Grab. The Makings of a SuperApp! Equity Research! Part 1/3.
42M Users, $17B GMV, and an Exploding Fintech Business!
People have always loved convenience, so even since ancient times, there have been businesses willing to service these needs. However, in the last 2 decades, businesses expressly designed to deliver unparalleled convenience have exploded in popularity.
One of the fastest-growing and most popular such businesses in South East Asia is Grab!
Dubbed “the Uber of Southeast Asia”. Grab is the most popular mobility service in the region, whose 42M monthly users spend over $17B on the platform.
In the 2010s, as the world experienced a digital revolution, new technologies converged to create businesses that were previously unimaginable.
Smartphones became mainstream as billions of people purchased devices with new and revolutionary capabilities.
Mobile internet access exploded as carriers invested over $1T to roll out 3G, 4G, and 5G technologies.
Google created the most accurate and widely available digital Maps in human history, enabling previously unimaginable travel convenience.
Easy to use, reliable, secure, and fast digital payments facilitated by Visa, Mastercard, and Apple Pay supercharged the growth of the digital economy.
Cloud infrastructure providers such as AWS powered the backends for many of these new digital age companies.
Most importantly, the innovations in the semiconductor industry made by ASML, Intel, Nvidia, and TSMC enabled all this through cost-effective and powerful computer chips.
The convergence of these technologies created an environment in which Grab was able to flourish!
In Part 1 of this Deep Dive, we look at how Grab conquered the region and its business model.
1. The Story of Grab
2. Business Model
3. Mobility and Delivery
4. Financial Services
5. Customer Acquisition
6. Parts 2 and 3
1. The Story of Grab
Grab was founded in 2011 in Kuala Lumpur, Malaysia, by Anthony Tan, who remains the CEO today. Originally called MyTeksi, through various expansions, mergers, and reorganizations, the company became Grab in 2016. Since then, they have expanded their operations to Singapore, Indonesia, Thailand, Vietnam, Philippines, Myanmar and Cambodia.
Grab’s offering
Grab’s mobile app allows people to choose from a selection of vehicles to drive them to their desired destination. Depending on the location, customers can pick motorbikes, taxis, ride-hailing cars, luxury vehicles, and even boats.
In 2023, there were 20.4M monthly transacting customers using Grab mobility services, up 79% from COVID lows but still 17% below the pre-COVID high of 24.7M.
As of the last 12 months of Q3 2024, Grab generated $1B from its mobility activities, 37.3% of total revenue.
Next, in 2015, the company began offering delivery services, starting with GrabExpress, a package delivery service. Through the years, Grab has significantly expanded its delivery offering, adding groceries and restaurant meals. Additionally, to further assist local businesses in the use of the platform, GrabMerchant was released. A solution that helps merchants manage their operations on Grab, tracking orders, deliveries, and sales.
In 2023, there were 19.1M monthly transacting people using the service, up 78.5% from 2019 but down 1.6% from 2022. The COVID pandemic caused a pull forward in demand for food delivery in 2021 and 2022. So, when the pandemic ended and cities lifted all restrictions, people decided to have fewer meals delivered.
As of the last 12 months of Q3 2024, Grab generated $1.45B from the delivery segment, 54% of total revenue.
Lastly, when ease of transacting becomes a bottleneck to growth, one might be forced to take matters in its own hands. So, in 2017, Grab launched GrabPay, a digital wallet and mobile payment platform that allows users to make payments for various services. Originally only meant to be used within the Grab ecosystem, it has since expanded outside it as well.
In 2023, 23.3M people were using Grab’s financial services products, an increase of 126% from 2019 and 9.4% from 2022.
As of the last 12 months of Q3 2024, Grab’s financial services segment generated $233M, 8.7% of total revenue.
Southeast Asia
To fully understand Grab, we must talk about its home region of Southeast Asia.
Southeast Asia is a region of 11 countries geographically located between the Indian and Pacific oceans. Home to 700M people, scattered across a vast region of over 32,000 islands and the mainland that borders China. The region is renowned for huge urban cities, such as Bangkok, Singapore, Kuala Lumpur, and Saigon, which mix with the natural beauty of waterfalls, jungles, beaches, and tropical islands that inspired fauna in the movie The Avatar.
Historically, Southeast Asia has been one of the poorest regions of the world, however, things have been changing rapidly. Thanks to industries such as tourism, natural resource extraction, and manufacturing, the region has experienced absolutely stunning growth, especially in the last 2 decades.
The average GDP per capita of the Association of Southeast Asian Nations (ASEAN) countries increased from $1,135 in 1999 to $4,021 in 2016. Additionally, the poverty rate decreased to 14% from 38%. Whilst, the number of paved roads grew threefold from 2000 to 2020, with 95% of the population having access to electricity, up from 60%.
Grab has benefited massively from the development of the region and has become the first app all tourists download. Today, Grab’s bright green color is a mainstay of the region’s megacities. However, as Grab has mostly cornered large towns, it is increasingly focusing on smaller towns and islands.
2. Business Model
Grab is not a logistics company, it is a technology company that manages a platform that aggregates demand and helps it get fulfilled!
The company doesn’t own or operate any of the vehicles instead, it partners with operators who maintain the vehicles and cover operating expenses.
Grab has two core competencies. The first is building sophisticated technology solutions to address the ever-changing needs of its platform’s stakeholders. The second is to acquire and keep customers.
Customer opinions are influenced by various trends, and Grab needs to be able to adjust its strategy to cater to them. Meanwhile, most merchants are small businesses that have limited resources. Grab must provide tools to help merchants become more successful and balance its desire for profitability and shareholder returns with the long-term sustainability of merchants. The more successful merchants become, the more business they do on the platform.
Grab makes money by charging merchants and customers various fees.
Merchants on the platform pay Grab upwards of 30% of the order value. This might seem excessive, but we need to remember that as there are significant costs involved in running the platform, the majority of this doesn’t stay with Grab.
Meanwhile, customers pay subscription fees, order processing, and delivery fees.
3. Mobility and Delivery
In the below picture from Grab’s IPO regulatory filing (S1) we see the economics of an illustrative marketplace order.
After picking their desired meals for $24, the customer has to pay a delivery fee of $3.40 and an order processing fee of $0.20, for a total of $27.60. However, as often various promotions are available, the final order value falls to $25.60.
In this example, the driver received the $3.40 delivery fee and an additional $1.20 driver incentive from Grab, for a total of $4.60.
Meanwhile, on the restaurant side, Grab takes a 20% commission from the food cost of $24, so $4.80. However, Grab provides certain merchants with incentives to join the platform, in this case, 3.33%, so the merchant received a $0.80 cashback for a final payment of $20.
Finally, the economics of a $25.60 transaction are that the merchant partner gets $20 and the driver $4.60, leaving $1 for Grab.
Effectively, in this example, Grab’s take rate is 3.9%.
On top of paying $13 for a taxi ride, customers must pay various other fees totaling around $1. However, in the same fashion as with delivery, Grab offers incentives to customers, in this case, $1, for a total order value of $13.
After completing the ride, the driver would receive $12.40 as Grab takes an 18.6% cut of $2.6 but provides a 7.1% incentive of $1.
In the end, Grab gets to keep $0.60 from a $13 order for a final take rate of 4.6%.
The economics of the mobility segment are slightly better (4.6% vs 3.9%) because there is only one partner, the driver. In the delivery, the economics need to be shared with two partners, the driver and the merchant.
In both scenarios, we notice that the merchant and driver partners receive the majority of the order value. This is intentional, as they cover all of the expensive items involved in providing the service. In order to prepare the meal, restaurants must purchase expensive kitchen equipment, rent a space from which to operate, and pay staff to prepare the food. Meanwhile, drivers have to purchase a vehicle and pay for the fuel, insurance, and maintenance.
Whilst Grab covers marketing, customer service, and technology costs of running the platform. Additionally, Grab hires engineers who do the research and development necessary to create and upgrade the platform.
The incentives Grab offers to customers, merchants, and drivers are just staggering. In the delivery order example, Grab gave away $4, so 80% of its $5 fee. The mobility incentive was $2 out of the $2.6 fee, so 77%.
Let’s look at merchant and driver incentives in more detail now, we will look at customer incentives in the customer acquisition section.
In the last 12 months, Grab spent $722M on partner incentives. Grab doesn’t disclose the split between driver and merchant partners.
If we look at the graph above, it becomes glaringly obvious that in 2020 and 2021, the company spent more than 100% of its revenue on partner incentives. Today, while partner incentives have remained relatively flat in dollar terms, they have collapsed relative to revenue to just 27%.
These incentives were imperative to get as many drivers and merchant partners as possible!
Once they start making money, they are not only less likely to switch platforms but more likely to work more.
4. Financial Services
Grab’s sophisticated multi-sided network has over 42M customers, 3M drivers, and 4M merchants.
Grab realized that there is massive potential in offering financial services to the participants of the platform!
GrabPay is Grab’s mobile wallet payment solution designed to help people transact on the platform. Customers can use the wallet to make and receive digital payments. Additionally, using Grab’s 1000s of retail partners, people can deposit cash on their wallets. For the use of GrabPay, wallet holders and merchant partners pay transaction, deposit, and other fees.
To deliver food or drive passengers, one needs a car or a motorbike. Meanwhile, restaurants require lots of equipment to prepare the food. Not everyone can invest thousands of dollars to start their business, so most get a loan.
Once a business is operational, other financial services are needed. Restaurants often use inventory financing and other working capital loans. Drivers need car and liability insurance.
Well, why shouldn’t Grab be the one to provide these financial services?
The company already has relationships with millions of stakeholders. With just a click of a few buttons, these partners can receive a loan in their Grab wallet.
Well, why would Grab stop at servicing its platform partners, why not expand these services to customers and 3rd party businesses? That is exactly what the company did.
It now offers consumer loans on various e-commerce websites, such as Shopee, Lazada, and Zalora. Its buy-now-pay-later product is used by hundreds of small and medium-sized merchants to increase their sales. As Grab builds relationships with these businesses, the company upsells other services such as insurance, receivables financing, working capital loans, and more.
Financial services are some of the most profitable businesses in the world. Using its platform, Grab has the potential to originate loans at a massive scale. Grab earns income from processing fees whenever a loan is generated and interest for servicing the loan.
In its insurance business, Grab doesn’t operate as a principal, rather it is an agent. Meaning that Grab doesn’t hold the insurance risk, instead, it partners with established insurance companies who pay Grab a fee for originating and servicing insurance.
To lower risk and increase liquidity, Grab provides loans in partnerships with banks, investment funds, and other financial institutions.
Furthermore, Grab uses financial services to stimulate the supply on its platform!
The more drivers and merchants have the resources to operate on the platform, the better the platform becomes for customers, increasing the demand. The higher the demand, the more money Grab makes from commissions. Grab’s financial services division is crucial in fueling this network effect.
5. Customer Acquisition
Customer incentives and marketing campaigns are the primary means of acquiring customers. Meanwhile, GrabUnlimited is a subscription service designed to reduce churn and increase order frequency, thus lowering customer acquisition costs as a percentage of revenue.
Let’s discuss customer incentives, GrabUnlmited will be discussed later in the report.
In the previous section, we looked at Grab giving a $2 delivery and a $1 mobility incentive. Well, all these incentives during LTM as of Q3 2024 amounted to over $1B.
In the graph above, we see Grab’s customer incentive expense from 2020 through LTM of Q3 2024. While in dollar terms, it has increased 63% from 2020 as a share of revenue, it has fallen significantly, from 158% in 2021 to 37% today.
This is a clear indication that Grab’s business has become more sustainable!
Loyal customers are choosing to keep using the platform despite smaller incentives.
These customer incentives have been instrumental in Grab acquiring and keeping users.
As of Q3 2024, there were 41.9M monthly transacting users on the platform, an increase of 43% in 5 years.
Furthermore, the growth has accelerated, from 8.6% in 2023 to 18% in 2024!
Grab’s employs a highly localized marketing strategy. It adjusts incentives, discounts, and campaigns depending on the region and season. The goal of these campaigns is to grow customers and increase customer engagement.
In some regions, large restaurant and convenience store chains such as McDonald’s, Jubilee, KFC, and 7/11 have signed long-term partnerships with Grab for it to be their primary delivery platform.
Grab’s platform is very appealing to them as it has a proven track record of processing and delivering millions of orders in a timely and efficient manner. Many businesses have realized that there is very little benefit from being on multiple apps. Often, customers will switch apps for their favorite restaurant, so being on more apps doesn’t necessarily increase revenues. Conversely, operating on a single app simplifies the delivery process, and as Grab has the best app, it is in a great position to capture a significant share of these businesses.
Furthermore, apart from using all the traditional marketing venues such as TV, radio, and newspapers, Grab, as a digitally native company, has embraced digital ads and social media.
Lastly, and most importantly, Grab drivers themselves in a sense are extremely powerful marketing vehicles. Millions of them drive around in their green uniforms and food bags, reminding everyone everywhere that Grab is always just a few min away from your door.
In the LTM, Grab spent $317M on sales and marketing, 12% of revenues. While in dollar terms, marketing spending has increased every year, in relative terms it has been falling since 2021, when the company spent 36% of its revenues on marketing.
It is likely marketing expenditure will remain in the 12% to 20% range in the long term.
6. Parts 2 and 3
Thank you for reading Part 1 of this Grab report. Grab is truly a unique company operating in a dynamic region with huge prospects for expansion!
In Part 2, we will look at how network effects fuel the Grab ecosystem. As the platform gets more customers, it becomes more attractive to merchants and drivers. The more drivers and merchant partners Grab has, the better the offering becomes for customers.
Grab. The Makings of a SuperApp! Equity Research! Part 2/3.
In the first part of this Deep Dive, we discussed how Grab came to dominate the 700M people-strong region of Southeast Asia!
Additionally, we will look what competition dynamics Grab faces.
Meanwhile, Part 3 will explore Grab’s opportunities for expansion, such as advertising, financial services, and its SuperApp goal. The Deep Dive will conclude with a financial analysis and a valuation model.
Grab. The Makings of a SuperApp! Equity Research! Part 3/3.
Welcome to the 3rd and final part of my Grab Deep Dive!
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I linked to your post in my Monday links collection: https://emergingmarketskeptic.substack.com/p/emerging-markets-week-february-3-2025
I covered this issue at the start of my https://emergingmarketskeptic.substack.com/p/emerging-markets-week-december-30-2024 post:
1) Malaysians have been telling me for years that Grab is “expensive” in Malaysia and to use other (I guess local…) ride sharing app alternatives. I rarely need a taxi etc here so can't comment...
2) A twitter user & then the Murray Hunter Substack recently noted that Grab has followed the old ‘Air Asia’ playbook with its online booking scam [Regulators in some markets put a stop to Air Asia doing that...] of inserting a “compulsory” 30 sen (roughly several US cents) insurance charge on rides that is hard to opt out of for future rides (if a customer even notices it on their receipt): "If we accept the figure of 2.5 mil rides per day as stated by Grab in its website, the additional daily income is RM750,000 [US$167,821.5] - the monthly extra income is RM22.5 mil!! [US$5,034,645]"
That's not as bad as AirBnB charges (which is starting to hurt them) though but its still questionable... 2.5 mil rides per day seems high for Malaysia - maybe that's a region wide number BUT nevertheless, the equivalent of 30 sen of questionable charges in multiple markets ads up...