New construction may go dark, but windows of opportunity can still be found in the housing market.
Watching the collapse of the goldmine of residential construction that sustained the economy through some recent recessions is painful and traumatic. It's easy to dwell too much on what is lost and look for meaning in it. But doing so may lead you to miss some of the opportunities lying amid the rubble.
The economists' words of foreboding have become inescapable, whether they think the national economy is headed for recession, or already in one, or just slowing down to shake out some of the excesses of the past few decades. But fretting too much about the fate of the residential market can lead to an unhealthy fixation on the words of Federal Reserve Board governors, financial analysts and talking heads of every persuasion in an attempt to divine when we might know we've hit bottom and can start looking for the market to turn upward again.
It's like waiting for the coldest nights of winter in a search for hope that things may begin to warm up soon. If the winter were treated like the housing market, we'd have politicians deliberating over which space heater works best and where it should be placed to warm the earth again.
Without being too fatalistic about it, booms and busts in the business cycle are as unavoidable as the seasons. And even if we can point to a cause — be it artificially low interest rates that created the bubble, or the bundling of subprime mortgages into securities that obscured the level of risk, or whatever — that doesn't change much about what people are seeing on the ground.
The reality is that the housing market is the most local of markets, and nationwide housing market trend numbers are essentially irrelevant when trying to understand the local terrain.
Foreclosure rates continue to climb in markets that were severely overbuilt, such as Southern California, Florida and Las Vegas, or where the general economy was already sluggish, such as Detroit.
But a number of distributors have been able to find bright spots amid the gloom. Or, if they're not exactly bright, at least less-dark spots. Michael Fromm, president of Fromm Electric Supply — Reading, Reading, Pa., says the economy is actually driving some buyers into his market.
“We are seeing a decline in new home construction, but our market has not been impacted to the extent the national market has,” Fromm says. “We operate in a geography that is benefiting from the influx of home buyers from the New York metropolitan area who are seeking more space for less money.”
Overall the news is bad enough. Federal Reserve Chairman Ben Bernanke is suggesting that banks consider writing down some of the value of their distressed mortgages to avoid losing the entire loan value in foreclosure proceedings.
At times such as these, it can help to touch base with the silverbacks, the industry veterans who've been around long enough to share a longer-term perspective. Alfred Pill, president of Ralph Pill Electric Supply Co., Boston, is somewhat philosophical about the current downturn.
“It's a cycle, and it's not the worst one I've seen,” Pill says. “The earliest one I worked through was 1958, which was relatively deep. The one that did greatest damage was ‘89 to ‘92. That's when the financial institutions failed. We lost business, lost margin and lost our lender. That was probably the worst, and caused the most damage to the company. That one drove a lot of companies out of business.”
Pill is wary of another banking-related downturn, but he doesn't see any signs yet that we'll get the same level of damage from the current slowdown. “Some contractors have really slowed down on payments. Some general contractors have gone out of business. The large ones, the developers and speculators, have evacuated from this area. I don't think we're doing worse than anyone else. In a cycle like this, the bad get worse, and the better suffer a little, too.”
At the same time, Pill sees continued strength in markets for multi-family residential buildings — more rentals than condos — in the city, as well as continuing commercial and institutional construction.
Recollections of the Houston market during the oil-price bust of the mid-1980s might hold some value for distributors in markets where residential construction is suffering serious reversals of fortune, says Jack Justilian, vice president of sales and marketing for Key Electrical Supply, Houston. They may not greet his advice with cheers, though.
From 1983 to 1987, the price of a barrel of oil went from $40 to $10 and stayed there, and Houston's housing market took it in the gut. “There were about five years when the electrical distribution business available in the market went from x to 1/3x. Half of the distribution locations closed up, and those people are no longer in electrical supply,” he says.
This time around, Houston is in a pretty strong position, in part due to the buoyant effect of $100-per-barrel crude on the world's oil capital. Justilian says residential construction has slowed somewhat even in Houston, but commercial and multi-family residential remain fairly strong. This comes not only because of the price of oil but also the increase in demand. After Hurricane Katrina devastated New Orleans, thousands of families sought refuge in Houston and many decided to stay.
But the memories of the mid-80s oil bust may hold some lessons for slumping residential markets elsewhere today. “What was the answer? Real simple: You have to work twice as hard for half as much,” Justilian says. “Whenever times get tough, you'd better go back to work. Some people couldn't do that, and those that couldn't lost their jobs and lost their businesses. If we're going to have a recession, it will hurt. I can only say people have to go back to work. Whenever there's a downturn in the housing market, you've got to get out there and hustle and work harder for less business.”
Beyond that rather bleak — but sound — advice, what else could distributors be doing to cope with a residential collapse? Here are some ideas:
Roll with It
Not to be glib, but this is the time you want to be as light on your feet as possible. Your residential contractor customers are not going to take the recession lying down, they're going to try to adapt. You need to be as close as you can be with them to get the earliest possible sense of where they see things heading. Investing in a lunch or greens fees to pick their brains and build some additional goodwill is a particularly good investment when the market is in flux.
People who are stuck in their homes and unable to get the jumbo loan that would let them move up to a bigger house will do what they can to make themselves comfortable where they are. This is being reflected in continuing relative strength in remodeling work.
Even when the middle-market families who were counting on easy credit to fund their McMansion dreams find the market shutting them out, there are business owners, dot-com beneficiaries, lottery winners and various other fortunate people who can go on as though nothing bad is happening. You can ride along. In most markets, custom homes and semi-custom homes continue to be a thriving market. Though the number of starts may be small compared to tract developments, the amount of material and the margins on the high-grade equipment that go into these homes continue to be a lucrative business for many distributors.
Many of the personal-finance advice columns out there trying to help people cope with the evaporation of their equity and the ballooning of their adjustable rate notes recommend that people consider getting out of their homes by whatever means necessary and consider renting until the storm blows over. This has sparked some growth in construction of multi-unit rental properties. Partnering with contractors working on these projects and targeting your marketing to this segment can pay off well.
Randy Germeraad, president of Springfield Electric Supply, Springfield, Ill., says his market hasn't taken the beating many of the larger metro areas have seen because tract development isn't the standard operating procedure there that it is in the suburbs ringing the big cities.
Residential contractors all over the country have suddenly become very serious about the commercial business, because that's where the action is now. You need to be ready to go with them.
Institutional, schools and universities
There's still quite a bit of activity in the educational sector and some government construction is continuing to move forward. Several distributors tell us they've done well supplying these projects, particularly the expansion of low-voltage structured wiring and multi-media theater facilities in dormitories and lecture halls.
New product categories
“Smart residential contractors are targeting the remodeling market,” says Fromm of Fromm Electric Supply — Reading. “This presents a very exciting opportunity for distributors to shift their attention from commodity sales to more profitable products like dimming systems, high-end lighting and home automation. We have recently opened two design centers with vignettes featuring products that have to be seen — or experienced — to be fully appreciated. This includes kitchen and bath displays as well as home theater and entertainment rooms.”
Developers with homes languishing unsold on the market are also looking to premium upgrades to differentiate their offerings and get those houses off their books.
Ralph Pill Electric Supply has been able to offset some of the residential slowdown with expansion in new markets such as online fulfillment and export. There's a lot of material being sold online these days, but at the back end, they all need someone with bricks and mortar and shelves full of product to fulfill the orders. Alfred Pill says this has become a major growth area for his company.
Key Electrical Supply, like many others, heeded the warning signs in the fourth quarter of 2007 and began preparing for a slowdown. Among the steps they took was to streamline deliveries. Instead of delivering out of two different facilities, Key was able to consolidate and serve the customers for both branches out of one warehouse. The company was able to get rid of a couple of trucks and consolidate delivery personnel in one location with no decline in service levels, says Justilian.
As a result of this and other proactive moves, Key was able to cover much of the lost business in residential with growth elsewhere. The company's residential business had been growing at a rate of 20 percent to 25 percent per year, and the company was able to offset all but about 7 percent of that growth through these measures.
Learning from the silverbacks, keeping an eye on the street, getting closer to your customers and investing your people in process improvements that can put you in a position to grow faster out of the downturn should keep you busy enough to keep your mind off the gloom and doom predictions coming from economists and pundits lamenting the nationwide slowdown. Paying attention to their moaning could distract you from seeing the glint of silver in your own backyard.
The Glint of Silver
Even an abandoned goldmine can yield up some precious metals of other sorts that you may find if you're not too fixated on your frustration that the gold rush couldn't go on forever. Here are some thoughts on where to direct your attention.
One hidden compensation of having business volume drop below the frantic pace created by the residential boom is that you now have time to think, and some manpower to throw at projects that could set you up for faster growth coming out of the downturn. It may be hard to justify keeping people on the payroll when volume slacks, but investing some of the winnings of the past few years in repositioning efforts can more than repay the burden.
Make extra effort to stay up with changes in your customers
Charge your salespeople with redoubling their efforts as your company's eyes and ears on the street. Have them spend a few extra minutes picking your customers' brains.
Talk to your people
You'll need to get them working harder with you. Be open and honest about your costs and possible need to reduce payroll. As they say, there's nothing like the threat of oblivion to sharpen the mind. Don't scare your people needlessly, but be candid about the risks.
Consider marketing into the change
If times continue to get harder, it's a good bet that some of your competitors are going to cut back on their marketing and advertising to cut costs. That means more share of mind for a company such as yours that keeps telling its story and promoting its services. The more tightly targeted the better.
Promote labor-saving, time-saving tools and products
Your customers will be looking for new ideas in saving time and cost on the job, or doing more with less. This is the time to catch their attention with your suppliers' most effective labor-saving products.
Promote products most often needed in retrofit and remodeling
Homeowners who can't trade up are putting more into making themselves comfortable where they are. Remodeling work will continue to grow as a result, and products such as high-end lighting or dimming systems, home theaters, in-floor heating systems or landscape lighting may help.
Custom homes will continue to go up, even when foreclosure signs look like a rash elsewhere in your local market.
Use e-mail and web promotions that cost less than mailers and print ads
Get your marketing agency or your in-house marketing staff busy looking for the lowest-cost, highest-yield marketing campaigns they can devise.
Rethink your pricing
Some price wars will be inevitable in a downturn as your competitors panic to move their inventory. Avoid cutting prices wherever you can, but prepare for it anyway — analyze your inventory and make fresh judgments about what you need to get for things that have been hanging around too long — use these as loss leaders, but make sure you have a plan for making up the volume elsewhere.
Learn to use your ERP system
You probably haven't had time during the boom to devote the time you really need to learning to get the move value out of your computer system. System providers invariably confirm that distributors leave some of the best functionality at their fingertips untouched. Take some time to dig in and use those activity-based cost analysis reports and dead-stock reports to refine your inventory. Use the customer relationship management system to sift and target segments of your customer base that eat less than they should from your warehouse buffet.
Jay Platt says Platt Electric Supply, Beaverton, Ore., unloaded 2,000 filing cabinets and went to a paperless document handling system. This would be a good time to throw some of your people at such a project.
Streamline delivery functions
Jack Justilian of Key Electrical Supply, Houston, says his company prepared for the residential downturn by consolidating deliveries from one location that had previously come out of two. Not only can such a move allow you to get rid of some redundant trucks, it allows you to concentrate your personnel who do the job best.