Rightmove's slowing growth: same problem as Zillow, different strategy

Rightmove, the U.K.'s top portal, announced its full-year 2018 results last week.

Why it matters: Not unlike Zillow, the growth in Rightmove's core advertising business continues to slow. The slowdown in velocity reveals the limits and highlights the challenges the business will need to overcome as it looks for new growth opportunities.

Overall revenue grows and slows

Overall revenue at Rightmove grew 10 percent last year -- respectable, double-digit growth, but also the lowest number recorded in its history.

 
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Rightmove's core revenue driver is its Agency business, which accounts for over 75 percent of total revenue (concentration risk!). Annual growth continues to slide over time. The 8.7 percent growth is the lowest number recorded, and reflects the growing difficulty the business has in charging its customers more money for the same service.

 
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Nearly all of Rightmove's growth is coming from price increases (average revenue per advertiser, or ARPA), as opposed to new customers. The amount that Rightmove is able to squeeze out of its existing customers is slowing over time.

 
 

Controlling expenses

Historically, Rightmove has demonstrated incredibly disciplined cost control. By managing its expenses, Rightmove is able to maintain its phenomenal 76 percent profit margins.

 
 

But while good for the bottom line, controlling expenses too much can limit the ability of a business to invest in future revenue streams.

One way Rightmove maintains its margins is limited headcount growth. In 2017 (which was a transition year when revenue growth slowed considerably as new pricing was rolled out), the business only added ten new hires. In 2018, Rightmove added sixteen new hires.

 
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Strategic implications

While facing similar challenges, Rightmove's strategy stands in stark contrast to nearly every other major real estate portal around the globe. Zillow and REA Group spent tens-of-millions of dollars to acquire mortgage businesses, Scout24 acquired a finance comparison business for over $300 million, realtor.com acquired Opcity for $210 million, and Zoopla acquired a range of adjacent businesses for half-a-billion pounds.

The real estate portal business is evolving, moving closer to and getting involved in more parts of the transaction. But Rightmove has remained steadfast and stationary in its solitary focus (more on this in my Future of Real Estate Portals Report and 2018 Global Real Estate Portal Report).

 
 

Rightmove's revenue growth slowdown may sound similar to Zillow (as I wrote about last week), although the slowdown is less pronounced and immediate. But the trend and concern is the same.

Both portals are facing slowing growth in their core businesses. Zillow has invested heavily in new business lines (mortgage, rentals, Zillow Offers, and lead qualification to name a few) and appointed a new CEO, while Rightmove hasn't -- its eggs are still in the same basket.

Zillow's New Strategy: Insights, Implications, and Analysis

Last week, Zillow announced a major strategic shift: Along with a new CEO, it made clear that its top focus is its Zillow Offers iBuyer business.

Today's email covers the highlights of that announcement. Additionally, next week I'll be holding a 60-minute webinar that dives deep into the strategy, numbers, and implications of Zillow's latest move.

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Premier agent growth grinds to a halt

The most striking statistic from Zillow's results is the lack of projected growth in its flagship, billion-dollar premier agent program (which accounts for 67 percent of its revenue). Guidance for the first quarter of 2019 is only 1.5 percent -- a steep decline from past quarters.

 
 

And on a full-year basis, Zillow projects its premier agent program will grow at 2 percent -- a flattening from past, double-digit growth.

 
 

Both of these projections come on the back of difficulties rolling out new premier agent products focused on lead quality over quantity.

But what's most striking is the suddenness of the decline. Going from double-digit to flat growth in the span of a year is significant. More than rollout issues, I believe Zillow has reached the upper limit of what it can charge agents for leads. Which is what's driving such a significant shift in strategy.

Expensive homes and a longer hold time

Last week I wrote about Zillow's unsold inventory in its Offers program, and the significance of longer hold times. The latest data highlights the same challenge.

 
 

The homes Zillow sells are less expensive: an average sale price of $292,000. However, the houses it holds in inventory are considerable more expensive, with an average value of $320,000.

This data point matches up exactly with the latest data from Phoenix, which shows a considerably higher average purchase price for Zillow compared to the other iBuyers.

 
 

The more expensive the home, the higher proportion of unsold inventory. It takes longer to sell more expensive homes, and it looks like Zillow is more than dabbling in the expensive end of the market. This is a key metric to watch!

Profit projections

Zillow released a detailed financial breakdown for its Offers business, including initial profit margins on its sold homes. Adjusted EBITDA, which backs out a number of costs including stock-based compensation, shows a per-home profit margin of 0.6 percent, lower than the stated goal of 2–3 percent.

 
 

(As a form of employee compensation, I believe stock-based compensation should be included in a true EBITDA calculation, so I've provided both options above.)

It's still early days, but this benchmarks current performance compared to where the business needs and wants to go in the future.

Strategic implications

I believe Zillow's guiding strategic principle is that it must be consumers' first destination in the home buying and selling process. Zillow's sustainable competitive advantage lies in its massive audience and strong position at the start of the consumer journey.

Think of this latest move as "Zestimate 2.0." The original Zestimate gave consumers a fun and helpful starting point when thinking about moving or buying a house. Now that online valuations are a commodity, Zillow needs to up the game: Instead of an estimate of value, how about an actual offer on your house? It's a compelling consumer proposition -- even if it simply serves the same purpose as the original Zestimate (attracting consumers at the start of the journey).

There's a whole lot more to discuss! If you want to listen and watch as I dive deep into the subject, register for next week's webinar.

Zillow Offers' most important metric

 
 

Later today, Zillow will announce its fourth quarter and full year 2018 results. Its activity as an iBuyer continues, and it recently overtook Offerpad to become the second-largest iBuyer in Phoenix. But my attention is focused on one key metric: Zillow's ability to quickly sell houses.

Why it matters: Zillow's goal is to hold houses for an average of 90 days. Any successful iBuyer needs to hold houses for as little time as possible, otherwise unsold inventory builds up, finance costs rise, and the whole model starts to blow up.

Overall activity grows; #2 in Phoenix

Zillow's overall iBuyer activity continues to grow, both nationally and in Phoenix (its biggest market). Based on the total number of homes purchased and sold, Zillow overtook Offerpad to claim the #2 spot in Phoenix for the month of January. Zillow is -- for the moment -- the second-largest iBuyer in the important Phoenix market.

 
 

Buying more than it's selling

While Zillow's overall activity continues to rise, its purchases are quickly outpacing sales. This is to be expected in the early months of a new market, but it's now eight months since launch. This is creating a growing inventory of unsold homes: around 350 in Phoenix as of February 12th.

 
 

It's natural for iBuyers to buy more houses than they sell when entering a new market. But over time, this Buy:Sell ratio is a critical metric for any iBuyer. Houses must be sold for the business to work!

Expensive homes, longer hold time

There are early signs that Zillow may be having difficulty selling houses. For iBuyers, time is money. The faster they can turn around and sell a house, the better.

The magic number for total holding time is around three months; Opendoor and Offerpad hold for between 80-100 days. Zillow currently has around 350 unsold houses in its inventory in Phoenix. Of those, it appears that around 110 homes have been owned for more than three months.

Part of the reason Zillow appears to have longer holding times may be the price of the homes it is purchasing. On average, it is buying more expensive homes than the other iBuyers in Phoenix.

 
 

Nationally, Zillow has purchased over 700 homes with an unsold inventory of over 500 homes.

 
 

The more expensive the home, the higher proportion of unsold inventory. It takes longer to sell more expensive homes, and it looks like Zillow is more than dabbling in the expensive end of the market.

Strategic implications

The key metric to watch is how well Zillow can sell its houses. Buying is relatively straight-forward; only once a house is sold is the entire business model complete.

To succeed as an iBuyer and appropriately manage its risk, Zillow needs to hold its houses for a minimum amount of time (on par with the other iBuyers), and avoid building up a large inventory of unsold homes.

It's still early days and Zillow has been quite aggressive in growing as fast as possible. But with its one year anniversary four months away, the pressure is on to demonstrate a consistent ability to buy -- and sell -- houses.

My Inman Connect Presentation

Earlier this month I had the pleasure of presenting at Inman Connect in New York City. My session, "iBuying Goes Mainstream: How Big Can it Get?" covered a range of topics, from the evolving role of portals to the latest iBuyer analysis.

My key points are outlined below. Watch the video of my presentation and download a copy of my presentation slides.

Growing iBuyer traction

The rise of iBuyers continues. During my presentation, I shared some of the latest national data available; a "sneak peak" at my upcoming iBuyer Report.

Opendoor in particular continues its strong growth in terms of houses bought and sold, clearly accelerating in 2018. Overall, iBuyers are small but growing: around 5 percent of the market in Phoenix.

 
 

The consumer journey

If you're an Inman subscriber, you can read the provocatively titled writeup of my presentation, "Opendoor's 'nightmare': KW agents backed by their own iBuyer." To quote:

 His point is that Opendoor, a tech-powered homebuying and selling startup with $1 billion in venture capital, is vulnerable to competition from companies that already connect with consumers on a massive scale at the beginning of their home-buying or selling journey.

Who wins?

The best new business models are exponentially better than the status quo, and the biggest companies are exponentially outspending their competitors.

Whether it's materially better efficiency with models like Redfin and Purplebricks, or Opendoor raising (and spending) 10 times the capital than its nearest competitors, the stakes are big. The trends that are impacting the industry are not incremental.

 
 

My presentation

You can watch the video of my presentation, and download a copy of my my presentation slides. I'd love to hear your feedback!

REA Group, Domain, and the non-battle for top spot

It's earnings season! In the past week, a number of portals announced their financial results, including REA Group and Domain, the two top Australian portals.

Why it matters: The numbers reveal interesting trends and insights, significantly around the difficulty of building meaningful adjacent businesses, and the non-battle between the #1 and #2 players in various markets.

Adjacent businesses are tough

Like many portals worldwide, REA Group and Domain each launched adjacent businesses, with goals to expand along more of the transaction, reduce consumer friction, and capture more revenue.

But as I've written before, the businesses have very different strategies. REA Group acquired a majority stake in an existing mortgage broking business, while Domain launched a number of joint ventures and partnerships. Different strategies, different outcomes.

REA's finance business continues to chug along, building revenue and generating meaningful earnings ($5.8 million EBITDA over the last six months).

 
 

By comparison, Domain's adjacent businesses (finance, insurance, and utility switching) generate similar revenues but with continued -- and mounting -- losses. The latest six months show a loss of $4.3 million.

 
 

REA's strategy is delivering a positive financial impact, while Domain's businesses are still in a heavy investment phase after more than a year.

The "battle" between #1 and #2

The battle between the #1 and #2 portal in each market is fascinating, and Australia is no exception.

One metric to compare portals is overall revenue generation. In general, the #2 portal generates between 25 and 40 percent the revenue of the leader (read my portal report), and that number doesn't fluctuate over time. In fact, in the case of REA Group and Domain, the leader is growing faster than the number two.

 
 

Domain is the underdog in Australia, and the evidence suggests it will remain that way. Overall situational awareness is important: It would be a mistake to assume Domain will overtake REA in any capacity.

U.K. portal wars -- what's changing?

Along the same lines, the real estate portals in the U.K. recently released traffic figures for the start of the year. It offers yet another fascinating glimpse into the competitive tension between top players -- and the complete lack of movement.

The figures released are for January 2019. And while the absolute numbers are generally rubbish, it's the comparison between portals and the year-on-year growth that's insightful.

 
 

Rightmove's numbers have hardly changed, and the delta between the number one and two is still the same. For all the investment on product, marketing, and inventory -- the all important consumer habits haven't shifted.

The variable, however, is the upstart portal OnTheMarket (read my past analysis). OTM has raised over £30m and is aggressively spending on marketing in order to drive traffic to its site. Its traffic has doubled since last year -- but does it matter?

For all of the tens-of-millions of pounds spent to build an alternative to the established portals, what impact is it having after launching four years ago? Zoopla's traffic is marginally down, but it reports that leads are up over 30 percent. The top two portals are equally and exactly as dominant as they were a year ago.

Strategic implications

There are a number of key takeaways for portals around the world:

  • Launching successful adjacent businesses is hard. It takes an incredible amount of investment, and there are a variety of execution strategies.

  • The evidence doesn't suggest that the #2 portal can overtake the leader -- let alone make a dent in its leadership position. It's not a horse race; it's static trench warfare.

  • Trying to launch a new portal and compete against the leaders is at best expensive, and at worst futile. Consumer habits are hard to change.