Slowdown may offer buying opportunities

Consider buying stocks of companies that command brand loyalty

Global markets responded positively to the buyout of Uber Eats’ India business by Zomato. The Uber stock rose by 7 per cent after the all-stock deal, which valued the India business at around $350 million. This indicated that a drag on the global company was being removed.

Uber Eats entered the India food delivery market late, after Swiggy and Zomato had established themselves. It burnt cash to push market share, by funding discounts. The burn rate is said to have risen from $100 million in the January-March 2019 quarter to over $300 million in the last six months. India contributed only about 3 per cent of revenue to the Uber food delivery arm, while being responsible for over 20 per cent of global losses. This is absurd and Uber had been trying to sell it for months.

According to Bloomberg, Zomato itself reported a loss of $294 million (Rs 2,035 crore) for 2018-19, even though revenues jumped to $206 million from $68 million in 2017-18. In 2018-19, Zomato claimed it lost Rs 25 per delivery, compared to Rs 44 per delivery in March 2018. The last mile cost per delivery was Rs 65, compared to Rs 86 in March 2018. Presumably, Zomato hopes that Uber’s 9 million-odd customers will help the food-delivery service to grow.

Globally, Uber Technologies is still running at a loss, though revenues are growing, and losses are reducing. In July-September 2019, Uber registered a loss of $986 million on revenues of $2.9 billion. This includes a payout of $401 million in stock-based compensation. Revenues are up 30 per cent and losses are down from $1.1 bn (including $64 million in stock-based compensation). Uber has sold its ride-sharing business in several regions, becoming a junior partner to Yandex (Russia) and Didi (China), while buying Careem which operates across markets from Morocco to Pakistan.

It’s interesting to look at the Uber business model from an investor's perspective. Given that the ride-hailing and ride-sharing business has caught on everywhere, Uber identified a gap in the market. It also realised that technology could enable efficient ways to fill the gap.

But critically, there is no moat that deters competition. Other companies could easily develop similar apps and technological back-ends to connect drivers to fares. Arguably, since this is a localised business, regional companies were actually better at feeling the pulse. Food-delivery is even more hyper-local.

Despite its growth prospects and its capacity for innovation, the lack of a moat would have kept a certain type of investor away from Uber. The management theorists would call this a situation where the company found a fit between product and market but failed to realise that it also needed a moat to defend the business from competition.

Most consumer-facing businesses rely on building a brand, and thus creating a base of loyal customers. That is a moat. However, ride-hailing and food delivery are businesses where it isn’t really possible to build brand loyalty, even though brand Uber is a household name.

Somebody hailing a cab has little, if any, brand loyalty. Drivers don't possess much loyalty to the app-provider either. If they get a better deal, drivers and passengers will move in a heartbeat. Ditto for restaurants and their customers. Incidentally, it’s an open question if Swiggy and Zomato will ever turn profitable, at least in the food-delivery segment, precisely because of these factors.

Contrast this with FMCGs, paint companies, automobiles, education apps, etc. Brand loyalty exists in those segments. People stick to the brands of soap, toothpaste and perfume they use. Automobiles and two-wheeler companies get repeat customers. People use the same brand of paint, when they repaint their houses and offices.

During an economic downturn, businesses that have successfully fostered brand loyalty are most likely to survive. That's one reason why brand building can lead to a premium in terms of stock valuations. However, even allowing for that, most large, consumer-facing Indian companies are over-valued at the moment. But a crack in the market trend could create a buying opportunity. Even if, and these are big ifs, the Budget is excellent in conception and scope, the economy is likely to remain in bad shape for quite a while. Sometime down the line, if the market cracks, companies that have successfully developed brands and created brand loyalty will be worth looking at.