Compass world’s most unprofitable brokerage ever
First and foremost, I didn’t come up with that real estate headline, Mike DelPrete a well known real estate analyst did.
In a recent VICE interview, Mike DelPrete offered his thoughts on how Compass’ longstanding cash burn problem could pose an existential threat to the brokerage and its ability to compete.
Mike DelPrete dug into Compass’ recent job cuts and cost-cutting measures, calling the well-funded brokerage “the world’s most unprofitable brokerage ever” in a new interview with Motherboard, VICE News’ tech vertical on Wednesday.
Describing the “critical” cash burn problem the brokerage has faced throughout its history, the industry analyst compared Compass’ strategy to The New York Yankees or Real Madrid, sports teams whose competitive advantage has been historically based primarily on their ability to spend the most money adding high-performance players to their rosters.
According to DelPrete, Compass initially targeted the most productive agents in a given market, wooing them with money and incentives. “So their strategy was to effectively try to build an all-star team. And when it got too cumbersome to pick up the phone and call them one at a time, they would go out and just acquire the brokerages.”
While many firms trade short-term profitability for growth, DelPrete said in his VICE interview that a “viable path” to profitability was always an uncertain one for Compass.
“Everybody knew this couldn’t last forever,” DelPrete told VICE. “And there were vague notions of what would need to happen to reach profitability — either it would have to get to enormous scale in the U.S. or they would have to deliver on the promise of technology reducing costs and making people more efficient.”
Another idea was that the company would get into title and mortgage and make money in those sectors to offset other costs.
“But that’s where things got really hazy,” DelPrete added. “It’s like a magician waving their hands and the misdirection [that comes with that]. There was no real set in stone path of: This is how we’re going to be profitable one day.”
According to DelPrete, the risk for Compass now is that it’s cash flow negative and still needs to cut hundreds of millions of dollars in operational expenses while competing against brands that are cash flow positive and continuing to expand.
“So I think that’s an existential risk here for Compass,” DelPrete concluded.
Excerpts from Vice News:
Where do you see this problem heading over the next six months or so?
… Compass does have a cash-burn problem. They’re spending a lot of money, and they have a rapidly diminishing bank account. So they need to make really significant cuts. And the question is, can they do that while still retaining their agents? How does a company cut $320 million of expenses and still offer the same level of service to its customers?
It’s one thing to say, Oh, we’re gonna cut some enormous chunk of the company and then the balance sheet will look a bit better. It’s a bit different so come out the other side with a sustainable operation and not one that’s really injured.
The other interesting angle here is looking at the competitive set. So you’ve got Compass who’s cash flow negative and needs to cut $320 million. Who are its peers? Who is it competing against? eXp. Anywhere Real Estate, which is Coldwell Banker and Sotheby’s. Douglas Elliman. These are companies that are cash-flow positive. They’re making money. They’re not laying off people. They’re not having to cut hundreds of millions of dollars of expense. It’s important to think about it from a competitive standpoint.
You have a company like Compass that needs to shed hundreds of millions of dollars of costs. And they’ve said we’re stopping growing, we’re not going into new markets, we’re not going to offer new incentives to new agents to join us. Many of these other companies that are actually cash flow positive, they’re making money. They can afford to invest. They can afford to grow.
So I think that’s an existential risk here for Compass. They’re taking a much-needed pause. But what’s the long-term implication of that going to be relative to who they’re competing with in the market?