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Case Study

Posted on 21 January 2021

Background

You are a business strategy consultant, employed by the firm Desai Wicksteed Connolly (DwC).  A new client, MeerBroad Properties Ltd (MBP), has asked you to assist them with a restructuring project and a potential partnership with a competitor.  MeerBroad Properties is a residential estate agency in North West England.

UK estate agency industry

A residential estate agency (the agency) acts on behalf of a person (the seller) who wishes to sell a property such as a house or apartment. The agency estimates the market value of the property, agrees with the seller the price at which it should be marketed (the asking price), advertises the property for sale and sends an agency employee to accompany potential buyers to view it. Once a buyer is found, the agency assists with price negotiations between the seller and buyer. The agency receives payment for these services from the seller, in the form of commission based on the final selling price of the property.

Agencies are regulated in the UK by the Estate Agents Act 1979, which aims to ensure that agents act in the best interests of sellers, and that both buyers and sellers are treated honestly and fairly. Agencies must also comply with money laundering legislation. Agency employees are not currently required by UK law to be either licensed or formally qualified. However, many employees belong to a professional body and must comply with that body’s code of professional ethics.

Traditional estate agency model

The traditional model for an estate agency is to operate from several retail outlets (branches). As well as administrative staff, each branch has several employees who provide services to sellers in a relatively small geographical area. These employees receive an element of performance-related pay. The estate agency industry is highly fragmented. There are some well-known national agencies with branches across the UK. There are also many local, independent agencies and the average agency has only two branches.

In the last ten years, technology has led to rapid changes in the estate agency industry in the form of online agencies and online advertising.

Online agencies

There are 35 online agencies in the UK. It is estimated that they will represent sellers in 15% of UK property sales during 2020. Online agencies charge sellers a fixed fee, regardless of the value of the property, and are significantly cheaper than traditional agencies. An online agency values the property and lists it for sale on its own website. Sellers can monitor the progress of their sale online and buyers can undertake virtual tours of each property, reducing the need for accompanied visits. However, online agencies do not provide face-to- face services and may lack the local knowledge of a traditional estate agency.

Online advertising on property portals

When looking for a property, buyers prefer to have all available properties listed in one place, rather than accessing multiple sources of information. 95% of buyers start their search by viewing properties advertised for sale on one of two online property portals: Pozla and Nextstep. These provide an advertising service to estate agencies by listing residential properties for sale on their portals. They use large databases to provide additional market intelligence but do not themselves offer estate agency services. The estate agency industry typically spends half of its advertising budget on listing properties with Pozla and Nextstep.

MBP business model

MBP was set up by Jaini Haldar and is owned and operated by the Haldar family. It is a traditional estate agency with seven branches, located in major towns. The branches deal primarily with the sale of residential properties, for which MBP charges the seller a commission of 1.5% of the final selling price. MBP also offers services relating to rental properties. People who choose MBP to sell their houses typically live within 25 kilometres of the relevant MBP branch. MBP's branch and office premises are leased.

MBP markets each property for sale by displaying property details in the relevant branch and on its own website, distributing brochures and paying to advertise in local newspapers and on local radio. It does not advertise with Pozla or Nextstep.

MBP's level of completed property sales has been declining, due in part to political and economic uncertainty which has affected both sellers and buyers. In 2019 MBP commission revenue and profits reduced as a result, although this decline was not consistent across all its branches.

Branch closure criteria

The MBP directors are considering whether to save costs by closing the two worst performing branches.  Branches A and B have been selected for possible closure on this basis. Performance data for the year ended 31 December 2019 are included in the Exhibit.

Strategic alliance

Jaini’s daughter, Rebecca, is one of MBP's youngest directors. Rebecca believes that MBP has failed to embrace the changes in technology which are challenging the traditional industry model. She has suggested a strategic alliance between MBP and OurCasa Ltd (OurCasa), a small online agency that recently started trading.

OurCasa charges sellers a fixed fee of £650 to register, advertise and sell a property via its website. Once a seller has registered, an OurCasa employee values the property using available online data about the property’s location. The employee also visits it to record details (e.g. size, condition, age, layout) and takes photos and videos to produce a virtual tour. The details and tour are then posted on OurCasa’s website. Potential buyers can ask to view a property or make offers to buy a property by emailing OurCasa. OurCasa passes these requests to the seller by email. OurCasa does not organise viewings or negotiate the final sale on the seller’s behalf.

Rebecca said:

“Our knowledge and expertise in our local property market is no longer enough to persuade sellers to use MBP. We don’t have the funds to launch an online agency ourselves, and our IT expertise is limited, so an alliance with OurCasa is the best way forward. We will be able to list all of our sellers’ properties on the OurCasa website, which offers an online service 24 hours a day.

In return we will provide traditional estate agency services to support OurCasa in introducing a new “premium sales package” for its properties in our local area. Sellers will pay OurCasa a fixed fee of £1,250 per property, which will include accompanied viewings and assistance in price negotiations. OurCasa will retain £750 of this fee and pay the rest to MBP for the support we provide. OurCasa have given us first refusal but plan to talk to other agents if we reject these terms.”

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