associated with them for a fixed commission per month. Most of the taxi bookings were done though call centers and a very few through the web. Due to this, booking a cab on demand was a hassle. With their general marketing strategies ie; newspaper inserts and bulk sms campaigns, customer acquisition was getting difficult.

JustDial gave a hope of better business to cab agencies by connecting them with the customers looking for a cab in their area. It soon became a popular lead generator charging upto Rs.15 lakhs per year as commission as reported by local cab agencies.

This was a golden period for the local cab agencies. However, most of the core problems of cab users-like cab availability, driver reporting on time, timely intimation of cab details, cab tracking and drivers demanding extra money after a ride- remained unaddressed.

The era of Cab aggregators

Necessity is the mother of invention. In 2011 in order to ease the cab booking process, Taxiforsure started as an online portal, aggregating multiple cab agencies. This relieved the customers from contacting multiple cab agencies for booking a cab and also helped the cab agencies to flourish. They charged cab agencies a small commission per booking instead of charging a hefty annual fee like JustDial did. They grew in popularity by including an Android based GPS system which helped customers track their ride.

India is Uber's Largest Market Outside US
India is Uber’s Largest Market Outside US

Meanwhile, another cab aggregator, Ola which started in 2010, was following a different model by associating directly with cab drivers, thereby eliminating the need for cab agencies. In 2013, while Ola was gaining popularity, global taxi market leader Uber entered the Indian market, heating up the competition further. However, Uber’s app-only model with credit card only as a payment option hampered its growth.

To further increase its customer base, Ola started offering rides for as low as Rs.10 per km. This was cheaper than an auto ride and the demand for Olacabs rose exponentially. When it comes to the cab industry, the demand was always high but supply was an issue. Realizing this, Ola started highly incentivizing the drivers due to which many of them started signing up with Ola.

Based on Ola’s cash burning rate, the rest of the industry didn’t expect it to last for a long time. But when Ola raised a fund of $210 million in October 2014, it gave a clear sign to everyone that it was here to stay. Soon Taxiforsure started attaching cab drivers directly and rolling out exciting offers to its customers to compete with Ola. Understanding the Indian market, Uber revised its strategy and introduced an Android app, Paytm mobile wallet, and cash payment option.

Meru CEO Pawha observes, “The app-based aggregators are incentivizing their drivers at around Rs 150 per trip to retain them in their network and compensate for their loss. Ola has a burn rate of $15 million to $20 million a month, Uber around $8 million to $10 million while Meru is at $1.5 million to $2 million per month.”

By the end of 2014, Ola and TaxiForSure had become major players in this industry and Uber and Meru genie had very small market shares. After purchasing Taxiforsure, which was struggling to raise funds, Ola’s market share zoomed to almost 80%, followed by Meru with 12% and Uber with 5% as per a report by brokerage India Infoline.merucabs

In 2015, armed with $1 billion fund, Uber was back in the race for the position of market leader. Since 2015 till date, Ola raised around $ 1.2 billion funds and intensified the competition further.

As on December 2015, an India Infoline report indicates that Uber’s market share is around 25-35% and Ola’s around 65-75%.  Ola is handling approx.7.5 Lakhs booking per day whereas Uber accounts for 5.8 Lakhs booking.  Ola has a fleet size of 3.25 lakhs and Uber has a fleet of 2.5 lakhs and both are targeting 1 million bookings per day by the first quarter of 2016.

One must appreciate Ola for its execution. In spite of having heavyweight players like Uber, it still holds the biggest market share. But as per the recent statement released by Eric Alexander, Uber claims that it owns 50% market share and is going to beat Ola in the next 30 days and in no time Ola has launched Ola Micro and as per the Ola spokesperson Raghuvesh Sarup, Ola Micro itself has a potential to become bigger than Uber in a month’s time.olacabs_logo.png

To say the least, the competition sure seems to be heating up.

Hurdles delaying the progress of the billion dollar industry

One of the main purposes of cab aggregators is to reduce car ownership, which they have succeeded in doing, partially (Anand Mahindra acknowledged it), due to the subsidized rates. Many people in Urban India, who belong primarily to the middle and upper middle class sections are thinking twice before purchasing cars and are relying more on cabs. But if the cab aggregators increase the prices or start charging normal rates, people will shift back to driving their own vehicles or purchasing their own cars.

So, while assessing the broader picture, I feel differential pricing models by cab aggregators may not help in addressing the issue of rising car ownerships in the country.

Meanwhile, at present, the entire game of the cab industry revolves around market shares. While Ola claims to have around 65-75% market share owing to its cash burning strategies, Uber has gained over half of it within a mere 3 years of its launch due to the very same cash burning strategy.

But in reality, both of them have failed to acquire a loyal customer base. A cash burning strategy is essential for acquiring the initial customer base but after that the aggregators are supposed to draw a line. Here, by offering heavy discounts, the cab aggregators are losing around Rs 10-20 crores everyday. So, even if they have raised such a huge amount, the money will not be sufficient if they continue with this strategy. The moment they revive their pricing as per the normal industry standards, it will become impossible for them to stick to the same market shares.

Customer acquisitions have become tough indeed even for high valued cab aggregators like Ola and Uber. No matter how innovative they are, people will run after discounts. In such cases, high valuations will be of no use because with their constant cash burning strategies, they can’t survive for a long period. With a high valuation, getting acquired by competitors will also get really tough and for an IPO it will still take a long time.

There is no denying that cab aggregators have solved the problem of commuting and availability of cabs. But in the process of solving problems, they have created new issues as well. Cases of misbehaving drivers, drivers cancelling booking or rash driving to reach their daily target for extra incentives have increased.

Drivers are running behind incentives and cab aggregators are busy achieving targets set by their investors. So whether all these challenges will allow the Indian cab industry to evolve as the next big thing or not is something we will have to wait and watch out for.

I have an intuition that the best is yet to come!

[About The Author: Lokesh Bevara is the founder of 360Ride.]

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