PurpleBricks Group plc (lon:purp)
PurpleBricks – Not As Good As I Had Hoped.

When I last looked at Purple Bricks I had a bit of a downer on them as I felt that expansion overseas was taking them into markets that they didn’t really understand, was costing them money and was taking attention away from developing the UK business.

So today’s news that they are withdrawing from Australia and scaling back and possibly shutting up shop in the USA as well was great news.

For some reason the market seems to have disagreed and the share price has dropped nearly 12%.

The “pay regardless of sale” model operated in the UK will always create some unhappy customers especially with a bad agent but the Trust Pilot reviews had some complaints but the number wasn’t worryingly high.

As Purple Bricks uses self employed agents the customer’s experience is very heavily affected by that one agent.

I believe that management needs to be monitoring agents very carefully when using this type of model including the commissions being paid, if the agent’s earnings are insufficient then the service offered will suffer.

With an online model there is an expectation that the agent will be available to meet potential clients any time of the day which makes for a long working day which needs to be rewarded.

This is important as a common theme amongst the complaints was the original agent had left and the new one wasn’t too interested, not really surprising as he had no income from that client.

Importantly it seems that PB sees the agent as an order closer but the customer sees him as their long term contact.

This leaves us with the question of can the company offer an acceptable service for the price it charges?

The cost of acquiring customers seems destined to remain high and the temptation to reduce agent commissions to improve margins may prove too great.

The two big dangers that I see for the company are;

The Inland Revenue declaring the Local Property Experts employees.

The bricks and motor estate agents also offering the same pricing model, my understanding of the market seems to suggest that outside of London it would need to about twice the Purple Bricks price at around £2k.

Purple Bricks suffered a big drop of around 30% which seems related to the trading update reporting a 20%ish drop in expected revenue.

Going to their web site one of the first sentences is “We provide a full estate agency service at a low cost because we've removed the expensive offices and fleets of cars that you see with traditional agents.”

For me the big question is can you actually do this?

Are the offices necessary and as an estate agent needs a car is the cost simply being transferred from Purple Bricks liabilites into the fees paid to their Local Expert?

The final question is the model, certainly in the UK with self employed agents, can they deliver the quality of service?

In the UK it seems that the business is heavily reliant on TV advertising and word of mouth, massive TV advertising is of course contradictory to a low cost model.

Currently the UK operation seems to be profitable but this drop may alter that and may be an indication that the growth period is over, whether this means a steady level of business or is the start of decreasing business in unclear.

In the UK the fee for using Purple Bricks is payable regardless of whether or not the property is sold, in the USA it paid upon sale and in Australia it is half for listing and half upon sale.

As numbers, in the UK the fees are £899 (£1199 with visits), Australia $8,800 in total (roughly £4,400) and the USA seems to have varying fees per area the website gave me around $5000 in Los Angles 90001.

In the UK the average estate agents fee is around 1.4%.

This overseas expansion concerns me as property sales are managed quite differently in different countries although complaining about estate agent fees is probably a world wide phenomenon.

My concern is that the last interim report, had a £10million loss on £7million revenue in Australia and a £20million loss on £6million revenue in the USA.

This could simply reflect the cost of starting up or it could be the cost of opening up a business in a market that is poorly understood and will be closed without ever making a profit.

In all three markets Purple Bricks is noticeably cheaper than the traditional model once you get away from the lower priced housing but as property price goes up so do buyer and seller expectations.

Considering these expectations and the incentives for Purple Bricks to ensure a sale, in the UK all fees are paid up front, in Australia it is a 50%/50% split and in the USA 100% on sale..

The big upside that makes me consider the business is that the company has no debt and has around £70million in cash.