SINGAPORE (Apr 30): Over the past decade, a whole host of start-ups have disrupted everything from retailing to transport with an asset-light and technology-heavy approach to business. Now, some of them are investing in assets associated with the traditional players they vanquished.
For example, Amazon.com opened a bookstore in New York in May 2017 and a supermarket in Seattle in January this year. Closer to home, Singapore-based budget accommodation platform RedDoorz has opened its own physical hotel here. Elsewhere, food delivery start-up Deliveroo has been experimenting with setting up “delivery-only” kitchens for restaurants to expand their reach. Deliveroo has already launched two such kitchens in Singapore — one in Katong and another in Kallang.
“The idea is that we can help restaurants expand into areas where they don’t have a physical presence. We [find out] what customers want in a particular neighbourhood and the cuisines that aren’t in those neighbourhoods. We then develop relationships with top restaurants to bring them into those areas,” says Will Shu, CEO of Deliveroo.
Rival foodpanda appears to be following suit, with a space at 71 Woodlands Avenue that accommodates a central kitchen and dine-in facilities that currently serve nine different brands. “Many leading Singapore restaurant brands tend to be located in more central locations and so due to their location, they can’t deliver to residents in the north,” says Luc Andreani, managing director of foodpanda Singapore. “The space and facilities at the pop-up kitchen are offered up rent-free to brands, in return for a percentage commission from their sales to offset the start-up costs.”
Why are these companies setting up physical locations? Is the growth potential of their revolutionary business models tapped out? Will they become capital-guzzling enterprises that grow more slowly?
Deliveroo’s Shu likens what his company is doing to Netflix’s decision to go from distributing film content to producing the content. “I think that food — like film, fashion, music — is a very emotional thing,” he says. Deliveroo is simply trying to ensure that it has the right food offerings to keep growing its customer base. “[We’re] ensuring we have the right content, the same way Netflix will think about movies,” Shu says. “If we have to build the physical infrastructure for our customers, we’ll do it.”
Bill Fischer, professor of innovation management at IMD Business School, says successful start-ups ultimately have to adopt some of the operations and processes of traditional players to enlarge themselves. “If they are to become successful market leaders, at some point they need to worry about reliability, and that’s when more traditional models appear,” he says.
In fact, it is quite typical for start-ups to go through different phases of growth, he continues. “If you think of successful entrepreneurial innovation as having three stages: (1) Nail it! (coming up with a great new idea), (2) Scale it! (being able to meet demand in a reliable fashion), and (3) Sail it! (building an attractive, profitable and sustainable model), then somewhere in Stage 2 you need to reduce variance and build in cost-control and reliability,” he adds. “This typically involves building a more responsible, dependable organisation, and therein lies the route to tradition.”
Philip Anderson, professor of entrepreneurship at INSEAD Business School, says an e-commerce platform that opens a physical shop is not necessarily going backwards. On the contrary, it is usually a reflection of the company’s attempt to maintain its edge, in whatever form. “Start-ups face the challenge of finding traction before they run out of cash. They will use any model that seems to work,” Anderson says.
He adds, “But even where you see start-ups going ‘back to the future’, they are not doing it the way they would have done 10 to 20 years ago. Entrepreneurs are discovering ways to rejuvenate old models — for example, physical stores that draw traffic using social media and that blend online and offline shopping using the mobile phone as the shopper’s command centre.”
Chandan Joshi, global emerging markets consumer products and retail leader at EY, agrees that most online platforms that open physical stores usually do so with ideas on how to create a better customer experience. “It is not simply a case of ‘going back’ to traditional models, but the growing emphasis [is] on creating a superior omnichannel customer experience, where there is an intentional integration of online and offline platforms as part of the retail strategy,” he says.
Joshi adds, “On the one hand, we see retailers focusing on making the physical retail environment more tech-enabled and integrated with their online platforms; on the other, pure-play online retailers see physical stores as an opportunity to deliver an immersive shopping experience as well as serve the ‘click and collect’ operating model, which can help them manage overall costs.”
IMD’s Fischer says some traditional operating models and processes are needed for a start-up that has achieved a certain scale to operate in a reliable and sustainable manner. “In some ways, this is the cost of success. This is what has happened to Google’s once-innovative advertising business, or inside the distribution centres of Amazon, or even in the compliance areas of Facebook. It’s all pretty traditional, because when reliability or cost are key determinants of customer adoption, then traditional ways of working have an advantage,” he says.
Satya Ramamurthy, head of management consulting at KPMG, echoes this view. “Directionally, these companies are aggressively growing their space in the models they have developed, [but] they have issues to deal with, such as issues with the last mile, where sometimes costs are too high [compared with] the benefits. Sometimes, having an offline presence solves the issue,” he says.
He adds that shifts to more traditional models are also necessary when start-ups grow to a certain size and begin catering to a more varied customer base. “In the larger scheme of things, [while] e-commerce is growing very fast, offline sales are still the bulk of what is being sold,” he notes. “The business models are evolving to take [into] account the different segments.”
New growth? Or, no growth?
So, will growth at these start-ups slow as they adopt more traditional operating models and processes? Are they discovering the limits of their disruptive business models?
IMD’s Fischer believes any limitation that technology faces is mired in traditional organisational behaviour, where there is a lack of an organisational framework to support innovation. “The limitations are inherent in the inability to reinvent the organisation to support the original innovation. We are in the midst of a business model revolution, where more non-technological innovations are arising to complement the technical ones. But we are not yet in a position to really develop the organisational innovation that is required to really do new things in new ways,” says Fischer. “It is ironic that the least technical part of the invention process is lagging so far behind, but this is pure mindset failure,” he adds.
In the meantime, it appears that technology will continue changing business models across industries. “What you are seeing is the emergence of hybrid business models,” says INSEAD’s Anderson. “For example, if you try to sell insurance without an omnichannel approach, you will be doomed to occupy a niche. Many old assumptions are dead and buried forever — for example, as e-commerce has reduced friction, you never need to own assets unless those assets give you a competitive advantage. Everything is moving towards ecosystems — if you want to start a mobile bike company, you don’t own the bikes unless there is something special about your bikes as opposed to anybody else’s,” he says.
IMD’s Fischer sees potential for further disruption across different industries, as visionary start-ups attack segments that are often ignored by the incumbents. “Think about the yearly changes to cell phones or notebooks; they are highly predictable and largely concerned with measurable improvements in the performance of technical offerings. At the same time, however, what we are seeing with many of the most successful disruptive start-ups is that they focus on other, long-neglected parts of the business models that are key sources of disappointment and disillusionment in traditional customer journeys.”
Fischer adds, “Think about how Tesco shook up grocery shopping in Korea, or how Xiaomi changed the role of OS upgrades in differentiating its place in the marketplace. The dry-cleaning and laundry industries in North America are in the midst of a great start-up revolution. But it’s all about pickup and delivery, while the traditional market-leading incumbents focus on the process itself. Similarly, the success of Dollar Shave Club was due to its attacking the purchasing part of the customer journey, rather than simply adding another blade to the razor.”
Staying asset-light
Back at Deliveroo, its CEO Shu says the delivery kitchens it has created are not just physical assets. “You see the physical infrastructure here, [but] you don’t see the supply chain software, labour management software, kitchen management software that we built for all our partners,” he says. “That’s a big part of it. [It’s] very different from a traditional restaurant.”
Shu says the shift to owning physical assets does not represent a change in Deliveroo’s business model. “I view this as a tool to achieve our ultimate aim, which is the best price and selection for the customer. I don’t see it as shifting our model. I don’t see it as in conflict with the rest of our business either.”
INSEAD’s Anderson says being asset-light and technology-heavy does not necessarily give start-ups the edge they need at every stage of their growth. “Investing a lot in tech only makes sense if your technology differentiates you from others. There are so many other ways to differentiate now, most importantly by using data to cement customer relationships that are difficult to copy,” he says.
However, it seems unlikely that start-ups with limited capital and an untested business model will want to own a lot of assets unless it is absolutely necessary. “Asset-light is not the only strategy, but it is the right strategy unless it is clear what competitive advantage you get from owning the asset. The most important advantage of asset ownership today is the possibility of using your asset to gather data that no one else can access without your proprietary asset,” says Anderson.
IMD’s Fischer also doesn’t see start-ups abandoning the idea of being asset-light. “Being asset-light is always interesting, but sometimes not achievable or financially feasible. Clearly, though, the present trend is towards increased asset-light approaches. AirBnB, Grab, Didi and Li & Fung are all examples of asset-light ventures, but in every case there is also a lot of ‘traditional’ attention to process activities to ensure that the customer experience is reliable,” he says.
This article appeared in Issue 828 (Apr 30) of The Edge Singapore.
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