One of the big digital China IPOs of 2020 was KE Holdings. Which does business under the brand names Lianjia and Beike. Lianjia, founded in 2001, is one of the biggest residential real estate brokerages in China. In 2019, it had +6,000 locations across China and +120,000 real estate brokers. In 2019, they completed 2.2M transactions across 103 cities. Beike is their newer online service.
But what makes KH Holdings really interesting is its platform strategy. It is trying to create a very large online-merge-offline marketplace platform for Chinese residential real estate. Sort of like Zillow but with an offline component.
First some background:
An Introduction to Lianjia / Beike / KE Holdings
Here is the description from its webpage. I added the bold.
“KE Holdings Inc. (“Beike”) is the leading integrated online and offline platform for housing transactions and services in China. We are a pioneer in building the industry infrastructure and standards in China to reinvent how service providers and housing customers efficiently navigate and consummate housing transactions, ranging from existing and new home sales, home rentals, to home renovation, real estate financial solutions, and other services.”
From Yahoo Finance:
“The company also owns and operates Lianjia, a real estate brokerage branded store; and owns Deyou, a franchise model for connected brokerage stores. The company was founded in 2001 and is headquartered in Beijing, China.”
That description is kind of a word salad. But the playbook for their platform strategy is there, just sort of buried. Here are the key points:
- A leading offline platform housing transactions in China.
- Owns and operates Lianjia, a real estate brokerage branded store.
- Owns Deyou, a franchise model for connected brokerage stores.
- Going for an integrated online and offline marketplace platform in transactions – with the home buyers and home sellers (brokers, brands, offices) as the primary user groups. Real estate developers selling new homes is another user group.
- Also trying to build complementary platforms for services.
And while they say this is about creating “industry infrastructure and standards”, this is about orchestrating an ecosystem. You’ll recall the E in my SMILE Marathon is Ecosystem Orchestration and Participation.
Here are the financials.
Net Revenue: 46B RMB
– Existing Home Transactions Services: 25B RMB
– New Home Transactions Services: 20B RMB
Gross Profit (after commissions): 11B RMB
Sales and Marketing Expense: 3B RMB
Net Revenue: 28B RMB
– Existing Home Transactions Services: 20B RMB
– New Home Transactions Services: 7.5B RMB
Gross Profit (after commissions): 7B RMB
Sales and Marketing Expense: 2.5B RMB
What Is the Difference Between Physical Platforms and People-Based Platforms?
I have stated many times that platform business models are nothing new. They have been around forever. It is the emergence of digital platforms that has made them so powerful.
Traditional platforms include:
- Physical platforms. Such as local markets, bazaars and shopping malls.
- Information (non-digital) platforms. Such as payment networks like MoneyGram.
- People-based platforms. Such as investment bankers, matchmakers and brokers.
But all of these platforms require certain capabilities to function. A bazaar or shopping mall needs a physical location. To get the interactions to happen you need the two user groups (buyers, sellers) into one physical location. So you need a building or a parking lot. And to get a network effect, you need all the stores to be available to a buyer. Note: Wall Street is named after the physical location where buyers and sellers would come to meet.
But what do you need to enable a people-based platform to function? Do all the male and female clients of a matchmaker have to meet in one physical location at one time? Do you need a big building? Or a popular bar?
What tends to happen with people-based platforms is there are agents and brokers. These individuals manually make the interactions. An investment banker calls the companies looking for money and then calls people looking to invest. These people are the enabling capability for the platform.
But you can see a problem immediately. Each agent is limited and sees only part of the network. A banker may know some buyers and some sellers. But not all. And everyone isn’t coming to one physical location to meet. So how can you get a bigger platform? How can you get a network effect?
You need the agents to coordinate and share information. Brokers need to share their buyers and sellers. So you create one large marketplace. This creates a lot of trust problems. You need to share information and you also need a common set of rules for what the roles are and how everyone gets paid.
Note: You don’t have this problem with physical marketplaces. The owners of one store in the mall don’t have to coordinate and share their information with the other stores.
In residential real estate, this is about brokers, stores and brands coordinating and sharing information. These are all the local service providers that hunt for clients. In the USA, this is accomplished by the Multiple Listing Service (MLS). This information database was created by real estate brokers in 1908. Prior to this, they used to meet in offices and events to trade their listings. But in China, this doesn’t exist.
Being a Real Estate Broker In China is a Tough Job
In every neighborhood and on pretty much every street in China, you will see small real estate brokerage offices. They are everywhere. With lots of apartment listings in the windows. And usually 5-10 people are sitting inside at computers. Outside of big residential developments, you will also often find brokers just standing near the gates.
Real estate brokers are everywhere in China.
They are trying to get clients. Both home buyers and renters. And home sellers and landlords. It’s a tough, hyper-competitive business. And not a fun job. Finding clients is difficult. And clients are usually working with other brokers at the same time. Completed transactions are infrequent, especially for home sales. And if they do get a sale (and its commission), they only get one sale per client. Then they have to find another. It’s hyper-competitive job, with no loyalty or exclusivity. Commissions are low. Income is sporadic. And everyone works really, really hard. You really don’t want to be in any business in China where it’s mostly about who works the hardest.
The experience isn’t much better for consumers trying to buy homes. You go to one sales office and talk to a broker. They show you their listings. But it’s unclear how many of them are real and authentic. And up to date. Maybe they just posted those listings to get you in the door. Plus, that broker only has their own listings. So to find more listings, you have to talk to multiple brokers. It’s inefficient and not an awesome user experience.
Enter Beike, which is the digital project KE Holdings launched in 2018 to address all this. In their IPO filing, they describe the problem pretty well.
- There is vicious competition for customer acquisition in residential real estate. There are over 2M agents in China. And +250,000 brokerage stores.
- There is little to no sharing of information.
- There is no comprehensive database for authentic, accurate and up to date listings
- Sellers go to multiple brokers as there is no industry framework for exclusive engagements.
- There is no mechanism for collaboration between agents.
The IPO filing uses the terms “lack of trust” and “inefficiency” over and over.
Beike’s Solution Is the Agent Cooperation Network (ACN)
They are trying to build a capability like the MLS. And I like that they call it the Agent Cooperation Network. That is really accurate. It enables agents to cooperate. And that gets you a functioning network.
Here is the company’s description:
- “Our operating system, Agent Cooperation Network (ACN), underpins our infrastructure to redefine relationships among industry participants.”
- It “standardizes listings, sets rules and enables provider cooperation, pools data and information sharing and streamlines the process.”
- “Housing customers at different locations can be efficiently matched through collective efforts propelled by ACN.”
- “Built on the success of ACN, we horizontally extended the core competencies of Lianjia to the Beike platform.”
They are trying to build a platform business model. They are trying to be ecosystem orchestrators. But their people-based platform is missing the enabling capability. That is why they are pushing ACN (which they call infrastructure and standards).
Ok. That is all pretty cool. And don’t underestimate how big of an idea this is. China is a massive real estate market. Buying and selling homes is like the national sport. Real estate developers complete around 6.4M new accommodation units every year. Plus there is the resale market. And real estate is the primary asset for storing wealth.
Solving the China residential real estate transaction ecosystem is about as big a platform play as you can make.
Challenge #1 Is Getting the Platform Configuration and Governance Right
BCG wrote a good paper on why ecosystems fail. I summarized it in the Daily Update (7 Reasons Digital Platforms Fail)
Note: BCG uses the term ecosystem but this is really about platforms.
Failure reasons 2 and 3 are what Beike is trying to overcome. They are trying to set up the configuration, roles and incentives for four main user groups:
- Sales agents
- Sales brands and stores
- Real estate developers (selling new homes).
BCG describes “wrong ecosystem configuration” as:
“This involves defining the required activities and partners, their responsibilities, and the links among them, and assigning roles to various partners—in particular, the role of orchestrator, which coordinates members, defines standards and rules, and arbitrates conflict. The initial configuration should focus on the core value proposition and incorporate the minimum number of partner types required for its delivery.”
BCG describes “wrong governance choices” as:
“The governance model is a critical design choice for an ecosystem because it replaces the hierarchical forms of control in traditional vertical supply chains with indirect forms of control appropriate to the complexity and dynamism of an ecosystem. Governance establishes the standards, rules, and processes that define an ecosystem’s formal or informal constitution. Specifically, it needs to regulate access (Who can become a member of the ecosystem and under what conditions?), participation (How are decision rights distributed among ecosystem partners?), and commitment (What level of ecosystem-specific investments and cospecialization is required?).”
Challenge #2 Is Creating Trust Between Brokers
Most marketplace platforms like Airbnb and Uber were about overcoming the trust problem between buyers and sellers. How can you trust products by a small 2-3 person company? How can you trust someone enough to stay in their home?
But for this real estate platform, the issue is trust between sellers. The brokers need to be willing to put all their inventory together in one place. To share information. And to agree to rules about shared commissions (principal broker, secondary commission).
It’s not clear whether this will happen in this hyper-competitive business.
And it depends whether they trust Beike to be the ecosystem orchestrator. This is not a neutral third party. They are a big real estate broker themselves.
The big issue at the center of ecosystem orchestration is always “can you convince everyone to sacrifice their self-interest to create a bigger opportunity long-term?”. It the greater good and collective action problem.
Challenge #3 Is Building a Platform Business Model on Infrequent Purchases
Most marketplace platforms are built on high frequency activities. Like ordering food and shopping. I have used this graphic to show that digital platforms are based on building 4 key intangible assets: users, participation, data and liquidity.
But buying or renting a home is a very infrequent activity. The money is big. But it is very rare. And once a user competes one transaction, they leave the platform. So they have low user numbers and participation. It’s hard to build a digital platform on that.
Ant Financial had the same problem when trying to build a platform in insurance and wealth management products. These products are big money but they are very infrequent purchases. With low ongoing participation by users. So Ant’s solution was to create three complementary platforms that support each other.
- A payment platform (which means lots of users).
- A daily lifestyle services platform for things like food delivery and movie tickets (which means lots of engagement and data).
- A digital finance and insurance marketplace platform (which means big money).
Their solution was to pair big dollar, infrequent purchases with smaller, high frequency purchases. The big purchases get you cash. But the other platforms get you users, engagement and data. I wrote about this in “Ant Financial Is 3 Platform Business Models Combined.”
You can see this same approach in Beike’s addition of services. Instead of just doing transactions, they are adding services like rentals, refurbishing, decorating, etc.
The Big Payoff Is Demand-Side Scale and Network Effects
Ok. My last point.
Imagine if the chaotic, inefficient broker system of Chinese residential real estate becomes one big network. Imagine the demand side scale of such a platform. And it also gets you network effects. The more users and usage, the better the service becomes.
If Beike can expand their database listings, the increase in value to home buyers will be dramatic:
- Access to a very large, authentic and up-to-date housing list. Both online and in physical stores (OMO).
- Access to trusted professional services and agents. Brokers and offices will have rankings, just like sellers on Amazon. The agents will be better trained. There will be less predatory behavior. There will also be a large selection of brokers to choose from.
- Greater transparency and more information-based decision making. The whole murky world will become transparent.
- Increased convenience and more secure transactions. Buyers will have multiple access points (OMO) to engage and to complete transactions. Seamless signing and closing services.
- The platform will have the scale and resources to invest in tools like AR / VR. Far beyond what the current small branches can do. This will dramatically improve the consumer experience over time.
The platform and network effect will also dramatically increase the value to agents:
- More effective customer matching. There will be a much bigger pool of customers and better lead referrals and matching services.
- Access to additional authentic listings. Brokers can access and sell listings posted by other agents. Cross-store and cross-brand collaborations will increase.
- Collaboration among agents, pre-allocated commissions and more transactions will mean more stable income for brokers.
- Specialized tools and brokerage service providers. Low agent productivity is a problem. There is also high turnover. Platform tech tools will increase productivity and operating efficiency. Targeting customers with precision will be important.
The increased value to brokerage brands and offices will be different than to agents:
- A big increase in the resources and solutions for business and growth. Data, data analytics, AI, etc.
- Revenue source diversification and cash cycle management. This will be good for small brands and stores. They have poor cash flow cycles and liquidity.
- Access to large customer and housing listings.
- Improvements in finding leads.
- Ability to build better teams of agents. Better training of staff. Better coordination. Better performance management.
- Better CRM.
That’s my take. It’s a pretty bold platform strategy. We’ll see how well they do.
From the Concept Library, concepts for this article are:
- Real Estate
- Platform Types: Marketplaces for Products and Services
From the Company Library, companies for this article are:
- KE Holdings / Beike / Lianjia
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.
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