Letter of Transmittal

To: Mr. Phanindra Sama,

CEO, Redbus

From: XYZ

KPMG

Date: 30th August 2012

Subject: Recommendation to strategize for future growth of Redbus

Please find below the report which evaluates and analyzes the current position of Redbus.
The report consists of the current scenario of the bus travel industry in which the company
operates, the possible alternatives to achieve its goal, evaluation of these alternatives and
recommendation of the best possible course of action which is aligned with the company’s
objectives.

Sincerely,

XYZ
 Summary

Situation Analysis:

Redbus has achieved significant growth since its inception in 2006. It has a 65% market share
in online bus ticket booking industry. The expansion of manufacturing and services has
increased the demand for inter-city and inter-state bus transport. The market size of bus travel
industry in India is about US$ 2.5 billion and growing at an annual rate of 25%. Internet
penetration increased from 0.66% in 2000 to 10% in 2011, which has increased the internet
user base in the country. More people are now accessing travel industry through internet. The
company has multiple sources of revenue generation such as selling applications, plug-in
tools, charging commissions and providing market research and analytical insights to bus
operators and manufacturers.

Problem Statement:

Decide the future course of action for growth to reach a turnover of US$ 1 billion by 2015.

Options:

1. Vertical Integration, i.e. launch own private bus service

2. Launch operations in International markets
3. Expand the portfolio with other online service offerings
4. Focus on company’s core offerings
Criteria:

1. Profitability/ Revenue generation

2. Capital Investments
3. Competition
4. Competency/ Strengths of the company
Evaluation:

All the options are evaluated and analyzed thoroughly based on four criteria.

Recommendation:

Option 4. Focus on core business.

Action Plan:

Detailed action plan is provided to implement the recommended option to achieve the target.

1
Redbus, launched in 2006 as a bus ticketing company revolutionized bus travel industry by
bridging the demand and supply gap through technology platform along with physical
network. Company had become a well-known brand in India by 2012.

Situation Analysis:

By 2012, Redbus became largest bus ticket company in India in almost all aspects like
serving largest network of bus operators, ticket sales, distribution outlets and number of
bookings per day. Company had a market share of 65% in online bus ticket booking industry
during 2011, and annual revenue of company is INR 345 million.

The expansion of manufacturing and services led to growth in demand for inter-city and
inter-state bus transport (Exhibit 1). The market size of bus travel industry is US$ 2.5 billion,
growing at an annual rate of 25%. With about 220 million tickets sold annually, the market
potential in terms of volume is huge.

Demand for internet and communications technology in India increased since 2000 and
internet penetration increased from 0.66% in 2000 to 10% in 2011. This contributed to the
growth of online travel market in India from mere INR 62.5 billion in 2007 to INR 378.9
billion in 2011 (Exhibit 2) and is expected to continue to grow at 50% per annum which
indicates a significant growth opportunity for Redbus.

The company has multiple sources of revenue such as revenue from sale of BOSS application
to bus operators, sale of Seat Seller plug-in to OTAs, commission charged to bus operators
for the sale of tickets, selling market research and analytical insights to bus operators to
suggest them new profitable routes and to bus manufacturers to share customer’s preferences
on types of buses.

Problem Statement:

The company targets to reach a turnover of US$ 1 billion by 2015. To achieve this target, the
company needs to strategize the action plan for further scalability and growth.

2
Options:

1. Vertical Integration, i.e. launch own private bus service

2. Launch operations in International markets
3. Expand the portfolio with other online service offerings
4. Focus on company’s core offerings

Criteria for Evaluation:

1. Profitability/ Revenue generation

2. Capital Investments
3. Competition
4. Competency/ Strengths of the company

Evaluation of Options:

Option: 1

Operating cost for buses is high, whereas profit margin is low (Exhibit 3). So, profitability
and revenue will not be significant.

Significant capital investment would be required for acquiring buses, and their maintenance.

Private and Public bus transport facilities already exist. Redbus will not have any competitive
edge over them. Moreover, starting own buses will negatively impact the relationship with
existing operators and will affect its core business.

Company has no prior experience of operating buses and it will require development of new
network and competencies. But the company can leverage its market research and analytical
capabilities to identify the most profitable routes to launch new buses.

Option: 2

In India, due to high population revenue generation is high. Other continents have population
even less than the no. of internet users in Asia (Exhibit 4). Similarly, in Asia, only China
appears to be a potential market other than India in terms of internet users and population
(Exhibit 5). Therefore, other countries will not provide high customer base to generate
revenue.
3
High capital investment would be required for setting up call centres and operations across
new countries.

There would be an existing bus network in other countries and Redbus will not have first-
mover advantage in other countries as in India.

The company can leverage its existing technology in India for expanding in international
market. But the global markets are complex and requires in-depth study and analysis of
country- specific factors like socio-economic trends, existing transport infrastructure, internet
penetration, population density and growth. Also, the company will have to collaborate with
local bus operators, travel agents and other stakeholders in new countries.

Option: 3

Revenue growth potential is high as the online travel industry is growing at an annual rate of
50% and is expected to grow at same rate in coming years. But the profit margins are razor-
thin in air travel, cabs and hotels which would affect the profitability.

The company can leverage its existing technology platform and infrastructure for integrating
add-on services with bus ticketing. Hence, expenditure required in technology would be low.
But due to intense competition, expenditure required would be high for marketing and
promotion.

Competition is huge as the concept of multiple online service offerings is dominated by some
of the OTAs like MakeMyTrip, ClearTrip, etc. (Exhibit 6). Redbus generates 20% of the
bookings through OTAs. Competing directly with OTAs will hamper the existing relationship
and revenue stream from these OTAs.

Company can aggregate other services as these are within the competency of the company.
But this might shift the focus of company from its core business of selling bus tickets and
might increase the operational complexity and negatively impact the existing business.

Option: 4

The online commerce industry is growing at 45-50% per annum, and bus transportation
industry is growing at 25% per annum with US$ 2.5 billion market size in the country. Socio-
economic trends are also positive with high GDP growth rate of about 7%. Hence there is a
significant growth opportunity in the core business itself in terms of revenue and profitability.

4
Minimal Investment would be required to scale up the business and network. Company can
leverage its market research and analytical capabilities to identify untapped potential growth
areas, i.e. Tier-III and Tier-IV cities and rural areas, and it can collaborate with more Road
Transport Corporations (RTCs)

Competition is not significant in India as Redbus is the market leader with more than 65% of
market share. Existing competition is generally regional. This puts company in advantageous
position in high growth market with high market share.

Existing business is the core competency of the company. With high population of the
country (1205.10 million) and low existing internet penetration (11.37%) (Exhibit 5), there is
a huge potential for growth in no. of people using internet in coming years which would
increase bookings through online platform.

Recommendation:

Option 4: Company should focus on its core business offerings and reach the potential growth
areas that remain untapped.

Action Plan:

Company should do market research and analysis to identify untapped growth areas to be
targeted. Company should then collaborate with local operators, travel agents and Road
Transport Corporations (RTCs) in these areas. Company should invest in Marketing
promotion to encourage use of more online bookings rather than phone bookings. Company
should further strengthen its technological capabilities with the help of Amazon to handle
much larger volume of transactions.

Word Count: 1092

5
Exhibits:

100

80% 45%
55%
60% 75%
85%

40%

55%
20% 45%
25%
15% Private Operators State Transports
0%
Urban... Intra-district & Inter-distr... Intrasta...
...
Exhibit 1: Private Bus Operators (Market Share) (Demand Projection for buses)

400 378.9

300 252.58

200
149.53
105
86.3
100
62.5 18.96 63.4
35.3 47.35 Industry
Online Travel
Online Non-Travel Industry
0
D D D

Exhibit 2: Online Commerce Market Size (INR billions) in India

6
 Economics for Private Bus Operators
Volvo Luxury
Cost Component Percentage Cost Percentage Cost
INR/ Km INR/ Km
Fuel 12.6 44.06 8 46.51
Personnel 2.1 7.34 2.5 14.53
Maintenance 2.8 9.79 1.75 10.17
Depreciation 5.6 19.58 1.85 10.76
Interest Cost 3.4 11.89 1.5 8.72
Misc. 2.1 7.34 1.6 9.3
Total Operating Costs 28.6 100 17.2 100
Earnings Per Km. 36 21
Profits Per Km. 7.4 3.8
Assumptions:
1. Capacity Utilization is 70%
2. A Volvo bus will run 500 km/day and a Luxury bus will run 350 km/day
3. The cost overheads do not include marketing offices, credit cycle costs etc.

Exhibit 3: Economics for Private Bus Operators

63.16% 78.61% 67.66%

4000 42.94% 80%
2000 27.45% 40.25%
15.59% 40%
Proportion of Global Internet Users (%)
0 0%

Europe Middle East

22% 4%
North
America
11%
Popultion Internet Users
Latin America (in millions) (in millions)
Asia 11%
45% Oceania/ Internet
Australia
1% Penetration %
Africa
7%
Exhibit 4: Global Internet Usage Statistics

7
 1500 100%
Proportion of Asia Internet Users (%)
82.54%
79.48%
1200 80%

900 60%
Japan
India 9% Indonesia
13% 5%
40.05% S. Korea
600 40%
4%

Rest of Asia 22.12% 21.62%

300 19% 20%
11.37%
China
0 50% 0%
China India Japan Indonesia S. Korea Rest of Asia

Popultion Internet Users Internet

(in millions) (in millions) Penetration %

Exhibit 5: Asia Internet Usage Statistics

138%
10000 140%

120%
8000
99%
100%
82% 80% 78%
6000
80%
63% 60%
60%
4000
42%
40%
2000
12% 20%
8%
0 0%
Indian MakeMyTrip Yatra ClearTrip Expedia Travel & MustSeeIndia IndiaRailInfo redBus HolidayIQ
Railways Online Network

No. of Unique Visitors % Change

(in thousands)

8
9