A once-unstoppable real estate behemoth, Realogy narrowly survived the Great Recession. But it now faces an equally daunting challenge. Like a swarm of jellyfish, a sea of innovators are encircling the New Jersey firm, beginning to sting at its market share.
Despite being somewhat beached for the last 10 years, the prodigious real estate company has 14,500 company-owned operations and franchises around the globe — making it the largest real estate broker in the U.S. in the biggest housing market in the world.
While its size, reach and revenue ($6.1 billion last year) are the envy of the industry, it also faces serious threats that are no longer being trivialized inside Realogy headquarters. The company understands it must make some big moves to fend off well-funded upstarts that are stalling the company’s growth.
Its stock market performance may be the single best indicator of Realogy’s woes. In the last five years, the Dow Jones Industrial Average shot up 60 percent while Realogy sunk, losing 45 percent of its value.
Realogy knows it’s got company
And now the battle on Main Street is equally vexing.
Every day agents are being rustled by fast-growing virtual operations like eXp Realty, top-producer raider Compass and 100 percent commission model companies such as HomeSmart. Well-capitalized discounters like Purplebricks are just beginning to nab home listings, and high-agent productivity tech brokerage Redfin is building a credible brand that promises a better customer experience and lower commission rates.
Realogy built its might as an enviable collection of real estate brands, but even that brand dominance is under siege. Today, Zillow owns the consumer while Compass, Redfin and a raft of cool post-recession indie brands appeal to a new generation of agents.
The good news? The company is no longer in denial, its imperious swagger has faded. Last year, the board of directors began to shake up the Realogy leadership ranks.
New tech-savvy CEO Ryan Schneider is realistic, scrappy and moving fast and furiously to confront a classic case of the innovator’s dilemma, a large legacy company that is seemingly too big to change when it is absolutely necessary to survive.
The Realogy brands are embracing the Schneider way, making gallant efforts to re-invent themselves with a new attitude to reach agents.
But rebranding is not the solution. Realogy is vulnerable on multiple fronts, including its iron-fist hold on a once-golden business model that consistently promised a free cash flow dream machine — formerly the darling of Wall Street. Agent looting, lower commission rates and expensive agent splits are chipping away at the Realogy recurring gold mine.
Woes across the real estate franchise business
Schneider is not alone; his legacy competitors are all scrambling to confront the changing dynamics of running a real estate franchise business.
Keller Williams announced earlier this year that it is becoming a tech company. The details are foggy but the proclamation rattled the industry and showed how uncertain the future is for companies that for awhile were unscathed by disruption.
Berkshire Hathaway’s strategy is to gobble up share by buying legacy companies. Late last year, HomeServices of America, a BH company, acquired Long & Foster, one of the biggest residential real estate companies in the country. Bulking up buys time.
Re/Max seems to be sorting out its next moves and technology may be part of its strategy, acquiring Denver-based technology firm booj — short for the phrase “be original or be jealous”.
Will these legacy companies survive the guillotine of change? Technology shows no mercy.
The best window into the future is what Realogy does or doesn’t do in the next year or so. Onboard for nearly four months, Schneider has already shaken up his executive team and he announced plans to build new technology to help his 289,000 agents.
But he must do much more, and he knows it.
What Pepsi and Domino’s reveal about adapting to change
With a powerful platform and an impressive footprint, Schneider has lots of assets with many choices for a future direction. Three paths stand out: tweak, transform or deliver on a new customer promise.
We all know what tweaks lead to — ho-hum results, which would be deadly to the company’s long-term future.
Transformation might look something like what PepsiCo’s CEO Indra Nooyi accomplished at the soft-drink conglomerate.
She put a stake in the ground 10 years ago, when she restructured the company, becoming a leader in healthy soft drinks and snacks and moved away from being one of the largest distributors of sugar water in the world.
The company acquired and incubated dozens of new health-driven startups and used its distribution and its marketing prowess to move in an entirely new direction.
“In many ways, you’ve got to make a break with the past. If you don’t, you’re spending more time appeasing the heritage [stakeholders] than making the necessary changes,” Nooyi said at a Stanford University symposium.
Schneider’s best path may be to deliver on a new promise. And of all companies, Domino’s Pizza, which used technology to transform the pizza production and delivery process, may offer the Realogy executive a roadmap.
Take the success of Domino’s simple tracking app that attacked a rather mundane part of the pizza industry: delivery. The Domino’s mobile app tracks your pie from order to arrival at your front door. The company made the process of pizza delivery transparent. Before the app, you’d sit on the couch, starved and anxious about when your pizza might arrive.
Instead of becoming a technology company, Dominoes baked tech into all parts of its business. The investment paid off as the pizza empire raced past its competitors. Transparency created a better consumer experience, trust for the Domino’s brand and soaring company profits and shareholder value.
And consider that Domino’s is a franchisor like Realogy. It deals with all of the same headaches of working with small business owners — as Realogy does with its real estate broker-owners scattered across the country — while competing with boutique pizza shops, legacy brands and gourmet pie snobs.
In the last five years, Domino’s stock rose from $50 to $233 a share, reaching a $10 billion market cap. During that same period, Realogy shares have fallen from $43 to $27 and to a $3.6 billion market cap.
Schneider has a huge opportunity to re-invent Realogy’s dusty technology and take it in a significant new direction.
The tech vs. broker experience: A bifurcated future
Part of his challenge is predicting what happens next, not mereley reacting to current events at Compass, Redfin and Purplebricks.
Real estate tech investor and New York broker-owner Clelia Warburg Peters predicts that in the coming years, the industry will be bifurcated into several levels of service and transaction types, much like Wall Street brokerages were reorganized a decade ago. Imagine a high-touch financial advisory role for some deals and an e-trade transactional market for everyday closings.
Peters predicts a time not too far off when most real estate deals are closed online, while the rest are handled by a real estate broker. Is such a future, imagined by an experienced and savvy professional inside the industry, really that far-fetched? Nope.
Realogy’s multiple brand smorgasbord may be perfectly poised to adapt to that multi-tiered world if Schneider is up for restructuring the company. Again Pepsico’s playbook may come in handy. Nooyi reclassified PepsiCo’s products into three categories: “fun for you” (such as potato chips and regular soda), “better for you” (diet or low-fat versions of snacks and sodas), and “good for you” (items such as oatmeal), according to Wikipedia.
No one knows for sure what’s to come. But waiting for Compass, Redfin and eXp Realty to implode may not be a good plan.
Uncertainty, disruption and change are as constant as people desiring homeownership. The question that remains is: Who will lead them home?
Editor’s note: For the last several months, Inman has been focusing on real estate leadership. This is the beginning of an ongoing series by Brad Inman on how real estate leaders are adapting to rapid change in the industry. Do you have a story? Send a note to firstname.lastname@example.org