How a workspace provider is expanding with a franchising model

February 18, 2020 12:06
Nancy Yip, Area Director for Hong Kong at IWG, says her firm is flexible in responding to changes in market demand. Photo: IWG

SoftBank-backed co-working space giant WeWork last year suffered major setbacks that included a failed initial public offering (IPO) plan and the ouster of a co-founder. The WeWork debacle is seen as a watershed moment in the shared office industry, which is expected to struggle amid rising economic recession risks in many parts of the world.

While WeWork slows down, one of its key competitors, International Workplace Group (IWG), is however stepping on the gas and trying to expand with a franchising strategy, having learnt some early lessons during a crisis in the wake of the dotcom crash in the early part of this century.

IWG, a flexible workplace operator originally founded in 1989, has been offering shared workplace service for more than 30 years, with five main brands in the family: Regus, Signature by Regus, Spaces, HQ, and No18. Navigating in the industry amid a drastic change in market fundamentals, the firm believes offering flexible service can protect it as a recession looms.

"We operate flexible spaces, and flexibility is key to our business,” Nancy Yip, IWG's Area Director for Hong Kong, told EJ Insight. "Our flexibility is not merely about the lease arrangements, but also in how we observe and respond flexibly to the change in market demand.”

Listed on the London Stock Exchange in 2000, IWG has now about 3,400 locations in over 1,100 towns and cities across 120 countries and regions. In 2018, the firm's revenue in the Asia Pacific region reached £368 million (HK$3.7 billion), accounting for 16 percent of the group’s total revenue, with a double-digit growth in its business in Hong Kong.

In Hong Kong, it currently runs 13 workplaces under the Regus brand, as well as five locations under the Spaces brand which it introduced to the city in 2018.

Without disclosing revenue figures for Hong Kong, Yip said the firm’s main source of revenue comes from private office space leasing business, while the value-added service revenue stream is growing, such as the service fee users pay for using meeting rooms and related facilities. It has also expanded its offerings to include hosting corporate events and meetings in its locations.

"In the past, companies looking for small and medium-sized venues for meetings and seminars would find very limited options in the market. Many of them would go to the conference rooms in hotels. Our locations are well positioned in the market to fit their demand,” said Yip.

Months of increasingly violent anti-government protests and a bruising US-China trade war pushed Hong Kong into a recession last year for the first time in a decade. And now the coronavirus outbreak is making matters worse for local businesses.

However, Yip is confident that IWG can firm up its position and continue to grow, as it has achieved a sustainable, profitable business.

“We have been in Hong Kong for 20 years, and the group was established 30 years ago; we have accumulated rich experience in various aspects of flexible spaces, such as operations, layout design, and interior decorating,” Yip said in an interview. "These are all unique industry experiences drawn upon from our heritage.”

Amid the recession risk, IWG launched a franchise scheme in Hong Kong last year whereby individual entrepreneurs can operate franchised Regus and Spaces locations in the city.

Making Regus and Spaces brands available for franchising, IWG provides infrastructure, training, tools, and other operational support, for franchisees throughout the lifecycle of their investment.

"Imagine the Starbucks or McDonald's-style franchising,” said Yip, adding that the terms and arrangements of the franchise agreements, such as the capital requirement, as well as the profit sharing ratio, depend on the country or region.

IWG’s industry-first franchise program accelerates the group’s expansion, while allowing industry newcomers to enter the market with support and lowered risks, she said.

According to IWG, it takes approximately four months from the moment a franchise agreement is signed until a center is opened. The group’s support during the set-up process covers a range of activities, from space planning and facility design to pricing strategy and staff training.

Last April, IWG sold its Japanese locations to Tokyo-based conference room lessor TKP for £320 million under a franchise agreement, and sold its Taiwan locations in August under a similar arrangement.

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IWG is doubling down on Hong Kong expansion plans through McDonald's-style franchising. Photo: IWG

EJ Insight writer