Understanding The Creation Of Value – Part 3

Here at The Motley Fool Singapore, we’re being highly encouraged to read – it’s one of the greatest perks of my job.

One of the books I am currently reading now is “The Personal MBA” by Josh Kaufman, a blogger tuned best-selling author.

At the beginning of his book, Kaufman talked about the different types of value a business can provide which can define it as a sustainable business. According to Kaufman, there are twelve types of value that a business can bring to the table for its customers.

Kaufman’s book triggered my mind and led me to the opinion that thinking about the value that a company can provide is a very good starting point for investors who are analysing a new firm.

In the first part of this series, I looked into companies that provide value through their products and services. In the second part, I dug into companies that brought value to their customers by sharing resources and providing subscriptions.

For this article, let’s look at business models involving resale and leasing.

Providing value through reselling

A reselling business model involves simply buying something and then selling it to another customer at a higher price. Normally, in order to obtain the product at a favourable price, the reseller would need to buy in bulk. After the purchase, the items can then be sold individually or repackaged into smaller bundles for resale.

A typical company that use this business model is a retailer or a wholesaler. A company like supermarket and hypermarket operator Dairy Farm International Holdings Ltd (SGX: D01) is a great example of a firm that utilizes this model (some retail chains in Singapore that are under Dairy Farm include Giant and Cold Storage).

As a supermarket operator, Dairy Farm purchases products from producers or wholesalers and then resells the products at a higher price to individual consumers who visit its stores.

This business model is valuable to consumers because as individuals, they lack the ability to get lower prices that can arise from bulk-buying. Therefore, retailers like Dairy Farm are there to plug the gap; they enjoy the discounted price that comes with bulk-buying and even after earning a profit for their work, they can still  pass on some savings to individual consumers.

Providing value through leases

A lease is basically an agreement that allows you to charge a customer for the use of your property for a specific time period. Given the high demand for properties in land-scarce Singapore, leasing has become a very valuable business model and might even be one of the most popular here in Singapore.

All real estate investment trusts utilize the leasing model to provide value for its customers and investors. In this case, the REITs are providing value for those who rent properties because the former allows the latter to use a space without having to cough up a large sum of money to buy a property for use.

For example, if Old Chang Kee Ltd (SGX: 5ML) wanted to open a new outlet hawking its popular curry puffs and other fried snacks, it could just lease a unit from a mall that’s owned by say, CapitaLand Mall Trust (SGX: C38U), instead of buying its own real estate to start a branch. This model is also beneficial for the asset owners because it allows them to earn a decent return on their investment and at the same time, provide a regular stream of income through rental payments.

Foolish Summary

Reselling and leasing are two more value creation models that businesses can use. Learning about how a business creates value for its customers and investors would give us a better understanding of the advantages and disadvantages of the business and help us to make better-informed investing decisions.

There are 12 types of value that a company can provide and I’ve so far ran through only six. There’d be more to come from me on the topic, so stay tuned!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Dairy Farm International Holdings.