Sunday, 14 August 2022

With a long road to profitability, a rethink of the traditional ride-hailing business model is in order

The ride-hailing business model has been more bust than boom — and homegrown Swvl’s operational pivot is proof: Earlier this year, Nasdaq-listed mass transit business Swvl announced it is expediting its timeline to hit profitability by streamlining its business and cutting the proverbial fat. This change entails shifting its operations to focus more on its B2B services, which have historically outperformed its B2C segment, and to discontinue B2C services in markets that are weighing on its balance sheet, CFO Youssef Salem told Enterprise. Altogether, the shift is an adjustment of the company’s business model, which followed the standard ride-hailing business structure of narrow (or negative) margins that are partially offset by more profitable segments, while relying on venture capital and public equity investments to stay afloat.

The financials: Swvl had previously planned to turn to the black by 2024, but has moved up its timeline to next year since listing on the Nasdaq, Salem previously told us. The company’s revenues are expected to reach USD 141 mn this year, an almost 80% y-o-y increase from 2021, before almost tripling y-o-y in 2023. The company is now looking to record net income of USD 100-200 mn by 2025, Salem told Enterprise, confirming a story in Al Mal.

Swvl’s shifting business focus is a reminder that most iterations of ride-hailing business models have struggled (or flat out failed) to hit the black. Uber, the world’s largest ride-sharing company, has been in business for some 13 years and posted record revenues in 2Q 2022 but has yet to hit profitability across all of its business lines. The company is, however, profitable by adjusted EBITDA standards. And although analysts expect the company to post a net income by the end of 2024, the company has also been thought to be on the brink of profitability since 2019. San Francisco-based competitor Lyft is also still posting losses after 10 years in the business, according to its latest earnings release (pdf). The same story holds in Asia, where Grab’s adjusted net income is also in the black and growing y-o-y, but non-adjusted 1Q 2022 earnings show the company is still making losses.

So why is the ride-hailing space still so attractive? Because of the “sheer market opportunity,” which allows companies to scale to a critical mass and eventually enter the black, Salem says. However, since this can be an extremely long journey in some cases, these companies are reliant on investor money until they hit the right products in the right markets and reach the scale required to generate net income. “It obviously needs investors that have that kind of long term vision and patience,” Salem said.

For Swvl, its priority is shifting to profitability on a contribution margin basis — meaning that every unit of its business is profitable on its own. “The difference between B2B and SaaS versus B2C is that, for B2B and SaaS, every country is launched as contribution margin positive from day one on a country level. On the B2C side, a country only breaks even on a contribution margin level after 18-24 months of operation, once you have enough supply and demand liquidity and network effects in the market to be able to reach the utilization levels that you need,” Salem told us.

The push to prioritize the company’s bottomline came with a (headcount) price. The company announced it is laying off around a third of its staff as part of its drive to turn cashflow positive by next year. Swvl cut around 400 jobs, most of which were in the company’s engineering and product and support functions, it said in May. An unverified roster of the company’s outgoing staff members indicated that the company’s operations departments also saw significant downsizing, particularly in its Pakistan office and its headquarters in Dubai. Salem confirmed to Enterprise that both of these offices remain operational despite the downsizing.

What caused the rapid pivot? When Swvl debuted on the Nasdaq earlier this year via SPAC, the transaction saw an 85% redemption rate, “which means we only received 15% [of the proceeds] we expected to receive,” Salem said. The company had decided against re-issuing the redeemed shares at a markdown and focus instead on “bringing the profitability target forward from 2024 to 2023 on a blended basis,” Salem said. However, Swvl agreed last week to sell USD 20 mn-worth of new shares to an institutional investor in a private placement. Less-than-ideal market conditions have also weighed heavily on Swvl’s shares, which are down 83% since the start of trading in April to USD 1.66 a pop.

What the roadmap to that profitability looks like: Swvl is now working towards making both its B2B and its B2C operations to be contribution margin-positive and scale these operations enough “so that this contribution margin positivity they’re producing is enough to absorb all the central expenses” such as engineering and product functions. The company’s B2B and Saas operations are already contribution margin positive, “which means they’re not impacted by our portfolio optimization,” Salem explained.

Ensuring contribution margin positivity meant axing “young” B2C markets: Right now, the company is shutting down “anything that is contribution margin negative, so that means there are certain markets where our B2C operations will be closed down in their entirety: Jordan, Kenya, and Argentina,” he said.

Pakistan now has a B2C subscription for “better economics”: In Pakistan, Swvl is halting its B2C services in some smaller cities and intercity routes, but is maintaining intra-city operations, Salem said. And in a bid to improve the performance of its Pakistan operations, Swvl launched a subscription model available to customers who work for certain businesses or schools — a replication of a subscription-based service Swvl already has up and running in Turkey. “The general service that’s open to the public via our app is explosive from a growth perspective because it’s open for everyone, but the economics of it are worse. A subscription is more specific, so it’s better economics,” he said.

The company’s B2C services in Egypt are “largely intact” because Egypt is one of Swvl’s more mature markets, where its B2C operations have had time to reach contribution margin positivity, Salem told us.

None of this to say that the answer is in halting expansions: Swvl recently expanded into Europe with its acquisition of Turkish firm Volt Lines and mobility platform Shotl. It also recently took a controlling stake in transit company Viapool, which operates in Argentina and Chile, and entered Central Europe with its acquisition of German company Door2Door. The company is also “very close” to entering Mexico and plans to focus on launching in the US — a market that Salem refers to as “the big prize” — likely starting with coastal cities, Salem told us.

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