Oliver Wyman

Australia/NZ Case Competition

Submission by:

Ariel (Zirao) Zhou, Guangnan Wang, Natalie

Yik Tung Tseung, Victor Ruifeng Liang
Summary - Industry and Business Model (Ridesharing)

- Perfect Competition (Lack of Product

Differentiation with Ridesharing Services)

Profits

- High Growth Industry (Expected 15% CAGR Growth

in Industry Revenues from 2020-2025)
- Industry Profit Margins: 0.5%
(Profits from Platform Commissions paid by the
driver as a cut of the cost of the ride)

Revenue

Executive Issues Solutions Implementation Impacts

Summary - Industry and Business Model (Food Delivery)

- Oligopolistic Competition (though with

Limited Product Differentiations)

Profits

- High Growth Industry (Expected 10.2% CAGR Growth

in Industry Revenues from 2020-2025)
- Industry Profit Margins: 3.0%
(Profits from Platform Commissions paid by the
restaurant as a cut of the product selling price)

Revenue

Executive Issues Solutions Implementation Impacts

Summary - Industry and Business Model
Profit Maximisation Strategy (Short-Term) Price Competition Strategy (Short-Term)

Increasing the costs for consumers or decreasing Reducing the costs for consumers or increasing the
the rates for drivers relative to one's competition rates for drivers relative to the competition

Users or drivers would leave, using instead the More users and drivers would adopt the service (X)
competitors' products (M)

Better experience for the users or drivers; with

Worser experience for the users or drivers which drivers able to be more efficient with route
remain; with either too much unfulfilled demand planning and users having reduced wait times
for drivers or an excess of drivers relative to users

Increase in consumer consumption (C) or an increase

Decline in consumer consumption (C) or a decline in the driver's time in Uber's platform economy (I)
in the driver's time in Uber's platform economy (I)

Lower short term profits (G-T) due to use of greater

Lower long term demand (AD) from reduced user incentives to promote one's services
and driver population

Executive Issues Solutions Implementation Impacts

Summary - Industry and Business Model

- The low profit margins here directly mirrors the macroeconomic occurrence of 'stagflation' in the 1980s; where no
matter the increasing or decreasing of interest rates, a negative effect would still arise from either increase
unemployment or inflation - both in the detriment of the economy overall

- In application and extrapolation of the aggregate demand model of the macro, national economy towards Uber's
ridesharing and food delivery services - the "platform economy", we would be able to observe:

Aggregate Demand = C + I + (G - T) + (X - M)

- Aggregate Demand: the size of the Uber's platform economy

- C: Consumption (of users and their spending in the platform economy)

- I: Investment (of drivers and their time in the platform economy)
- G: Government Spending (in this case Uber - with their subsidies and rebates)
- T: Government Taxation (in this case Uber - with their fees and commissions)
- X: Exports (in this case the amount of spending by other platforms' customers in using Uber's platform economy)
- M: Imports (in this case the amount of spending by Uber users towards its competitors' platforms economies)

Executive Issues Solutions Implementation Impacts

Summary - Industry and Business Model

- Hence, in resolution of the issues underlying the two strategies, of the tradeoff between having a
greater loss with increased spending or having fewer users in the long term; the goal of increasing
efficiency must be established

- This is because it is only with an increased efficiency; that Uber's spending could truly decrease,
whilst having its resulting effects towards platform growth (AD) still remaining very similar (leading
to greater profit margins)

- This mirrors the impacts of the Keynesian Multiplier for macroeconomics; in incentivising, in this
case, greater inputs of time by the driver and inputs of money by the consumer well beyond the
value of the money initially injected by Uber into the platform economy with rebates and subsidies

Executive Issues Solutions Implementation Impacts

Inefficiency: Uber's Fuel Discount Rewards (Both Ridesharing + UberEats)

Executive Issues Solutions Implementation Impacts

Inefficiency: Uber's Fuel Discount Rewards

- Whilst fuel discounts are aimed to increase the willingness of drivers to work, this may be offset by the significant price
fluctuations; with prices cycles occurring that are of different lengths and magnitudes, all impacting drivers' profitability

E10 Fuel Prices in Greater Sydney; October 2017 to July 2020

$1.80

$1.64
$1.60

$1.40

$1.20

$1.00

$0.88
$0.80
2018 2019 2020

Executive Issues Solutions Implementation Impacts

Inefficiency: Uber's Fuel Discount Rewards
- In addition, besides price fluctuations based on time; there exists also substantial price differences regionally
E10 Fuel Prices in Greater Sydney; 24th of July, 2020
(Graph of the Number of Stores for Each Franchise at Each Price Range)

Executive Issues Solutions Implementation Impacts

Inefficiency: Uber's Fuel Discount Rewards

- Assuming an 8 hour work day for an Uber driver; that 50kms are driven for each hour of work; and 10.8 Litres of fuel are required
per 100 kilometres for an average passenger vehicle,

- Each day of work would require 43.2 Litres of fuel

- Looking at the price cycle and the highest and lowest costs for fuel at $0.88-1.64 per litre, this would mean that a driver would
need to pay anywhere between $38.016 per day to upwards of $70.848

- This difference alone equates to a gain or loss of almost two hours of pay; a quarter of the working day

- This is made worse factoring in the regional variance in the cost of fuel; where even with the price cycle being at a midpoint with an
average cost of fuel being $1.32 per litre - drivers could still potentially pay upwards of $1.49 at certain locations in Greater Sydney

- This is a variance in expense of upwards of +12.8%; equating to half an hour of pay potentially lost every single day due to these
locational price variances alone

- For ridesharing drivers, because of their inelastic demand for fuel accompanied by a relatively high per-day consumption of fuel;
this makes strategies such as waiting for the price to fall with the price cycle impractical, and makes it particularly difficult for
drivers to also go to locations with the cheapest fuel during the day granted the variance in ridesharing destinations

Executive Issues Solutions Implementation Impacts

 Solutions Proposition: Variable Fuel Subsidy

- Instead of a flat discount of 6, 7, 8, or 12cents per litre of fuel as per

Uber Momentum and Uber Pro Rewards; Uber could work with partners
to instead grant fuel discounts based on the price of fuel paid by the
driver at franchised stores

- For example, instead of the flat 12 cents per litre of fuel granted to long
serving drivers; Uber could instead use the moving long term average
Potential Fuel Subsidy Partnerships: Market-Leading Companies
price of fuel as a baseline - where should the individual purchase fuel
at a very low price, Uber could simply pay a lower subsidy

- Similarly, should the individual pay a very high price for fuel, Uber
would similarly also give a larger subsidy to offset the changes in cost

- As an example, with the fuel prices of July 24th averaging $1.32 per
litre; Uber could offer the flat 12 cents per litre as a rebate to the driver

- Should the driver pay lower than that, for example at around $1.22 per
litre of fuel, Uber could instead offer them a 4 cent rebate

- Should the driver pay higher than that, for example at around $1.42 per
litre; Uber could offer them a greater 20 cents as rebate
Illustrative Diagram: Variable Fuel Subsidy and its Effects to Price

Executive Issues Solutions Implementation Impacts

 Solutions Proposition: Variable Fuel Subsidy

- For the driver, this greatly reduces the impacts of the fluctuation of fuel
prices towards their profit margin and its stability through time

- Instead of a locational variance of fuel prices between $1.025 per litre

and $1.459 per litre; the highest and lowest prices of fuel observed on
the 24th of July, 2020 - with a variable subsidy, this is reduced to the
Potential Fuel Subsidy Partnerships: Market-Leading Companies
prices of only $0.9625 per litre and $1.259 per litre

- This is a reduction in locational fuel price differentials, to the driver, of at

least 33%

- This provides the drivers with a stable future expectation; with a lower
likelihood of them experiencing excessively high fuel prices potentially
leading to a greater willingness to work for Uber at a more consistent
rate (without needing to factor in price differentials in fuel as a
significant variable for profit calculations)

Illustrative Diagram: Variable Fuel Subsidy and its Effects to Price

Executive Issues Solutions Implementation Impacts

 Solutions Proposition: Variable Fuel Subsidy

- For Uber, granted the "Law of Large Numbers" alongside the inelastic
demand for fuel leading to drivers refuelling without much
consideration for price, it likely for the cost of this schematic change to
remain consistent with current implementations of the flat fuel
subsidy; particularly as the average subsidy should be equal to the
Potential Fuel Subsidy Partnerships: Market-Leading Companies
subsidy scheme of the present time

- In addition, to some extent, due to the greater number of partnerships

to be established; the cost for Uber may actually decrease relative to
the current scheme - as the companies may wish to compete for the
partnership opportunity to attract more demand through the offering of
increasingly favourable terms

Illustrative Diagram: Variable Fuel Subsidy and its Effects to Price

Executive Issues Solutions Implementation Impacts

 Variable Fuel Subsidy: Risks and Solutions
- However, despite these advantages, there are still several business and implementation risks associated with the variable fuel
subsidy - which would need an anticipation of potential risks.

Risk Scenarios Mitigation Strategies

High

3 Undertake sufficient trialling and

Incorrect price input or inaccurate testing of technology (with
1: Technological Risks
calculation of the variable fuel subsidy technological personnel), enable
Impact on Revenue

1 manual override mechanisms

2 Change in fuel subsidy not having the

Collect and analyse customer
2: Business Risks desired scale of impacts towards driver
feedbacks and ratings
retention
Low

Low High Create greater awareness of the

Probability Non-acceptance of the contracted
scheme through in-app promotions;
3: Business Risks partners of this changed rewards
conduct market trials and adjust rollout
scheme
plans

Executive Issues Solutions Implementation Impacts

 Variable Fuel Subsidy: Timeline of Implementation

Conceptualisation Trials Launch Refine

Hire software
Negotiate newer engineers who Incorporate technology Make technology and
contracts with has application into Uber application subsidy available to all
potential fuel service and API building and allow this system to drivers
franchises experience be trialled by a select
group of drivers
(whether that be BP,
Create a system that would allow the
7-Eleven, Caltex
real-time updating of price information
Woolworths, or
from partnered franchises and
Metro Fuel - aiming
locations; and to have an algorithm Monitoring of performance; collection of customer feedback
to split the costs on Monitoring of
that accurately calculates the variable
the fuel subsidy performance; changing
subsidy
program) the extent of the
subsidy's variability if
Test accuracy and
necessary
system reliability in
internal trials Promotion of the subsidy

August to December, 2020 Q1 + Q2, 2021 Q3 + Q4, 2021 2022+

Executive Issues Solutions Implementation Impacts

 Variable Fuel Subsidy: Impacts

To Drivers: To Consumers: To Uber as a Firm:

- In increasing the stability of fuel prices as a - With a greater supply of drivers (granted the - A variable fuel subsidy could create far greater
significant part of the cost base; this allows for impacts from the variable fuel subsidy network effects for the ridesharing/online food
the greater stability of income facilitating a more stable source of income) and delivery's platform economies than the fixed
the subsequently reduced average waiting rate observed currently - and in the short term
- Drivers would now be able to not only decide to times for each ride/delivery; a better experience this would allow for greater impacts to be had
drive in accordance to their preferences, but could likely be delivered from drivers to for a similar amount of funds spent on subsidies
also without consideration for the fuel prices consumers (increasing its absolute revenue and profit
and their change through time and location numbers overall)
- This may enable also the reduced extent of
- Thus, an easier time scheduling their times surge pricing; as surge pricing is commonly - In the longer term, this could also allow for
spent driving could be facilitated; with drivers caused by the mismatch between ridesharing Uber to decide between a growth strategy (with
able to establish a consistent schedule with an supply and demand - increasing the greater effectiveness granted the current extent
accurate expectation of earnings through a attractiveness of Uber's platform for price- of spending) or otherwise a profit oriented
better control of cost elastic customers strategy (facilitating similar extents of
effectiveness, but done at a lower budget)
- Drivers may also decide to drive more hours;
even during off-peak hours when surge pricing
is not in effect

Executive Issues Solutions Implementation Impacts