I have been catching up on Series 5 of Mad Men in the last few days.
I needed to remember what had happened toward the end of Series 4 and went on IMDB to read the synopses so that I could get up to speed. Then I thought I would check the Wikipedia entry for the program to get a sense of the way that the series came into being. That led me into reading about the series’ creator, Matthew Weiner…. What a fascinating story of creativity and leadership he personifies…
As a result of writing the original script for Mad Med, Weiner was hired to become a full time writer on The Sopranos. The script languished in his desk drawer for seven years while The Sopranos took over his life. He pitched the show all over Hollywood, and finally got AMC, who were not known for buying original, first release programs, to buy it. The show became a resounding success as we all know.
What is more interesting to me, partly because of the course that I teach each year for the Australian Institute of Music, was when I read about how Weiner develops, writes and produces the series.
He spends a lot of time talking to friends and acquaintances about the period in which the drama takes place, discussing the events that shaped America, media and the world. Then he gathers together his writers and each of them is instructed to go away and come back with 10 story ideas. Many of these get shot down along the way. From what has survived an outline is created and script writers are assigned. Weiner then takes on the rewrite responsibility. When the show goes into production finally, Weiner is the chief writer, the executive producer, and also takes on the role of “showrunner“.
This is the ultimate creative control role in TV, and those that perform it well, are the creative leaders and genius characters of the modern TV business. Weiner’s leadership in the role is clearly what makes this show work. We may be familiar with the stars that we see on the screen, but it is Weiner who breathes the words into their characters and gives them life.
Weiner seems to lead in other ways too. He has a disproportionately high percentage of female writers on his team. In comparison to the Hollywood norm of there being 2 males for every female writer, seven writers of the nine total, are female. Perhaps this is what gives the program its edge?
Looking at how someone like Matthew Weiner operates as a leader of an incredibly successful production operation is fascinating in itself. But how did he get there? Clearly he must have a tremendous ability to build rapport with people. David Chase, who was the Executive Producer of The Sopranos, hired Weiner after reading the initial script that he had written for Mad Men. Prior to AMC buying Mad Men, HBO offered to buy the series as long as Chase became the producer and head writer. From this I would have to figure that Chase became an influential character in Weiner’s life and career development. Perhaps it is the ability to work closely with a significant mentor figure that really helps future leaders grow into their skins?
Weiner has to be one of the more significant creative leaders from the TV industry worldwide now. No one is loyal to a TV network any more. The audiences are only interested in the show itself. And that means that the show has to communicate authenticity. That comes from leadership.
One of the things that I enjoy about having a teaching gig, is that I learn something each semester.
This semester, on Monday just gone, it was something entirely different.
I posed a question to the class about workplace ethics. I asked them what they believed the responsibility was, for employers, with regard to discrimination: discrimination by virtue of gender, ethnicity, weight, etc.
What happened was remarkable. Instead of a discussion on some hypotheticals, what I got was a study in personal experience of all the above and much more. Each one of the students felt that they had been mistreated. Several, who had worked at fast food places while at school, talked about how managers had been abusive to them. One talked about her employer failing to pay her for weeks on end. Another talked about how her employer (a well known clothes retailer) had failed to make superannuation contributions for months at a time, totalling thousands of dollars. Yet another talked about only being allowed to take a few minutes for lunch break, and when he complained, was told to “eat faster”.
Several of the students had, because of their experiences, placed calls to the Office Of Fair Trading or to the NSW Ombudsman.
I asked the female students whether they had witnessed or experienced any sexual misconduct in the workplace. The overall majority of students of a class of 20 had, to my surprise, become directly aware of such behaviour. More disturbing, was that they all felt that jobs are sufficiently hard to come by, and whistleblowing sufficiently frowned on, that they felt that they needed to put up with it if they wanted to stay employed.
I told them that this was utterly unacceptable. I told them that they have a responsibility not only to themselves but to society as a whole to root out this kind of conduct. However, to do that, they need to be given the tools and the methodologies to enable them to know what the processes are.
I am not particularly in favour of creating even more regulations in a society that I feel is far too regulated as it is. However, I believe very strongly that it is utterly wrong for young people just starting to come into contact with the “real world” to feel that they just need to shut up and take it. To me, that smacks of the culture that has been promulgated by the Catholic Church for so many years.
The only way to counter this, is for educators (and by that I mean the institutions who set the courses, rather than the individuals) to realize that they have an obligation to their students and to the taxpayers who provide their wages, to deliver to the students information that is going to prepare them for the real world and not just a bunch of theory that is not going to be useful.
Almost every time I meet someone with a great idea they are so focused on the problems associated
with the idea that they lose touch entirely with the fact that the solution comes from raising capital.
If the vision is strong enough there is invariably an infinite amount of capital available to help realize that vision. However this capital is only unleashed when the vision starts to relentlessly march forward in execution mode. That means that the entrepreneur needs to not only be thinking about how to develop the technology, secure the patents etc. He (or she) also needs to be thinking about how to market it, develop the customer relationships, make sales (ahead of production), and to inspire people with the idea. All of these things absolutely have to happen in parallel.
I was talking to a young scientist today, who is really brilliant. However he is also utterly insecure. He has been taught about the need to do the research, the research, the research. He has been imprinted by the academic system with a culture of thinking small and taking a long time to do so. I told him that he needs to unlearn a lot of what he has learned. Instead he needs to get an absolute focus on the customer and their very specific needs; to not be sidetracked by all the other things that could be done on the way to developing what I think is a incredible socially valuable and extraordinary product.
Of course his idea is going to need a huge amount of research. Of course it is going to take time. But the job of any CEO is to find ways to shorten development time, to identify markets and what they will tolerate on the way to perfection, and to get product out there and start selling – even if this is primarily to figure out what problems have not been foreseen in the initial development stages.
Media plays a very significant part of this too. If you can’t create a visualization of the device or the technology that you want to build, how is someone who has no idea of your idea going to understand it. We are, after all, visual beings.
Getting the idea into the market is all about getting things done. It is hard. But you have to keep on pushing forward, and you have to start raising capital.
I met with a student last week who is about to join the class that I co-ordinate. I hesitate to use the
word teach, because to me the word “teaching” implies that one person tells the other what to do. While I try to impart a huge amount of useful and relevant information to the students, the thing that I think they need to do for the most part, is to learn how to think.
The student told me that she was really enthusiastic about English Literature and wanted to do anything in the field of writing, particularly to work for a publisher. She had tried to get an internship at a book publisher and so far had failed.
I asked her whether she had an e-reader. She did. I asked her what she knew about e-book sales. She looked at me blankly. I told her to go out and do some research on ebook sales, what the driving force behind them were. Essentially I told her to find out about the marketplace and to find out about the field of work that she really wanted to enter: the one that will exist tomorrow. (As the great ice hockey player, Wayne Gretsky famously said, the reason that he got so many goals was that he didn’t skate to where the puck was, but to where it was going to be next….
Then I thought that I would do a bit of research on the topic myself. It really is fascinating.
One thing that I found out this morning, is that it is quite hard to get any figures, which is remarkable, given that it should be much easier to gather the information for a synchronous set of electronic transactions. I suppose that this is a valuable piece of IP that enables Amazon and Apple to construct business and pricing models to recommend to their author and publisher partners.
However I did find out some sales information that may be useful.
According to the Association of American publishers in Q1 of 2012, (reported in Mashable) ebook sales overtook hardcover book sales for the first time. This was driven by the increase in e-reader sales, naturally enough.
Meanwhile The Guardian in the UK reported that
Three of the top 10 most popular Kindle authors of 2012 – Nick Spalding, Katia Lief and Kerry Wilkinson – were published by Amazon’s own Kindle Direct Publishing.
Jorrit Van der Meulen, vice-president of Kindle EU, said: “Customers in the UK are now choosing Kindle books more often than print books, even as our print business continues to grow. We hit this milestone in the US less than four years after introducing Kindle, so to reach this landmark after just two years in the UK is remarkable and shows how quickly UK readers are embracing Kindle. As a result of the success of Kindle, we’re selling more books than ever before on behalf of authors and publishers.”
There is some potential to correlate chart positions and reported sales figures that could be useful. Publishers Weekly in the US has surveyed publishers to get a sense of the comparative sales of e-books and paper. And there is other data from the UK that has hard figures on some of the books, so you can start to see a pattern emerging that could lead to some interesting conclusions….
The following are the Publisher’s Weekly reported best selling Kindle books:
1. Fifty Shades of Grey by E.L. James (Vintage)
2. The Hunger Games by Suzanne Collins (Scholastic)
3. Catching Fire by Suzanne Collins (Scholastic)
4. Mockingjay by Suzanne Collins (Scholastic)
5. Fifty Shades Darker by E.L. James (Vintage)
6. Fifty Shades Freed by E.L. James (Vintage)
7. The Hunger Games Trilogy by Suzanne Collins (Scholastic)
8. The Marriage Bargain by Jennifer Probst (Entangled)
9. The Lucky One by Nicholas Sparks (Grand Central)
10. Fifty Shades Trilogy by E.L. James (Vintage)
11. Defending Jacob by William Landay (Delacorte)
12. Gone Girl by Gillian Flynn (Crown)
13. The Innocent by David Baldacci (Grand Central)
14. Extremely Loud and Incredibly Close by Jonathan Safran Foer (Houghton Mifflin Harcourt)
15. The Help by Kathryn Stockett (Berkley)
16. A Game of Thrones by George R.R. Martin (Bantam)
17. The Girl Who Kicked the Hornet’s Nest by Stieg Larsson (Vintage)
18. Beautiful Disaster by Jamie McGuire (Jamie McGuire)
19. The Witness by Nora Roberts (Putnam)
20. 11th Hour by James Patterson (Little, Brown)
Following are some actual sales figures for hard cover and e-book from Future Book.
Pos Title Author Publisher Print volume E-book volume Print + E-book
1 Fifty Shades of Grey James, E L Cornerstone 4,500,248 1,609,626 6,109,874
4 The Hunger Games Collins, Suzanne Scholastic 851,066 405,000 1,256,066
7 Bared to You Day, Sylvia Penguin 635,170 302,000 937,170
12 The Casual Vacancy Rowling, J K Little, Brown 394,754 59,413 454,167
13 Is it Just Me? Hart, Miranda Hodder & Stoughton 382,807 23,964 406,771
14 Before I Go to Sleep Watson, S J Transworld 362,177 286,740 648,917
17 War Horse Morpurgo, Michael Egmont 339,436 121,652 461,088
18 Call the Midwife Worth, Jennifer Orion 324,798 84,287 409,085
48 The Hundred-Year-Old Man . . . Jonasson, Jonas Hesperus 175,531 145,000 320,531
Over the last couple of months I have been working to put together a strategic alliance between my client, ACES,
and the AMCRC.
Putting together an alliance between two bodies that are funding substantially the government, and therefore taxpayer funds, is not an easy thing. Well, not if you want to do it properly, that is. And the properly part is to get them out of what they may do in the future, and to focus on execution.
There are plenty of reasons to get people into execution mode. In my view the main one is that once people start to do things they are forced to talk to each other about the reality of the problems that they face, rather than talking about what they are going to do when they get started.
In the case of this alliance there are issues to contend with that make things complicated – particularly the fact that both are involved in rebids. However, we got past all that and we have an execution path….
The other thing that is always difficult is to get the participants in the deal to focus on what their strategic objective is. A lot of the time they fall back into focusing on what they want rather than what they need to achieve in order for what they want to crystallize. In the case of the AMCRC-ACES alliance the strategic objective has to be that which will get the attention of the politicians in Canberra, and convince them that these two bodies working together are going to help them solve problems.
One of the key objectives, therefore, is to be able to present the media story about how, by working together, one of the leading groups of scientific researchers in the country, working together with a group that represents some of the leading manufacturers in the country are going to be able to deliver new proprietory synthetic materials that will be of use in manufacturing. But more importantly, to offer the promise of spin out companies in manufacturing. Manufacturing drives more jobs that any other sector in the economy. And according to the US Department of Labour new companies deliver net job growth to an economy, whereas legacy businesses are flat lining.
So the key task of the alliance has to be to drive entrepreneurial activity that leads to company formation. That drives high tech jobs, private sector investment, and helps invigorate manufacturing: all key factors for the economy, and in an election year, this is going to be a major issue on both sides of politics.
So on Monday just gone, we got the alliance signed and now the respective organizations can get started. There is much more, but I can’t go into it all for obvious reasons.
Back in the 1960’s in the UK there was a band called The Animals. One of their early hit records was a classic blues song
called, “Please don’t let me be misunderstood”. Being misunderstood can be the difference between winning and losing. As my old friend and mentor Rob Irving used to say, “It’s not what you say. It’s what they hear”.
Last night some friends came round to dinner at my house. Geoff is retired and Penny still works – in health care. Penny’s sister lives in the US and works for the World Bank. She is married to a guy who used to be a senior executive at Goldman Sachs. Penny mentioned that she had been talking to her sister during the past week. She had apparently been present at an event at which our Prime Minister had given an address.
Penny was recounting how her sister, while listening to the PM talking to the conference, had found herself fielding questions in hushed whispers from those Americans around her, asking her what was being said by the PM. The people in the room just couldn’t understand her!
Now, everyone knows that if someone from the outside world wants to get an acting job in Hollywood, they have to go to a voice coach. They have to learn to speak like an American. They have to because the studios know that if they put a movie out into the market with accented speech in it, people in the US will stay away in droves. So they don’t do it. The movie industry is big business. It is also perhaps the most marketing oriented business there is in the world. If you make it difficult for the customer, the customer responds accordingly: he just stops spending money. The result is that when you see a movie with Scarlett Johansson (from South Africa) or Russel Crowe, or Nicole Kidman (from Australia) what you get is American accents. The only people who seem to be able to get away with speaking in their native accent are the classic Brits like Maggie Smith or Hugh Grant, who built their careers playing classic Brits, and so presumably are now type cast…
But, back to the point: Our Prime Minister is hard on the ears for most Australians. But we can all cope with it. However, when the people in the audience for a speech in the nation that substantially determines our foreign policy, can’t understand her, surely, we should all be concerned. The Hollywood stars who learn to talk American get paid big bucks to do so. But the people who represent our nation, have a much much bigger responsibility to be understood. Surely our PM could take some lessons in how to talk to ensure that people in the audience at the World Bank or the UN actually understand what she is saying. If not, why should she bother with going overseas, and why should any of us tolerate having her represent us? It doesn’t mean that she has to talk like Nicole Kidman. But it does mean that she should learn to make herself understood. It is the basics of marketing. And if her role is to be the CEO of the country, that means she should be the #1 salesman for the country too.
By the way: the same goes for each of us too. I learned a long time ago, that if you want to do business in the US, you have to think like an American and you have to speak so as to be understood.
I have been buying wine online for a couple of years now. Sometimes it has been a great experience and sometimes a
crappy one. But what it shows is how fragile customer loyalty is and the things that can damage it and a brand.
I got hooked initially on Graysonline – about two years ago. The thing that Grays did, in Australia, anyway, was to create an expectation in the minds of this shopper that with respect to wine, anyway, bargains were possible. A friend, who is a wine buff, and was a professional chef, in a past life, really focused me on that, when he encouraged me to buy Chablis from Greys. He told me that he had a bidding technique that worked for him and he was able to get really good Chablis, which I love, at under $12 a bottle! When you consider that some of the Sauvignon Blanc that is made in Australia and New Zealand and is utter crap, sells for a good deal more than that, it had to be a bargain.
So for the last 18 months I have been snaffling up Chablis, and paying somewhere in the region of $12 – 15 per bottle for a pretty damn good drop of wine. Alas, it seems that Grays have run out…. and by the way, the particular Chablis that they had on auction is imported by Grays rather than being sold on behalf of a third party.
With the prospect of not having any Chablis in the house at Christmas, I decided to look for some alternate options.
That led me to Cracka Wines, a more recent addition to online marketing in Australia. Cracka sets itself up as an aggressive price differentiator in the way that it markets itself. I bought a case of Chablis from them, and the product, delivery service were all fine. The problem is that as soon as you have made a purchase from them, they start spamming you with discount coupons and product announcements. Now the notion of a discount coupon can be pretty compelling if the rest of the value proposition is great. And by that I mean that you have to be on a line ball in terms of price before you begin the game that Cracka is playing. Discount coupons as a business model is pretty thin on its own…. You can give me 10% off my next case, but if I can buy the same product from Dan Murphy for 20% cheaper without having to go through the effort of finding the email with the discount code in it, you can bet I am going to do it.
So yesterday when I went down to the cellar and grabbed a few bottles of French Burgundy, Chablis and Rose to put in the pantry for easy access, I noted that I was running riskily low on stocks and therefore should get an order in place…. When I logged on to my email later in the day, I saw yet another piece of spam from Cracka, this time a note from the CEO telling me that he hadn’t seen me shopping recently, and was there anything wrong…. It had in it a couple of options that I was invited to click – the reasons that I may not have shopped. These included the following riveting pieces of hypothetical feedback: “Nothing tickles my fancy right now”; “I’m waiting on the auction of
a personal favourite”; “I’m all stocked up at the moment”; “Wine? I’m too busy to think about wine!”; “Eagerly waiting for payday”…
The lack of any real creativity, combined with the fact that instead of intelligently asking me some questions that I might actually want to answer, made me think: “These people don’t actually understand marketing in a Web 2.0 and beyond world. They’re all about discount coupons and push.” So I decided to look analytically at what my options were. And so I spent some time price comparing Cracka with Dan Murphy and as a result ordered some inexpensive French Chablis and Rose that is so much cheaper than the same product almost exactly (Same brand, same variety, same grape, but 2 years difference on vintage) as to make it a no-brainer.
Here is the price comparison:
2008 Simonnet-Febvre Petit Chablis: Cracka Price: $26.99 discounted to $21.99. With a further 10% discount (if I could find the coupon) this would bring a bottle down to $19.79.
Meanwhile at Dan Murphy they show the same recommended retail – $26.99, but I can pick up a 2010 for $16.15 per bottle. And at Dan Murphy there are no shipping costs.
So it stacks up that for a dozen bottles from Cracka I paid $279.88 for a case of 12 on the first and only time I purchased wine from them. Today my purchase of 2 cases of 6 will end up costing me $237.48. That is a whopping $42 difference in cost!
I can imagine that if I were buying one of my favourite wines, Chateau Talbot, that there might be a significant difference in vintages, but much less likely with an inexpensive Chablis….
What is really happening here?
This should not be the way that this particular scenario plays out, surely? Dan Murphy is a big player in bricks and mortar retail. You would think that in spite of their buying power, the overhead of their bricks and mortar assets would make it tough for them to compete with a virtual store front that presumable has very little overhead. It would be running its purchasing on 30-60 days credit, so when it pays its bills, its already got the money in the bank thanks to Visa. It wouldn’t own a warehouse, because it doesn’t need to. In fact its only overhead would be its web development costs and its third party marketing. The conclusion has to be that Cracka is trying to gouge as much profit as it can while it can. The problem with that concept is that you can’t imagine Cracka becoming such an explicit threat to any of the big players that it will be able to greenmail one of the majors into buying it.
Meanwhile Dan Murphy is going to keep on getting bigger, and I will be watching to see when Grays gets in some inexpensive Chablis again!
There is one other aspect of this that should be ringing alarm bells for those people at Cracka in particular: Once you lose a customer through churn, where the customer discovers that you are only a retailer, and retailers are only as good as the sum total of the brands they carry, the prices they charge and the service they provide.
On line the mix that leads to customer loyalty is a lot more tenuous than in the bricks and mortar world where there are shop assistants to help you and the potential exists for a more enriched relationship between seller and buyer. Online price is where retail brands first create a relationship and then build on it. And trust becomes the mortar that binds together the experience and the relationship. Maybe I am not the right demographic for Cracka. But I think the greater possibility is that the company has a bunch of young marketing graduates working for it, doing what they learned at university, without a true understanding of the rationale that drives customers. And think about it. What is the big demographic of customers for buying wine? Should be pretty easy to answer…. it has to be people over the age of 65. They have discretionary spending capability; they have time on their hands; and there are just so many of them anyway – and growing. What companies who are online need to start doing, is to employ people who are over the age of 60 to communicate with the people of their own age….
I am producing the AdBioFab conference again. It will be at the Sydney Business School on December 18th.
If you are interested in attending visit the AdBioFab website to find out more or to register. If you are a regular reader of this blog and want a complimentary pass for the conference add a comment to this post with your details and I will contact the first 2 people to arrange complimentary registration.
AdBioFab will focus on the opportunities in the medical device sector that arise from the development of new ‘smart’ materials (including new sensor technologies), 3D printing, and the growing aging demographic. The acceleration of the size of the population that is over 60 years old, combined with their high discretionary spending capability, and their personal interest in curative/restorative medical solutions is the key market pull. When you add the development of new nanomaterials and the ability to manufacture on demand you have the means. Then add social networking and mobile devices and you get a volatile mix…. That is where the conference goes. It then sets the scene for what will happen next – which is not the subject of the current conference. You can’t get to the next part of the discussion without the information in the conference.
This is where the story evolves: Once you have the means and the market, then you have the potential to imagine and to deliver on a whole different scale. Because once you have the tools that we now have you also have the means to not just restore, but to enhance.
While one demographic is being tattooed on the outside, another, older demographic, is starting to be modified on the inside: cognitive enhancement through pharmaceuticals like modafinil and ritalin at the moment, and via wearable biofeedback devices that will produce results by stimulating the precise neural systems necessary to increase memory, brain acuity etc.
And then next, every other part of the body…. where art, science and engineering ability are all working together to fulfill human desire. Will it be driven by altruism, self-interest, community, and how much will the networked brain be the key to how we evolve?
Last Thursday evening I went to a book launch.
Not just your average book launch with a glass of chardonnay and some canapes, mind you, but instead a book launch and formal dinner for several hundres in the ballroom of the 4 Seasons Hotel in Sydney. And the event wasn’t just remarkable for the dinner. When was the last time that you went to a dinner where before the main course is served, you are asked to be upstanding in order to sing the national anthem?
It made me realize that I was in a room full of people who were not just supporters of the author, but were also passionate about Australia and its future.
But then that is what I should have expected in going to the launch of a book by the world’s richest woman, Gina Rinehart.
I was joined at the dinner by a strikingly beautiful young Arab woman, who I met while she was a student, and who I have been mentoring. She is currently interning in the newsroom at Channel 10, one of Gina Rinehart’s portfolio of investment interests. I am also editing a book that she is writing about refugees. She knows a thing or two about the subject because she was born in a refugee camp, and she spends time as a volunteer, taking food to refugees at Villawood, one of the detention centres for “illegals”.
Widyan al Ubudy is her name and she was, without doubt, in a dead heat as the youngest person in the room with one of Gina’s daughters who was with her. Most of the people in the room were male and over 70 – investors and entrepreneurs from the mining sector. They had come to hear Gina’s vision.They got what they wanted.
Widyan and I were seated at one of the VIP tables, thanks to Julian Malnic, the chairman of the Sydney Mining Club, who had previously met Widyan, and saw the same spark that I saw, and wanted to help give her the opportunity to get noticed.
A lady came and sat at the table next to me and introduced herself as Jan, and we got chatting.
It turned out that Jan was on the board of the organization that Gina has set up to help drive her vision for Australia. She started to talk to me about the Gina that is not in the media. It was quite fascinating. There is clearly a public Gina Rinehart who is all P&L and a private Gina who has a strong philanthropic motivation. Jan, the lady at the table with the insights, told me that much of what Gina does philanthropically never gets into the news, because Gina doesn’t want it out there…I thought that was rather interesting….
I am rather pleased to say that Widyan got to meet Gina…. who told her to hang in at Channel 10 and stay the distance. Who knows where these things lead….?
Yesterday morning just before I headed out to a couple of meetings at the uni, there was a knock at the door. It was someone who lives a couple of streets away, and who was the realtor who sold us our house. (I’ll call him John for the purposes of this story). He and his wife are splitting up, and he told me that he was about to put his house on the market. He wanted to know if I knew anyone who might be interested. John then went on to tell me what he had originally paid for the house, and that he didn’t expect to get anywhere near that price in the current market. (Property values in this area seem to have been going sideways for at least a couple of years).
I told him that I would be happy to tell friends about his house, but that most of the people that I know who are looking at a possible purchase in my local village or the countryside around, have noticed that there is a lot of real estate that has been on the market for a long time. Their simple analysis is that asking prices must be out of step with market reality. So they are sitting it out.
It is a classic case of a deflationary state of mind – “if I wait longer, price will go down”. The problem with this, of course, is that unless market realities are met, the concept of waiting longer becomes a self-fulfilling prophesy that is so embedded that even when prices go down, buyers want them to go further down…. leading to a never ending spiral into market oblivion!
My neighbour, John, is not a believer in that. He is actually an extremely good salesman when it comes to real estate. He gets the who concept of the potential of deflation big time. John’s franchise operation is up in the next little hamlet up in the hills and his comments about the broad market were rather interesting:
Here is a digest of what he told me:
His sell-through rate for the current calendar year in his area is approximately 23 houses sold. This is against an average for the realtors in my local area which is apparently 12 – 13.
Median prices of transactions in his area are running about 10-12% higher that in my local area. He told me that this is contrary to accepted practice for the local economic area, and this ratio should be in reverse.
He gave me his reasons for what is happening: He said that the local realtors in my local village establish unrealistic price points for property that they put on their books. They do this in order to impress the vendor and to win the listing. In a bull market, you can do pretty much anything and the purchasers and vendors come to an agreement about price, so you get to a sale. In a static market, which we very definitely have, unless the realtor manages vendor expectations, sales don’t eventuate fast enough and then prices go much much lower when sellers start to feel the pain.
His case in point: A house in the last 12 months that was listed at $1.5M by another realtor. John thought that the market value price of the house should be around $1.15M. He told me that if he had listed this particular house he would have put a sticker on it for $1.25M and would have been able to close a sale at his target price fairly rapidly. As it happened John had a client who was interested in making an offer which was $1.1M. The agent representing the vendor was unenthusiastic about recommending that price to the owner, and downsold the practicality of it to the vendor. As a result the offer was rejected. John’s client didn’t make any further offer, but instead moved on to look at other properties and bought elsewhere. The house stayed on the market for a full year, and has recently been sold, but has realized a price just under a million.
So from the point of view of all the participants this has been a bad exercise. The vendor had the continuing cost of maintaining the house for the period in which it was on the market; the vendor had the continuing costs of capital, either through debt or inability to access cash tied up in the property; the realtor ultimately had to take a commission on a lower number than he may have liked…. And everyone’s properties in the area is, as a result of this, a little less valuable today than it was a year ago, whereas if the property had sold faster at $1.15M there would be market momentum and a less negative impact on real estate values.
I asked John about a property that has just gone on the market and is near where I live. It is one acre block of land with a run down fibro house on it that is essentially a tear down. But it is on prime quality land, that is the best dairy country in the state. The place is listed at $575K. I asked John what he thought about that price.
He told me that he thought it was a great case study of exactly what was happening elsewhere in the area. He thought that the real market value of the house was $45oK. His view was that it should have been listed at under $500k to generate a quick sale. He said that the underlying land value would be $350K and that, while it is a tear down, the existing house would have the ability to generate some cash flow from rental while plans were developed etc, and as a consequence there needed to be a slight uplift beyond raw land value. His view was that this house, like so many in the area, will stick.
So this area is now caught in its own deflationary spiral waiting for something to break. I can’t imagine that even the most cashed up realtors in the local village can survive very long with only 12 sales in a year. If you figure that these days they would earn a commission of 2% and the average house price would be in the region of $875K, they would generate a shade over $200,000 in a year, which may be a good living for some, even after overheads. And it would be the overheads that would be crippling.
In the meantime all the people in the area who want to sell, are going to find themselves in a long, long line with no end in sight.
How much does this quietly impact the local economy? It may not be something that is highly visible, but it clearly means that there are less builders employed (people who buy, invariably renovate or upgrade); it means that council services are not upgraded (people who are selling are more interested in getting out, than in ensuring that the local infrastructure is performing optimally); and in a more general way, when new people come into town, and have cash, they are going logically going to buy a lot of consumer items locally because it is easier. All these contribute to the local economy in a quite significant way.