Back to square one? Why are "asset-light" players in the sharing economy buying up property and cars?

FOUR years ago, an advertising and public relations executive penned these words about four up-and-coming companies: "Uber, the world's largest taxi company, owns no vehicles. Facebook, the world's most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world's largest accommodation provider, owns no real estate. Something interesting is happening."

While then-Havas Media executive Tom Goodwin's observation seemed perceptive at the time, these revolutionary business models have evolved to the point that the statement no longer holds true. Today, at least two of the four practise what Mr Goodwin said they eschewed, shrugging off the "asset-light" label with investments into vehicles and property.

This development, which seems to run counter to the layman's understanding of how the sharing economy works, is no surprise to experts. They told The Business Times that it was bound to happen as such companies try to manage the balance of supply and demand to grow their businesses.

Assets galore

The sizeable fleet of cars Uber had to offload was a talking point when the ride-hailing company left the Singapore market in 2018. The company has not stopped spending on vehicles since; it will be receiving up to 24,000 sports utility vehicles from 2019 to 2021 in a deal it struck with Volvo in 2017, and its filing for an initial public offering in April 2019 revealed that it has spent more than US$1 billion on autonomous vehicle technology, including 250 self-driving vehicles.

Meanwhile, Airbnb has partnered a real estate developer to build and run a hotel-like apartment concept called "Niido Powered by Airbnb". The apartments are designed to be easy for residents to rent out, with smart locks on doors and built-in concierge services. In April, Airbnb announced a partnership with New York real estate developer RXR Realty to create, essentially, hotel rooms in New York City commercial properties, which can only be booked through Airbnb.

Companies following the same playbook in Singapore include Grab Holdings, Deliveroo and foodpanda in the ride-hailing and food delivery industries. A Grab spokesperson told BT that under GrabRentals, "We own a few thousands of vehicles... as part of Grab's ongoing efforts to outserve our driver-partners by helping them reduce their operating costs while providing quality vehicles."

Deliveroo and foodpanda are building central kitchens around the island to encourage high-demand eateries to set up operations in underserved areas. Deliveroo has three such kitchens, of which Deliveroo Editions Katong was the first, launched in April 2017. Measuring 3,150 sq ft, it is designed as a space for chefs to cook solely for delivery orders. A year later, the company launched Deliveroo Editions CT Hub in Lavender, which measures 3,207 sq ft and includes a small physical dine-in space.

It launched its Deliveroo Food Market at one-north's Alice@Mediapolis in March this year, its largest location so far at 3,930 square feet (sq ft), housing a fully automated dine-in space that can seat 40 people.

foodpanda has two central kitchens here, and plans to open a third in 2019 in a "central location", it told BT. Its Woodlands location is 3,100 sq ft with a 30-seat dine-in area and seven stalls, while the Mandai kitchen occupies 2,600 sq ft and has five stalls. Both Deliveroo and foodpanda declined to disclose the amount of investments in their central kitchens.

Meanwhile, Grab introduced a similar Kitchen by GrabFood service in Indonesia in 2018, and has indicated that it plans to set up a central kitchen in Singapore too. The company declined to comment on its central kitchen operations or plans for this article.

Focus on supply

The shift towards an asset-heavier model comes as the companies attempt to gain some control over supply in a system where the providers are free to move between platforms - as illustrated by the ride-hailing industry.

"Uber and Grab tried to be very asset-light, but what did they spend their money on? Incentives. They spent to control and secure the capacity of the assets," points out Lim Kuo-Yi, managing partner of venture capital firm Monk's Hill Ventures. Purchasing their own vehicles is simply "moving numbers from one column to another".

Ng Weiyi, assistant professor of Strategy and Policy at the National University of Singapore (NUS) Business School, adds that sharing economy companies have always had to focus on supply in one form or another from the very start.

"Uber was UberCab, and started out asset-based with a fleet of black cabs and the demand from that. Airbnb started out with Brian Chesky's and Joe Gebbia's air mattresses," Prof Ng notes.

And long before Airbnb started sinking funds into the properties themselves, it invested in ensuring the supply was sufficient and attractive to customers. Alongside convincing homeowners to join the platform, the company enlisted the help of professional photographers to boost the listings' appeal - a strategy it still uses today.

Prof Ng says: "It's always been about the supply side, and it was never about the demand side. The notion is that once the platform is attractive, the early adopters will come and it will snowball."

In addition, the level of demand a company can meet is contingent on the amount of supply available. Despite the costs involved in setting up central kitchens, Deliveroo and foodpanda think the boost to their businesses in underserved areas is well worth it, as the additional capacity will help them tap the growth they still see in demand for food delivery.

According to a study released in March 2019 by Deliveroo, 53 per cent of consumers in Singapore say their use of food delivery apps has become more frequent in the last two years, and more than 60 per cent have increased their spending on the apps.

Deliveroo Singapore general manager Siddharth Shanker tells BT: "We are also on track for another year of expansion in Singapore, as we add more restaurant partners and riders to cope with the growing demand. The scale of the opportunity in Singapore is huge, with a vibrant food scene and population of foodies, so we are optimistic about the food delivery industry and Deliveroo's continued growth and expansion."

He adds: "Opening a restaurant can be incredibly expensive and risky, but with Editions, restaurants are able to pinpoint key locations into which they can expand and do so at a lower cost since we have already invested in the infrastructure. And since we take care of ordering and delivery, the restaurants need only to focus on food preparation."

Says Luc Andreani, managing director of foodpanda Singapore: "There is definitely an upfront investment that we would need to put in, things like rent and maintenance. However, the decision to open a favourites by foodpanda outlet comes on the back of strong consumer insights and data on the demand for food options in a particular area."

Mr Andreani notes that despite intense competition, the industry is still seeing exponential growth year-on-year, and foodpanda continues to focus on being the market leader across Asia Pacific. "We've been able to maintain and grow our market share because we really understand the needs of our customers and offer them exactly what they want - it's as simple as that," he says.

As the delivery players focus on generating their own supply, a ripple effect on existing shared kitchen facilities is emerging. In July, shared kitchen operator Smart City Kitchens (SCK) said it had filed a formal complaint to the Competition and Consumer Commission of Singapore (CCCS) against Deliveroo and GrabFood, after the two companies stopped providing food delivery services for restaurants using SCK's facility in Tampines.

While the eateries still have access to foodpanda and other platforms, SCK general manager Warren Tseng said that Deliveroo's and GrabFood's actions will stifle innovation and penalise his tenants. Lawyers that BT spoke with said that some considerations the CCCS will likely take into account include whether Deliveroo or GrabFood have dominance in the food delivery market and are abusing it to increase their market share, and whether their actions will result in fewer choices for consumers.

Risk reduction

Companies may choose to expand via asset ownership in existing verticals as an alternative to the riskier strategy of exploring other asset-light businesses, says Ben Choi, assistant professor in information technology and operations management at Nanyang Technological University (NTU).

"I think these companies have seen greater benefits in acquiring vertical expansion rather than developing horizontals. Each of these expansion strategies entails vastly different operational thinking," Prof Choi says. For example, when acquiring verticals, companies focus on ways to improve their existing operations, while horizontal expansions require a more exploratory and risk-taking approach.

In addition, while horizontal expansion is relatively common in the platform business model used by companies like Grab, the ease of doing so is also a drawback when it comes to gaining an edge over competitors. Since the platform model involves "essentially providing mechanisms to facilitate business transactions" and these mechanisms are not too difficult to duplicate, the businesses are often pulled into price competitions when an alternative platform provides a similar mechanism for the same type of transaction, says Prof Choi.

New regulations that remove or limit loopholes these companies once exploited are another push for them to switch up their tactics, says NUS' Prof Ng.

For instance, drivers are now required to undergo training and obtain a private hire car driver's vocational licence to work for ride-hailing companies in Singapore, and only cars with the private hire vehicle decal can be used for such purposes. Other countries are pursuing stricter regulations; in California, legislators recently passed a bill requiring companies like Uber and Lyft to treat their contract workers as employees.

"In most cases, a big advantage of these sharing economy companies is their agility as startups. This means that they move quickly, often ahead of regulation. And when regulation falls, they then have to scramble," Prof Ng notes.

Making business sense

Overall, it appears that this gambit of taking on assets could bode well for the companies. Mr Lim, whose firm Monk's Hill Ventures prefers asset-light companies, says that a company turning to an asset-heavier strategy is not necessarily riskier or a turn-off to investors, if the move helps it better hold onto demand for its platform.

"The key thing to understand is, will the additional dollar lead to additional investment returns that will justify the investment that we're putting in? If a company we invest in started out asset-light, reached a certain scale and decided to invest in assets that will make it stickier and more dominant in the market, to extract more value from the demand or supply side, then the business strategy makes sense and we will not be averse to investing further," Mr Lim says.

In fact, investors place high value on a startup's ability to think on its feet and tweak its approach when faced with new challenges, says Willson Cuaca, co-founder and managing partner of venture capital firm East Ventures.

"Assets or no assets, it doesn't really make much difference to investors," Mr Cuaca says. "It's about whether you trust their story: you see if there's demand, and they are able to explain their rationale for their solution and how they will get there. These solutions won't be 100 per cent accurate - there is a lot of competition and they have to stay flexible. But the biggest reason why we invest in certain startups is the team and their ability to navigate change and come up with innovative solutions."

Such asset acquisitions are also less risky than they once were, since the companies are using relevant, up-to-date data to make these decisions.

Singapore hotel booking and management platform RedDoorz, which takes budget hotels on board as franchisees and revamps their facilities before listing them on its website, has moved into leasing and operating its own hotels in areas where it has identified a low supply of existing hotels to work with. This is done using its proprietary supply management solution RedEagle, which combines publicly available data with the company's own to create a colour-coded map of supply and demand.

Among the 1,400 properties on the platform, more than 20 are leased and operated by RedDoorz, comprising close to 1,000 rooms in total. Given that leasing and operating yields a slower growth rate than franchising existing properties, the company intends to keep the proportion of leased and operated hotels low, RedDoorz founder Amit Saberwal tells BT.

"If there are areas where existing properties are not available, then we have no option but to lease and operate our own. It's not our preferred way of doing things... (but) we do it very scientifically."

Adding that about half of its leased and operated properties are located in Singapore, Mr Saberwal says: "Singapore as a market is important for us, and the availability of properties here is limited, so as and when the opportunity comes up, we will happily take over more properties on a lease-and-operate model (here)."

Pros and cons for consumers

Naturally, consumers will benefit from having their needs addressed with supply in the locations and forms they most desire. However, there is the risk that diversity will diminish as money is funnelled mainly to investments that will yield the most returns.

For instance, consumers may see fewer disruptive innovations as companies focus on consolidating existing operations, says NTU's Prof Choi. This is because the companies will likely have less bandwidth or motivation to explore new opportunities if they don't provide immediate benefits to existing verticals.

"Additionally, as these companies expand vertically, new entrants will find it increasingly difficult to innovate due to the rapidly saturating market and entrenched consumer habits. To illustrate, new startups will find it extremely challenging to create additional mobility solutions since consumers have already developed new habits in using electric scooters," he adds.

These companies also leverage customer data extensively in order to provide more targeted offerings, which opens up a whole other can of worms.

"It's two-sided," says NUS' Prof Ng. "It's good for us because we get choices optimised for our preferences. But on the other hand, we have to acknowledge the loss of data and control. And as these companies get bigger and bigger, the monopolisation of private data is immensely dangerous."

But, as Prof Ng adds, "That's a completely different story."