Letter of Transmittal

From:

Consultant

McKinsey & Company

World Trade Center,

To:

Phanindra Sama, Charan Padmaraju and Sudhakar Pasuounuri

Executives

redBus

Whitefield, Bengaluru, Karnataka 560055

October 23, 2020

Subject: Recommendation on future course of action of redBus.

Hello,

Please find enclosed the report and recommendation on the future course of action of redBus.
The report takes into account the current scenario and recommends the best possible option.

Thanks and Regards,

Truly,

(Consultant)

SUMMARY

Situational Analysis: redBus operates in the bus ticket booking industry. Size of the industry
is growing at a fast pace. redBus has achieved a growth of 1000 times over the past 6 years.
redBus faces three major types of competitions and have multiple revenue streams.

Problem Statement: Choose the future course of action for redBus to achieve revenue of
INR 74 billion by 2015.

Options:

1. Lauching it's own fleet of buses

2. Expansion into different countries
3. Diversify it's service portfolio
4. Focus on core business

Criteria:

1. Potential of growth:
2. Market Demand:
3. Area of Expertise:
 4. Expenditure Required
5. Competition Present:

Evaluation of Options:

1. Lauching its own fleet of buses: redBus has no expertise in running own fleet of
buses. Moreover, there is high CAPEX required and huge competition from private
players
2. Expansion into different countries: Depends upon the factors such as socio-economic
trends, population density, bus travel infrastructure, penetration of internet etc. Will
vary in different countries
3. Diversify it's service portfolio: Entry barrier is huge with five or six large OTAs
having major market share.
4. Focus on core business: There is huge potential of growth and bus travel industry is
growing. Moreover, redBus is the market leader of the niche of online bus travel
booking.

Recommendation: redBus should focus on its core business and should penetrate the market.

Situational Analysis

redBus operates in the bus ticket booking industry. It was launched in 2006, Currently works
with 800+ bus operators, 40000+ agents, and 10+ million customers.

Since the 1990s demand for bus travel was increasing at a fast pace. The current market size
of bus travel and expected future market size seems quite optimistic (see Exhibit 1).

Processes: Indian bus travel market has always been very fragmented with a large number of
players of varying sizes (see Exhibit 2)

Till 2006, intercity bus transport heavily dependent on travel agents as an interface between
buyers and suppliers.

Then redbus came in 2006 and rectified it. It connected bus travellers directly to bus
operators. It also introduced information symmetry and transparency to the entire process.
The bus operators can upload their inventory on an application plug-in called BOSS (Bus
Operators Software System). For non-computerised bus operators, redBus manually uploads
their inventory into the system after taking inputs from them on phone in real time. For OTAs
redBus provided Seat Seller plug-in. Offline travel agents also use redBus platform in
exchange of commission.

redBus achieved a growth of 1000 times from INR million 3.5 in FY2007 to INR million
3450 in FY2012

redBus has three major types of competition. The First one included the big players like
IRCTC, and other big OTAs. The second one included individual travel agents. The third one
included direct competition with online bus ticket-booking companies like Travelyaari,
Ticketgoose, Abhibus, etc. redBus has collaborated with the first type of competition by
providing them application plug-in (Seat Seller). They also collaborated with the second type
of competition by allowing them to use redBus's platform in exchange of commission. The
third type of competition are small regional players and do not pose any major threat.

revenue stream: redBus has multiple revenue streams. The first one was the revenue
generated from sales of BOSS application to bus operators. The second one was from the sale
of Seat Seller plug in to other OTAs. The third one was the commission charged to bus
operators for sale of tickets via redBus. The fourth one was the commission charged form
individual travel agents who uses redBus platform for sale of tickets.

Problem Statement

Choose the future course of action for redBus to achieve revenue of INR 74 billion by 2015.

Options

1. redbus can launch its own fleet of private buses on the most profitable routes.

2. redBus can expand its operations into different countries.

3. Alongside bus ticket booking, redBus can also diversify its portfolio of services by
providing other services.
4. redBus can stick to its core business and penetrate deeper into the business of bus travel
booking.

Criteria

Criteria with decreasing order of importance are given below:

1. Potential of growth: Growth potential in the most critical criteria since the objective is to
grow and achieve revenue of INR 74 billion by 2015

2. Market Demand: Market demand will dictate the growth of company.

3. Competition Present: Competition poses a major hindrance to growth and hence given the
third priority.

4. Expenditure Required: redBus has already gained trust of venture-capital investors and has
already established itself as one of the most capital-efficient firms. Hence raising capital will
not be very difficult.

5. Area of Expertise: Leadership at redBus is based on problem solving culture and

comprised of young, passionate and dynamic individuals who are quick to gain expertise of
unknown territory.

Option Evaluation

1. Launching it's own fleet of buses

Criteria 1: High growth potential. redBus can also leverage it's capabilities in analytics and
data mining and can launch it's buses on most profitable routes. Moreover, the bus travel
industry is growing at a rate of 25% since 2012

Criteria 2: There isn't much demand of new buses that redBus can fulfil.

Criteria 3: Huge competition from private players as well as RTOs.

Criteria 4: High amount of CAPEX required.

Criteria 5: No expertise in running own fleet of buses.

2. Expansion into different countries

Criteria 1: Depends upon the factors such as socio-economic trends, population density, bus
travel infrastructure, penetration of internet etc. Will vary in different countries

Criteria 2: Demand is present in other countries for a service like redBus

Criteria 3: No significant competition present in other countries.

Criteria 4: Technology based ecosystem is already present. But gaining the trust of bus
operators and travellers will require significant expenditure.

Criteria 5: redBus doesn't has much of operations in different countries.

3. Diversify its service portfolio

Criteria 1: Value of online travel industry is INR 570 million and is growing at rate of 50%
per annum. Even if redBus can tap into airline ticketing industry the potential of growth can
be significant

Criteria 2: Demand of various online bookings is increasing.

Criteria 3: Huge competition present from other big OTAs. redBus currently ranks at number
9 in terms of number of unique visitors among travelling websites.

Criteria 4: Entry barrier is huge. Significant expenditure is required in terms of continuous

innovation and upgrades on end user interface and service offerings. Meanwhile, margins are
very low.

Criteria 5: redBus will be tapping into newer customer base and offering new services. Not
much market expertise is there.

4. Focus on core business

Criteria 1: There is huge potential of growth. Bus travel industry is growing at very fast rate.

Criteria 2: Market demand is increasing since online commerce market is growing by 45-50%
and online travel comprised of 80% of online commerce.

Criteria 3: redBus is the market leader of the niche of online bus travel booking.

Criteria 4: Technology based ecosystem is already present. No significant CAPEX is

required.

Criteria 5: This is redBus's core area of expertise as evident by huge success that redBus has
gotten since its inception

Recommendation

redBus should focus on its core business and should penetrate the market. Bus travel market
will be of INR 361.32 Billion in 2015 and if redBus is able to capture 20% of bus travel
market, it should be able to achieve its objective

Action Plan

Since internet penetration is 10%, collaborate more with individual travel agents in smaller
towns where internet penetration is low. redBus can also utilize data mining and analytics to
figure out the regions which requires optimisation. redBus can keep on focussing on it’s core
competency and can capitalize on growing online commerce market which is growing at 45-
50%. The share of online travel industry as a part of online commerce industry is 75% on an
average.
 EXHIBIT 1: MARKET SIZE OF OVERALL BUS TRAVEL INDUSTRY

Year 2012 2013 2014 2015

Market Size (In US$ 231. 289.062 361.328
Billions) 185 3 5 1

EXHIBIT 2: MARKET SHARE OF BUS OPERATORS OF DIFFERENT SIZE

Fleet Market
Size Share
<20 65
25-75 25
>75 10