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The Acceleration of Asset Lite Business Models

The number of asset lite businesses is steadily increasing, as is the breadth of industries effected.  I first noticed them in the 1970’s, when Baron Hilton sold several flagship Hilton hotels while retaining management contracts that entitled Hilton Corporation to a share of revenue and earnings. Over the next two decades, Marriott Corp copied and then perfected the hotel management agreement business approach, coupling a Marriott franchise with a management agreement for any one of a growing stable of brands (Fairfield Inns, Courtyard by Marriott, Residence Inns, J.W. Marriott, etc. etc.), enabling absentee investor/owners.  It turns out, however, that asset lite business structures date back much earlier.

Franchises and Dealers
Early versions of asset lite businesses include franchise and dealer organizations. Soft drink and beer distributors, auto dealers and tire and repair franchises date to the early nineteen hundreds, as manufacturers needed mass distribution. The dealers furnished growth capital for manufacturers in the form of distribution outlets. Some of those early distributors not only still exist, but have become large enterprises and illustrated by the large regional cola bottlers and beer distributors.
But globalization, the Internet and the ubiquity of smartphones and other mobile devices have created an explosion in new forms of asset lite businesses. Some are services providing information on other businesses, others are becoming known as marketplaces,  and still others  may be filed under the rubric of “the sharing economy”.

Knowledge Experts Leverage Asset Holders
As more firms expand international distribution and outsource manufacturing, especially to Asia, they encounter the difficulty of managing complex supply chains. Those may extend into the interior of China, Malaysia, Indonesia and Viet Nam. Multiple languages, customs and duty requirements, inter-modal shipping, scheduling and departure dates of vessels and aircraft, and so on will hobble all but the largest and most sophisticated operator. As a result, many multinationals and importers turn to firms like C. H. Robinson to manage the flow of goods and merchandise. Robinson doesn’t own aircraft or freighters or rail lines, but its on-the-ground and onsite employees coordinate freight activity for thousands of businesses. Its balance sheet is far smaller than giant cargo ship owner-operators or freight airlines, but nonetheless produces attractive returns to shareholders.

Pharmacy Benefit Managers (“PBM’s) are best exemplified by Express Scripts.  Express Scripts occupies a complex interstice among drug manufacturers and wholesalers, individual patients, and payers and providers.  That is, an employee of Company A with a health insurance plan from, say, Anthem, goes to a Walgreens store and gets a prescription filled. Walgreens bills Express Scripts.  Express Scripts bills Anthem. Express Scripts negotiates discounts from the drug manufacturers, and shares some of that discount with Anthem and keeps the rest. It also keeps a little toll it charges Walgreens. The drug manufacturer has invested in R&D and expensive manufacturing facilities. Walgreens has invested in physical stores and drug inventory.  Express Scripts basically invests in software.  Asset lite Express Scripts yields attractive returns to its investors, while having made a minuscule investment compared to Walgreens and the pharma companies.

Marketplaces
While marketplace business models have been around for a while, growth is suddenly spiraling.  Marketplaces The Knot and WeddingWire serve customers in the bridal industry. Those businesses connect brides-to-be with wedding goods and service providers such as caterers, jewelers and wedding photographers. They charge fees for ad placement, much like the business they’ve disrupted: bridal magazines. One of the advantages they have over magazines is that brides that register with The Knot and WeddingWire know that their contact information will be passed along to various suppliers and that those suppliers will contact them.  That saves brides time, while the suppliers know the bride will likely have multiple offers so they must be competitive.
Registration models such as Expedia and Orbitz take the place of travel agents.  Marketplace PriceLine auctions travel capacity that increases utilization of hotel rooms and airline seats that might otherwise be vacant. Open Table inserts itself into the business of making restaurant reservations.

Information About Information
While information aggregators have been around for a century or more, collecting and distributing information about stock prices, or construction activity, or oil exploration, drilling and production, there are now companies providing information about information. Trivago trolls travel websites, which are collecting prices or contracting for hotel rooms and aggregates it by city. That’s about as asset lite as one can get.

Conversion of Consumer Assets to Commercial Assets
There is now a newer twist on this business design. That twist takes existing, consumer properties and converts them to revenue-producing assets. That twist is best illustrated by Uber and AirBNB.  Also labeled marketplaces, Uber, its competitor Lyft and AirBNB represent a new class of asset lite. Not only do they not own the assets they collect a toll on, those assets were previously largely idle, and furthermore were purchased for consumption, not investment. Using the intersection of the ubiquity of real-time intelligent communication devices and otherwise idle assets, these businesses have created tremendous value for their investors and disrupted markets (e.g.-taxi companies and hotels).

Future Valuation?

Clearly asset lite business models are widely accepted by investors; indeed, given valuations, in many cases they seem to be preferred.  However, as a long run investor, I’d rather own the hotel and real property than a sales commission agreement with the hotel. But I might very well be a distinct minority. Entrepreneurs are racing to develop the next asset lite model, with a lot describing themselves as the “Uber of X”. I don’t think there are that many Uber-opportunities that won’t be exploited by, well, Uber. As to what industries will find themselves upset by asset lite businesses, we’ll see won’t we?

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