Interview by Kathy Bevan
This year one of Canada’s largest real estate organizations celebrates its 95th anniversary. From its beginnings as the one-office business of Toronto entrepreneur A.E. LePage, to its position within Brookfield Real Estate Services, Royal LePage now has 15,000 Realtors across the country – 1,200 working out of corporately owned offices in the greater Toronto area.
Phil Soper became president of Royal LePage in 2002, oversaw the firm’s restructuring as a public company in 2003, and was named CEO in 2004. As 2008 began, Soper sat down with REM Senior Editor Kathy Bevan to discuss the past, present and future of one of the Canada’s best-known real estate brands.
REM: You’ve said there’s a risk with successful long-standing organizations that they can become complacent. What kind of risks would you say Royal LePage has been willing to take over its 95-year history?
SOPER: If you think back to the early days of A.E. LePage himself, he took risks with advertising and the use of the technology they had then – cameras and film-based motion pictures of high-end properties. He took risks as a developer in a much smaller city, but there was still the opportunity for someone who was a real estate developer to carve out and shape Toronto.
To take the brand and push it across the country, that was obviously a huge risk that our company took, and it paid off. Royal LePage was by far the most important brokerage in the later part of the last century and a real commanding presence across all forms of real estate brokerage in Canada. And of course, as we know, Royal LePage didn’t catch the big change that happened in the ‘80s in particular, and found itself shrinking dramatically. The company was cut approximately in half by the time the bleeding was stopped. The big risk then was moving into hybrid brokerage/franchise brand.
The more successful leaders in business are the ones who are not only willing to take the risk of making that initial change, but are willing to flood limited resources into an area that starts to show success, even if it means less resources for established successful lines of business. That’s what our company did in the mid-‘90s – we flowed resources into adding the tier into the model. Royal LePage had always been a two-tier model, with a Realtor and a manager.
Adding the third tier in terms of the overall service provider/franchisor was a big step. As a business, you leave a tremendous amount of money and opportunity on the table with that model – out of the dollar, Realtors take 75 to 80 per cent or more in larger companies; manager/brokers account for the majority of the rest of it; franchisors get a very small piece of the overall puzzle. So the only way you can truly be successful is through size and scale and that’s one of our pillars, to continue to leverage our size and scale in a way that allows us to be successful.
When we moved into a franchise model, my predecessor had the plan that, like our competitors in Canada, we’d move all our offices over into franchising. I stopped that when I came in – it wasn’t a hard sell to make to our ownership, because there are tremendous advantages in having a balanced portfolio and in having a hand as a franchisor in the real estate business. I saw some very successful examples of that in the U.S. where yes, they were creating a franchise infrastructure, but they also (were successful) in their portfolio owned brokerages. For one thing, it allows you to build a development team of future leaders for your franchise business in a way that’s just impossible in the stand-alone franchise business. It takes hundreds of people to run the company and it takes tens of people to run a franchise system, even a large one like ours. Some of our most successful senior leaders within the upper ranks of Royal LePage Canada – now Brookfield Real Estate Services – started their careers as salespeople and branch managers within our brokerages. So our current business model really gives us a huge competitive advantage.
REM: You’ve taken a different approach with two real estate franchises you’ve acquired within Quebec – Groupe Trans-Action has been assimilated into Royal LePage, La Capitale continues under its own brand name. Can you explain the corporate strategy behind those two approaches?
SOPER: One of the reasons new entrants into the Canadian marketplace over the past decade have had such limited success – even if they’re well-known brands in the U.S., they just haven’t been able to get a foothold in Canada – is because it’s such a highly concentrated country with vast geography. And Canada is a country that favours oligopolies – we have a handful of banks, we have a handful of telecommunication companies, we have a handful of many industries. It’s worked that way in terms of real estate brands – if you look at the revenue generated by the top five to maybe seven brands in the country, it’s tough to find your way in.
So you have to ask yourself, if you were to acquire a company that is a stand-alone brokerage, what are the characteristics of this brand that would allow it to survive in a highly concentrated marketplace like Canadian real estate?
Groupe Trans-Action is a good example. It had a lot of offices – they were in something like 80 locations, many of them with less than five Realtors. But the managers of that business quickly realized that Royal LePage offered a stronger suite of services, a much stronger brand and value proposition. By simply moving the services business – where the real assets are the people in it – into the new model, they could increase the productivity and the market presence of that business. And that’s exactly what happened. It’s been a wonderfully successful integration.
La Capitale is a very different situation. Number one – they are much larger. They have 1,500 Realtors, in fewer offices than Groupe Trans-Action had with their 400 Realtors. With La Capitale, you also have the only franchise system headquartered in Quebec. You’ve got a very well known business leader – Paul Legault – who is not just respected within the industry, but is loved by his team. And he believes in the vision as long as it can remain La Capitale. So it fit perfectly with where we were taking the business.
REM: Are we likely to see you taking advantage of the strong Canadian dollar to make an acquisition in the U.S. sometime in 2008?
SOPER: It’s a wonderful time if you can find the right opportunity, because you can make the acquisition with our strong currency and then build your business model from the beginning on a currency at par. If over time there’s a relaxing in the difference between the Canadian and the U.S. dollar – a lot of economists think 90 cents on the dollar is a more reasonable long-term, sustainable value – then you’d get a lift on your American operations. That’s certainly what I’d expect in the long term. But right now it’s a good time to be making a move.
To your question about 2008, we’ve been seriously looking and in discussions with people dating back to 2005. The problem has been that the market in the U.S. has been so turbulent. In the early days of our discussions – 2005/2006 – the sellers of businesses in the U.S., just like the sellers of homes, had not adjusted their expectations. In the early part of the decade, thanks to some well-capitalized consolidators in the States, people were overpaying for real estate companies. Everybody, including those real estate companies, realizes that now. They were paying dot.com style multiples, despite it being a mature industry, despite the fact that we have a century of data that shows fairly consistent rises and falls in transactional dollar volume. No one could have imagined that prices could rise by 10 per cent forever, yet they seemed to price their acquisitions that way. There was a period there where the people we were talking to were simply staring starry eyed at early 2004/2005 valuations.
In 2007, people started adjusting to more realistic levels. The challenge now is, when is the right time to make the move? It’s not a market where anyone you acquire would be able to grow quickly in the early years of your holding the company. And what you hope for is to get some immediate lift from your acquisition to help with the expense associated with the initial payments. But whether it happens in 2008 or 2009, it will happen – it’s just a matter of time and persistence.
REM: What type of real estate company would you be looking to acquire in the U.S. – one that’s a good fit for Royal LePage’s culture, or one that may not fit as well, but is too good an opportunity to pass up?
SOPER: Using the metaphor of our industry, you may have your heart set on a certain street in the neighbourhood you’re focused on, but there may not be any good properties available for sale there, and – unless you’re silly with your money or silly rich – you can’t convince someone who doesn’t want to sell, to sell. Good businesses realize that and they may set their sights on geography or a size of business, but if there’s not a willing seller or reasonable external conditions, you may not be able to buy there, you may have to buy somewhere else.
The keys for us are finding an organization with a full-service, client-service oriented culture. There are very successful companies that focus on niches where their value proposition is purely price – we call them discounters or price cutters. Every industry has them and ours has had some successful ones in that space. There are industries that from a culture standpoint exploit the natural tendency for our Realtors to be individualists – they focus on the power of the individual, and talk aggressively about the individual Realtor’s importance and strength – that is their corporate culture.
La Capitale, Royal LePage and the brand we would hope to develop in the U.S. would have to build upon our culture of collaboration and joint support. Our tagline for the Royal LePage brand, ‘Helping you is what we do’, works on so many levels – between the Realtor and the consumer, between the manager of the office and the Realtor, between the mother ship and our Realtors in their offices.
I’ve seen businesses that have tried to mix heavy discounting with high service. What tends to happen is the heavy discounting business acquires capabilities and offerings from the high-service model, then offers them in the marketplace at a price far below their value. This not only cannibalizes the high-service business, but it makes the lower service, lower-price model unsustainable – they look unrealistically profitable, because they’re not carrying all the costs.
You can’t run a business and charge the consumer the equivalent of one per cent of the gross value, and offer services to the consumer and to the Realtor along the way. You have to cut corners somewhere. Of course there’s a market for that, but it’s not a fit for our company.
REM: Not that long ago, Royal LePage spoke on behalf of the Industry Leaders Group, calling for change within organized real estate. There doesn’t appear to be any one real estate company speaking out in that way – is there still a leadership role for any one company to play in Canada’s real estate industry?
SOPER: I’d say the relationship between for-profit companies in the real estate industry and the non-profit professional associations is much more positive today than it was in the days of the Industry Leaders Group. Yes, there will always be overlap in terms of services and the organizational growth plans. But today we’re able to sit down at meetings between the leaders of Canada’s largest real estate companies and the leaders of organized real estate. We have good relationships with the heads of provincial organizations and big boards and the senior leadership of CREA.
We’ve actually taken much more of an outreach approach to organized real estate and particularly CREA during the past five years, than we did in previous years. One example is that, rather than creating a completely stand-alone version of our consumer portal – royallepage.ca – we worked in partnership with CREA in the last two releases, senior business and technology people working in lock step with CREA’s.
We did this with the understanding that the technologies and the business ideas that were being developed within Royal LePage would be shared with the rest of the industry. That’s an interesting change, but there were considerable benefits for our membership. One of the most obvious was, if you want to go it completely alone – and there are some big organizations in the country that run their web portals completely independently – all your members have to double all the work associated with managing the core asset of the business, which is the listing. The cost savings collectively across the 700 offices of our real estate services business of not having to duplicate that effort – by cutting that listing management effort in half – is tremendous.
We still do certain things on our own – our Luxury Home Integrated program has a listing that carries the sub-brand of Royal LePage Carriage Trade, highlighted in the Carriage Trade portal and on mls.ca, for example. For niche products we’ve decided it’s worth the extra cost of doing it ourselves.
CREA has shown some great willingness to work with private industry. They support one of the most competitive entrepreneurial industries in our nation. Realtors are fiercely entrepreneurial, as are people who run brokerages and as are the national organizations that support brokerages and the franchisors. If you think about the senior leadership of CREA, they have been successful in changing and adapting that organization. They’ve been there a long time and that’s a tough gig – it’s not an easy job, with almost 100,000 people that all have a vote. How do you channel that and make everybody happy?
REM: A great deal of CREA’s effort and focus lately has been directed toward the Competition Bureau and what appears at times to be its surveillance of this industry. From your perspective, do you think the Canadian real estate industry needs such tight oversight?
SOPER: I’m going to step back from that for a moment and say that one of the first questions we should be asking ourselves in the industry is, are we devoting too much of our limited resources to this issue? The parallel I draw would be to life insurance. Our average life expectancy now goes beyond the point where such a policy gives us any advantage, and it takes resources away from things we’d rather spend money on. But if, in the very unlikely circumstance you need it – it’s invaluable, because your family is looked after.
So collectively, the real estate industry devotes quite a bit of time to this unlikely occurrence of a heavy-handed intervention in a free market that’s actually working very well. But the consequences of this unlikely occurrence would be so damaging and so lasting. One thing about government regulators, they move very slowly, but once they make a decision, that decision is extremely difficult to change quickly – we’d be living with it for an extended period of time. So yes, we devote a lot of attention to it – perhaps we should devote even more.
One of the things about being a large organization that’s national in scope, is that we have a responsibility and we certainly take it seriously – at all of our management meetings we provide updates on the latest areas of concern that the Competition Bureau has. We treat their guidance, however veiled, very seriously. It’s been decades since Royal LePage was disciplined in this regard, but we’ve been there. And we realize it can happen suddenly and it can cause grave personal consequences to any of our people who are involved, and we just don’t want to go there.
A direct answer to your question: This is one of the most competitive industries you could possibly imagine. Do the people charged with enforcing competition law in Canada really understand how competitive it is? No, they don’t – they don’t at a visceral level. They haven’t seen two people fighting for a listing. Honestly, I haven’t seen evidence that there’s been an effective job at looking at the wide bell curve of prices charged by the members of our industry.
The difference between a four and five per cent commission rate, or more dramatically, between a three and a five per cent commission rate, is a discount of 40 per cent. So there’s a wide range of pricing, and no, I don’t think the industry needs the kind of scrutiny it’s received. And I’d hope that we, in partnership with CREA and other organized real estate organizations across the country, have done enough of an effective job that as the market slows, the scrutiny of the competition watchdogs will simply shift to more fruitful pastures.
REM: Five years from now, when Royal LePage is a venerable 100 years old, what will your company’s future pastures look like?
SOPER: I think our theme – ‘Helping you is what we do’ – will continue to resonate both through Royal LePage and through the umbrella company that it will be part of. Royal LePage five years from now should be part of a multi-national real estate organization that, through size and scale, is able to compete on a global level, and able to provide the very best of services to its members. It will be a proud brand within a family of brands. It will remain not just our anchor brand, but the philosophical grounding and our principles will come out of Royal LePage. We’ve benefited tremendously from our association with Brookfield Asset Management, which is a large and respected company, and through that affiliation we’ve been able to grow in a way we couldn’t have otherwise. But it’s Royal LePage and its almost 100-year history that we’ll continually turn to for inspiration about what is it we stand for, what should we be bringing to the market, and how should we be servicing our clients. I don’t think that will change five years from now.