BUSINESS VALUATION END TERM (INDIVIDUAL) Nidhi Nahata, C026

The article ‘When “Asset Light” Is Right’ discusses how firms can benefit with their asset light model and
vertical integration. They can also deploy smart- control techniques and improve their returns, their agility,
make use of their business scale and experience of their suppliers, and conduct their operations more
quickly. It discusses examples of some of the world’s biggest companies’ business models like McDonald’s,
Apple, Nike and Toyota. These techniques can also be applied to the companies in the post COVID
scenario. Social distancing and nation-wide lockdown due to the pandemic have had major impacts on
businesses. Businesses will now have to relook at their business management or even make changes to
their business plans. As companies recover from COVID-19, they will need to review their capital allocation
and re-evaluate ownership of non-core assets and operations, and potentially migrate to an ecosystem of
strategic partners.
Below are some ways in which business have benefitted currently or will be later in the post COVID
scenario by effectively managing their assets, and how being asset- light is going to make a huge
contribution to their business:

1. Online grocery shopping platforms: Companies such as BigBasket and Grofers have capitalised on
the newfound market of customers. They prefer isolating themselves while ordering supplies to their
doorstep. Store.se is another start-up that is catering to the needs of people stuck at home during the
lockdown. They provided a platform with dashboards for retailers to view any orders received and then
schedule deliveries. They also got delivery partners to do the job for a small fee. They set aside their
margins too. They also have low customer-acquisition spending. Another benefit they generated was to
their retail partners who experienced low footfalls at their stores and therefore low revenues.
However, post COVID when the restrictions will be eased the company might face reduced sales. They
would need to come up to solutions like B2B model to empower stores to run their own operations by
helping them set them up.
2. Hotels: Hotels such as Indian Hotels Co. Ltd is making strategies to improve profitability through an
asset-light model, amid trying times. The strategy to shift from owned properties to leased assets, and drive
revenue growth through income from managing hotels, is paying off. There was a rise in share of rooms
under management contract from 28% in FY16 to 43% in April-December FY20. This business model
enjoys higher profit margins. There are also efforts to cut operating costs and reduce leverage. Hotels are
also aiming at debt reduction through lower capital expenditure and divesting stake or even the sale of non-
core assets.
3. Real Estate: In the post COVID- 19 era, the real estate sector could use asset-light franchise models to
be back in the game. Large population, consistent rapid urbanisation and boom in the middle-income
households with increase in income are increasing the demand for real estate. Technology and digital
marketing will play a major role in the post COVID world. Asset light franchise models that are dependent
on sharing of resources and market information, credible institutional support, lead flows, and profit sharing
can be the new trend in the real estate world. Franchisees can leverage the infrastructure of the parent
company and build a successful asset-light model.
4. Co-living: In the ongoing Covid-19 pandemic, there have been changes in business models of co-living
operators as most of the new deal conclusions and negotiations for prospective transactions are now
focusing on revenue share structures with landlords. Deals in the past were concluded with fixed lease
commitments. However, in today’s time pure revenue sharing with no guarantees is preferred by Asset light
co-living operators like Nestaway, Olive by Embassy and others. Another unique concept by Uniworld is
‘crowdfunding model’. In this model, individual investors own specific units, earn assured rentals by a
pooled and distributed property management model. A cloud-based ‘Investor Relations’ portal would allow
investors to access real-time occupancy & rental yields.

Other Concepts:

Asset fractionalisation: Concept of splitting an asset into multiple logical part especially in financial
markets. A well-known example is shares of a publicly traded company, where each share is a part of a
company that the investor owns and in return receives a proportional component of that company’s profits.
However, for physical assets, such as industrial machines, such models aren’t prevalent. Such illiquid
assets remain under-utilised as there is no easy way to connect the supply side with the demand side.
Asset Fractionalization converts the previously illiquid assets into new revenue streams. This can then
result in a secondary market where the fractionalised assets could be traded as per the then demand-
supply equilibrium.

Outcome-based pricing: The supplier charges the customer only if particular business outcomes are
realised. Instead of paying the supplier for resources, the customer now pays for business outcomes.

Example from real estate industry: In current models, a retail outlet (tenant of the commercial property)
pays the owner of the property (shopping mall) for the rented area. In an outcome-based pricing model,
rent would be based on the actual footfall instead of the rented space. The retail outlet would pay only if it
experiences footfall for its outlet. If the footfall drops, the retailer’s outgoing expense also drops. On the
other hand, if the retailer’s footfall increases, the shopping mall would earn additional revenues for the
same rented space. Such a model would enable the supplier and the customer to share risks, costs as well
as the revenues. Both these models require closer level of collaboration and trust to succeed.

In such times, all businesses need to focus on combination of their online & offline presence. Merely having
an offline presence may not go very well with a lot of businesses. Also, most businesses need to focus on
their domestic consumption and creating indigenous supply chains to fulfil their raw material requirements.
Also, for large corporate houses, there has to be a leaner cost structure with minimum possible debt in their
books, which may be the critical success factor for all leading corporate houses in the upcoming decade.
All businesses should use technology as an enabler to improve their efficiency and control the costs for
each SBU of their organization.