When industry giants fail: The demise of Countrywide
It has been exactly a decade since Lehman Brother’s shuttered its doors as the first domino of the financial crisis. It was the event that changed the perception of the banking industry forever. It was also the case study which will be repeated over time about the lessons of liquidity and solvency.
Lehman’s collapse was marked by its inability to find anyone willing to lend it any money. It could no longer get short term loans, let alone raise balance sheet debt. The other underlying issue was the declining value of assets. The housing market’s depression resulted in a value base that very quickly changed all the metrics that define how solvent a company and its assets really are. The rest is history. But what is also a great learning from this history is the impact it had on the future. The financial crisis would not have been a crisis if it was about the health of a single commercial enterprise or mismanagement of specific companies. It was a systemic problem where the weak went down first and consolidation resulted in a handful of survivors existing in new structures of lower risk and greater regulation.
When the giants of an industry start to fail, it should trigger concern. It requires a real analysis of the what and the why along with the understanding of the impact on the market that it serves. We are at such an event with the collapse of Countrywide in the UK.
Countrywide is the United Kingdom’s largest estate agency. It manages 125,000 properties around the country and owns 65 Agency brands all acquired by aggregating 850 agencies. In 2007, Countrywide was taken private by a consortium of Private Equity investors and relisted in 2013. During its IPO, it was listed at a £750 Million market cap. By 2014, it hit its peak at a market cap of around £1.4 Billion. This was followed by a period of underperformance and in January 2018 Countrywide announced an earnings warning. By August of 2018 it was unable to raise new debt with a failed bond offering. As I write this article, the Board has made an announcement for an Emergency Cash Call which is to be approved by August 28’ 2018. The market cap of the largest estate agency in the UK is languishing at £34 Million. It needs to raise another £140 Million for its “turnaround” which we should fairly call its “survival”.
So, what went wrong?
A lot is being written about the competition from Online Letting Agencies and its impact on the traditional business models but we need to look at Countrywide intrinsically and the industry itself before we start blaming external factors. There is genuine truth in the fact that online letting agencies have a higher growth rate than the traditional incumbents but that is natural for any startup. When you start from scratch, growth rates will be higher than an incumbent. Also, less than 10% of the market is held by the online letting agents and 90% is still with traditional incumbents. The problems that Countrywide faces are not driven by competition. It is more about the way that properties are managed and the industry itself. It comes back to liquidity & solvency. The problem is systemic very much like the problems with Lehman Brothers and it is only the first of the victims of a much larger tsunami of change.
We are in the People Business
A quick glance at the publicly reported financials of Countrywide shows the very base of the problem with the Agency business. It shows a Company whose Asset value lies in Intangible Assets and Goodwill. There is a lack of real assets including cash. Service businesses like Brokerage, Property Management or Surveying are all based on intellectual property. The 2017 annual report of Countrywide acknowledges this with the statement “Industry expertise in all areas of our business is key”. Moreover, the acquisition of multiple brands has inflated the goodwill on the books with the brand value of all the 65 brands under the Countrywide umbrella representing large justifications of its Asset value. The “turnaround” plan for Countrywide included “going back to the basics and bring back people who were with us before”. This strategy ignores a very crucial problem. The business is not scalable. And to be the largest agency in the UK, you need more real “Assets” than disaggregated brands and a limited resource of people.
Countrywide currently manages between 25-34 properties per employee on payroll. This metric is actually quite standard for most traditional agencies. Based on publicly available information, the hybrid digital property managers are able to make an improvement of 10-20% on this metric and can manage around 35- 40 properties per employee on payroll. This metric includes all the functions in a company like accounting, admin, agents and management. In a self-confessed note in the Annual report, the management at Countrywide says that “Centralization lead us to adding substantial overheads to the group”.
When an enterprise scales, not being prepared for the scale is the biggest challenge that it faces. The Countrywide strategy to acquire brands and agencies was the perfect solution to show top line growth and scale but it had no strategy or secret sauce for managing this scale. The economies of scale that are held as the truth of all management theory breaks down when there is no integration plan for the rapid growth. As Countrywide acquired more agencies, it hired more people to manage these acquisitions. For a company which has most of its use of funds being allocated to working capital and people costs instead of any real investment into an asset, it is no surprise that the sparkle of the top line growth eventually turned on its profitability. Today, during a time of crisis, it will now have to face the challenges of redundancies and lease contracts on closed storefronts.
But what is alarming for us as an industry is that these problems are not an issue just with Countrywide but a trend which is intrinsic to the ways properties are let and managed today. “We are in a people business” is a trademark for most agency businesses. However, the industry is also in the real estate business. The landlords who are paying for tenancy fees, management fees and sometimes also ground management fees are driven by yields. If there is any way to help improve their yields, then the industry must focus on that, or else it should come as no surprise when it collapses under the weight of its own overextension.
We can (not) do Digital
The 2014 Annual Report from Countrywide uses a word “innovation” 5 times. It announces new channels in addition to the storefronts like digital portals and applications. More people are hired to manage these new channels. Over £2 Million is spent on marketing redesign and online presence. Large IT teams and partnerships are set for “transforming technology infrastructure” with the creation of a common platform and integrated VOIP. Countrywide announces the launch of “Traveltime” and “ Launchpad”, its digital solutions for property search and landlord tools. Countrywide also launched a digital fixed fee proposition to customers which was a reduced fee offering without full service. Today, in 2018 the same Annual report mentions “ We need to define what digital means to us as an organization”.
Like most in the industry, Countrywide jumped onto the bandwagon of technology solutions as a trend follower. Their digital platform competed with their full-service proposition creating confusion for both the employees and the customer on the expectations of the actual value proposition. This confusion is not just a problem for Countrywide. It is a systemic problem for all traditional and the new online property managers. While full service agencies are ramping back on services, the hybrid platforms are adding new full-service options.
Countrywide made the same decisions that most banks made with regards to technology. They decided to replicate and spend millions on digital assets without recognizing what the true potential of technology really is. Its priority in 2018 as mentioned in the latest annual report continues to be to improve its legacy IT and contact center which hinder all scalable growth and in this case, efficiency of scale.
The Day 1 Philosophy
Startup founders often worry about the consequences of someone “copying your idea”. It is a very irrelevant fear. There is no reason why any business would not have evolved to an improved vision of itself by the time the “copying” happens. The growth of Amazon from an online book seller to the master of the universe is based on the Jeff Bezos trademark philosophy of “Day 1”. It did not matter how many e-commerce businesses “copied” or incumbents created new channels, it did not stand still for a single day, building a scalable enterprise. The Day 1 philosophy strives to keep a startup mentality at every stage of the scaling of a business. It guards against the contentment from success. Day 2 is when irrelevance begins. It is followed by pain, decline and death and it can be slow but it is inevitable. The property management industry needs to find its roots back to “Day 1”. The industry has been using the shield of competition and macro-economic trends to ignore that it is languishing in Day 2. The strategy to scale in property management & agency has not yet been discovered. The traditional incumbents are using their financial lead to acquire into a winner’s position. The new entrants are using technology to expose changes in the demands in the market and also get to a lead but both will eventually face the same issue of managing scale. Tomorrow if Countrywide was acquired by another incumbent or online player, the challenges will remain unchanged. The customer will continue to demand better yields and a real solution will need to solve for scale. Till then, the coming years will continue to see more business fail due to a systemic industry problem.