GARAGE: NEWS ANALYSIS

Grab layoffs highlight cost burden when startups grow heavier

AMID the economic downturn, homegrown tech firm Grab has cut 5 per cent of its workforce, but will "double down" on the delivery segment by redeploying more talent there, chief executive Anthony Tan announced to staff on Tuesday.

Grab's move to retrench employees highlights how even startups touting asset-light business models may not necessarily be more operationally agile than traditional counterparts under crunch conditions, especially when they take on additional assets.

While many are optimistic about Grab's ability to weather the downturn with its streamlined operations, observers also reckon the startup must re-evaluate its unit economics when it comes to delivery.

On Tuesday, Grab's Mr Tan told employees the firm is laying off about 360 staff, representing just under 5 per cent of its regional headcount. Eight-year-old Grab operates in Indonesia, Singapore, Malaysia, Thailand, The Philippines, Vietnam, Cambodia and Myanmar.

"Since February, we have seen the stark impact of Covid-19 on businesses globally, ours included. At the same time, it has become clear that the pandemic will likely result in a prolonged recession and we have to prepare for what may be a long recovery period," Mr Tan said in a note to employees.

Besides the layoffs, Grab will axe non-core projects and consolidate certain functions. It has also redeployed employees to the delivery vertical to meet increased demand. Earlier this month, the startup had expanded its grocery delivery service, GrabMart, from two countries to all eight of its markets.

Grab's financial challenges highlight how startups are being forced to confront whether the efficiency gains they reap from technology can actually cover costs, said Associate Professor Walter Theseira of the Singapore University of Social Sciences.

This is especially pertinent because while ride-hailing was touted as a cost-efficient asset-light business model when it first came to market, there is now the question of whether it truly is.

"(It) turns out that given the need to provide vehicle fleets and manage driver and commuter relations, it is not necessarily much 'lighter' than traditional taxi services, after all," Prof Theseira said.

Added to this, the likes of Grab are more heavily invested in tech talent compared to traditional firms, which raises the question of cost efficiency.

He explained: "Taxi services have been able to implement many of the innovations such as better matching and dynamic pricing at relatively lower cost, once the benefits were proven. So the question of cost efficiency is still there. What are you getting for the talent?"

Grab's ride-hailing vertical suffered a dearth of business during the circuit breaker period, but demand for its food delivery business surged. Chua Joo Hock, managing partner of Grab backer Vertex Ventures, thinks that Grab's decision to double down on delivery is timely.

"It shows that Grab will leverage its scale and base to evolve more into a Meituan-model - where they sell services to business and serve as a lead generation tool to SMEs," Mr Chua said, in reference to Chinese food delivery giant Meituan Dianping.

"This pivot bodes well for (Grab's) profitability over the longer term," he added.

The emphasis on the delivery vertical is also complementary with Grab's financial services, such as its bid for a digital full bank licence with Singtel, said associate professor Lawrence Loh of the National University of Singapore Business School.

Li Jianggan, chief executive of venture builder Momentum Works, similarly thinks that doubling down on delivery is the right move for Grab, even if demand for delivery services may cool down.

"The social distancing measures in different countries have forced many in the F&B and retail sectors to seriously explore online options... While many players have rushed into it, I think Grab has the right infrastructure, technical and operational capabilities to tap into this," he said.

But the question of finding the right unit economics for food and grocery delivery still looms large. In the case of food delivery, the key problem is that restaurants have yet to shift towards a delivery-only model, making an app-based solution limited.

"Restaurants already are locked into paying these huge rental and manpower costs, and there is little room to pay the delivery commissions unless delivery results in additional business on top of dining-in sales," Prof Theseira said.

But if Grab can nudge restaurants to shift their business models, the delivery business could be rich in potential.

Ultimately, fundamentals will be more crucial than ever for asset-light startups. "The question of sustainable unit economics can be deferred for much longer in a good economic environment with growth. That's no longer true," Prof Theseira said.