Grab’s search for inorganic growth may be curtailed by anti-competition concerns

WITH changing consumer preferences and the highest inflation rates in four decades, the current operating environment has not been kind to transport and food delivery company Grab.

The Nasdaq-listed group needs some quick wins soon, and it appears inorganic growth has become the answer to some operating challenges that have been plaguing it since the pandemic.

Grab may have two deals in the works. On Jul 20, it announced it was acquiring privately-owned Trans-cab, Singapore’s third-largest taxi company. The Straits Times, citing sources, has put the deal at around S$100 million.

Grab has also been cited as a potential buyer of foodpanda’s food delivery businesses. Parent company Delivery Hero in September said it is in negotiations to sell foodpanda’s businesses in seven South-east Asian markets.

Business magazine Wirtschaftswoche said Grab could pay over one billion euros (S$1.46 billion) for the acquisition.

Competition concerns

Unfortunately for Grab, its impending purchase of Trans-cab has sparked concerns from Singapore’s competition watchdog. The Competition and Consumer Commission of Singapore (CCCS) said it needed to review the competition effects of the acquisition in greater detail.

Under Singapore’s point-to-point transport regulatory framework, licensed ride-hail operators must not impose exclusive arrangements that prevent their driver-partners from driving for rivals.

Still, CCCS flagged that if Grab owned the Trans-cab fleet, it could affect Trans-cab drivers’ use of rival ride-hailing platforms. This might create barriers to expansion and entry for ride-hailing competitors.

It is clear that the events of five years ago are still fresh in the commission’s mind. In March 2018, Grab acquired Uber’s South-east Asia operations for an undisclosed sum. It remains the single biggest reason why Grab is where it is today. In one fell swoop, the company edged out a strong American rival, multiplied the scale of its ride-hailing operations, and gained market entry for an emerging business – food delivery.

But the deal came at the expense of competition. Grab and Uber had a combined market share more than five times the next biggest player, ComfortDelGro.

CCCS’ investigations later found that both parties likely knew the deal was anti-competitive, but charged ahead anyway.

Grab’s impending buyout of Trans-cab in Singapore is nowhere as big as the Uber deal. Nevertheless, its impact on other platforms and drivers’ livelihoods needs to be delicately handled. During the 2018 deal, many drivers were left stranded with contractual obligations that they argued tied them to certain platforms.

The way the Trans-cab transaction is handled is likely to set the stage for other deals, as the market enters a period of consolidation.

Attractive solution

Grab and Trans-cab may offer commitments to CCCS that remedy, mitigate or prevent adverse effects due to the merger.

Investors will be watching closely to see whether concessions to negate monopolistic effects will significantly dampen the attractiveness of the acquisition.

Shareholders already have a sense of how much Grab needs this deal. The company has spoken at length about its shortage of drivers in various markets, ever since a wave of drivers left the industry during the pandemic.

In February, Grab said its supply of drivers in Singapore was only at 70 per cent to 80 per cent of pre-pandemic days. The company’s efforts to increase supply have been hindered by rising vehicle costs and fuel prices that eat into drivers’ income.

Rival Gojek faces a similar issue. It is lowering its driver commission rate – the cut it takes from drivers – from 15 per cent to 10 per cent on Nov 1, in part to increase driver supply.

If Grab’s purchase of Trans-cab goes through, it will immediately gain a 2,500-vehicle fleet comprising 2,200 taxis and 300 private-hire vehicles. The agreement also includes Trans-cab’s taxi and vehicle rental business, as well as its maintenance workshop and fuel pump operations.

Still, it may be too early to celebrate, given regulatory concerns.

CCCS’ scrutiny of the deal could be a harbinger of how regulators will react to any transaction between Grab and foodpanda in the food delivery sphere.

So far, analysts have mostly been optimistic about the potential move. Barclays noted that industry consolidation will help Grab expand its food delivery coverage in a cost-efficient manner. Maybank believes Grab would likely have a monopolistic market share in Singapore, Malaysia and the Philippines, resulting in better unit economics.

JPMorgan analysts, however, were less sanguine about the deal. They flagged potential regulatory restrictions and weaknesses in the underlying food delivery business model. The service has become too expensive for most consumers, especially when compared against dining in, they wrote in a Sep 21 report.

Consolidation might stifle industry growth, as a result of platforms increasing monetisation to squeeze out higher profits.

“On-demand platforms should reduce their cost structure and pass on the savings to their customers (merchants and consumers) to increase the penetration of food delivery in Asean,” the report said.

Grab has made a few smart investments to accelerate its growth, such as Malaysian supermarket chain Jaya Grocer, which has been contributing steadily to deliveries revenue.

As the company enters another phase of acquisitions, it will need to fully optimise its chances to create a stronger operational standing, at a highly uncertain time.