Meru cuts discounts, uses technology to take on Uber, Ola

It is cutting back on discounts and infusing technology in its back-end services to crimp costs and turn profitable before others

Even as taxi aggregators Ola and Uber battle for supremacy in the Indian cab-hailing market, Meru Cabs, one of the early entrants in this game, is trying to fight back.

The company, which raised $25 million from Times Group’s private equity arm Brand Capital last week, has reported positive figures for the last six months and has been PAT-positive for the last three months.

Meru’s operations are profitable in six cities (Delhi, Mumbai, Hyderabad, Bengaluru, Jaipur and Ahmedabad) and has achieved breakeven in six or seven other cities, though it loses money in seven or eight others.

The turnaround happened because of the course correction it undertook from September 2015, which focused on using technology to improve utilisation of cars, automating repetitive back-end processes to reduce manpower and costs and increasing tariff for its hatchback service, Meru Genie, as it realised it can’t sustain a pricing war.

Meru had raised $50 million from India Value Fund Advisors in early 2015, much of which was spent in price wars, fighting Ola and Uber. Though Meru was growing at 40 per cent a year, the growth came at a disproportionate cost, and the cash burn was unsustainable.

‘‘We realised that the industry was going through madness. Companies were throwing money at consumers and drivers. Rather than creating value, they were destroying value,’’ says Meru Cabs CEO Siddhartha Pahwa.

The madness that started in early 2014 assumed disproportionate levels in 2015. Meru had accumulated losses of Rs 219 crore till March 2015. Ola reported loses of Rs 796 crore in 2014-15. Industry insiders estimate that Ola and Uber would have lost Rs 4,000 crore in 2015-16.

Pahwa was hired in 2011 by India Value Fund Advisors which has invested $115 million in Meru since 2007 and owns 85 per cent of it.

TURNING THE CORNER

• As cash burn was unsustainable, it made a course correction from September 2015
• It set three goals: increase utilisation of cars, automate processes, and increase fares
• It used the app to push advance bookings and improve utilisation of cars by 20-25%
• It reduced dry runs for drivers by giving them rides in the direction of their home
• It has tried to eliminate manual intervention and automated repetitive processes
• This helped it cut manpower by 30 per cent, mainly in call centres, cash collection and sales
• It increased prices for Meru Genie, its hatchback service, from Rs 9/km to Rs 15/km
• These measures helped it turn positive for six months, raise $25 mn in fresh funding

The turnaround
Technology played a key role in driving efficiencies and cutting costs. Thus, it used algorithms to push advance bookings. Earlier, people would ask for a cab at 6 pm or 6.30 pm; they would not ask for a cab at 6.05 pm or 6.10 pm. Its mobile app now allowed consumers to know what slots were available and book every five minutes.

More important, Meru could study the demand pattern in an area and position cabs accordingly. This helped increase the utilisation of cars and revenues for drivers by 20-25 per cent.

Similarly, drivers often faced huge dry run while returning home. Meru started giving drivers trips in the direction of their home. Similarly, it started optimising rounds, based on where most of its drivers stay.

Next, it started focusing on automating back-end processes. It integrated its money collection from drivers with the Oxygen wallet so that manual processes could be stopped.

In another instance, sometimes a driver would reach a location, and call the call centre if there was a no-show by customers after 15 minutes of waiting, who would in turn call the customer.

Meru has now automated this process: if a customer doesn’t show up within 15 minutes, the driver can press a key and trigger an automated call. This has helped Meru cut its workforce by 30 per cent, which is down to 650 today from 1,000 in September 2015. A majority of these cuts have come in the call centre, cash collection centres and sales people at branch offices.

Earlier, the sales staff would go out in the field for driver verification; Meru has started automating this process whereby these documents can be uploaded by the drivers on the app.

As it improved its operations, it wanted to rope in a strategic partner who would believe in its hypothesis that a good quality taxi business can be built without giving disproportionate discounts to customers or drivers. Brand Capital came in and asked Meru to show its capability to run the business profitably or at a break-even level. Meru demonstrated so by reporting positive numbers for six months at the trot, improved margins, operational efficiency and cut overheads. The investor agreed to invest subject a condition: Meru can’t use the money to subsidise drivers.

Significantly, India Value Fund Advisors which has invested over $115 million in this business did not participate in the last funding round.

Pahwa says the investor is committed to Meru, invested $50 million in 2015, and doesn’t see much erosion in its holding as it controlled 85 per cent in Meru. Interestingly, this is not the first time Meru will turn profits: it had reported PAT of Rs 3.5 crore in 2013-14, and hopes to break even in 2016-17.

The future
Will Meru be able to fight aggressive players like Ola and Uber, who have deeper pockets? Meru says it is running a profitable business, growing at 25-30 per cent per annum; the money raised from Brand Capital will help it enhance marketing efforts, increase consumer recall and base, which will help it grow further. ‘‘It’s not the only money we will raise. We are looking to raise some money,’’ says Pahwa. Some media reports have said that Meru is looking to raise another $75 million.

‘‘The game is not just about capital. There are three important things (we have). One, is the good quality of supply,” says Pahwa.

Meru helps drivers buy a car by taking loans on its books, who can pay the monthly installments through it. This gives it committed supply for four years. In a business where the driver churn is very high, Pahwa says loyalty is one way of fighting competition. But such supply is only 30 per cent of its fleet.

Two, Meru Cabs enjoy first kerb access at many airports. When passengers get down from a flight, they want to take the first available cab. Meru has commercial contracts with airports, which earn 10-12 per cent on every trip in lieu of providing parking space, facilities for drivers and offices at the airport.

And three, Pahwa says, Meru has good business processes and technology that is helping it fight the capital game and hold on. “The capital onslaught cannot continue. In this period, if we can be a profitable business, we can sustain the onslaught.”