Beach House Dreams, Shein, and Asset Light Companies
We just booked the flight for this summer’s trip to our favorite beach location.
Vacation involves walking on the beach, reading, and drinking- not necessarily in that order. Pro tip: If you’re having cocktails on the beach, pour them into a Yeti Cup. It will stay cold and you won’t lose your drink if it tips over in the sand.
Every year we book the trip, I think to myself: wouldn’t it be great just to buy a place?
Well, let’s do the math:
Condo cost: About $700,000
Insurance: $1,000 to $5,000 annually- call it $3,000
Maintenance: Estimated at 1% of the purchase price, or $7,000 per year
So, $10,000 a year for insurance and maintenance.
In addition, think about opportunity costs. What rate of return or benefit do I miss out on? Say that I invest $700,000 in the stock market, rather than buy the condo. How much could I earn?
According to Investopedia: “The average annualized return since its inception in 1928 through Dec. 31, 2023, is 9.90%.” Call it 9%. Over time, I might earn $6,000 to $7,000 annually on the investment.
I guess I should keep renting.
This article:
· Defines asset light companies,
· Explains why Shein uses an asset light business model
· What is a minimum viable product?
· Illustrates how this type of business increases return on assets.
Asset Light Companies
Some businesses are rethinking big investments and becoming asset light companies. Here’s a definition:
“Asset-light marketplaces manage to make money from things they don’t own or even fully control.”
Two great examples:
“Uber does not purchase the car before making it available, and Airbnb does not purchase the house before renting it out.”
The retailer Shein has succeeded using the strategy.
Understanding Shein’s Approach
Shein is a fast-growing online retailer that is taking advantage of several trends noted by Contrary Research (a great resource, by the way):
Movement toward fast fashion: Fast fashion is the “rapid manufacture of highly affordable, trend-driven clothing.” These companies continually release low-cost clothing, and don’t rely on fashion seasons.
Growing acceptance of e-commerce: Who’s not buying stuff online? I think Amazon has a truck that constantly drives around my block- throwing stuff on my front porch as I need it. US e-commerce totaled over $1 trillion in 2023.
Buying through social media: More purchases are made using TikTok, Instagram, and other platforms. More time online means more purchases through social media.
Shein’s approach to retailing applies the minimum viable product concept.
Think: Minimum Viable Product
Gartner explains that:
“A minimum viable product (MVP) is the release of a new product (or a major new feature) that is used to validate customer needs and demands prior to developing a more fully featured product. To reduce development time and effort, an MVP includes only the minimum capabilities required to be a viable customer solution.”
Shein is the ultimate “experimentor” in fashion, because the company analyzes consumer behavior in real time, based on how shoppers respond to marketing. It experiments by putting out thousands of clothing items each day- then assesses how customers respond.
That takes a huge network of manufacturers, and each may only produce 50 to 100 units of a particular item at a time.
If it sells, they make more. If not, they haven’t spent a great deal of time and money on one item.
Shein is creating thousands of minimum viable products in a given year. They’re small tests to see what works.
Here are Shein’s risk of operating an asset light business:
Capacity: Shein can’t find enough manufacturers to meet its requirements
Prices: Manufacturers charge more than Shein is willing to pay
Quality: The items manufacturers produce don’t meet Shein’s quality standards.
So, what’s the financial impact?
Higher Return on Assets (ROA)
Shein can operate with less capital, because it’s not investing large amounts to build and maintain manufacturing facilities. As a result, it can generate a higher return on assets, compared to other businesses that operate with more assets on the balance sheet.
Let’s assume a company generates net income of $10 million a year has $12 million in total assets. The ROA is ($10 million net income / $12 million total assets), or 0.83.
The business decides to shift to an asset light business model. It contracts with third party companies for production, and sells off $4 million in assets. If the company generates the same net income of $10 million a year has $8 million in total assets. The ROA is ($10 million / $8 million), or 1.25.
The Lesson
If you can solve the challenges of capacity, price, and quality, you may be able to operate with a much smaller investment in assets and increase your return on assets. Get more out of the dollars you spend in the business.