August, 2007

Old Lessons

Why some dealers are thriving in the downturn.

By Steve Easley

It’s true that business isn’t as bad in some places as it is in others, but it’s curious how differently some dealers are holding up relative to their markets. Some are flat-out in the dumps while others are thriving.

That doesn’t mean sales are up versus last year—although in a few cases, they are. More often, the most successful dealers’ sales are down but not nearly as much as their markets. In other words, they’re taking market share from their competitors. And the reasons for that are not only consistent, they’re timeless.

The first rule may be the oldest in the book: Diversity is an insurance policy but boom markets tend to push builders and dealers both into greater specialization. The fact is that it is more efficient to focus all your resources on one thing—a product category, a customer segment, or a set of services, for example—to maximize economies of scale. The problem is that the more you specialize, the harder it is to switch gears when the bottom falls out of the market. The rising tide lifts all boats, but when the tide goes out, boats in shallow water get grounded first.

That’s what’s happening for both production builders and the dealers who specialize in the production housing market. Smaller builders frequently shift gears in a downturn and start taking on remodeling projects; D.R. Horton probably doesn’t have that option. Dealers who specialize in major production builders have an advantage when their clients are going full tilt, but tend to be hurt worse when they stop building.

The flip side of this rule is that a housing boom also creates underserved markets, which opens up opportunities. Remodeling is probably the most obvious example and it’s an old one. The 1950s boom created the DIY movement because virtually every available carpenter was tied up building homes. DIY confirmed demand for remodeling, which led some builders to specialize in it.

But it was a downturn that created the industry. The first dedicated remodeling firms began to emerge in the late 1950s and early 1960s when home building was in its first serious down cycle since World War II.

At one time, dealers lived by the rule that you never allow one customer to account for more than 10% of your business. That 10% might not be quite realistic today, but the most successful dealers these days are aggressively pursuing alternative market segments—not just remodeling, but installed sales to consumers, commercial/industrial accounts, high-end custom homes, and whatever else they can find.

The second common thread among successful dealers is the degree to which they’ve been able to engage employees in fighting their way out of the downturn. They aren’t sugar-coating the situation; their message is that business is bad and only you can do something about it. That means selling harder and eliminating mistakes, but many are also launching new niche businesses that give their people more tools to generate sales.

Five years ago, people were talking about the end of housing cycles. Economics 101 says otherwise: Supply and demand are never totally in sync. That was an easy lesson to forget over the course of a 13-year boom, but it shouldn’t have been.

All we needed to do was look at dealers who have been around a century or more, founded at a time when builders stopped building during the winter. Great-granddad delivered lumber in the summer and coal in the winter because it was impossible to forget that housing is cyclical—every year brought a new downturn.

That’s a lesson that will carry savvy dealers into their next century.