A lot of the behaviors of the founder seem outrageously fishy, however they are legitimately filling a rapidly growing need. At this very moment I have the WeWork Toronto locations page open as I contemplate biting the bullet on a private office there just to get out of the home office occasionally.
I think the author's point is, that in a recession, you wouldn't bite the bullet, because you (the average consumer) become cost-conscious. The idea is that therefore, WeWork's revenue model can turn on a dime but their debt obligations go nowhere when that happens, and then they are in a hole.
Moreso, the author's point is that other businesses that have these long-term depreciations trade their equity at a much smaller revenue multiple. He's basically saying, you can't escape the fundamentals.
it'll be super expensive to hedge -- the higher the volatility of the underlying asset (here, the number of people who pay for a desk or whatever), the more valuable/expensive an option on that asset is. but I also don't think it makes a ton of sense. in effect, WeWork would reduce their cash flow growth, with payments going towards hedging. their entire pitch is that they are a fast growing company, which justifies an insane multiple, any hedging would reduce that risk.
you don't hedge against decreases in demand via financial instruments, instead you:
1. hedge against decrease in demand through diversification of services; if wework sells some property management software (for example) then that might be more recession-resistant than their actual leasing business.
2. hedge against decrease in demand through long-term contracts: getting IBM to sign a 10 year lease (for example) is usually a safe bet that you'll have a tenant through the recession; on demand hot desks are much less safe
3. hedge against cost increases using financial instruments: most corporations doing hedging are hedging against commodity price changes, e.g. airlines buying oil futures or mcdonalds buying beef futures. similarly, wework might buy kombucha or aluminum cup futures, but there is no derivatives market for on-demand desks :)
of course, there are different perspectives on this. matt levine has a really interesting column about the different philosophies of where diversification belongs, at the corporate level or at the investor level: https://www.bloomberg.com/opinion/articles/2019-04-09/ceos-l.... my finance classes were relatively recent so you might be able to tell my bias.
Patent post suggested drought of renters due to a recession. Recession can be hedged against by purchasing e.g. 12 months options that are far enough out of the money to be cheap yet close enough to cover a major recession event.
I don’t know if the math adds up, but I think it deserves studying.
I’m not looking to hedge against all kinds of customer flight with an instrument, that’s clearly foolish as you noted. But particular events can be hedged.
The cost of consistent recession hedging is prohibitive and larger than the benefit you’d receive, because of arbitrage (if it was cheaper than risk, you could invest risk free).
If you could hedge a recession, we’d have no recessions :)
Hedging only works if you have short time durations (eg you wanna hedge specifically in October, because you have a big bill due then), or if you’re the one providing the hedge and capturing the Volatility Risk Premium.
"We Work" can have a built-in cushion against smaller recession events - long-term leases, being able to predict which percentage of short-term leases will dry up, cash reserves, some sort of counter-cyclical lease agreement (e.g. with repo companies), counter-recession marketing/education/etc program (e.g. "let's beat recession together by sticking together!" or some such).
Where the hedge is coming in is making sure that the company does not end up upside down if recession hits harder than the built-in cushion can absorb. They could be buying 12 month S&P500 options on a rolling basis - buy a new batch every month as the previous batch expires. The idea is not to get paid each time SPY drops 5% down, but to get paid when it drops 35% down signaling an actual market crisis and have enough time/money to survive the hit.
I don't know if it makes sense as I'm just making this up as a I go, but your criticism is selling the idea short. Ahem.
what underlying asset would you buy the options on? if it's just on the overall market, then what advantage is there for wework to do that versus an individual investor?
Hedging via options is guaranteed to cost more than the benefit you’d receive, over the long run. This is due to the volatility risk premium (the insurers against risk must be paid, and will price it to come out ahead).
For sure, though the common model seems to be going in a class B building on a highway somewhere on the periphery and setting up an incredibly drab, soul crushing office. I've worked for Bell and RBC -- I've already done the soul crushing office thing.
I have absolutely no doubt that I've missed some good ones, but that's how WeWork made me interested in something that I'd put off for so long -- really nice looking interiors in great parts of town/great buildings. They are in no way a tech company, however their aesthetic and values do more closely mirror tech companies than a lot of their competitors that are low cost satellite office providers for low-tier organizations.
I don’t know about Toronto, but, here in Philly, we are at the Make Office at 20th and Market, diagonal to WeWork.
We have private offices, better views, zero annoyance from fellow lessees (nobody leaning over to sell us insurance while we have headphones on, or harassing us about their recruiting services), pay half the rent (even less, now that we signed a long-term lease, previously we were month-to-month).
As far as I can tell, the WeWork across the street has a nicer interior and better coffee. That’s it. That’s all.
And it’s way more expensive and has a way more distracting culture.
The reason WeWork is a better offering is that they’re losing money and investors are paying for this nice interior.
This is all nice for customers, but makes for a shitty investment.
WeWork doesn’t have any real competitive advantage when you want to turn it into a healthy, profitable company. Then it will just be any other coworking space; perhaps a more fancy one, but also more expensive.
Starbucks has no real competitive advantage over Local Coffee Co. other than great location, decor and brand appeal too. Thats what OP argues were the deciding factors for them. To attribute nice decor as being nothing more than a sunk cost is erroneous at best.
That's not correct. Starbucks has incredible economies of scale and purchasing power at this point.
Clearly Wework has at least some economies of scale, but as for purchasing power not so much. The mass importation, distribution, and sale of a perishable agricultural product is a whole different kind of thing.
Let’s go with your argument. What economies of scale and purchasing power would make for a differentiable competitive difference vs Local Coffee Co? Are those economies the driving force for Starbucks success? For their competitive advantage in the eyes of a consumer?
WeWork is an international brand. Can you name another coworking space in nearby [state/country]? On the other hand there’s prob a WeWork there with a certain consistency wrt quality that you’d expect.
But you still haven’t given me an example. Thusly any competitor to come into this space would have to spend as much as WeWork at least to unseat them or to make a competitive brand for themselves. Sure the market’s not new, but the solidified brand in this market is. That counts for a lot.
I have indeed given you an example, it’s called Regus. Google it, they have an international brand too. Wework now has a higher profile.
Good for them, but what’s that worth exactly? Having brand recognition is not at all the same thing as a barrier to entry of a market, or a network effect.
The market for shared or managed office has very low barriers to entry and modest network effects. Thus making the concept of a monopoly in this market more than implausible.
> What economies of scale and purchasing power would make for a differentiable competitive difference vs Local Coffee Co?
If Starbucks spends less money buying coffee, that means they can afford to spend more money on nice decorations (and better real estate, more ads/PR to increase brand presence, etc.) than Local Coffee Co. The real estate/furniture is presumably a relatively small portion of the operating costs of a coffee shop, so e.g. buying 10% cheaper coffee beans could mean getting a location that's two times as attractive to customers.
WeWork might not be able to do that as easily because for them, the real estate and furniture is their only product.
Cost of coffee in cup of latte is less than 25cents and Starbucks sells latte for $4.5. I am sure Starbucks has small price advantage compared to local coffee shop but this advantage is minuscule for widely traded commodities like coffee, milk and paper cups. I doubt that's their main competitor advantage.
Personally for me ability to order Starbucks coffee online and have it ready when I get to the store is a game changer + consistent user experience. Local coffee shops are always hit/miss.
So a competitor to WeWork would have to spend even more than WeWork to compete vs the brand. They’d be even more strapped for cash for PR/ads than the main player. They have the first mover advantage.
> So a competitor to WeWork would have to spend even more than WeWork to compete vs the brand. They’d be even more strapped for cash for PR/ads than the main player.
WeWork won't be able to maintain their venture-capital-fueled level of spending forever. Starbucks' economies of scale aren't a one-time "build the brand" thing, they're a constant source of capital that allows them to continually build and maintain storefronts better than Local Coffee Co can.
I can totally see a world where WeWork, forced by the public markets to attempt to reach profitability, stops putting as much money into their buildings and furniture as they currently are. Then, the next real estate firm disguised as a tech startup can raise private money at a forty-eight million dollar valuation, build even nicer offices, and eat their lunch.
> They have the first mover advantage.
I am not convinced the first-mover advantage is very significant in the short-term office rental industry! WeWork got a lot of customers by selling nice offices at below cost, even though other players in the space had been around longer. Who's to say another company couldn't do the same thing?
Starbucks also has incredible gross margins of close to 60%. Almost as high as a SaaS business (70-95%).
WeWork has 10-15% gross margins.
"Gross margin is a company's net sales revenue minus its cost of goods sold (COGS). The gross margin represents the amount of sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells."
Starbucks also has product consistency. I know a Flat White in Kansas City will be the same as a flat white in Vancouver. If you like that product, that consistency is welcome.
Additionally to CPLX's point, they can also move profits into low-tax countries by licensing their brand. The fix costs for that are too high for a Local Coffee Co. to copy.
> I have absolutely no doubt that I've missed some good ones, but that's how WeWork made me interested in something that I'd put off for so long -- really nice looking interiors in great parts of town/great buildings.
(I understand that most WeWork locations should look about the same, so…)
I still don't get how their "private" offices have glass panes for walls. That's horribly unconducive for work.
I visted the WeWork office on Bloor last year, and it was more like a party than I would like. Seems like a great place to meet a future spouse. Not necessarily a great place for quiet, deep work without noise.
They have a lot of social events. Seems to be their big selling feature. So if you are looking to prospect for customers like a real estate agent or something, maybe it's worth it.
There are definitely offices as good or better than WeWorks in the downtown core. Most of the companies will give you a free day or something so you can actually work there and see what it's like.
We ended up at iQ offices, much quieter than WeWork. Workplace One's new location also seemed pretty compelling, just not in as good a location for those of us commuting on the go train. If internet speeds are important, make sure to ask about that, because most of the offices we talked to had pretty shit speeds.
In Toronto if you're looking at WeWork look at Workhaus as well. My employer just rented with them and I'm pretty impressed. Definitely not boring suburban spaces.
Frankly, this is what I don't understand in this whole charade. IWG has a decent 2.5 billion yearly revenue and wringes a paltry 0.1B net income out of it. I mean, good for you, employing near 10 000 people and still being profitable but still, a 4% profit margin. That's razor thin and it's not immediately visible what WE is going to do so much better -- or better at all.
Would it not be more economically prudent to simply rent a small office? When I looked into these shared spaces, I found them to be a significant rip-off.
..until you pay utilities, sign a lease, pay various insurance, furnishings, security, reception, etc. The rent cost of a small office doesn’t include all of the various things you have to often pay to make it I habitable.
Depends on scale & of course location/local market. If you're only a couple of workers it isn't cost competitive to rent your own office and take care of everything.
