Author| Song Zihao
Editor | Li Xin
In the business world, there are many stories of giant winners taking all, and small and medium-sized enterprises struggling. But the co-working track seems to be the other way around. On the one hand, giants lose money all year round, and their stock prices keep falling; on the other hand, small and medium-sized enterprises report that the market is good, and new players are constantly pouring in. A wonderful scene of a giant moving forward with a heavy load and a quiet time for small and medium-sized companies emerges in front of us.
Look at the Chinese and American giants. WeWork, the originator of shared office in the United States, has an average adjusted net loss of nearly 2 billion US dollars in the past three years, and its valuation has also dropped from 47 billion US dollars at its peak to 2 billion US dollars; domestic shared office No. 1 From 2017 to 2022, a Ucommune has accumulated losses of over 4.3 billion yuan in five and a half years, and its market value has dropped by 60% from its peak.
The capital market now generally judges that shared office giants like WeWork are essentially “second landlords” labeled as technology companies. The simple understanding of this “second landlord” model is: first spend money to rent the office property, and then sublet it to corporate customers at a certain price after decoration, and earn the difference as a middleman. But what makes people puzzling is that the traditional second landlord is mostly making money, but the second landlord who adds “technology”, why can’t it work?
Compared with the poor performance of the giants, some practitioners of small and medium-sized shared office companies are full of confidence in the industry. An employee of “Chuangfugang”, Xiao Zhong, told “Leopard Change” that the projects around him are in good condition, “The project is fully rented, there is no vacant office, or there are very few vacant offices, depending on the venue, the good-looking apartments are average Customers can sign if they like it.” Chuangfugang is a shared office service provider, listed on the New Third Board in April 2016. Since 2017, although the net profit has fluctuated, it has always been positive.
Similar to the perception of the employees of “Chuangfugang”, although the “Oxi Science and Technology Innovation Space”, which was only established in May 2020, has just entered the industry for more than two years, the founders and operators believe that these two years are a breakthrough in the track. good time. “Compared with the previous time when the concept of shared office was popular, the operation of shared office is now more mature and the realization is more diverse. This track has a broader space for development, so it is transferred to this track.”
It seems that there are not a few companies with similar ideas. According to Qichacha data, 8,493 co-working-related companies were newly registered in the past year, a year-on-year increase of 37.65%.
Why are there more and more players? Mr. Luo, who has many years of experience in commercial real estate and shared office, told Leopard Change that there are many new players, mainly for two reasons:
On the one hand, the demand for investment in upstream commercial real estate has increased. Take Guangzhou as an example. Previously, the office buildings were mainly concentrated in Zhujiang New Town, Tianhebei, and Yuexiu. Now, there are more Pazhou West District, Financial City, Wanbo, Goose Zhangtan, Nansha, Baiyun, Huadu, etc. Every place has newly delivered A Class office building. There are too many office buildings, and investment and property upgrades are needed. Commercial real estate will introduce co-working companies.
On the other hand, some small and medium-sized enterprises in the market have demand for low-threshold and flexible office space. “The customer base is mainly offices and branches, and members of this type have strong leasing ability, and there are companies such as new media, consulting, and technology that are relatively easy to accept new things, plus 10-20 % of individual users.” Mr. Luo said.
However, he also said that the occupancy rate mainly depends on the location and price. If the overall quality of the space is average, the occupancy rate can only reach 70%. On the whole, compared with the “mass entrepreneurship and innovation” era of “mass entrepreneurship and innovation”, the total market demand now can only be considered average.
The giants are miserable, and the small and medium-sized enterprises are gearing up, why is there such a contrast? Is shared office destined to be a giant nemesis?
1. Giants turn from heavy to light
On March 18 this year, Apple TV launched the TV series “WeCrashed” (literally translated as: We are bankrupt), which tells the story of WeWork’s entrepreneurship.
This TV series starring Anne Hathaway and Master Leto tells the story of how Adam Neumann, the founder of WeWork, who is proficient in human nature, made Masayoshi Son invest $4.4 billion in 12 minutes, and how to make this company valued at $470 The billion-dollar unicorn nearly collapsed.
Similar to the plot in the TV series, burning money and losing money is the general impression of the investment community on shared office.
Aside from Neumann’s personal misconduct, the reason why shared office giants are in trouble is largely because companies are unable to resist the temptation to expand, and this expansion often leads to losses.
From the perspective of business model, the main income of shared office companies basically comes from three parts: member rent, value-added service income, and brand and marketing income.
Among them, rent is the largest source of income. For example, WeWork’s prospectus mentioned that of the company’s nearly $2 billion in rental income in 2018, the non-leasing business was only about $10 million.
The meaning behind this income structure is that if a company wants to maintain rapid revenue growth and soar its valuation, it needs to continue renting more venues to expand and increase the number of members.
But aggressive expansion comes at a cost. An industry insider said that unlike Internet companies whose marginal costs decrease as they expand, shared office companies do not have this feature. “Every time an office space is added, the cost of design, construction and maintenance will increase simultaneously.”
In contrast, in China, the growth logic of shared office is also burning money to expand, but the difference is that the first batch of companies to enter the market have caught up with the demand for “mass innovation and mass entrepreneurship” in 2015.
This has also allowed the giants to find an expansion model that now seems to be called “heavy bleeding”-industry mergers and acquisitions.
For example, Ucommune, which was invested by many well-known institutions at that time, acquired many competitors such as Hongtai Space, Wujie Space, Fangtang Town from 2017 to 2018, and its scale expanded rapidly, and its valuation was as high as 3 billion US dollars. .
However, when the market encounters a downturn, the companies acquired by the tailwind at high prices become a historical burden. According to the financial report for the fourth quarter of 2021, the revenue of Ucommune is only 303 million yuan, but the net loss is as high as 1.698 billion yuan. Such a huge loss is mainly because the goodwill impairment loss of Ucommune in the current period was as high as 1.5 billion yuan, but even if the goodwill impairment was excluded, the net loss still reached 198 million yuan.
Mr. Luo told “Leopard Change” that the occupancy rate of Ucommune around him is not low, reaching more than 80%, and high-quality projects can reach more than 90%. In his view, Ucommune lost money because the rent and maintenance costs invested were too high.
“Some projects can be profitable with an occupancy rate of 80%, but if the maintenance cost is too high, the full lease may not be profitable.”
Ucommune has indeed been making money at a loss.
In the 2021 annual report, Ucommune mentioned that the membership income from 2019 to 2021 was 558 million yuan, 423 million yuan, and 377 million yuan, respectively, but the operating costs significantly exceeded the income, which were 814 million yuan, 557 million yuan, 508 million yuan, which means that gross profit margins are -45.87%, -31.68%, and -34.75%, respectively. Among these high costs (as shown in the figure below), lease fees and operating costs together account for more than 70%.
What should I do if heavy assets can’t work? Nowadays, many shared office companies have begun to tell stories about light assets, focusing on value-added services, branding and marketing.
For example, Ucommune, its asset-light model is divided into two categories – U Brand and U Partner. U Brand mainly collects brand, consulting and service management fees from the landlord; U Partner provides the landlord with the right to use the space, and Ucommune is responsible for the operation and management, and the two parties share the income.
In April this year, Mao Daqing, founder of Ucommune, said in an interview that the industry is transforming to an asset-light model, and the model of self-sustaining venues will become a thing of the past.
WeWork also acquired Common Desk, a collaborative office operator in 2022. The company mainly shares a certain percentage of rent by helping to manage the space of the property. WeWork also said it will develop towards this model.
In March 2022, WeWork China officially launched the “WeWork China Pass”. Users only need to purchase a monthly black card to use office workstations and conference rooms in 60+ WeWork communities across the country.
However, there is still a question mark on whether asset-lighting works and whether it can re-attract the favor of capital.
2. The asset-light model, the savior?
In August this year, a16z, a well-known investment institution, announced that it would invest in a new real estate company, Flow, with an investment of up to 350 million US dollars. The founder of Flow, known by the Chinese as the international version of eggshell apartments, is Adam Neumann, who almost led WeWork into a cliff two years ago.
It seems that the scythe of the master does not cut the unknown, and some people are indeed favored by capital.
In contrast, the same asset-heavy “second landlord” model, some small and medium-sized shared office companies, did not attract much capital attention. Would the asset-light model be a good story?
First of all, we must admit that the asset-light model can temporarily increase income rapidly. In 2020 and 2021, the income of Ucommune’s asset-light asset model will be 23.5 million yuan and 66.7 million yuan respectively, and the year-on-year increase of 183% in 2021.
As of December 31, 2021, Ucommune had 165 spaces under the asset-light model, distributed in 55 cities, with a management area of approximately 622,900 square meters, accounting for approximately 72% of the total management area.
But judging from the data, the gross profit margin of Ucommune’s business is declining. According to the financial report, the gross profit margin of Ucommune’s asset-light model in 2020 can still reach 39.6%, but in 2021, the gross profit rate will drop to 15.3%.
Gross profit margin is a key indicator to reflect the profitability of an enterprise. It indicates how much money can be used to pay for various expenses during the operating period after deducting the cost of sales for every 1 yuan of revenue generated to form a profit.
There are two possibilities for gross profit margins to decline. Either the company actively sacrifices profits in order to grab a share, or it has to sacrifice profits due to lack of competitiveness. But in general, the changes in this data are the traces left by enterprises in the fierce competition.
In addition, the asset-light model is not easy to work with really good projects. Xu Ran, who has more than ten years of experience in the operation of first-line brand office space in the industry, told Leopard Change that rich and well-located property owners are still willing to spend money to decorate and rent them out, rather than cooperating with shared office companies.
In Xu Ran’s view, he believes that the transformation of shared office enterprises into light assets is only because of the lack of capital transfusion: “To tell the truth, is it (because there is no money, will other owners not settle accounts? (Shared office enterprises) do not take risks but If you want to make a lot of money, how can there be such a good thing.”
Therefore, the asset-light model may improve the profitability of contributing office companies, but it may not be able to change fate.
So, is the asset-heavy model really unprofitable? the answer is negative. As mentioned above, although the profit of Chuangfu Port will fluctuate from 2017 to 2021, it can still be profitable. Chuangfugang takes the road of self-rental property, design and decoration, and team operation. At the same time, it shortens the empty rent time and improves marketing efficiency through IT technology.
In addition to the wealth creation port, DoBe Culture, which is sprinting to the GEM in 2020, is also making profits. DoBe Culture is mainly engaged in the positioning, design, renovation, investment attraction and operation management of cultural and creative industrial parks. The rental income from providing operating office space to tenants accounts for more than 80%, and it is also a typical second landlord.
Therefore, the business model may not be the most critical. For giants such as WeWork and Ucommune, returning to the essence of operation and thinking about how to increase revenue and reduce expenditure may be the key at the moment.