Prelude
The race for SuperApps is steaming up in Southeast Asia. One of the growth strategies they adopt is something unconventional, that is by burning hard cash to win the market share. In this podcast, we’ll share our thoughts to answer two key questions. Should your organization consider a cash-burning strategy? And how do you ensure a successful cash burn?
Introducing our Speakers :
Host : Jessie Tung, Chief Strategist – Twimbit
Co-host : Siewmei Loh, Research Analyst – Twimbit
Jessie
Hello, everyone, welcome back to Asia Tech Room. As always, I’m Jessie. And joining me today is my co host, Siew Mei.
Siew Mei
Hello, everyone.
Jessie
WeChat, Grab, and Gojek, I think for people who are interested in Asia tech, and in Southeast Asia, are brands that are often associated with the buzzword “SuperApp”. So, to give a little bit of context, “SuperApp” is a one-stop platform where you have access to a wide range of digital services and products. It’s usually a breed of tech giants from a single vertical. Let’s take a few examples: Grab started as a ride-hailing app, WeChat started as a messaging app, and Shopee started as an e-commerce platform, and all of them today have grown their ecosystems of services. They’re dipping their foot into almost everything now. So, if you think through it thoroughly, you may realize that “SuperApp” is ingrained into our daily life, from transportation, food deliveries, e-commerce, even paying for your electricity, to things that are much more serious such as insurance coverage and more.
Siew Mei
Yep. I think like our intro mentioned in our intro earlier, today, we are going to debunk how the “SuperApps” are using cash-burning strategies to actually expand their market share, right? So, now, I will give a little bit of context behind what the cash-burning strategy is. If you look at SuperApp now, today, they tend to spend a massive amount of money on their operating activities and on their suppliers. First of all, operating activities such as marketing, like spending on digital ad campaigns, and I think the most direct approach that they use is incentivizing the users to download the app and use their service. So, let’s say, Grab will give you RM10 off when you sign up as a user and use the service for the first time. The incentives are not limited to cash backs, but also “refer-to-earn”, when you refer to your friends, cash vouchers, and they also often give out free deliveries when you order food. The second thing is the supplier of their services, which is also the key enabler that makes the entire value chain work. So for ride-hailing, it will be the drivers. for food delivery, it will be the riders and the restaurants. For example, they will offer a more competitive salary and bonuses to the drivers to ensure the supply is adequate to meet the users’ demand. It is to make sure that whenever you use Grab to get a car, then there would be enough drivers to serve you. So, the same goes for food delivery. Riders are heavily subsidized to deliver more orders and deliver it faster. The company also tend to fund the merchants, like restaurants, to run marketing offers and promotions for their food. That actually attracts users to order more from their app, because of, you know, it’s cheaper. Ultimately, all these cash-burning activities are to shape the ecosystem of the “SuperApp” itself and also the participants’ behaviour and habit towards the “SuperApp”. They want to build a strong network effect by offering a range of services to the users, grip them in the ecosystem under an umbrella brand, like Grab like Shopee, or you know, any other superapp in the market.
Jessie
Yeah, exactly. I think if you were to really summarize the “SuperApps” vision, it’s fairly straightforward. They’re spending money today in hopes that they will generate revenue and reach profitability in the future. The benefit of the cash-burning strategy is to acquire customers at an ultra-fast pace and to grab that market share before another competitor lands on their shore, right? So, with all these impressive growth metrics such as high monthly active users and high GMV numbers that they have achieved so far, I can see that their cash-burning strategy is showing some positive effects here and there. So, I have a question in mind. What if I apply the cash-burning strategy to every organization? Is it the holy grail for everybody?
Siew Mei
Okay, so, before we come to a conclusion on whether this cash-burning is the way to go for all the organizations, let us go through the pros and cons of the strategy. Before we go into the dark side of the cash-burning strategy, I think there’s another advantage on top of growing the user base, that is that the “SuperApp”, the ecosystem itself actually helps to create the data flywheel. We all know that data is a new goal in the digital economy, right? The more data that “SuperApps” get, including social and transactional data, it will be instrumental for them to know what’s the next business line they should be focusing on? How do they fill in the gap for the customer journey, and also fill the gaps of customers’ needs? Coming back to the cons of the cash-burning strategy, I think people are easily masked by the growth numbers. We get really excited when we see revenues are ramping up, whether GMV numbers up is breaking its quarter on quarter record. So, again, building a “SuperApp” is a creative opportunity for any platform business to expand and grow. Essentially, it is also a highly competitive market as more players are looking to join the space. I think some telco companies are actually trying to be another “SuperApp” as well. So, to continuously capture new market share, even to retain the existing market share, “SuperApps” tend to fall into a price war, or maybe you should call it a subsidy war, where they’re constantly giving out a different forms of subsidies to actually retain the customers and users. This will actually cause the cost of acquisition for new users and returning users to increase substantially when there are more competitors coming into the game and when the user’s loyalty remains weak.
Jessie
Yeah, I actually think it’s quite surprising because when I first landed back in Malaysia, from Singapore, Grab is almost like the primary choice. But I also saw a sea of orange bags on motorbikes. Then I was Siew Mei, I was like, what is that? Turns out Shopee launched its food delivery services in Malaysia. They’re giving out cash vouchers and free delivery vouchers for their users. And if you have used the food delivery service, you realize that the differentiation of restaurants option is very limited between Shopee, Grab and even Food Panda, meaning that essentially there’s really no difference in the food that is being offered. So being a typical consumer or being any other consumer, you’re always looking for your due. You want something cheaper. So, whenever I want to order food, Shopee will come to my mind because it is simply cheaper, so no matter how frequent I use grab in Singapore, I easily converted to Shopee when I’m back in Malaysia.
Siew Mei
Likewise. I also use Shopee more than Grab nowadays. So, yeah, unless Grab is giving me more vouchers, then I might go back to Grab again. You see, the thing is that the customer’s loyalty is extremely low when they are incentivized to use your service, the reason behind being that they are not attached to any unique proposition of your services. Long story short, it means the service is easily replaceable by another brand as they appear to be ubiquitous to the users. It’s all about the price that people are concerned about. At the end of the day, it may come to a situation where the top-line growth does not accelerate on the same trend along with the rapid acquisitions of new users. Essentially it will delay the potential of the “SuperApp” to turn its net losses into net profit.
Jessie
Yeah, I think it really begs to question of how do we actually ensure that the cash-burn strategy is successful? So, what we did was that we actually did some analysis, we looked at some “SuperApps” that did really well, and some that didn’t do too well, and see if there’re any lessons, or is there any commonality on why some succeeded and some didn’t. So here are some of our findings.
Siew Mei
Right. So, I think that number one is about user stickiness. First of all, I think a “SuperApp” must at least have a robust use case for the users. It means that it will provide a digital service that will keep users sticking to it. It will be something hard for users to even imagine how to live without the service. For instance, a great example would be Kakao from South Korea.
Jessie
Yeah, and for those who don’t know, Kakao is similar to WeChat in China. Kakao is the main messaging app in South Korea, and the app as of today is installed in over 90% of the country’s smartphones.
Siew Mei
Yeah, so you see, this is a strong moat for Kakao to differentiate themselves from the pool of “SuperApps”, because the users are actually superglued to this messaging app for daily and business communications. So. users are actually trapped in the ecosystem of services. If we speak in a statistical language, it simply means that whenever a user uses Kakao app, it will be a new stochastic event where they have the possibility to continue to use other services within the ecosystem itself. Hence, it will eventually trap the users within the ecosystem, creating recurring revenue for this.
Jessie
Yeah, I think that’s a very good point, because we also look at the Kakao case study, when Kakao launched their additional bank service back in 2016, within a four-year span, they actually managed to acquire 17 million users, and that is about 30% of the South Korean population. And even more impressive is that they actually reached profitability in less than two years whilst some of these other “SuperApps” haven’t even reached profitability, sad to say. I think it’s fair to say that if you want to make this cash-burning strategy successful is that user stickiness is very much vital.
Siew Mei
Yep, definitely agree with that. The second thing for “SuperApps” to ensure they have executed their cash-burning strategy successfully is to identify their cash cow. Since this is a cash-burning strategy, , cash is a vital asset in this game plan. I know that cash primarily really comes from the VC, you know, for all the startups, but again, it is important to actually have the long term cash flow to keep your ecosystem sustainable. Again, a “SuperApp” is providing a wide range of services, meaning it is managing multiple business lines within a company. So what the “SuperApp” must do is to identify its cash-generating powerhouse, possibly one or two business lines with high margins, so that they could leverage on the cash flows to fund and build more new business lines within the ecosystem.
Jessie
Exactly. I think a simple way to put it is that they need to have the right synergy of business units to reach a scenario where one business which is a bit laggy to support the other business, so it can sustain a long enough strategy, maintain a position and meet the competition that will come up across the horizon. I think for this one, we actually did research and we found that one thing that could really represent this was like with a SEA group or S.E.A group as some might call it. SEA group is actually the parent company for Shopee, but SEA group is also the gaming segment. As far as I know, also, the SEA group has a gaming segment called Garena, which is highly profitable. So for those who don’t know, Garena is part of Tencent, and Garena runs games like League of Legends, which is huge, and even Call of Duty mobile. So it’s quite successful. In 2020, alone, Garena’s operating income has leapfrogged from 500 million to a billion dollars, and that is a 100% increase, which is insane when you’re playing at such a large scale off the top line, right? I think it’s no brainer to conclude that Garena is the cash cow for SEA group to sustain Shopee and also invest in SEA money’s growth. When you really look at it, in that sense, if you want to make a cash-burning strategy sustainable for any organization, there are two things you need to take into account; first is user stickiness and second is to find your cash cow. You need a business unit that will supply the money. Another interesting thing we’ve also found out was that AirAsia actually rebranding itself from just an airline company to a “SuperApp”. They actually, in fact, call themselves on Facebook as the ASEAN “SuperApp”. It is indeed brave for them to do that, especially in times like this, with the pandemic and all the border closures, etc, it’s very uncertain for their business model. And I wonder if they’re also adopting the cash-burning strategy, to grab the market share from other giants like Grab and Gojek. So, from what we have discussed just now, Siew Mei, do you think that AirAsia has the potential to land as a successful Southeast Asian “SuperApp” at the end of the day?
Siew Mei
Well, to be honest, I’m not sure if they have adopted an aggressive cash-burning strategy or not. So far, from what I know they have a quiet Gojek business in Thailand, but I’m not sure if they have been incentivizing the vendors within their ecosystems or even the customers, the users, right? Because since the pandemic started, it has been some time since I logged into the Asia platform and there are many caveats to consider before we can actually conclude if AirAsia will become the next leading “SuperApp” in Southeast Asia. But anyway, yeah, I think I just see it like how AirAsia is trying to transform itself and redefine what AirAsia is, and what kind of value the brand wants to deliver to the consumer. So, we all know that AirAsia is a well-established airline in the Southeast Asia region, right? People recognize them for cheap air tickets, the go-to airline to travel across the region. So, I think they already have certain stickiness for the travellers who are actually frequent travellers within Asia or Southeast Asia. Sorry, Jessie, do you remember what are the services that are currently available or the AirAsia “SuperApp”?
Jessie
Yeah, I actually do because I think when I was buying my flight from Singapore to Malaysia, naturally, I gravitated to it on AirAsia for cheaper tickets. So, when I got onto the site, I was so surprised to see Singapore Airlines being listed as one of the options for flights. So, then I found out that they actually quietly became an airlines aggregator like qb.com. In fact, they have always had hotel bookings, travel packages, duty-free shopping, etc. But now they have even expanded it to things like ride-hailing, food delivery, groceries, and even in Fintech division, and big pay. So, that’s quite a comprehensive array of services for travellers if you are in Southeast Asia.
Siew Mei
Right, right. I think if we look at the AirAsia “SuperApp” I think it actually has a strong use case for travellers, at least. Just imagine a foreigner travelling from Singapore to Malaysia and probably they want to continue to travel to Thailand and other Southeast Asia countries, it will be quite handy for him or her to plan all the travel itinerary on this AirAsia “SuperApp” itself. But again, coming back to the two points that we mentioned earlier, to ensure that they actually executed the cash-burning strategy well, AirAsia must identify which one is the high margin business for them, because it essentially helps to make the whole ecosystem sustainable.
Jessie
Yeah, that’s true. And I can’t wait to see how they unravel over the years.
Siew Mei
Yeah, I think just to add on another point that I recently read about. I think AirAsia actually started this AirAsia 3.0 plan, which is to digitalize everything, to make themselves into a digital company instead of a traditional airline company before the COVID happens. It was quite unfortunate, to be honest, that pandemic happened, and actually severely impacted its cash flow from the flight revenue. But, anyway, I think it will be quite interesting to follow AirAsia’s upcoming journey on how they will grow in the future. I think it will be interesting if we can actually have a session with Tan Sri Tony Fernandez in the future. Yeah, perhaps we can talk about that in another episode.
Jessie
Okay, sign me up for that episode. Anyway, guys. There you have it. Let us know if you want us to talk more about AirAsia in another episode if you want us to break down their business model. We’ll love to hear your thoughts on the cash-burning strategies used by “SuperApps”. Do you think it’s sustainable? For now, we think that there are two factors that should be met before anyone should decide to go on with the cash-burning strategy. Let us know if there’s more. We always appreciate your feedback, and it’s always fun for us, to hear from you guys and your thoughts. So, as always, if you want to reach out to me, I can be contacted at jessie@twimbit.com or my lovely co-host Siew Mei, at siewmei@twimbit.com. We love making these episodes every week. Thanks again for tuning in. As always, again, until next time, see you guys.