The real estate market is quite a mess. Volume is down, prices are down, information transparancy is up, brand and broker support of agents is way down, marketing options are increasing, banks are selling many of the homes on the market – with all of the turmoil where are we likely to see winners and losers? It appears that big franchisors are likely at greatest risk right now.
Franchisors like Realogy seem to have the biggest challenges ahead of them. As listings and data has proliferated, brands have lost relevance. As the biggest brands have been financially squeezed, they have reduced their level of investment in marketing, support, systems and innovation. It is evident in the transaction volumes – it was not long ago that the Realogy companies claimed 25% of the total domestic US sides – now I believe that they claim more like 18%. This is while Relogy has expanded the number of brands in its portfolio with the acquisition of Sothebys and the launch of Better Homes and Gardens.
You can see more evidence of trouble in the latest 10Q. For the 1st 9 months of the year, Realogy participated in 719,682 sides. It cost the franchisees (brokers and agents) $257 per transaction to carry the brands. If you think of the brand as being a marketing expense, is this affordable? I have heard that a good rule of thumb is that roughly 20-30% of brokers leads come from brand websites or brand marketing. So the cost per sale moves from $257 per transaction to more like $1,000 to $1,200 per transaction. That seems like a pretty expensive marketing relationship. We know that there has been a defection of some of the better agents to independent brokerages and to smaller brands that take a smaller cut. I would expect this trend to continue. I would say that unless the big brands can figure out how they can lend a real competitive advantage to their franchisees, they will experience a continued erosion of their position in the market. I know that there are a lot of smart people at these companies trying to figure out how to create better brand relevance and leverage the economies of scale they can bring to their customers – I would not count them out. But the chips do seem to be stacked heavily against right now.