In the last article, we examined the fact that even in mature markets, differentiation is possible through tailored strategies by looking at the cases of self-storage companies overseas. This time, we will focus on the case of 'Public Storage', the world's largest self-storage company, and explore the self-storage industry from the perspective of economies of scale. We will look at how economies of scale operate in the self-storage industry and what competitive advantages can be obtained through this by examining the growth strategy and operational efficiency of Public Storage.

Self-Storage and Economies of Scale

<U.S. self-storage market share (by area) / Source: Extra Space Storage>

Self-storage is one of the representative industries where economies of scale operate strongly. The economies of scale in self-storage manifest as cost efficiency increases with the number of facilities operated. The reason economies of scale are effective in the self-storage industry is that the cost of facility investment is relatively low compared to other real estate sectors, allowing for aggressive site expansion. In the U.S., the construction cost of self-storage is about $40 per square foot, which is only about 30% of the $300 required for office buildings.

When looking at the most mature self-storage market in the world, the U.S., it becomes even clearer how important economies of scale are. Currently, about 52,000 self-storage facilities are operating in the U.S., which have rapidly grown at an annual rate of 8% since 2012, forming a market worth $39.5 billion (about 52 trillion won). According to global market research firm Mordor Intelligence, the U.S. self-storage market is projected to grow to $51.2 billion (about 74 trillion won) by 2030.

Notably, despite forming such a massive market, over 60% of all facilities are operated by individual entrepreneurs or small operators. This reflects the characteristics of the self-storage industry where physical facilities are needed regionally, and significant initial investment costs (CAPEX) are required for each facility.

In contrast, in the domestic market, Darak holds an overwhelming market share that surpasses the combined facility numbers of the 2nd to 5th ranked companies. This is because Darak focuses not only on physical facility expansion but also provides automated operational solutions, overcoming structural limitations. Recently, fierce competition has unfolded among large operators listed on the REITs in the U.S. to realize economies of scale through such innovations and lead the market.

Public Storage's Economies of Scale Strategy

The company that first successfully realized economies of scale in the U.S. is Public Storage. With over 3,400 facilities and 241 million square feet (about 6.7 million pyeong) of leased area across the U.S., Public Storage has established itself as a global leader with a market capitalization of $58 billion (about 81 trillion won). Amazing profitability indicators such as Same Store NOI margin at 78% and operating profit margin over 50% showcase the advantages that scaled businesses can enjoy.

<Public Storage site distribution status / Source: Public Storage>

Public Storage has implemented three core strategies based on economies of scale to continuously achieve superior market share.

First is an aggressive mergers and acquisitions (M&A) strategy for small and medium storage companies. A notable example is the acquisition of Simply Self Storage for $2.2 billion in 2021, securing 90,000 customers and 127 facilities all at once. This has not only expanded the scale but has also rapidly increased its influence within the market.

In response to Public Storage's aggressive M&A strategy, competitor Extra Space Storage has taken an even bolder step. In July 2023, they acquired Life Storage for an astonishing $12.85 billion, successfully executing the largest M&A in the industry.

Through this, they added more than 1,200 facilities, securing over 3,800 facilities and 283 million square feet of rental space, thereby building the largest portfolio in the industry. This clearly demonstrates that economies of scale are a key factor in the success of this industry.

<U.S. self-storage transaction trends / Source : National Report on 2024 Self-Storage Investment>

Similar trends are emerging in the domestic market. Darak began acquiring storage facilities operated by Megabox Central in 2022 and has successfully integrated numerous privately operated storage facilities. Facilities that previously struggled with profitability are achieving high occupancy rates through Darak's automation technology and operational platform. As the domestic self-storage market grows, such cases are expected to continue to increase.

Second is strategic real estate development. Since 2019, Public Storage has invested $12 billion to expand its portfolio by 36%. Especially, by purchasing cheap land in suburban areas and developing large-scale facilities, they are able to secure high-return assets while minimizing construction costs. This strategy leverages the significant cost advantage of constructing self-storage compared to other real estate, allowing for capital gains due to increases in property value along with operational profits when undervalued land is converted into self-storage facilities.

<Operating personnel per facility by self-storage company / Source: Company disclosures>

The effects of Public Storage's realization of economies of scale are most prominently demonstrated in operational efficiency. Each facility operates with an average of 1.9 employees, showing a high level of efficiency compared to the U.S. average of 3.5 employees. Labor costs account for only 11% of revenue, while marketing costs at 2.5% and purchasing costs at 4.6% are also maintained at significantly lower levels compared to the industry average.

This efficiency tends to be maximized as scale increases. Darak has achieved even higher levels of operational efficiency. By introducing fully unmanned automation solutions, they manage 158 branches with only 2 headquarters staff. This reflects an average personnel level of only 0.01 people per branch, showcasing nearly 200 times the operational efficiency compared to Public Storage.

They also maintain a strong advantage in terms of smooth financing. As the only firm with top credit ratings such as Moody's A2 and S&P A, they secured $9.2 billion in debt at a low interest rate of 3.1%. This financing advantage creates a virtuous cycle that leads to continuous growth investment.

Efforts to Realize Economies of Scale

<Public Storage and Darak's 'Dynamic Pricing' / Source: Each company's website>

Public Storage's main strategy for maximizing the effects of economies of scale is revenue maximization through data-driven pricing. Based on data secured through operating multiple sites, they adjust pricing according to demand and supply, occupancy rates, and regional characteristics.

Darak has developed this strategy further by implementing a 'Dynamic Pricing' system where real-time demand-supply data is analyzed by AI to set optimal prices. This system minimizes the vacancy rate by site and maximizes revenue. In fact, Darak's revenue per pyeong is recorded at levels 2.5 to 3 times higher compared to other companies.

<Public Storage vs. Darak digital operation technology / Source: Each company's website>

Public Storage is recently focusing on technological innovations for digital transformation, thereby striving to efficiently operate multiple locations and maintain standardized service quality. While they are making significantly more investments compared to other firms, their use of kiosks and remote consultations via video calls remains at a basic level compared to Darak. Additionally, such technologies are only applied to new locations, and still most locations are operated in an analog manner.

Strong brand recognition is also a very important factor. Public Storage operates multiple facilities in business areas where over half of the U.S. population resides, instilling strong brand awareness among customers. By providing practical and reliable solutions tailored to their lifestyle beyond simple storage services, they have expanded their customer base.

As positive brand experiences accumulate, Public Storage naturally creates a virtuous cycle of customer expansion when there are many locations. Darak also operates more than 140 locations in Seoul and the metropolitan area, achieving high recognition. In particular, they have built a strong brand image of 'self-storage = Darak' through representative landmark locations such as COEX and Lotte World.

Such strategies have been the foundation of Darak's focus on a 'technology-driven' future for self-storage since its inception. Being the first in Korea to implement the strategies adopted by leading self-storage companies in advanced countries, Darak has been able to expand sites and attract customers faster than anyone else. This is also strong evidence that Darak possesses a unique competitive advantage in the market.

Future Prospects for the Domestic Self-Storage Market

Through the case of Public Storage, we can confirm that the self-storage industry will ultimately grow under the leadership of large operators capable of realizing economies of scale. Just as the U.S. market transitioned from individual operators to large corporations, the domestic market is also likely to develop in the same direction in the future.

Currently, the only company in Korea capable of realizing economies of scale is undoubtedly Mini Storage Darak. The reason is that Darak has been developing and applying technologies such as digital contract systems, unmanned operations, AI-based demand forecasting, and smart storage technology that Public Storage has only recently introduced for several years. Darak uniquely possesses an efficient operational structure based on technology in the domestic self-storage market, and it is further accelerating growth through customer experience improvement and digital innovation.

Ultimately, as the domestic self-storage market grows in earnest, the competitiveness of scaled operators will become even stronger, and Darak will be a company that sets the standard in the market.