Issue No. 24: Hemnet
Pricing power, margin expansion, operating leverage... and buybacks
“There are actually businesses ... where any manager could raise the return enormously just by raising prices—and yet they have not done it. So they have huge untapped pricing power that they are not using. The ultimate no-brainer."
Charlie Munger
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”
Warren Buffett
I think eventually this newsletter might devolve into a journal that purely follows companies that are exercising pricing power. Someone once joked that Buffett’s post-acquisition strategy was to rip out all the capital and raise prices - I feel myself being drawn to the same orientation.
Last week I discussed a new business I had come across that, on a cursory look, seems to have all the characteristics of a franchise - Hemnet. This week I wanted to devote the entirety of my word budget to diving deeper on why this business is in such an unusual inflection point in it’s ability to very predictably grow it’s intrinsic value.
Historical Primer
As I mentioned last week, the historical context for Hemnet’s creation was not too dissimilar from the creation from other online property listing platforms. The genesis for their creation was the desire of industry participants to find advertising channels that were more cost effective than print media. In a prior age the listing pages in a monopoly newspaper were once described to me as the ‘rivers of gold’. A place where job listings, property listings, and all other kinds of miscellaneous advertising simply had to be to get discovered.
By the early 1990’s print media, newspapers, magazines, and television advertising began to transition from it’s historically dominant economic position, to virtual abeyance. Buffett illustrated this observation (grossly underestimated at the time) in the 90’ and 91’ Berkshire Hathaway Annual Letter. Clairvoyant as ever, three short years later the Mosaic Web Browser gained mass appeal, further disrupting virtually all categories of traditional media. The days of 6% a year pricing increases across advertising rates in print died in the cradle of the web 1.0.
The nimbus of print’s economic glory days would persist amongst the most powerful of it’s champions well into the early 2000’s. Such was the case amongst the stalwarts of the Nordics. In 1998 an enterprising Swedish Real Estate Broker conceived of Hemnet as a way to offer a centralised place to list properties for sale. The site was later sold onto a consortium of leading Brokers for 15,000 Kroners (just shy of 1,400 USD). Even I can feel that in my pocket book.
While most Western countries (and I will include the Nordic countries in that general tradition even though I know there are very important cultural differences) have found themselves with a single online, most had much more commercial beginnings. REA Group - that I referenced in my last writing - was a 100% commercial enterprise from the get-go, listing on the ASX in the early 2000’s. Zillow (USA), and RightMove (UK) have likewise been public companies for over a decade. Hemnet spent it’s first two decades of life run by consultants on a part time basis. It eventually found it’s way into Private Equity ownership, which was the catalysing force for it finally listing as a public company on NASDAQ Stockholm.
Perhaps a word on two on the West’s somewhat unique obsession with property. I’ll exclude the Nordic’s from this, but their relationship with property ownership somewhat analogises the Anglo-Saxon experience. The British - or more accurately English - system of common law and property rights is deeply tied to land ownership. For most of our (I say ‘our’ as a citizen of a country who inherited this system) post-Roman civilisation wealth, taxes, status, and even titles of nobility were tied to a system of land ownership. The inheritance of land was the surest way to secure one’s future as late as the pre-WW1 era. To this day the great land owners of the British Isle’s (several of whom are fabulously wealthy) trace their roots to this tradition.
This millennia old mentality survives to this day - the cultural fascination is even more intense in places like Australia and Canada. It wouldn’t be too much of a stretch to say that property ownership verges on something of a national cult in the former British Colonies. Like most wildly uneconomic phenomena that persists in spite of itself, it began with a good idea. The Post-War (that is to say WW2), and it’s accompanying population boom, allowed for a generation of consumption-led growth at a time of ever evolving financialisation. Property proves to be a very stable asset, and lending against it has devolved into the lifeblood of many places that adopted the Western system of capitalism and democracy.
Booms and busts have abounded. Japan in the late 80s and early 90s, Australia in the early 90s, the USA in 2008, and the examples go on. It seems almost every financialised and capitalist economy undergoes at least one very painful de-leveraging related to property speculation. Sweden and the other Nordic economies experienced their own property bubble in the early 90’s, that burst spectacularly in 1994. The Swedish authorities dealt with the crisis deftly, a case worthy of it’s own article. Since then the Swedish property market has had been very rational - expanding inventory in line with population, and price appreciation somewhat in line with income growth. It’s also a country that has somewhat notoriously opened it’s borders to large scale immigration. Population is set to gradually increase for many, many years to come.
I’ll digress from the general history lesson - every geography that shares a Western system of property ownership has ended up with a dominant online listing website. In Sweden this is Hemnet. The casual nature of it’s development as a going concern illustrates how powerful these online properties can be. Despite not even having full time employees for the first decade of it’s existence it has gained a preeminent position in it’s homeland. It first began to commercialise itself in 2014, and it is only now (2023) beginning to add some of the advanced advertising features that it’s international peers introduced a decade ago. This underdevelopment is going to explain the tremendous pricing power this company has in front of it.
Business
Hemnet commercialises it’s online portal’s in the follow ways: