Property Anatomy – Foxtons

Disclosure: James Dearsley worked at Foxtons for 5 years from 2001 – 2005

 

Introduction

 

“Revenues and profits plunge at both Countrywide and Foxtons” was the lead headline on Property Industry Eye on 27th July 2017.

Revenue in Foxton’s half yearly results fell 29% while lettings fell 2%. Profits took an enormous hit, declining nearly 40% year-on-year. While sales volumes have already come under huge pressure, changes in the lettings and property management market (detailed here in our recent post in EAT) suggest that there are significant future headwinds to this more stable revenue stream.

We have documented our thoughts about Countrywide’s digital strategy but to date we haven’t seen much, if anything, about Foxton’s own strategy. Where we compliment Countrywide for grasping the nettle, there is nothing on which to congratulate Foxtons. This article explores why this might be the case.

 

Background

 

In the early 2000s Foxtons built a bespoke system from the ground up which, when combined with a strong and ingrained sales culture, underpinned the tremendous growth and revenues generated by the firm.

The sales functionality then had extra features added onto it including marketing, property management, PR, legal and HR. The entire company was run from, and built around, this central architecture.

Named BOS, it was a huge undertaking that took years to complete and ultimately made Foxtons the most efficient, finely tuned estate agency in the country. Combined with a sprinkling of talented individuals and a ruthless culture, an amazing business grew to dominate London. The internal mechanics allowed the salespeople to focus on just one thing – speaking to customers and doing deals. Not even national TV exposés could halt the juggernaut.

Foxtons was the first residential agency to go through a digital transformation and it was this process which created its competitive advantage but, as is often the case, they were so early, they now need to transform again or risk huge challenges ahead.

Foxtons was the first residential agency to go through a digital transformation and it was this process which created its competitive advantage but, as is often the case, they were so early, they now need to transform again or risk huge challenges ahead. Click To Tweet

 

Today’s Situation

 

In 2017, however, it is those same systems that are in danger of becoming the albatross around Foxtons’ neck as the next wave of digital transformation takes hold in the wider industry and new challengers emerge. As we discussed with our look at Rightmove, the very innovation that helped build Foxtons now leaves it with a dilemma.

This can be seen clearly in Foxtons’ recent expansion. When most agencies were looking at consolidating their physical office positions, in the teeth of hybrid models, Foxtons were in fact looking to increase their number of offices around London. Even as recently as January 2017 they were bucking trends and opening two new offices, taking their total to 67.

They stated that the opening of offices was in line with their “organic growth strategy” and once again launched with the “infamous 0% promotion” for sellers and landlords in the two new areas. Plus ça change, plus c’est la même chose – another initiative that began in the 2000s.

It hasn’t worked. In the face of a challenging housing market and competitors springing up with new value propositions, Foxtons numbers tell the story of an organisation on the precipice. Organic growth on a business as usual basis is a recipe for disaster. But what can they do about it?

 

Moving Forward

 

Foxtons need to focus on three core areas, and quickly:

 

Systems:

 

BOS is a closed system, unique to Foxtons. No one else has it. No one else has spent close to 20 years perfecting the way that it works and so – and this is critical – no one, external to Foxtons, can easily integrate with it. They have developed themselves into a corner.

This makes any type of partnerships with PropTech businesses, M&A or general investment activity very difficult to execute. This excludes Foxtons from offering external innovation to their clients – the deal in which we acted for Connells and Countrywide in their investment in, and subsequent rolling out, of Fixflo being a perfect example –  and leaves them at a competitive disadvantage in a sector where similar outfits, with newer business models and technologies are offering new value to the consumer.

There is a school of thought which says that businesses in today’s digital landscape need to build platforms, not products 

Businesses in today’s digital landscape need to build platforms, not products. A fundamental risk to FoxtonsClick To Tweet. Foxtons is a traditional agency with some added flair based on an old fashioned business administration platform. If it is to add value to its bottom line it needs to build a complete platform that has the customer, and not the company, in mind.

Foxtons must therefore recapture their spirit of technological innovation, throw BOS in the bin and start again with another 20-year roadmap in mind.

 

People

 

Foxtons have some of the best people in the business. Of this there is no doubt. However, are they – and the culture that they operate in – fit for the future of the property market where consumers are empowered and demand flexibility?

If Foxtons keep opening offices and filling them with negotiators – the very people most at risk from new ways of working – then this represents a very large capital risk. Although their commission structures are very heavily weighted to provide for low basic salaries (£10k in James’ time and again these have not changed much, though there are some variations now), the capital cost of branch leasing and fit out is significant. Is it necessary in an age when multichannel, digital offerings are the trend?

Similarly to Rightmove, Foxtons also have a CEO – Nic Budden – who is a company man, with 12 years’ service. It is unlikely that this approach to leadership will deliver significant strategic change. Whilst Foxtons have recruited from external sources in the next tier of management, allowing some new blood coming into the senior management team, the entire focus needs to be on the future.

Similarly, the IT estate is run and managed by those who have a vested interest in seeing it continue in its current state. A clear separation of roles between historic IT and futurist technology needs to be created pronto with new blood coming in.

We bang on about how digital transformation must be led from the top. Alison Platt is obviously driving this at Countrywide, and while some lay the blame for their bad numbers at the door of their digital transformation strategy there is at least an attempt to do it properly which even the analysts are picking up on. As Anthony Codling from Jeffries put it,  “the costs of this strategy are being felt before the benefits and whilst it is difficult to see Countrywide receiving any help from the underlying housing market, we do see silver linings amid the clouds.”

At least there is a strategy at Countrywide. In the meantime, the absence of a strategy at Foxtons will inevitably frustrate the management tier which has come in from outside industry.

Nic Budden needs to realise that he must take the lead role in Foxtons’ digital transformation and make some tough decisions.

 

Value Proposition

 

Over 55% of Foxtons’ revenue is now from lettings. This includes fees from tenant finding as well as property management and other associated fees.

Given all the pain points in the lettings process, this is one of the largest areas for innovation amongst PropTech companies, innovation which is solving real problems and building excellent businesses. Whilst Foxtons has historically had an incredible process for dealing with lettings, this doesn’t mean it is prepared for future innovation around both deal making and the ongoing management of properties.

Furthermore, the mentality and structure of lettings is shifting as more people look for more flexibility in their accommodation without enormous discrepancies in price. Short lets are booming along with PRS initiatives.

With so much innovation available to landlords and occupiers, Foxtons must establish a new value proposition to ensure they create a meaningful place in this market. In an environment where processes are under such pressure from external operators, and consumers are seeking new value propositions, this will not be easy.

Similarly, the Foxtons property management department must find a way to remain relevant as cheaper, more efficient competitors with better processes muscle in on their turf. This space lends itself so well to technology that Foxtons look extremely vulnerable to us.

 

Conclusion

 

David Rogers, from Columbia Business School, said “the future is not about new start-ups burying long established enterprises. It’s about new growth strategies and business models replacing old ones as established companies learn new ways of operating.”

Foxtons need to pay serious attention to this view because it is perfectly applicable to them. Today there is lots of innovation available to property firms to help them cement and improve market positions.

Foxtons, the original PropTech agency who led with the innovation, must start looking forwardClick To Tweet

Foxtons, the original PropTech agency who led with the innovation, must start looking forward, embracing innovation and ally it to the best of their past strategies. Their current approach will not serve them well in the future London property market and that will hurt shareholder value.

We also know that the market isn’t solely to blame for Foxton’s ills. LSL-owned Marsh and Parson’s recent results prove that Foxtons are underperforming.

If Foxtons don’t make a change then they may, in fact, find themselves buried by start-ups.

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Showing 2 comments
  • Richard Berridge
    Reply

    Good piece James. I made the same comment ( condensed into 144 characters) last week.

    Personally, I feel Foxtons are fatally constricted by their culture and blind belief in their systems. I can’t see the straight jacket of past glories being cast off. As for the 55% of income from lettings; that could prove fatal if/when the lettings fees ban comes into effect.

    Despite the brickbats, I also agree with your points on Countrywide. LSL will follow.

    • Eddie Holmes
      Reply

      LSL’s numbers are excellent! They are doing something right compared to the competition. Eddie

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