WeWork, the coworking giant valued at a shocking $20 billion, has long been a controversial and trendsetting player in the flexible workspace industry. The brand has been able to continuously raise money, they’ve opened a plethora of locations worldwide in a short-span of time, but they’ve also raised questions about their business model sustainability.
And although WeWork claims to be unlike any other coworking or serviced workspace operator, they sure have a thing for going after coworking and executive suite clients.
Shocked? Well, we were as well when we found out.
About a month ago, Allwork.Space spoke with Matias Velazquez, founder of coworking space Sharing E.C. in Brazil. Velazquez expressed serious concern about WeWork’s marketing strategy, which had been aggressive since January of this year, six months before they opened the doors to their first Brazil location.
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They’ve even reached the point of dumping. WeWork’s prices are really low, compared to that of other workspace providers in the area. – Matias Velazquez, Sharing E.C.
Not too long after that, Allwork.Space received a report that analyzed WeWork’s business model in Brazil and whether or not it was as profitable as they claim. According to the report:
WeWork is asking for BRL 1,100 for a dedicated desk (US$ 350), which in the current state of Brazil’s market, translates into slim profits and a low-probability of generating adequate return on the invested capital. Considering WeWork was not able to obtain the 75% allowance they expected from their landlord, this means their invested capital is at least 4 times greater than what they had planned.
According to the calculations of a financial analyst, the annual operating cash flow that WeWork will generate in Brazil will be of approximately US$5 per square foot. WeWork’s 2014 leaked Pitch Deck showed that the company calculated a payback period ranging from 7 to 22 months. In the case of Brazil, analysts believe WeWork’s payback period will be of approximately 20 years.
Clearly, something doesn’t add up.
Velazquez further told Allwork.Space that WeWork was offering significant discounts to local influencers and members of local coworking spaces.
Now, if you ask us…only a desperate operator is willing to cut its prices to fill up a center.
Is WeWork Desperate?
At first, we thought WeWork’s aggressive marketing was part of their strategy to enter a new market. But it turns out that Brazil isn’t the only place where WeWork is leading questionable and potentially unethical approaches to attract new members.
In the past 2 to 3 weeks we’ve experienced the most aggressive attempts to poach our clients; where they are setting up sales stations outside of our locations, and deliberately attempting to solicit our clients as they enter the building. – Carrie Gates, Barrister Executive Suites, Inc.
Allwork.Space received information from several other workspace providers that WeWork was reaching out to their members, sending them email blasts, offering up to 50% off if they were willing to switch and move into WeWork locations.
Yet, email blasts and cold calls are not the worst of WeWork’s offenses towards other operators and their respective communities.
“WeWork has parked food trucks, canopy tents, and other types of kiosks, outside of many of our locations, ” Gates told Allwork.Space. “They’ve done this to a couple of other providers as well. They position themselves outside of the building entrance, and hand out coffee, t-shirts, and other company items in an effort to lure tenants into coming over and talking to them.
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“Then they use that as an opportunity to give their sales pitch, gather contact information, and offer clients what appears to be very large incentives to switch over to WeWork,” Gates added. “But buyer beware, if it seems too good to be true…..that is often the case.”
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“As a brand, Barrister has always been successful and competed based on the merits of our own brand. We take great pride in our high tenant retention and customer loyalty, which we have worked hard to earn by always striving to provide the best possible customer experience for our clients.”
“Similarly, I’ve held respect for WeWork and the differences in our products, so I was very surprised to hear the reports from our clients and landlords,” Gates continued.
This type of deep discounting may get WeWork a fair amount of clients. But when it comes to this scenario, low prices come with high consequences. Selling a product for less than the cost to provide for it, or break even profit margin, is not a sustainable business model for any company.
Eventually the investors, customers, or both will likely be unhappy if we WeWork is not able to meet their projections at the rates which they are currently offering.
In other words, are they just ‘chewing up their investors’ money’?
How Low Will WeWork Go?
In May this year, CEO Adam Neumann told TechCrunch that “the company is still focusing on growth and not worrying about striking the kind of profitability the public market might demand from a company like WeWork.”
By lowering their prices and operating at a loss, WeWork is depreciating the value of the entire market. And in the long-run, this doesn’t benefit anyone — other operators will have to lower their prices, making it harder for companies to stay in business, ultimately reducing the number of consumer’s options.
Now, if WeWork’s product offering was unique like they claim it to be, they shouldn’t have any issues filling up their spaces, right?
Yet, it seems that WeWork has been unable to attract enough people into its centers, even considering the popularity and growth of the flexible workspace market.
With a $20 billion valuation, you’d think WeWork would have people flocking into their locations, but it seems that WeWork’s overconfidence has finally taken a hit.
This begs the question, “how low will WeWork go?” in terms of pricing and in terms of ethical practices.
