The real threat to the high street is earnings: Will likes of Purplebricks and OpenRent make more firms go fixed-fee?

Partner with everyone, so their success is your success – this is the philosophy behind Rightmove and Zoopla.

While they have very different businesses now, they were always B2B, ie serving business customers.

It is often odd to hear people – mostly agents – suggest that either of these very profitable companies would take on the massive cost of going direct to consumer.

Far easier to send 20,000 invoices a month than hundreds of thousands. And that’s before customer support costs.

But are these portals now at risk from well-funded direct-to-consumer offerings like Purplebricks and OpenRent, whose boards are now a common sight outside property across the UK?

By number of new listings, these are among the largest sales and letting agents respectively, and both are growing rapidly – at the expense of other online agents as well as high street agents.

The threat to Rightmove and Zoopla isn’t that consumer buyers and renters go direct to each of these websites to find property – they won’t.

The real concern should be how effective these fast-growing services cut down the amount of commissions earned by the rest of the industry.

Let us do a very simple paper exercise.

According to Morgan Stanley’s report, released last January, there were 1.1m house sales last year across the whole of the UK worth an estimated £275bn.

The napkin calculation for what estate agents earned at 1.6% (but see below) would be £4.8bn.

Compare that to the maximum £1,100 per listing charged by Purplebricks: if everyone goes fixed fee sales, then the total fee pool would shrink to £1.2bn.

That’s a quarter of the existing revenue sloshing around the industry.

Where would savings be made to keep businesses profitable? Ditching high street offices certainly won’t dent the losses.

Data gathered by Morgan Stanley in its Fourth Annual Estate Agent Survey and eHome Tracker breaks down estate agent costs, highlighting that wages made up 34% of revenue, and rent was a mere 4%.

In aggregate UK agents spent £288m on online classifieds, or 6% of revenue – of which 4.8% (or £201m) went to Rightmove. You could read that as the ‘ Rightmove tax’ on estate agents currently standing at almost 5%.

It’s worth noting the Morgan Stanley authors estimated total agency revenue at £4.2bn, made up by taking the average estate agent fees at 1.3%, coming out with £2.9bn of industry sales revenues for the 1.2m transactions in 2016. They also included £1.3bn for lettings revenue.

Overall, Morgan Stanley estimates that agents earn 13% of revenue as profits. Considering they have 3-4x the revenue of online/hybrid agents, how will the industry survive if the march toward low fixed fees continues?

Even with their massive volume, we know that Purplebricks just about breaks even. We don’t know what would happen if they stopped their very effective TV advertising campaigns, which make up a significant portion of their costs.

If the rest of the industry increase their marketing spend to compete with Purplebricks, say with 10% of revenue taking them close to break even, that would equate to approximately £400m of advertising spend. That’s twice what is spent on Rightmove.

Rightmove’s share price is sky high because the markets believe agents could eventually spend £600m a year with the portal. It’s the easiest thing for agents to do, as most think that’s all you need to do.

Not everyone can produce a ‘hit’ advert, but the leading agent of today is dominating mindshare with their ‘Commisery’ adverts and re-educating the populace against paying estate agent commissions.

And this is where the war will be won or lost for Rightmove: will the ‘Rightmove tax’ increase from 5% to 15% and earn that £600m a year?

Or will agents realise that Purplebricks’s biggest weapon is massive, disruptive TV advertising and begin to follow suit?

It’s worth noting that OpenRent’s growth strategy is also TV advertising: they sold a stake in the company in exchange for many hours of media exposure.

And as the largest and fastest growing letting agent, it paints a picture that TV advertising, and not paying Rightmove more, is the path to winning in our industry.

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6 Comments

  1. Essjaydee51

    Are they the leading agent of today? And only breaking even!! So on the stock market does Morgan Stanley grade share price by size of company or size of profit? I wouldn’t want them managing my portfolio on this evidence, oh wait, they don’t

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  2. AgentV

    Collective active intelligent marketing is the way to disrupt the so called disrupters.

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  3. Bless You

    Trouble is, a normal businesses wouldn’t spend all their advertising budget on a scheme that only broke even.

    Example of govt. not understanding business and thinking cheap is better.

    Online agents should have to pay rates in every town they operate in. Level the playing field a bit for small businesses in market towns trying to survive.

     

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    1. Bless You

      ONTHE MARKET needs to change tack quickly…
      1) Let all agents join including corporates ( who probably trained 90% of indie agents anyway)  who operate no sale no fee
      2) Drop the 1 portal rule
      Thats it. 
       

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      1. Beano

        The headline says it all – lower fees, lower profits…..a fairly bleak outlook of rising costs and falling revenues; watching competitors grow and take market share on the cheap and essential service providers making millions and asking for more. 
        Just what are traditional agents doing to counter these threats to their livelihoods? Answers on a postage stamp please.

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        1. Hillofwad71

          By doing what  a good agent always  has offer a good service Local agents  stand or fall by reputation  not cheap fees  Builders are well aware that the cheapest quote rarely wins the day . Clients fully aware they have  to make  a decent  profit otherwise they will cut corners and they will be the ones that suffer
          Maybe more agents will offer performance fees  if they  achieve a figure over and above an agreed valuation 

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