Life, or at least business, is weird.
Five years ago, the two biggest business failure stores in China were bike-sharing company Ofo and coffee retailer Luckin. They both rose rapidly, got tons of media and investor interest, and then collapsed. Mostly due to management behavior.
But in the last month, some weird things have happened.
- First, Luckin Coffee has re-emerged. It went through a restructuring and got new management. And it is doing quite well. It now has +10,000 outlets in China.
- Second, Dai Wei, the founder of Ofo, has re-emerged in New York City with a new venture. He has launched a retail coffee business called About Time Coffee. It has several prime locations in downtown New York and they take their orders through their mobile app and do lots of customized discounts and coupons. At first glance it looks like a copy of Luckin Coffee. You can’t make this stuff up.
Now About Time is not really doing the Luckin Coffee model, although that is what most of the press reports are saying. They are also speculating on why he is in New York and seem to have forgotten he was blacklisted in China.
But regardless, it’s an odd coincidence that he is doing new retail coffee. I thought I was worth talking about these two companies. I generally like both of them.
Ofo and Luckin Both Pioneered Really Innovative Business Models.
I wrote a lot about both of these companies five years ago. If you looked past the management behavior and scandals (and lack of coffee drinking in China), they were both really interesting business models.
- Ofo created a bike rental business that didn’t need people or stores. Putting bikes on the streets with a mobile app and smart locks made them cheap and super convenient to use. It was clever and scalable.
- Luckin Coffee created an online-merge-offline version of retail coffee. They shifted all consumer interactions to a mobile app and them put tons of convenient locations all over town for pick-up. Again, it was clever, cheap, convenient and scalable.
Both businesses were highly innovative. Neither was ever going to become a tech giant. But they were both worth studying.
So it’s not surprising that both have survived. Bike-sharing is still really common in urban centers of China. And the Luckin model is showing up around the world in different formats.
I thought it was worth going through exactly why Ofo failed. Luckin suffered from very slow demand growth. But Ofo had tremendous demand and still failed. That’s an interesting situation. Here are the 5 reasons why Ofo failed.
Reason 1: Ofo Underestimated How Long Money Wars Can Last in China. And They Didn’t Preserve their Capital.
Money wars are common in China. A new business is launched (Groupon, social media, online video, food delivery) and lots of venture-backed competitors jump in and fight for customers with capital. They subsidize services, pay for referrals and so on. And it works.
Because spending big usually gets you get more market share, which then lets you raise more money (at a higher “valuation”) and that lets you spend even more. Whoever fundraises the most aggressively tends to pull ahead in the market. A few market leaders emerge and the rest die off. Ofo did all this successfully and ended up a market leader, along with Mobike.
So they did fairly well in the money war early on. However, that was not the end.
Even after the leaders have captured the market, these money wars can keep going for a long time. For example:
- Meituan and Ele.me fought for years and years in food delivery. They both had operating losses forever.
- Online payment services Alipay and Tencent Wallet are still probably running at a loss or just above break-even.
- Online video (iQiyi, Tencent Video) has been particularly unprofitable in China forever (although that has a lot to do with the economics of licensed content vs. ad revenue). Although iQiyi has just reached profitability this year.
My favorite example of these money wars was the +10 year fight between Ctrip vs. ELong (then owned by Expedia). Both became market leaders rapidly but the money war then lasted about a decade. After losing hundreds of millions of USD per year, Expedia finally sold their stake in ELong and exited. Ctrip quickly bought their stake in ELong.
Ofo did well in the initial phase of the money war for bike-sharing. But they then ran out of capital and could no longer compete with Didi, Mobike / Meituan and Hellobike / Alibaba. They couldn’t match them in marketing spend, subsidies and new bikes deployed.
This was all about the competitive dynamic. There is nothing inherently unprofitable about bike-sharing. It’s not a cash machine but it can get to operational break-even fairly easily. But money wars can be brutal. And Ofo didn’t save their capital for the long fight.
Reason 2: Ofo Went International Before Winning in China.
This is a minor point. But Ofo went international in 2017. They launched in the USA, Europe and lots of other locations. This took time and money – and likely exacerbated Reason 1. And going international wasn’t really necessary.
Launching operations in the USA, Europe and other locations probably helped their “valuation”. But it also meant buying lots of bikes and placing them all over the world. And there wasn’t a strategic requirement for them to do this. Ofo’s success or failure was always going to be determined by their success or failure in China.
Going international is usually something China’s digital giants only do after they win in China (like Didi, TikTok and Alibaba). Or if they need to avoid larger domestic competitors (like Huawei in the 1990’s or OnePlus today).
Anyways, in retrospect going international was an expensive mistake. But not a huge one.
Reason 3: Ofo Stayed a Stand-Alone Bike-Sharing Company, Which is Not Competitive Long-Term.
This was a bigger factor.
Lots of great services are not great stand-alone businesses. Sometimes the economics just aren’t strong enough to compete and grow. Sometimes the service makes more sense as part of a broader consumer offering.
It was clear early on that bike-sharing didn’t have the economic power to compete as a stand-alone company. It just didn’t throw off enough cash. Digital China is a rough sport and you need to get big. A successful bike-sharing business is a $2-3B mobility company. But a dominant ride-sharing business is a $50-100B mobility company. You’re just too small of an animal in the jungle.
In China, this was even worse because you had 3-4 giants that dominated the consumer-facing markets (Alibaba, Baidu, Tencent, ByteDance, etc.). They were always going to go after any service that got lots of usage (like bike-sharing). Digital China is mostly a team sport. And you really want to be on team Alibaba, Team Tencent, Team Didi or other.
In addition to its smaller size, it was also clear that bike-sharing was going to be part of a more comprehensive mobility service. It was clear that cars, taxis, metro, bus, bikes, scooters and such would all be one integrated “get me from here to there” super-mobility service.
So it was always pretty clear that bike-sharing was going to end up as a service within a larger business. And Ofo had done deals with Didi and Alibaba / Ant Financial early on so things looked fine.
But then something happened in these relationships (see Reason 4) and somehow Ofo ended up a stand-alone business. Plus, Dai Wei made several statements about wanting to stay an independent company. I was never sure if that was negotiating language or if he actually meant it.
I don’t know what happened.
- Didi ended up with Bluegogo plus their own Didi bike service.
- Alibaba partnered with HelloBike.
- Meituan acquired Mobike.
- Ofo ended up alone.
The big dance partners were all gone and Ofo ended up a stand-alone company. So even without the money war problems (Reason 1), Ofo was not positioned well long-term as a stand-alone business.
Reason 4: They Didn’t Kiss the Ring of Didi (and Maybe Alibaba)
Now we’re getting to the really big reasons.
All through 2017-2018, I was hearing rumors of discord between Ofo and Didi (their primary partner). I don’t know if they were true but I was hearing them a lot.
And then in late 2017, Didi launched Didi Bikes. And then they acquired Bluegogo a few months later. That was a bombshell. Something was definitely bad between Ofo and Didi. It was like your wife announcing she was going to date other guys.
Over the next year, I heard rumors and press reports about 3(?) rounds of negotiations between Ofo and Didi / Ant Financial. And in each case, they all ended up falling apart. Again, I’m not sure what really happened but the stories weren’t good.
And this souring relationship is reason 4. If you are a bike-sharing company in China, you 100% cannot have a conflict with Didi. You have to avoid conflict with them at all costs. In fact, you should be doing everything you can to make sure they really, really like you.
Didi is the mobility giant of China. It can put you out of business if it wants to. If the management at Didi was evenly mildly upset at Ofo, their management should have gone and apologized. They should have done everything possible to build a good relationship. That’s good business in general. But it was critical in this case.
I can’t imagine how or to what extent that partnership fell apart, especially after multiple rounds of investment. But keeping Didi and Alibaba really happy was a top priority for Ofo. And something went very wrong.
Last Reason: Ofo Didn’t Recognize and / or Address Management Problems.
By mid-2017, Ofo had it won. They had a great service with massive consumer adoption. They were one of two market leaders. And they had partnered with Didi and Alibaba. Awesome.
And then somehow they grasped defeat from the jaws of victory. They ran out of money. They stayed stand-alone. They broke with Didi and Alibaba?
I don’t really know what happened. But I do know that it wasn’t the market or their competitors that took them down.
Ofo clearly had problems at the management and / or Board level. There’s nothing wrong with that. It’s common. Every team has weaknesses and gaps. You just have to identify them and fix them.
- Sometimes it’s at the CEO-level. For example, Facebook brought in Sheryl Sandberg to help Mark Zuckerberg. Eric Schmidt joined Google.
- Sometimes it’s with the CFO and fundraising. For example, Jack Ma hired PE-veteran Joe Tsai early on to help with fundraising.
- It could be at the Board level. Or the mid-management.
But for some reason, the problems at the management and / or Board level at Ofo didn’t get fixed. Or maybe not in time. That’s my take as an outsider watching. But I wasn’t in the room.
One explanation I kept hearing was that certain veto rights were held by certain people on the Board. So changes couldn’t be made. Possible?
Anyways, I’m guessing on this last point. I suspect a Harvard Business Case is going to be written about Ofo at some point – and then maybe we’ll know the full story. But that’s my take.
Overall, I still like the Ofo and Luckin Coffee business models. Very clever small to medium businesses.
Photo by Chris Griffith, Creative Commons license with link here.
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.
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