Power Plays
There has been growing resistance within the real estate industry towards the price increases being enforced by realestate.com.au, which is owned by REA Group (ASX: REA). We cannot help but draw parallels to Carsales.com (ASX: CRZ).
There have been reports that a number of real estate agencies have formed a group to negotiate advertising rates with REA. These members have threated to boycott certain products if the negotiations produce an unsatisfactory outcome.
Among this chorus of opponents has been Domain, one of REA Group’s main competitors. The CEO recently circulated an email to agents arguing that the price rises enforced by realestate.com.au were inconsistent with the value provided by the products.
The fact of the matter is that realestate.com.au generates the majority of leads in the Australian market by a considerable margin. The real estate market is comprised of numerous participants, which means there is very little that the individual agents can do to push back against REA. Just think, if you are a local agent who takes down their ads in protest of price increases, this will advantage a competitor down the road that maintains use of the site. While this dynamic is harbouring negative sentiment within the agent network, it’s becoming increasingly apparent that REA is a necessary tool to sell homes, which is why we think that moves to boycott the site are unlikely to gain traction.
Carsales.com has experienced similar resistance from its user base towards its pricing power. This resistance culminated in a number of car manufacturers ordering their dealers to remove new car ads from the site. The actions had an impact on Carsales’ revenue, but it paled in comparison to the drop-off in sales experienced by the dealers. The reaction demonstrated that Carsales.com has become a necessary tool to sell cars in the Australian market. While management would prefer to maintain a favourable relationship with the dealer network, the episode has confirmed management’s belief that price increases can be sustained.
CRZ is an investment of the Montgomery Fund and the Montgomery Private Fund.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Gary Crash
:
Agents sold themselves out years ago and have just started to realise the convenience of REA they promoted is the behemoth that could steal their industry.
REA does not have a monopoly in WA and that is the model the industry should be throwing money at and regaining control of their industry.
Once arrogance pervades in a competitor you know its losses are not far away.
Regards
Crash
Carlos
:
so do you hold REA as well, and if not why not ?
Roger Montgomery
:
Only reason would be price one suspects.
Andrew Legget
:
it is similar to the prisoners dilemma. In order to prevent these price rises from REA, all gents need to boycott. However if compeitotrs are boycotting REA then an agent, knowing that REA provides the most eyeballs and there for higher chance of being veiwed by potential customer, can gain an advantage by “cheating” and listing ads on REA.
I have been playing around with a new analysis concept i created to combine ROE and competitive advantage and REA ranks 53rd and CRZ 34th out of all listed profitable businesses based on this (it is still somewhat flawed and unfinished it should be noted and also untested).
Although there may be some short term impact i would imagine over the long term that unless REA loses its “eyeballs” then it will be similar to the CRZ situation.
Roger Montgomery
:
That sounds fascinating Andrew..looking forward to hearing more.