Winners / Selection Rationale

KATITAS CO., LTD.

2017 17th Porter Prize Winner Rehabilitation and resale of pre-owned houses
KATITAS CO. , LTD (hereafter, Katitas) purchases, remodels and resells second-hand residential housing in rural communities throughout Japan. Katitas resells the houses at a low price?the monthly mortgage payment for a Katitas home is comparable to the amount paid as rent for an apartment in the same geographic area. The company grows its business by providing good-quality, freshly renovated pre-owned homes in areas where there is a limited supply of newly built homes.
../../data/img__2017_01_p.jpgGeneral features of vacant homes in Japan

There were 8.2 million vacant homes in Japan in 2013 (or 13.5% of the country's 60 million homes), according to the "Housing and Land Survey 2013," conducted by the Ministry of Internal Affairs and Communications, under the Statistics Bureau of Japan. This survey shows that one out of every seven houses was unoccupied. The number of vacant homes has been rising steadily since 1963 (the year that such data started being compiled on a nationwide basis). The 2013 survey showed that vacant homes (including vacant properties neglected by the owners) increased by 630,000 units from the previous survey, taken in 2008. Single-family homes accounted for 79% of the increase in the overall number of vacant homes. The growth in vacant houses is primarily attributable to the fact that vacant homes are not being demolished or remodeled. The growing number of vacant and abandoned properties are recognized as a social problem because the scenery in a neighborhood is destroyed when a property becomes infested with weeds, and there is simultaneously a deterioration in security.

Since the commencement of the survey by The Japan Journal of Remodeling in fiscal year 2013, Katitas has ranked No. 1 in annual sales of used houses (on a unit basis) every year, for four straight years.

Unique Value Proposition

Katitas purchases used houses mainly in rural communities with populations of 50,000 to 300,000. The company then remodels the houses and sells them. The selling price of a remodeled home ranges from 10 million yen (US$90,900 at 110 yen/$) to 15 million yen (US$136,364) per house. (In fiscal year 2016, sales of single-family homes accounted for 93% of the company's total sales. Fifty-five percent of the company's remodeled homes were priced between 10 million yen and 15 million yen. The average selling price was 13 million yen.) Katitas' main customers are couples with children and annual household incomes of less than 5 million yen (US$454,545). The company especially targets apartment dwellers who are buying their first homes. (Seventy-six percent of Katitas' customers have annual household incomes of less than 5 million yen. Regarding the geographic distribution of sales, 87% of sales were outside of Japan's three largest metropolitan areas of Tokyo, Osaka and Nagoya.)

In Japan, consumers usually must choose between newly built homes, pre-owned homes, and apartments. By offering remodeled single-family homes, Katitas has created a fourth option for consumers. The following are Katitas' five value propositions. The first value proposition is to offer good-quality, single-family homes at a reasonable price. For most buyers, the monthly mortgage loan payment is less than 50,000 yen, which might even be less than the amount they pay as rent for their apartment. So, Katitas has made it possible for families who normally wouldn't be able to afford a newly built home to become homeowners without taking on an additional financial burden. (Katitas' remodeled houses are about half the price of same-size newly built homes in the same location.)

The second value proposition is the provision of good-quality used houses. Most of the used houses are old, and many of these homes have termites. Sometimes the property lines are not clear. In some cases, the neighbors' piping runs below ground on their property. These are some of the reasons why many people prefer newly built homes to second-hand homes. On average, Katitas' homes are 30 years or older, and the properties have a variety of issues, including aging degradation. However, Katitas resolves all these issues, and then resells the home with a two-year warranty against defects. Katitas completely remodels the kitchen, the bath tub, and the lavatory. The company also upgrades the plumbing by installing new pipes. Katitas repairs the roof and the exterior walls. It improves the home drainage system, and carries out an anti-termite treatment. Katitas makes the house a more comfortable living space by changing the layout, and enlarging the area for parking, an essential feature of homes in suburban and rural locations. Katitas also resolves issues relating to rights and registrations, which include the confirmation of property lines and the removal of underground pipes that cross property lines.

The third value proposition is for the sellers. When homeowners sell their homes to Katitas, the company uses a simplified process for arranging the housing property's sale. Once both parties have come to an agreement, the deal can be executed much more easily than usual and in a shorter amount of time. The home inspection must be attended by the sellers. If the schedule for the appraisal itinerary is well managed, Katitas can determine the purchase price in as little as three days. After the seller has agreed to the price and submits the necessary documents (property registration documents, etc.), the soonest that Katitas can make payment is three weeks. Because Katitas conducts an appraisal before submitting a bid for the house, there will be no subsequent renegotiation of the price once a bid has been offered. In contrast, when a homeowner sells the property through a real estate agent, the owner is frequently required to attend the preliminary inspection of a listed property each time a new potential buyer asks to visit the home. When selling a home to Katitas, the seller transfers to Katitas all responsibility for any defects, such as leaks, and problems with the water supply and drainage pipes.

The fourth value proposition is for builders. Katitas outsources remodeling to 750 small and medium-sized builders with whom Katitas has established a partnership. Katitas enhances the stability of these builders' businesses because the company gives each builder a specified amount of work that corresponds to the builder's capacity. The opportunity for steady work is valued highly by builders who operate in communities where the local economy is sluggish. Builders are able to operate without having to commit much capital because Katitas provides in bulk the materials, fixtures and other equipment to be used in the remodeling projects. Katitas also helps builders maintain their skills and motivation. Builders are required to use the materials, fixtures and equipment supplied by Katitas. They must also comply with Katitas' work standards. However, the remodeling of a used home is always a unique experience, and one that requires much creativity.

The fifth value proposition is for the local community. By remodeling vacant houses, Katitas contributes directly to solving the problem of vacant homes.

The rural communities (with populations of 50,000 to 300,000) on which Katitas focuses are not the kind of market that attracts the attention of many real estate agents. The majority of houses are not listed with a real estate agent because of the low unit price and the low commissions. The small size of the local housing market means that the supply of newly built houses is limited. With the value proposition of remodeled pre-owned homes, Katitas has found new opportunities in such communities.

Unique Value Chain

Katitas' value chain is unique in its purchasing, construction management, and sales activities. The company most ensure that its appraisals are accurate, and correctly determine the home's purchase price. Otherwise, Katitas will have to spend more than expected on the home's remodeling. This would result in lower profitability for the company. Without proper construction management, Katitas could not successfully achieve both cost control and customer satisfaction. Without an effective approach to sales, Katitas would not be able to sell its remodeled pre-owned houses (each of which is unique) within a fixed period of time and at a reasonable price.

Purchase
Katitas has two channels for procuring used homes. One channel comprises more than 100 branches in rural cities scattered throughout Japan, and homeowners who want to sell their homes are encouraged to contact a Katitas' branch office directly. The other channel consists of a network of "Core Agents," i.e. small- and medium-sized real estate agents operating in a quasi-franchise relationship with Katitas. In the fiscal year 2016, more than 30% of the homes were purchased directly from homeowners rather than through real estate agents. In order to increase direct purchases, Katitas aggressively runs TV commercials in select local markets, intentionally avoiding Japan's three largest metropolitan areas (Tokyo, Osaka, and Nagoya). Through the active use of TV ads, Katitas aims to reinforce the company's brand image: "Katitas--The first choice for anyone wanting to sell a home." Katitas positions itself as a trusted and reliable partner of homeowners. Anyone interested in selling a residential property is encouraged to contact Katitas directly. (In a survey conducted by Search Light in May 2017, survey respondents were asked, "Which company do you think of when you want to sell a house?" Katitas was ranked No. 1 as a buyer of used houses in unaided recall, placing above large real estate agents like Mitsui Fudosan Realty.)

A home inspection and appraisal are crucial for determining the right contract price for a home and minimizing unexpected renovation expenses. Costs would increase and the renovation work would overrun the work schedule if evidence of degradation, disrepair, or termites are discovered at a later date. If structural reforms later on prove to be more difficult than expected, or if there are any oversights regarding structural issues, this could cause the home remodeling project to exceed the budget, or delay the schedule. Katitas requires the presence of three parties: 1) Katitas employees, who conduct the appraisal to determine the home's value; 2) the builder, who determines the expenses that will be incurred in the home's remodeling and assesses the flexibility of the building's structure; and 3) the contractor, who inspects the property for termite damage. All three must be present at the time of the home inspection and appraisal. For Katitas, this practice has led to significant reductions in both the number of renovations that run over budget and the number of home remodeling projects that require an extension of the work schedule.

The real estate markets in rural communities are less liquid than those in urban locales, and it is difficult to set a home contract price using the local market as a reference. That said, Katitas has been focusing on small and medium-sized cities in rural locations, and the company has worked hard to develop a deeper understanding of these rural real estate markets. The majority of branch managers are locally hired individuals who possess extensive knowledge about the local real estate market. Area managers, who oversee three to eight branches and understand market trends from a boarder perspective, back up the branch managers, providing a double-check of the home's contract price. Katitas transfers its personnel between the company's branches, but even when individuals are reassigned to different posts the company makes sure that either the branch manager or the area manager has extensive knowledge about the local market. The ability to set an appropriate price for its renovated homes helps Katitas achieve high profitability.

Remodeling planning
Katitas sets the sales price first, and then determines the upper limit for remodeling expenses. Katitas designs the remodeling plan, staying within the limits of its budget.

Katitas designs a remodeling plan by incorporating renovations that contribute to a "safe, clean, and comfortable" living environment. The company does not try to add value by using expensive materials or installing high-end fixtures.

Remodeling
Katitas outsources the remodeling work to its 750 "partner" builders. In order to realize a uniform level of quality and control expenses, Katitas shares its "Standard Specifications" with the builders. This document contains the specifications for each work item (the walls, floors, and the roof, for example). In accordance with these standard specifications, remodeling will be conducted for each house based on the "Remodeling Guidelines," which builders sign before the works start.

Katitas purchases materials, fixtures, and large items like kitchen equipment and bath tubs directly from manufacturers and wholesalers, and provides these to the builders. Katitas can take advantage of volume discounts through the centralized purchasing of such materials, fixtures and other items. This also reduces remodeling costs by lessening the builders' operating capital.

As a result of these various arrangements, Katitas can finish the remodeling of a home in 1.5 months on average.

Sales of remodeled homes
Katitas contacts potential customers who have shown interest in the past. The company also actively lists properties on its website. The company frequently provides detailed information and updates on its homepage regarding houses that are in the process of being remodeled. The sharing of such information results in quick sales. Even pictures showing the space beneath the floor and other work in progress are posted in order to communicate Katitas' policy on remodeling. Customers can compare "Before & After" photos of the remodeled home. Detailed information about fixtures and other items is provided so that viewers can feel as if they are visiting the property. This information is periodically updated as the remodeling project makes a progress. These posting are conducted in accordance with the company's "Guidelines for Internet Postings," which is about 100 pages long. A sales representative from one of the company's branches takes pictures of a real estate property and writes some comments. A designated person at the headquarters checks the quality of postings periodically, and provides instructions on how to improve the postings. In fiscal year 2016, about 30 percent of sales contracts were signed before renovations had been completed. Many companies that provide remodeling services usually advertise renovated homes after all the remodeling work has been completed. In the past, Katitas used to rely on printed advertisements that showed completely renovated homes. The company then decided to reduce its reliance on newspaper inserts and flyers, and began expanding online advertising. By switching its main focus to online advertising, Katitas has been able to significantly reduce its advertising expenses.

Marketing
The sales representatives at Katitas' branch offices visit real estate agents and speak to the neighbors of a given property. They conducting interviews to gain a better understanding of customer needs.

Overall management
When a sales contract is going to be signed for a renovated residential property, a standard format email is sent to the top management team. The email message contains the following information: the sales price, the inventory turnover period, and the amount of profit. Based on this input, the top management asks the sales representative about the customer and why it took so long to sell the remodeled home. Top management's objective is to clarify the opportunities and risks being faced by sales representatives working in the field.

Katitas connects all its branch offices through an intranet computer network. The company holds a "Morning Meeting" once a week for one hour. All the company's branches participate in the meeting, which is convened online. During the meeting, the company's executives share information regarding changes in the Katitas' internal rules. Company officials discuss noteworthy matters. Top management shares examples of both best practices and failures, and then presents awards to branches that have achieved a strong performance. After the Morning Meeting, each employee is asked to fill out a questionnaire. Company officials evaluate the efficiency of its communications, listen to the requests of staff members, and answer questions. Afterward, top management reads all the questionnaires that have been filled out by staff members, and provides direct responses to their questions.

Human resources management
The same person is in charge of purchasing, remodeling, and reselling a single real estate property. Under such an approach, the opportunity to specialize in a single activity is sacrificed. However, Katitas is able to minimize the loss of information about a particular property. (Information is lost as a project changes hands if different people take over the project as it evolves.) Having one person handle a real estate project from the initial purchase of the home through its remodeling and resale enables Katitas to maintain the high quality of its operations. Furthermore, because individual employees are held personally responsible for realizing the sale of the remodeled home that they had originally purchased from the homeowner, they are less likely to buy houses that would be difficult to remodel and resell.

Katitas' reward system is designed to: (1) achieve "the alignment of the company's interests and the individual's interests"; and (2) promote "sales activities that are well coordinated throughout the organization, rather than encourage various individual-led initiatives."

Fit among Activities

Katitas made four choices that are central to its competitive strategy: (1) The choice of product breadth (old, single-family homes in rural areas); (2) the choice of price range (a low price); (3) the choice of a remodeling policy ("safe, clean, and comfortable" living environments); and (4) the choice of the key performance indicator (inventory turnover). The KPI measures the efficiency and effectiveness of a business. In order to transform old houses in rural areas, Katitas has to remodel them and make them "safe, clean, and comfortable" living environments. The company must be able to sell these remodeled homes at a low price. In order to lower its procurement and sales costs for pre-owned homes in rural areas, Katitas works to improve customer recognition by utilizing TV ads, which are less expensive outside of Japan's large metropolitan areas. The company must also collect real estate market information from "partner" real estate agents who operate in rural areas, and make available online information on specific homes. Katitas is able to remodel homes at a low cost while ensuring good quality by: (1) arranging partnerships with builders in rural areas; (2) utilizing "Standard Specifications" and the company's "Guidelines for Remodeling"; and (3) supplying builders with centrally procured materials, fixtures and other equipment for all of the company's remodeling projects. Finally, in order to improve inventory turnover, Katitas maximizes the efficiency of its operations (specifically, the purchase, renovation and resale of pre-owned homes) by making one person responsible for the successful completion of all three of these operations for a single home. Furthermore, individuals who succeed in decreasing long-term stock are rewarded. (Please refer to KATITAS CO., LTD's activity system map, which appears at the end of this report.)

Innovation that Enabled Strategy

  • Has created a fourth residential option (i.e. newly renovated pre-owned homes), targeting people who live in rural areas and do not own homes. Before that, options had been limited to newly built homes, pre-owned homes, or apartments.
  • Has created a system by which to control the quality and cost of remodeling used homes. (The refurbishment of a home is a complicated project, and each home remodeling project is unique.)

Trade-offs

  • Does not buy and remodel homes in metropolitan areas, such as Tokyo's 23 wards and Central Osaka. Although metropolitan areas have large populations and the residential housing market in those areas includes many pre-owned homes, the competition is intense. Any value that can be added by remodeling a home is not significant, considering the extremely expensive price of land. Customers in such urban areas would require even higher quality for both customer service and home renovations, and catering to the needs of such customers would drive up renovation costs and other costs.
  • Does not enter the high-end segment, where customer needs are different from the needs of Katitas' target customers. High-end customers would not be satisfied with the kind of materials, fixtures and equipment that Katitas centrally procures.
  • Does not target used apartment units. It is difficult to add value to an apartment building by remodeling the apartments, simply because there is a limit to the renovations that can be done. Moreover, there is a low barrier to entry and intense competition. The ample supply of apartments makes for a liquid market. In such a market, it is difficult to set a higher price.
  • Does not offer remodeling services only (without the ownership and resale of the property).
  • Does not expand business by opening more branches because additional branches would increase fixed costs. Rather, Katitas expands its business by increasing its staff.
  • Does not customize renovations, as this would increase the likelihood of work schedule disruptions, cancellations, and customer dissatisfaction in the event that renovations do not meet the customer's expectations.
  • Does not undertake extensive remodeling. Katitas aims to create "safe, clean, and comfortable" living environments. The company does not offer a sophisticated design and special or unique features. Katitas does not try to make the home "new" again by replacing all the materials, fixtures and other equipment.

Consistency of Strategy over Time

The consistency of Katitas' competitive strategy is its focus on the purchase, renovation and resale of pre-owned single family homes in rural areas, and its commitment to making these homes available at a low price (the 10 million yen to 15 million yen price range).

In 1998, the amendment of the Civil Execution Act made the procurement of auction property easier. Yasuragi Co., Ltd., the predecessor of Katitas Co., Ltd, started purchasing, remodeling and reselling used, single-family homes. This business grew in rural areas, where there was less competition.

In 2012, a private equity investment fund, Advantage Partners LLP, acquired Yasuragi, Co., Ltd., which became a wholly owned subsidiary of Nihon Jutaku Saisei Co., Ltd., a holding company created by Advantage Partners. Upon the acquisition, Advantage Partners examined Yasuragi's competitive strategy and decided to maintain the commitment to the company's existing strategy. A plan to enter a higher-end segment was considered, but later rejected for being inconsistent with the activity system in place.

Katitis has maintained Yasuragi's original strategy, but switched its procurement route for pre-owned homes from auctions to direct purchase transactions with homeowners. Changes in the market are what prompted this switch in the company's inventory procurement strategy. The number of auction properties peaked in 2009. There was a surge in supply during the economic downturn that followed the global financial crisis, which started in 2008. However, when the SME Financing Facilitation Act came into force in December 2009, the supply of auction properties declined because the law required banks to make concessions on the repayment of loans when requested by small and medium-sized companies. Meanwhile, from about 2010, there appeared new entrants (small-scale competitors) who began trading in auction properties, and this pushed up the price of auction properties. The company has responded by switching its procurement channel from auctions to direct purchases from homeowners. Then, in 2013, the company changed its name from Yasuragi to Katitas, and began actively investing in TV commercials to raise brand awareness of Katitas as a buyer of pre-owned houses. About 90% of the company's inventory was procured from auctions in 2012. By 2016, 90% of Katitas' pre-owned homes had been purchased directly from homeowners.

Katitas has also changed its sales activities. In 2013, Katitas made online marketing its primary sales activity. Newly added activities include the posting of property information on real estate portal sites and on the company's homepage. Before 2013, Katitas relied primarily on flyers inserted in newspapers once a remodeling project had been completed. Katitas employees also made sales calls to people who had attended the company's sales events. Sales grew from 2,415 houses in 2012 to 3,451 houses in 2016, marking a 140% increase over a four-year period. In contrast, online sales increased by 630% over the same period.

Profitability

Both the five-year average of the return on invested capital (ROIC) and the return on sales (ROS) exceed the industry average, and the ROS exceeds the industry average by a wide margin. (Profitability analysis was conducted by PwC Japan.)

Activity System Map

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