Should you invest in the next Uber or Airbnb?

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Should you invest in the next Uber or Airbnb?

The swift rise in prominence of such sharing businesses emphasises the importance of identifying sectors and companies potentially at risk of similar disruptions. Solange Le Jeune, ESG Analyst at Schroders, investigates.

Published on 14 December 2016

Sharing businesses have emerged as the hot topic in the current wave of technology excitement. Start-ups compete to be the “Airbnb” of every industry imaginable. The impacts are already clear in several sectors. Airbnb itself advertises three times more beds than the world’s largest hotel chain. Remarkably, despite the inroads they have made into established markets, those examples are still very young; Airbnb was founded just eight years ago, and Uber only launched in 2011.

Identifying sectors vulnerable to similar disruptions and understanding incumbents’ exposures and strategic responses is increasingly vital given the scale and speed with which change can unfold.

Should you invest in the next Uber or Airbnb?

Massive disruptive impact

Heavy investment has provided new entrants with war chests for assaults on established industries. Coupled with short lead times, the commercial impacts can be substantial.

Drivers of this growth are also swelling and these include access to communication technologies, increased trust and social acceptance of online exchanges and sharing, recognition of the existing inefficiencies and the savings those models can deliver to consumers, and flexible working patterns. These trends are strongest among younger generations, who represent the most active users of sharing businesses.

US$335 billion

Sharing revenues are set to grow at 25% annually over the next decade, to reach US$335 billion by 2025, PWC estimates.

US$219 billion

The total value of sharing start-up businesses had reached by mid-2015 according to Credit Suisse.

US$23 billion

Sharing businesses receive more venture capital funding than any other category, overtaking social media platforms in recent years. US$23 billion of new capital has been invested in the sector since 2009 and US$20 billion in just the last two years.

There are however few opportunities to invest in the theme through public equity markets. By being able to scale with limited capital, most sharing businesses operate outside public equity markets and provide little visibility into their finances or operations. Our main focus is therefore on the ability of incumbent companies to defend their competitive positions, and potentially ride the growth opportunities this presents if they are able to adapt quickly enough.

Should you invest in the next Uber or Airbnb?

Threat to listed companies in exposed sectors

In markets for which sharing businesses started earlier and have achieved greater scale, the impact on established incumbents is already becoming clear as it is set to redefine growth rates and profitability over the coming decade. For sectors such as hotels and transport, growth expectations used in valuations have already dropped.

But more sectors may be at risk. Where no major players have yet emerged due to a lower penetration or slower behavioural change, the effects are less obvious. However, we expect that sharing models will appear in a much wider range of markets than has been seen to date, with commensurate impacts on incumbent industries.

Through examining large categories of spending on consumer durable goods with low utilisation rates (and for which physical sharing is straightforward), we have identified markets we think are likely to face disruption, including travel equipment and sports goods, luxury jewellery and accessories, apparel and footwear.

While there is no single solution, it is clear that incumbent companies in exposed industries will need to plan for significant changes.

The experience of lodging or transport (through Airbnb or Uber) demonstrates the speed with which change can unfold; and the inability of incumbents to adapt after that trend has become established. Sharing businesses are typically based on a kernel of innovation that allows them to undermine the economics of traditional peers.

Airbnb uses the scale of an online marketplace to allow homeowners to generate a positive return on property, albeit lower (often) than hotel groups would demand for the same investment, and eliminates redundant administrative and service overheads its users do not require.

Uber similarly leverages an online market place, combined with advances in navigation technologies, to bring together self-employed drivers and passengers. Had incumbents recognised those business model opportunities, they might have more easily stemmed their growth by adapting their own strategies.

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