Why estate agencies are the latest brands to be digitally disrupted

"Digital disruption" has become something of a hackneyed phrase in recent times. Yet those that ignore the need for digital innovation will pay the ultimate price.

Blockbusters, Polaroid, Kodak and Borders are just some of the businesses that have failed to keep up with the speed of change taking place in society and technology. 

The High Street has been hit particularly hard, with retail giants HMV and Woolworths two of the big name casualties. 

But it's not just retailers that are having to survive what author Brian Solis has termed "digital Darwinism". 

Estate agents, for instance, looks very different in the twenty-first century, and with aggregation sites now taking centre stage, the industry is being reshaped. 

Many of the incumbents are facing the ‘innovator’s dilemma' - a familiar challenge for many estabslished companies these days, where they must decide between holding onto an existing market by doing essentially the same thing only a bit better, or trying to capture new markets by embracing new technologies and adopting new business models.

Think IBM, which embraced PCs alongside its mainframes business. Or - more recently and radically - Netflix, which swapped its old business model of sending out rental DVDs by post for an entirely new one – streaming on-demand video to its customers – and reaped the benefits.

Right now, a particular version of this classic business quandary is facing High Street estate agents.

Household names that are fixtures of the country’s house-buying and house-selling process, from Countrywide to Connells to Savills to Foxtons, are wrestling with a particular question: is their dominance of the High Street, and the strong businesses they have grown, facing up to a compelling threat from the new-model army of hybrid estate agents that nowadays seem to be all over our TV screens (if not yet hosting our for-sale boards in huge numbers)?

Publicly, the answer is still a confident, unmodulated ‘no’. But what’s the more nuanced version? How much market share will the likes of Purplebricks, eMoov, easyProperty, Tepilo and the rest have to take between them, and how quickly, before the High Street agents try to move more decisively?

And of course, there’s the other side of the story. A lot of money is already invested by fully paid-up believers in this alternative version of the future. It’s a future where many of today’s now-ubiquitous High Street names are vanishing by 2020 – replaced in short order by a new breed of online agency that delivers on its promise of decent service levels, competitive pricing, low overheads, national coverage – and even healthy profits.

‘First they ignore you’

“I like the famous Gandhi quote to explain how things are playing out,” says Russell Quirk, founder and chief executive of one of the new agency breed, eMoov.

“‘First they ignore you, then they laugh at you, then they fight you, then you win.’ That’s the way I see things going!”

This transparency provided by the aggregation sites has levelled the playing field and shifted the emphasis to service and trust.

Quirk and several others also think that all the rhetoric and arguments in the world about how the sector is transforming – or not – don’t really matter. It’s the data that really points the way ahead, whether it relates to the overall market share statistics or, down in the detail, at the proportion of asking price being achieved per sale by different types of agent.

“Six years ago you couldn’t meaningfully measure the inventory of online agents – there was too little to bother,” admits Quirk cheerfully. “Since then, the market has been roughly doubling its market share year on year from those small beginnings: from a half of one per cent to one per cent to two and then to four. It’s a trend that hasn’t stopped yet I don’t think: 2016 should see a doubling again in the hybrids’ share of the market.”

Tipping point

So has a tipping point been reached in adoption terms? Is consumer use of online or hybrid estate agencies already a mainstream activity on the terms of the technology adoption lifecycle first postulated by Everett Rogers and others back in the late-1950s?

“I think it is,” says Will Clark, managing director of online agency Sell My Home. “In 2016, we are moving well beyond the innovators and early-adopters picking this up. Now it’s the early majority that are in the frame – hence the TV ads from the likes of Purplebricks and Easy Property. Like others that are now active in the UK marketplace, we are projecting that online agents will account for 15% of the market by the end of 2017. That’s steep growth over the next two years but it’s only an extension of what’s already been achieved.”

The innovation question

Estate agency is, of course, an industry that has undergone profound disruption already.

It’s now possible for any informed, engaged property professional, and plenty of Rightmove-surfing amateurs, to understand the dynamics of a local market quite easily.

The shift of property listings from local newspapers and other printed media to the online aggregation sites – chiefly Rightmove and Zoopla – has changed the industry for good. As recently as the 1990s, would-be sellers and buyers were reliant on the High Street agents to see available properties in their search area or to get a sense of market values. But today the whole market is visible and searchable online via a handful of well-known websites, giving greater transparency than ever before. Add to this the accessibility and ability to analyse the Land Registry sales data and it’s clear that a huge amount of control rests with today’s consumer.

“Estate agents can’t escape the reality of Rightmove and Zoopla giving great visibility of the market to consumers,” says Clark. “That’s what everyone relies on in today’s property industry, and there are no barriers to access.

“This transparency provided by the aggregation sites has levelled the playing field once and for all. It has shifted the emphasis in the marketplace to other factors, like service and trust, which is where we are focused.”

Even the element of detailed local knowledge, which once a High Street agent could claim as a selling point, has been taken off the table, it seems. It’s now possible for any informed, engaged property professional, and plenty of Rightmove-surfing amateurs, to understand the dynamics of a local market quite easily. And most acknowledge that it’s the market that decides the price a home sells for, rather than any clever spin from an agent.

The price is right?

Once consumers are convinced on the service levels provided by the online agents, the main selling point of the new upstarts is the price.

By my reckoning, many of the High Street agents have profit margins of about 10%, with all their overheads, while the online agents can run at a 70% profit margin even on the lower fees.

If you consider that Foxtons’ London-centric business now averages a fee of £13,000 per sale, based on charging about 2% of the achieved sale price, the fixed fees of the online and hybrid agents, at typically well under £1,000 before extras, look compelling. And even at this fee level, many are happy to acknowledge that the margins still look good, assuming per-client marketing costs are under control, since the online players’ property and staffing costs are much lower.

“The listed online agents have big market capitalisations right now. Some say these valuations are hard to justify, given the lack of profits, but the potential is there once you consider the potential profit margins,” says Clark.

“By my reckoning, many of the High Street agents have profit margins of about 10%, with all their overheads, while the online agents can run at a 70% profit margin even on the lower fees they charge. At Sell My Home I reckon we are ten times cheaper on the sales side and 18 times cheaper when it comes to rentals – but our margins are still there.”

A High Street fight-back?

If this new business model is so great, and in a sector that is unusual in that it remains an unregulated free-for-all, what’s to stop the High Street agents from shifting away from their model over time and ultimately seeing off the online competition?

Property commentator Henry Pryor says: “That’s one way things could go, for sure. The High Street agents have two things in their favour still. One, you’ll never escape that need to inspect a property and have a face-to-face conversation with an expert about what is a valuable asset. Two, there is scope for the High Street agents to cut what they charge and compete better on price, even with their extra overheads.

“The market has surged in recent years, but today 1.4% of the selling price is still the average on the High Street. That can be trimmed - and every seller is free to negotiate, after all – which would narrow the price differential between online and the High Street. It’s something the high street still has in its armoury; it will buy it some time to contemplate what other innovations might be needed – and it’s not like the online-only model is mysterious.”

It’s something the High Street still has in its armoury; it will buy it some time to contemplate what other innovations might be needed – and it’s not like the online-only model is mysterious.

Rosalind Renshaw, long-time property journalist and editor of Property Industry EYE, adds: “There are other tactics for the High Street to consider, too, like acquisition. We have already seen Connells acquire online agency Hatched, so it has a foot in both camps. Launching something dedicated online is also an option, particularly given that startup costs are low for these established players.”

The best example of that play will likely come from Countrywide later this year. Alison Platt, chief executive of Countrywide, has said that the business could well launch an online offer in 2016.

Harder than it looks

So what do the online agents think of the threat of existing players evolving?

Quirk of eMoov says: “I don’t think incumbent agency businesses cannot prosper by tinkering with the future, but can only compete with the progress that is being made by the new sector if they buy in that expertise.”

The innovation argument being made by Quirk and others is that setting up successfully is harder than it looks, and those that are now established have learnt plenty along the way, and continue to innovate with new plays like virtual open-house tours to move the dial further. Added to this they reckon it will be hard for the High Street to play catch-up without being seen to undermine the value of their existing proposition.

Unpicking digital disruption

It’s an argument that seems to have recent history on its side. We live in an era of digital disruption. Innovations happen every day. But the effort of trying to anticipate the future and be a disrupter doesn’t come easy. It’s hard to approach it in a half-hearted way, looking backwards and worrying about your existing commitments, rather than pressing forward with real intent.

Estate agency is particularly interesting as the disruption that happened and is still coming rests on technology that is mainstream. So no great leaps are required in tech terms. It’s just a question of how quickly, or whether, the market will change.

For some, digital disruption will be explosive and immediate – a force that rocks the foundations of their business.

Business advisory Deloitte puts it like this in a recent white paper: “In some ways, today’s innovations – broadband, smartphones, the cloud, the ability to analyse complex data sets, social media and other tools that make it possible to ‘digitise’ business processes – are just extensions of the computing and online advances of the past few decades.

“It is a mistake to see the digital revolution as a function of technology, rather than one of business evolution. Moreover, even as extensions of existing technologies, these innovations are powerful, pervasive and have multiple indirect impacts.”

Digital, says Deloitte, reduces barriers to entry, blurs category boundaries, and opens doors for a new generation of entrepreneurs and innovators. In turn, incumbent market leaders will face pressures:

“We refer to changes – both positive and threatening – as ‘digital disruption’. It’s a neutral term; a description of what is happening. For some, digital disruption will be explosive and immediate – a force that rocks the foundations of their business. For others less vulnerable to digital trends, the changes will be slower and more subtle. For others again, digital innovation will be the cornerstone for future value creation.”

So here’s our question to close: is estate agency on the cusp of ‘explosive and immediate’ transformation or something more subtle? Don’t look away, because in the next 12 months we might well have an answer.

Christian Annesley is a staff writer at Sift Media. 

A version of this article originally appeared on MyCustomer's sister site BusinessZone.co.uk.