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TKP manages conference rooms and shared workspaces like this Regus-brand location in Tokyo. (Photo by Yuki Kohara)
Company in focus

A WeWork that works? TKP turns heads by turning profits

Japan office rival puts new dent in SoftBank's 'kingmaker' strategy

WATARU SUZUKI, Nikkei staff writer | Japan

TOKYO -- Hours before WeWork withdrew its initial public offering on Sept. 30, a Tokyo-listed competitor priced its own shares in a public offering that added more than $200 million to its coffers.

The timing was coincidental, says TKP founder and President Takateru Kawano. Nevertheless, it was as if investors were giving his office space company a stamp of approval while shunning its bigger and more famous peer. TKP's new shares were priced 40% above their value at the end of last year. WeWork, meanwhile, took a $9.5 billion bailout from SoftBank Group that valued the company at less than a fifth of its former $47 billion price tag.

There was nothing coincidental about that difference in performance, however. While WeWork's losses more than doubled to $1.3 billion for the third quarter, TKP has logged a net profit for nine of the 10 quarters since it went public in March 2017.

The rise of this WeWork rival in Asia is the latest sign that SoftBank's "kingmaker" strategy -- in which it uses its $100 billion Vision Fund to power the growth of selected startups and drive out competitors -- is not working.

U.S. ride-hailing giant Uber Technologies, which received about $7.7 billion from SoftBank last year, continues to battle Lyft and its own lackluster stock price. Indian hotel startup Oyo has stumbled in Japan, where sources say it has missed ambitious expansion targets and faced labor disputes.

As for WeWork, its expected downsizing in the coming months could give TKP room to expand. "WeWork had been renting entire buildings [from owners] at very high prices," Kawano said in a recent interview, pacing restlessly around the room. "It was hard to compete. Now we can build inventory properly."

TKP founder and President Takateru Kawano says he was inspired by Disneyland, where visitors often spend more on food and merchandise than the entrance ticket. (Photo by Manami Yamada)

Some analysts question TKP's own targets -- it wants to more than triple its current office network to 1,500 locations in Japan alone by 2030. But Kawano, whose roughly 61% stake in the company is worth roughly $1 billion, is raring to go. As he gathered his thoughts during the interview, he frequently jotted down important points in a notebook. Expansion across Asia was one of them.

One thing that Kawano wants the world to know is that TKP is not WeWork -- although it does share several similarities.

Like WeWork, TKP takes out long-term leases from building owners and rents the space to business clients for short periods. It mostly focuses on conference rooms, which are used by companies to train new employees or host events. But earlier this year it also acquired the Japanese business of British company IWG, and moved into actual workspace sharing.

Also like WeWork, TKP's "sharing economy" business model helped it generate early excitement among investors, who saw it as something more than just a property business.

Yet, while investors have soured on many sharing economy players, TKP's shares continue to trade at 70 times its earnings. Surprise, surprise: Profitability counts for something.

TKP is different from WeWork in another important way too.

Rather than attempting to turn a profit on room rentals alone, TKP adds a range of ancillary services like catering, hotel accommodations and event management. These extras account for about half its total revenue, and the convenience of one-stop shopping helps keep customers from straying to cheaper alternatives.

"TKP's biggest resource is its salespeople, who can cross-sell services based on client needs," said Junichi Tazawa, a senior analyst at SMBC Nikko Securities.

Kawano says a TKP conference room can break even with a 35% occupancy rate. By contrast, WeWork Japan is believed to make losses even though it says many of its co-working spaces in Tokyo are filled nearly to capacity.

In Kawano, analysts see a man with an endless fountain of ideas and the drive to realize them. He may not share WeWork co-founder Adam Neumann's predilections for going barefoot, hammering tequila shots and jetting around in private planes, but he does display a similar exuberance.

Now 47, he started out in the 1990s as a currency trader at Itochu, a Japanese conglomerate. He went on to work for an Itochu online brokerage venture, before leaving with his boss to set up an internet banking startup. Over the years, Kawano toyed with the idea of applying an arbitrage strategy -- acquiring something at a low price in one market and selling it in another market for a higher price -- to online services.

In 2005, it dawned on him that this could work with room rentals.

He tested this by securing two floors of a building in Tokyo's Roppongi district that was destined for demolition. When he offered the space online for 100 yen an hour, he racked up a surprising number of bookings.

Kawano felt he needed to keep prices low to attract customers, but he realized there were other ways to make a profit. Instead of offering free beer and coffee, as WeWork did, he charged for them. He often dashed to department stores himself to buy bento boxes for lunch, which he would sell to clients for more than he paid.

He widened his margins even further by picking dishes individually from the deli corner. The catering proved so successful that he eventually decided to acquire a bento company to provide lunches in-house.

Kawano says he was inspired by Disneyland, where visitors often spend more on food and merchandise than the entrance ticket.

WeWork's Iceberg co-working space in Tokyo: The troubled company's locations are undeniably stylish. (Photo by Nobuyoshi Shioda)

Making a profit also meant doing whatever it took to limit costs. In the early years, Kawano handled cleaning and key management himself. Many of the rooms were in small buildings on hard-to-find streets. He would often take calls from lost customers in his car.

Gradually, however, TKP became too big for one man, with more than 2,000 conference rooms and event halls across the country.

Armed with proceeds from the company's IPO in 2017, Kawano plotted his next big move -- an entry into shared work spaces. He saw an opportunity in IWG, which was struggling to compete with the SoftBank-funded deep pockets of WeWork.

This past April, TKP acquired IWG's Japanese operations for 320 million pounds ($410 million), marking its biggest acquisition to date.

The deal added IWG's 144 shared offices in Japan, marketed under the brand Regus, to TKP's network. It also broadened the company's customer base. While TKP had mainly served Japanese corporations, Regus brings a more international clientele, and the two companies feed clients to each other.

Kawano has now doubled down by purchasing Regus' operations in Taiwan, and he sounds hungry for more. Regus offices are scattered around Southeast Asia, India and China -- all markets where WeWork appears to be beating a retreat.

"Our expansion was limited to developed markets in the past," Kawano said. "Thanks to Regus, there is now a possibility for us to spread our business to places like Jakarta, Kuala Lumpur and Bangkok, where the economies are growing."

The recent share offering will allow TKP to pay off debt from its acquisitions and "take on additional risk," Kawano said.

Though the WeWork debacle has cast doubt on the future of office sharing itself, some market watchers pin the blame on Neumann's management, not the core model. Experts still have faith that companies will increasingly look to share space, rather than own it, much the same way businesses have switched from in-house servers to cloud computing.

The prospects in Asia look particularly bright, judging from research by property consultancy JLL. It found that the region's flexible office space market grew by 35.7% per year on average from 2014 to 2017, faster than the U.S. and Europe. By 2030, JLL estimates flexible space will account for 30% of global corporate commercial property portfolios.

Kouki Ozawa, an analyst at Mitsubishi UFJ Morgan Stanley Securities, said the premium on TKP's stock price reflects investor confidence in its aggressive targets, which include more than doubling revenue to 79.3 billion yen ($730 million) for the year ending February 2022. But to achieve its goals, the company will have to expand quickly both its core conference room business as well as Regus, while maintaining occupancy rates.

As WeWork found, rapid growth can be a dangerous business. Kawano runs a tight ship, but it will be harder for him to micromanage operations spread out across the region. His own track record of deal-making is not flawless: last year, TKP was forced to write down a stake in Otsuka Kagu, a struggling furniture retailer.

Regus' offices hew toward the conservative, compared with WeWork's, but TKP hopes to increase the brand's cool factor. (Photo by Yuki Kohara)

The founder admits to feeling pressure from activist investors who want TKP to start paying dividends. He sold a portion of his own stake in the latest offering -- opening himself up to another parallel with Neumann, who famously cashed out about $700 million before WeWork's doomed IPO -- but insisted it was only to prevent dilution by issuing too many new shares.

Though Kawano is keen to differentiate TKP from WeWork, he says he agrees with its vision of "turning experience into an added value." In some ways, he embraces WeWork's modern aesthetic and social concept. The newest Regus offices feature stylish lounges and hold gatherings for tenants.

One question is whether those spiffed-up offices will lure clients away from WeWork, which is down but not out. The U.S. company's local executives say Japan is the group's best-performing market. It is moving forward with plans to open its largest location yet in Tokyo's Shibuya district this December, with 3,500 desks on five floors. Ken Miyauchi, CEO of SoftBank's mobile unit -- a joint venture partner in WeWork Japan -- recently said the company "can turn a profit soon."

Some analysts hint that TKP and WeWork might even complement each other, noting that the former lacks the latter's large base of fast-growing startup clients. Asked if a partnership with WeWork might be possible, Kawano stressed Regus remains his priority.

SoftBank is in the mix for Kawano, too -- although as a customer. TKP managed a major conference for the conglomerate in Tokyo this summer, which included a keynote speech by billionaire CEO Masayoshi Son.

Kawano said it was a lucrative contract.

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