Assignment 2: redBus – The Next Step to Growth

A report submitted to

Prof. Gita Chaudhuri

In partial fulfilment of the requirements of the course

Written Analysis and Communication – I

On

27-09-2020
 Letter of Transmittal

From
Mitul Sanghvi
Consultant
Bain Consultants
23, Andheri Road, Mumbai – 400047

To
Mr. Phanindra Sama,
CEO
redBus
12, Gandhi Road, Bangalore – 530068

September 1, 2012

Dear Mr. Sama,

Please find enclosed the report and recommendation on further strategies that redBus can take to
achieve annual revenues of US$1 billion by FY2015. The report takes into consideration the current
industry scenario and suggests the best option available.

Thanks and Regards,

Sincerely,

Mitul Sanghvi

Consultant

Bain Consultants
One Page Summary

redBus has created a niche position for itself in the online bus travel industry by building a robust
and nation-wide platform. redBus currently holds 65% market share and the bus travel industry is
showing positive growth due to the socio economic changes in the industry. Also the domains like
air, travel, cab and hotel bookings are currently a bigger source of revenue but there is cut throat
competition in the segment and margins are razor thin. At this juncture redBus is looking for a
strategy to increase its revenue streams and looking for avenues to reach US $1 billion dollars annual
revenues by 2015. The key for choosing the future strategy will be to upheld the values of the
companies that have helped them reach this position.

Hence, the problem statement is that redBus must decide “What strategy can redBus use to achieve
future growth and gain US$1 billion dollars’ revenue by 2015?”

The options it has to look forward are:

1) Vertical Integrations – venture into bus operations
2) Expand into global markets
3) Increase portfolio of service
4) Focus on core business

The criteria for evaluation are:

1) Capability of redBus to implement the solution
2) New strategy effects on existing business and relationships
3) Ensuring transparency and customer satisfaction
4) The monetary gain of redBus

The ranking of criterion are:

1) New strategy effects on existing business and relationships
2) Capability of redBus to implement the solution and Ensuring transparency and customer
satisfaction
3) The monetary gain of redBus

The evaluation of options are as follows:

1) Low on first, second and third criterion, moderate on fourth

2) Moderate on first, third, fourth criterion and high on second
3) High on first, third and low on second and moderate on fourth
4) High on all criterions
Based on the above evaluation, it is recommended that redBus continue to focus on the core
business

Situation Analysis

The online travel industry has grown from INR62.5 billion in 2007 to INR378.9 billion in 2011 at an
annual growth rate of 50 per cent. This growth is expected to continue due to various socio-economic
indicators, technological advancement and customer needs of convenience. The industry is
segregated into rail travel (market share 20 per cent), air travel (market share 80 per cent) and other
(market share 20 per cent). The latter 20 per cent market share belonged to the online bookings of
hotels, cabs, buses, tour packages, travel insurance etc.

The bus industry is considered as one of the most accessible and affordable modes of transportation
in India. There has been an increase in interstate and intercity transportation due to increased
migration to big cities due to industrialization. The increase in internet penetration from 0.66% in
2000 to 10% in 2010 has laid down the base for the online bus travel industry. The online bus travel
industry is growing at a rate of 25 per cent per annum and has a market size of US$2.5 billion and
sales of 220 million tickets.

redBus, having started in 2006, currently holds a niche position in the online bus ticket booking
industry. It has a market share of 65% and is growing at a cumulative annual growth rate of 286.5 per
cent over the past five years (see Exhibit 1). redBus has been a chief architect in the online
transformation of the bus travel industry. redBus has used the latest technologies to bring in
transparency into the ticket booking process. It has increase revenues for bus operators and improves
bus travellers experience. To achieve the target of $1 billion revenue, redBus has to grow at 42.58%
annual growth rate.

The robust online platform and various call centres have helped redBus handle 19000+ bus services
every day across 20+ states. redBus mostly focuses on intercity and interstate bus service, and the
growth in bus requirements for these segments have been 10 and 14.52 per cent respectively over the
past five years. This shows strong growth in the sector. redBus has also partnered with the bigger
OTAs and provided them with an application plugin names Seat-Seller. These OTAs mostly focus on
air, train, hotel and cab bookings and hence may not pose direct competition to redBus as redBus has
positioned itself to cater to the middle-class market. Also looking at the internet audience statistics,
redBus has been ranked nine, and that shows its strong position in the niche online bus travel market.

Many redBus customers have requested redBus to venture into the other domains like air, train, hotel
and cab bookings, but the big OTAs dominate these markets. Although this segment can be a big
source of revenue, the markets are highly competitive, and margins are razor-thin.
redBus was also suggested to look into global markets, but that requires detailed research into the
market. Hence redBus is looking for avenues for increasing its revenues.

Problem Statement

What strategy can redBus use to achieve future growth and gain US$1 billion dollars’ revenue by
2015?

Options

1) Vertical Integration –. redBus should start its own bus service on profitable routes.

2) Expand into global markets – redBus has achieved a niche role in the Indian online bus ticket
booking market by developing a robust platform. redBus should try to achieve a similar
growth in the other countries and should go global.

3) Increase the Portfolio of Services – The online travel industry is dominated by air, train and
hotel bookings. redBus can increase its portfolio offerings and get into other domains.

4) Focus on the Core – The online bus travel industry still has untapped market and redBus
should focus on further expanding in the same industry.

Criteria for Evaluation

1) Evaluating the infrastructure and operational capabilities of redBus to implement the strategy.
2) The new strategy should not be detrimental to their current business and relationships with
stakeholders
3) The ability of redBus to uphold the customer satisfaction and transparency standards that has
helped them gain their niche market position.
4) The monetary increase in revenue redBus will achieve from the new strategy.

Ranking of the Criteria

1) The second criterion ranks first as future growth must not happen at expense on existing
business
2) The first and third ranks second as redBus require expertise and also customer satisfaction is
core to their values
3) The monetary gain comes third
Evaluation of Option

1) Vertical Integration – The option ranks low on the first and third criteria as redBus currently
has no infrastructure or operational experience in running a bus. On the second criterion it
will rank low as starting a new service puts them in direct competition with the bus operators.
The option ranks moderate on fourth criterion as their current profit margin is 2.89% of
revenue but the bus service of luxury buses can give around 25% profit margin assuming
70% capacity utilization but it will require bugger investment.

2) Expand into global markets – The option ranks moderate on first and third criterion as it will
still require much expertise while moving into new markets. The option ranks high on second
criterion as the existing stakeholders will not be affected. The option ranks moderate in the
fourth criterion as redBus is not sure about profitability there.

3) Increase the portfolio of service – The option ranks high on first and third criterion as it
already has a robust infrastructure. The option ranks low on second criterion as it will put
redBus in direct competition of OTAs. The option ranks moderate on fourth criterion as
redBus will get higher revenues but the margins are razor thin.

4) Focus on the core – The option ranks high on the first and third criterion as it already has a
robust and scalable infrastructure. The option ranks high on the second criterion as the bus
operators and OTAs will be benefitted. The option ranks high on the fourth criterion as there
is still untapped potential in the market.

Recommendation

According to the above evaluation, redBus should focus on their core business and try to
expand in the market.

Action Plan

The bus travel industry is growing at a growth rate of 25%. redBus should take advantage of
this growth. It should become more aggressive against smaller players in the market and
increase its market share from 65%. It can target more regional government transport
companies and can partner with more OTAs. It should increase presence in Tier 2 cities and
help identify the bus operators more profitable routes through data mining and analytics.
Exhibit

Char t Title
400

350 345
300

250

200

150
133
100

50 54
26
00.4 4.1
1 2 3 4 5 6

Year – 1 – 2007 to 6 – 2012