The ‘BIG BRAND BUILDER’ | Trap – Part 2

Continuing from my last blog Price Trap One – ‘Big Brand’ Builders, I offer a few more reasons why it may not always be profitable to invest in a project by a big-name builder.

Big Builder = Higher Cost

The BIG-BRAND BUILDER usually has an associated HIGHER COST attached towards building that name and bigger size of the organization, which lead to more expensive products for the same – or at times even inferior – product attributes.

Let us examine the reasons for this:

1. BIG BUILDERS ARE BIGGER BUREAUCRACIES. A big builder has bigger corporate headquarters leading to higher costs on the following fronts:

  • More Expensive Human Resources: Big name builders usually turn to talent from Big-name institutes. However, in most cases, this talent is disproportionately expensive when compared to the value it brings to the table. This drives the HR costs through the roof.
  • Slower Decision Making: As the bureaucratic distance increases between the owners (individuals/family run or board run) and the executive, the decision making also slows down. This leads to inefficiencies that push up costs.
  • Play-Safe Attitude: The bureaucracy usually plays safe and one way to do this is to work with vendors who are equally BIG. So they will hire a Big name marketing and advertising agency, a Big construction company, a Big liaison company and so on. And all such big names come at an exorbitantly higher-than-normal cost, which is naturally passed on to the buyer.

2. BIG OFFICES AT PREMIUM LOCATIONS. larger employee base requires a bigger office space. And the big reputation of the builder requires it to have an office in the most premium location, burdening the company costs, which are again passed on to the buyer.

3. PROCESS INEFFICIENCIES. It has been observed after close and detailed analysis of various products that difference between construction quality of big builders viz. a viz. medium sized builders (at times even small sized builders) is usually negligible. Infact, due to the buying and execution processes of Big Builders the executing teams are generally far removed from the decision making teams. This leads to:

  • Systemic Inefficiencies: There are more systemic inefficiencies and corruption at the worksites of bigger builders. Pilferage is rampant due to poor control mechanisms.
  • Low Accountability: The decision makers are far removed from the ground realities and mostly working in silos in far removed corporate headquarters.
  • Bulk Buying Vs. Logistical Inefficiencies: The advantage of being able to buy in bulk is usually nullified by the geographical spread of projects, which translates into high logistic and transportation costs.
  • Construction Delays: Size of a builder has usually not translated into projects being delivered on time, which is usually the expectation when investing in projects of a big builder.

Profits Don’t Depend On Big Names

There is no attempt to say that Big Builders do not make good products. The case being made is that on careful analysis a profit seeking investor can find more profitable products from Tier-2 builders.

While these Tier-2 builders and their products may not be fancy names, the returns on investment can more than make up for it. The key here is “Detailed and Careful” analysis. If you are not inclined to spend time and effort in doing this analysis then it makes more sense to buy from a known brand name and pay for the brand price. One thing which usually works well with a big builder is the “financial capacity” to withstand bad times.