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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