Assignment 2: redBus: The Next Step for Growth

A report submitted to
Prof. Rohini Patel

In partial fulfilment of the requirements of the course

By
Ravi Kant Kumar
Section A
Roll No. 2011199

On
27-09-2020
From: Ravi Kant Kumar

Consultant, PWC

Bangalore, Karnataka

To: Phanindra Sama

Chief Executive Officer, redBus

Bangalore, Karnataka

Date: 27-8-2012

Subject: Evaluation of options available for redBus along with the recommendation

Dear Phanindra,

As requested, I am providing a detailed analysis of the online travel industry and redBus. I
have evaluated the options for the future course of action on specific criteria and based on the
outcome of the evaluation, I have provided the recommendation.

Thanking you,

Sincerely,

Ravi Kant Kumar

The technological advancement and adoption of communication services had transformed the
commerce and travel industry. The online booking has increased in the past few years and
will continue with the same trends in the future. The redBus, being the market leader in the
bus travel industry, has increased its revenue significantly in six years of operation and is
disruptive this industry through technology. The positive changes in the socio-economic
factors will raise the demand and attract more prominent players in the industry which pose a
threat to the company

The company has to decide on its future course of action for scalability and sustainable
growth and has to look upon the following options:-

1. Vertical Integration
2. Enter into potential global markets
3. Increase online service offerings
4. Focus on the core

The criteria on which these options are evaluated are:-

1. Investment
2. Impact on the relationship with its existing bus operators and OTAs
3. Profitability
4. The threat of new entrants
5. Transparency and high-level customer service

Based on the evaluation of options on the above criteria, it is recommended that redBus
continue with the same business model.
Situation Analysis

Internet penetration in India had increased from 0.66 per cent in 2000 to 10 per cent in 2011,
which had triggered the growth of the Online commerce and travel Industry. The online
commerce and travel industry grew at a rate of 47.22 per cent in 2011, while the online travel
industry grew at a CAGR of 57 per cent and valued at INR378.9 billion in 2011(see Exhibit
1). The market share in the online travel industry was taken up majorly by air travel(60 per
cent), followed by rail travel(20 per cent) and others(20 per cent), which include hotels, cabs,
buses, etc.

Liberalization of the Indian economy and globalization had a massive impact on the bus
travel industry, growing at a rate of 25 per cent per annum and had a market size of US$2.5
billion. While the overall bus industry valued at 30-40 per cent of the online commerce and
travel industry, online bus bookings had less than 25% of the market share. Air travel covers
the upper middle class or niche class of the society while the traveller of bus belongs to the
middle class, which is non-overlapping.

redBus is the market leader in the online bus travel industry with more than 65 per cent of
market share. The key focus of the company had been bridging the gap between demand and
supply in the bus travel industry through technology. The technology offered by the company
is the BOSS for bus operators, the online platform for bus travellers and seat seller for the
OTAs(Online travel agents). The three technology provided by the company helped it to
grow steadily from INR0.4 million in 2007 to INR 345 million in 2012. Majority of the
bookings (50%) were done via the Internet, which imply that internet penetration has made
an impact on redBus as well. redBus has less competition from OTAs because the served
customer segment is different, and OTAs primary focus is on air travel, hotels, cabs, etc.
Incorporation of new technology and analytical tools to understand the consumer preferences
and the market trends helped the company to attract the new customer segment, i.e. bus
manufacturers like Volvo and Daimler. The positive trends in the social, economic,
technology and political landscape have posed a threat for the company as this will attract
more prominent players. It has made mandatory for redBus to look into the future course of
action for scalability and sustainable growth.

Problem Statement

What course of action should redBus take to penetrate the travel industry market and achieve
a turnover of US$1 billion by 2015?
Options:

From the above analysis, the following options are available for redBus:

5. Vertical Integration – Launch its own private buses

Criteria for Evaluation:

6. Investment
7. Impact on the relationship with its existing bus operators and OTAs
8. Profitability
9. The threat of new entrants
10. Transparency and high-level customer service

Evaluation of Options:

Option 1- Vertical Integration:

The option of launching its own private buses will require lots of investment from the
company side. Buying new buses, maintenance, running cost and operating the fleet would
add extra burden on the capital and the company as it is entirely new for it.

redBus own buses will hamper its existing relationship with the bus operators, and the
operators will lose trust in the company, which is the key value proposition by redBus. It
ranks high on this criteria

The company had strong capabilities in analytics and data mining which will help them in
determining the most profitable routes. Launching its own buses on these routes will be
beneficial, hence high on the third criteria.

As Hugh capital investment is required and there is already well established private bus
service provider, so it will pose lots of difficulties for the redBus.

The redBus would be able to ensure transparency and customer service, using its existing
ticket booking platform. So, option ranks high on this criteria

Option 2 – Enter into potential global markets :

Option 2 ranks low on this criteria as it is entering into new markets outside India so, its
existing relationship won’t be affected.

Profitability doesn’ work for this option as it’s an entirely new market, quite complicated and
require careful analysis of socio-economic trends and the threat of entering is high for the
above reasons.

Option 2 ranks high on this criteria as it will be operating on a similar business model so, it
will be able to ensure transparency and high-level customer service.

Option 3: Increase online Service offerings

The company has the needed technology and infrastructure to diversify into add-on services
like air travel, hotels, cabs and package tours. No significant investment required so, option 3
ranks low on this criteria.

Adding the services will put in direct competition with big players and negatively impact its
existing relationship with OTAs.

The online travel industry is growing at an annual rate of 50 per cent and is expected to
continue at this rate in future. There are lots of markets to capture; the profit margin is less as
consumers look for the best online deals while making purchases.

The online travel market has high entry barriers and is dominated by five or six large OTAs
and redBus ranks 9 in this industry.

As these add-on services will be aligned on the same platform, ensuring transparency and
high-level customer service.

Option 4: Focus on the core

Less investment is required, transparency and customer service is ensure as the company will
operate on the same business model and platform.

The threat of new entrants and the impact on relationship is invalid and negligible.

The bus transportation industry is growing at 25 per cent per annum, and the overall the
market size is US$2.5 billion. These all are the healthy signal for great potential in this
segment.
Recommendation

Based on the above evaluation of options on five criteria, the company should go with the
fourth option, i.e. Focus on the core – continue with its existing business model.

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