Special Feature: Asset-light vs. asset-heavy (Part four)

Companies have been reviewing their business structures, and cutting the fat is resulting in leaner operations.

Previously seen as a remedy for underperforming companies, asset-light strategies are now being used by companies to manoeuvre through the market changes caused by the Covid-19 pandemic and to create continued growth.

Read part one: SA companies driving asset-light strategies
Read part two: Shedding non-core assets
Read part three: Asset-light or asset-right?

Cutting the fat
A leaner operation has been Sasfin FD Angela Pillay’s strategy. Angela has on-shored Sasfin’s Hong Kong operations, exiting some of its non-core assets and preference shares. “The leaner operation model allows for capital to be allocated more appropriately, enabling us to further grow our core activities,” said Angela.

The financial benefits that include the leaner operation strategy have borne results. Sasfin has reported headline earnings of R141.1 million for the year ended 30 June 2021. According to the company, this improvement was largely driven by an 11.65 percent increase in total income to R1.303 billion and improved credit performance. The group also reported a return on equity improvement to 9.11 percent.

Consumer businesses have not escaped the eventual probability of approaching an asset-light model. According to Deloitte’s report, The future of consumer business, businesses need to move from “owning the aisle” to “owning the consumer”.

The report said that, “in recent years, however, the digital revolution has transformed the world and today an individual may be both a consumer and a creator. The average individual willingly shares data about themselves in exchange for convenience, such as shopping through digital channels, and this allows for the creation of valuable insight about the individual’s consumer preferences.”

The reports add that “asset-light and digitally native start-up brands that are using consumer data as the basis for competition and bypassing the traditional advantages of economies” have a competitive advantage over traditional linear businesses.

This has not been taken lightly by the traditional business model and “consumer-product companies have responded with significant investments in digital channels, customer analytics, and similar programmes”.

According to the Boston Consulting Group’s article, “When “asset-light is right”, the benefits of this strategy are not best suited to all.

The report adds that the approach has, however, served some consumer brands well.

“Both integrated and asset-light models – when well chosen – can deliver good results. For example, Zara, a Spanish fashion retailer, benefits richly from its integrated model. It designs and manufactures its lines of fashion apparel in its own facilities and sells them through its global network of company-owned stores. Nike, on the other hand, also delivers superior results with its athletic apparel at a significantly lower level of vertical integration,” it says.

But it adds that, “light isn’t always right. Despite the benefits that an asset-light model can deliver, sometimes a vertically integrated model is a better choice. When coordination, speed, know-how, or knowledge sharing is essential – or when core strategic assets, such as vineyards in the Champagne region, are scarce – greater integration can be helpful. Integration can also help ensure that the economic interests of all parties are aligned,” it says.

A hybrid approach to asset-light models is also a possibility for companies to consider. By reducing certain assets and co-locating staff to partners, the business reduces expenditure but retains the benefits. The business can also retain sections of its vertical models to retain market share as well as intellectual property in that field.

You can read the full Special Feature in the first 2022 edition of the CFO Magazine.