Sink or Swim for WeWork Labs in China?
COVID-19 and China
WeWork's Food Lab. PHOTO: Credit to WeWork Labs

WeWork Labs is WeWork’s “global innovation platform” and provides early-stage start-ups with a working space, community, and other resources to help them succeed. Some resources WeWork Labs provide are an educational network (how to pitch, secure funding, etc.), mentorship program (a network of mentors to advise entrepreneurs in the right direction), and incubators and accelerators (labs help start-ups get ready to join an incubator or accelerator).

While one of the company’s goals is to provide an opportunity to budding entrepreneurs, WeWork Labs in China is raising red flags with a single revenue stream, speculations of burning cash, and competition in the local market.

When the private firm first published its financial results sometime last year, Reuters reported its simultaneous surge in losses and revenue. “Total revenue rose to USD 421.6 million from USD 198.3 million in the year-ago quarter,” Reuters reported. Memberships also “jumped to 268,000 at the end of June from 128,000 a year earlier.” Net losses saw a drastic jump to USD 723 million in Q1 2018 from USD 154 million a year ago.

Single Revenue Stream

Flexibility is a critical component in WeWork’s business model. In ToB’s interview with Roee Adler, WeWork Labs’ senior vice president, he confessed that their current revenue stream strictly comes from memberships. Currently, they have no plans to add additional sources in the future. Depending on location, their membership pricing varies.

While WeWork Labs implement reasonable pricing, it’s not revealed how WeWork manages its membership system. Therefore, WeWork Labs’ may strengthen its revenue stream through online logistics. Kidswant, an O2O maternal-infant new retailer strategically uses its membership system to do effective precision marketing online and track user behaviour. Additionally, when their user buys an item, this allows Kidswant to know approximately the age of the child which the company can push other appropriate products to its users when the child matures.

As WeWork Labs serve start-ups in different stages, by tracking their initial data through an effective logistics system, the real estate company may be able to suggest and push relevant information, promotions, and offers as the start-up grows.

Rapid Expansion Financial Problems

According to ToB Industry Headlines, WeWork’s net operating income losses beat its revenues with USD 1.9 billion and USD 1.8 billion respectively. DMR Business Statistic also showed these numbers.

However, SUN Zhengyi (孙正义), Softbank’s CEO, remained positive about WeWork in an interview with ToB Industry Headlines. Even though WeWork suffered a loss, it wasn’t short of money. In Jan 2019, Softbank’s vision fund generously invested USD 2 billion in WeWork.

SUN Zhengyi expressed that WeWork’s expansion was “too fast” and caused the company’s loss. Yet, despite the losses, he would continue pursuing the company. This hints that WeWork will continue this strategy in the years to come. Softbank is one of WeWork’s investors.

Luckin Coffee, a Chinese coffee start-up, has also been using this strategy, citing losses were “within expectations and part of its expansion strategy to capture as large of a market share as possible in the shortest time,” according to China Knowledge. However, rapid expansion can cause devastating consequences, being one of the causes Bopai (a Chinese O2O car-washing service provider) to go bankrupt and YUM China to turn a 21% growth in 2011 to a 13% drop in 2013.

Despite WeWork Labs being in its early stages, it already has 51 offices in 15 countries and 32 cities, according to ToB Industry Headlines.

Competitor Comparison

Ucommune (优客工场) is WeWork’s number one competitor and offers event spaces in addition to co-working spaces. The company currently “has 200 locations in 37 cities, with more than 120,000 members and more than 10,000 enterprises,” according to Coworking Resources.

While Ucommune may have a competitive edge in technology and its aggressive M&A strategy, WeWork Labs’ industry-specific resources may make it more competitive.

In an interview with Forbes, MAO Daqing, Ucommune’s founder expressed how the company “is evolving as a platform built on technological advancements.” Therefore, its workspaces are integrated with IoT functions in addition to a mobile app. However, WeWork Labs resources are tailored specifically to an industry. In this case, it can be argued that it has an industry advantage rather than attempting to adapt to all industrial needs.

In 2018, WeWork acquired Naked Hub, a China-based luxury resort company that was one of WeWork’s main competitors. In response, Ucommune began making friends through aggressive M&A to boost its presence. The company completed its fifth acquisition in 2018.

However, while Ucommune may see significant economies of scale and greater funds for research and development, it may see an increase in higher prices. In Ucommune’s case, as it aims to make their co-working spaces more technologically advance, greater R&D funds will be a plus. It may also ultimately engage in a price war with WeWork Labs.

Sink or Swim?

2019 marks WeWork’s third year in China. HUANG Di (黄迪), who previously worked for Didi and Ofo also officially joined the team of five in January and is now the head of WeWork Labs in China. The company also recently launched its “Food Labs” that start at USD 300 per month.

Whether or not WeWork Labs sink or swim in China may depend on the needs of the consumer market which may simultaneously boost entrepreneurial demand that leads to finding an effective workspace that WeWork Labs can provide. This is not only applicable to China but also other countries WeWork Labs also operate in. As such, this requires initial research into the various market to first determine consumer need.

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