Century 21 Real Estate to Increase Earnings by 200%

Case Type: reduce costs; operations strategy.
Consulting Firm: Bain & Company first round job interview.
Industry Coverage: property & real estate.

Case Interview Question #00266: Our client Century 21 Real Estate LLC is a real estate agency based out of Los Angeles, California. It focuses on managing and renting apartments for short-term contracts and temporary leases: our client rents the entire apartment building for 5 to 10 years, furnishes the apartments and rent each of them to its clients for a short period of time (usually shorter than 1 year). Its own clients are usually corporations (that rent apartments for expatriates or temporary transfers) and people from the entertainment industry (movie stars, pop singers, etc). The company currently has $750M in revenues but only $12M in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Bain was hired to help them increase the EBITDA to $34M. What are the possible recommendations?

Additional Information:

• Fully-owned maintenance and cleaning services are charging 20% premium over market.
• Client does not own properties, they are all long-term leasing contracts.
• Decentralized procurement.
• There is no price discipline.

Possible Answers:

Interviewee: (Summarize the case and work on a profitability framework, profits = revenues – costs). I want to understand all sources of Revenue as well as Costs, and figure out room for cost reduction or revenue optimization. I will analyze opportunities for expanding the business as well. I will start with Revenues. I am assuming the biggest revenue source is the rental revenues, right? What do we know about the customer demand?

Interviewer: I can tell you that our client has 95% of occupancy rate.

Interviewee: This is very impressive; I do not believe there is room to increase this rate because of the maintenance and turnover lead time. The client seems to have a very efficient sales force, thus volume cannot be increased. What about pricing?

Interviewer: This is something I actually looked at. Regardless who the client is, there is no price differentiation at all. Also, at different times throughout the day, a client might be given different prices.

Interviewee: Here we already see something to work on. The client should most likely implement a pricing schema which would allow price differentiation. Certainty some of the customers are less price sensitive. Also, our client does not seem to have a robust CRM or standardized processes. The client should perhaps implement systems and review processes which would improve its operation and offer pricing discipline.

Interviewer: Right. Anything else to consider?

Interviewee: Do we have market share data? I want to analyze the competitive landscape and see room for additional revenue streams.

Interviewer: Yes we do. Our client’s 20 major competitors have all together the same market share of our client.

Interviewee: Which means our client is the largest player in this industry.

Interviewer: Yes it is, and for now it is not considering diversifying the business. Thus let’s focus on costs. What are the major cost elements?

Interviewee: The major fixed costs would be rent expenses and real estate taxes. Overhead and marketing expenses are also fixed. Operating staffing is primarily fixed, and so is furnishing. Other than that, there are only variable costs, such as: Maintenance services, cleaning services, utilities, sales.

Let me start analyzing the rental costs, which is most likely the major cost element. What do you know about this cost category?

Interviewer: Well, I was also very interested to know more about rental costs. This is what I found out. Rental contracts are managed locally by each of the client’s 45 regional offices. They argue that the close relationship with landlords offers them more flexibility with contracts, eg. not paying rent during the summer months (low season).

Interviewee: Although it could indeed be true, I would imagine economies of scale are huge in the real estate industry. There are very big real estate owners in this country. The client should think of centralizing rent negotiation for the major markets and perhaps keep some of the local markets with some autonomy. By doing so, our client could also consolidate and reduce overhead expenses.

Interviewer: By doing so we estimated a $5-10M savings per annum.

Interviewee: What do we know about the maintenance and cleaning costs? Is it outsourced or internal resources?

Interviewer: This is also interesting. Our client has fully-owned maintenance company and cleaning services company. They are both high-end and offer great services.

Interviewee: Do we know costs for equivalent services in the market? I would assume there is limited scale in the internal business and the company could save by contracting external services.

Interviewer: We do. As I said, the current services are high-end, so our client could save 20% of a $60M budget by outsourcing these services.

Interviewee: Perhaps the client should spin off this business and then require lower costs. There is room for $12M savings.

Interviewer: Anything else?

Interviewee: Unless the client wants to expand into other businesses, we have already accomplished enough. We have already identified opportunities to generate the additional $24M in EBITDA.

Interviewer: What are your recommendations?

Interviewee: I would recommend a set of actions:

• Spinning off the maintenance and cleaning service businesses will most likely generate an additional $12M in EBITDA;
• Designing a pricing differentiation schema would allow our client to extract a higher margin from some of its customers;
• Implementing CRM and new systems will generate cost savings;
• Centralizing procurement with major real estate owners will generate cost savings in renting expenses.

Interviewer: Excellent! Let’s stop here. Do you have any questions for me?

Interviewee’s Notes: This is an interesting case, and the interviewer said that she was at that time working with this client. Take the time to structure your thoughts and discuss the case. Besides the framework, the interviewer was expecting a different set of recommendations. Some important elements to be discussed were:

• Opportunities for outsourcing
• Economies of scale
• Customer segmentation
• Cost structure (variable vs. fixed)