Mar 28, 2017
Discovering the Untapped Potential in R&R Segment Growth
After 30 years in the industry, it continues to amaze me how infatuated manufacturing companies are with the new construction (NC) market. When NC declined several years ago, many companies panicked. They frantically redeployed resources and started focusing their efforts on the replace and remodel (R&R) segment and multi-family.
Just like clockwork, the same companies are quick to pull attention away from R&R the moment NC starts trending upward.
I understand what attracts these companies to NC. The amount of volume is unmatched. While R&R can’t compete on volume per project, the market does present more opportunities for high-value product sales, which leads to higher profits per sale in almost every category. I predict these opportunities will continue to grow.
Yes, engaging with the more than 80,000 remodeling contractors spread across the country is a challenge. But contractors are adopting technology and social media at a high pace, which makes these interactions more accessible. Digital engagement makes it easier for companies to find, nurture and convert remodeling contractor prospects.
R&R Market Growth Creates Valuable Opportunities
As NC continues its slow and steady rise, it’s safe and easy to focus efforts on this market. However, I challenge manufacturers to remember the valuable opportunities within the R&R market. According to Qualified Remodeler, the R&R segment reached $340 billion in 2015 (surpassing its previous peak in 2007). In 2016, the market reached an all-time high of $360 billion.
Moving into the future, R&R will continue to grow thanks to the shift in homeowner demographics and economic improvements. I’ll explore these factors in more detail below.
The Power of Changing Demographics
The unprecedented spike in remodeling and repair projects is expected to not only sustain itself but also increase year-over-year.
Several factors contribute to the market’s growth including the aging of homes, as well as the shifting age and preferences of homeowners. Since these contributing factors differ from NC’s success, experts have a hard time making a comparison between the two markets’ success. Forecasters believe that, given the vast potential for unique remodel and repair projects, the R&R market may see higher growth rates than the NC market experienced during its prime.
Top 5 R&R Growth Factors
1. Aging Homeowner Population
North America’s aging population is expected to have the greatest impact on R&R growth.
In particular, the Baby Boomer generation (78 million people born between 1946-1964) should be a strong focus for R&R manufacturers. This generation makes up the second largest portion of America’s population, but they constitute the largest disposable income within an estimated $18 trillion of net worth. This disposable income can turn into profits for R&R contractors and the manufacturers that put focus on it.
Boomers are living longer and, in turn, staying in their homes longer. Fewer moves mean more repairs, replacements and remodels. We’ll explore the valuable opportunities in aging homes next.
According to Qualified Remodeler, expenditures by homeowners over the age of 55 are expected to grow 33 percent by 2025, which accounts for more than three-quarters of the total R&R segment gains over the decade. Plus, the share of market spending by these homeowners is projected to reach 56 percent by 2025. That’s a 25 percent increase over the course of 20 years.
Generation X (50 million people born between approximately 1965–1981) is also becoming a large spender in the home improvement category as their children finish college and their investment equity increases. They have more disposable income to spend on big-ticket projects. Something they may have put off after the market crashed in 2008, or until their kids graduated from college.
As these Gen Xers head towards retirement and start updating their homes, demand increases for providers products and tradespeople in the R&R market. Both the Gen X and Boomer generations play a large role in this market’s sustainable growth.
2. Aging Homes
As new homes are built, existing homes continue to age. Eventually, those new homes turn into existing homes. And so goes the circle of life and opportunity for residential buildings.
In 2016, nearly 5.45 million existing homes sold and transferred over to a new owner. A majority of these homes were more than 20 years old.
It’s estimated that nearly 88 million homes in the US are 20 years or older. That’s great news for manufacturers and R&R contractors. Aging homes need repairs, replacement products and major remodeling. Many product categories require a replacement at or before 20 years. While some product categories are “nice to change” like interior paint, front doors or furnishings, other products “need to change” like HVAC systems, hot water tanks and windows.
All remodeling projects are projected to grow but the Cleveland Research Company estimates that exterior projects will have a 4-5-point higher growth rate than interior projects. Replacement roofing, windows, entry doors, decking and siding are more common needs found in aging homes. Plus, homeowners care about improving curb appeal, which helps drive resale value.
3. Millennial Buyers
Millennials are projected to purchase a higher percentage of “fixer-upper” homes per capita compared to their preceding generations. Given their student loan debt and lifestyle expenses, Millennials have a strong focus on value. But don’t mistake that factor for being cheap. They care about quality, as well. As a result, they’re buying older homes that need some love, which in turn, contributes to the growing revenue streams for the R&R market.
Unlike their Gen X parents, Millennials don’t take on as many DIY projects. Many people in this generation have busy, active lifestyles and will require assistance from contractors during the R&R process.
Millennials are one of the fastest growing groups of homeowners (along with single females). Their positive impact on the remodeling segment will continue to increase as more Millennials purchase homes over the next 10 years at an accelerated rate.
4. Housing Prices on the Rise
The housing market is building back its strength after the devastation that started in 2008. Now, homeowners are regaining equity in their homes and are more likely to invest in bigger remodeling projects like additions, kitchens, siding and roofing jobs.
The rise in house prices also leads to a rise in turnover. The number of existing homes sold in 2017 is expected to surpass the 5.45 million homes sold in 2016. These new homeowners will typically spend several thousands of dollars on R&R projects in the first several months after buying their home. The trick is, you want to be their R&R contractor’s go-to supplier.
5. Fashionable Design
More than 15 years ago, Target changed the way Americans think about home products. The retail giant made trendy home décor accessible for the masses. IKEA has also followed suit with furniture and cabinets.
In recent years, we’ve seen another shift in interior design expectations thanks to platforms like Pinterest and Houzz, as well as online design services like Decorist. The millions of users on these social platforms demonstrate that consumers control their potential home improvement projects. Homeowners are beginning projects with more information and more expectations than ever before.
This trend bodes well for building materials with an aesthetic appeal. There are new possibilities for categories like roofing and siding that were historically replaced for necessity. Now, homeowners may update their roofing or siding to meet the changing style trends.
New expectations and information overload mean that manufacturers need to be prepared to utilize technology to showcase their products in a new and more dynamic way. The old, clunky visualizers that every company has used over the last 10 years won’t cut it. Consumers want visually appealing options that showcase manufacturers’ products in relatable settings.
R&R manufacturers and marketers can leverage up-and-coming trends to experience even higher growth rates.
The dominant Millennial influence on environmental health creates plenty of niche opportunities for energy-efficient and sustainable products. If you attended AIA last year, the biggest trend and discussion was around creating “healthy homes” and removing unnecessary chemicals and VOCs.
Home automation is another leading trend spearheaded by Millennials and now adopted by Gen Xers and Boomers. Although, the vast array of technologies embedded into products needs to be filtered into only a few common platforms for this trend to be optimized and truly enjoyed by the homeowner.
Also anticipate new trends for our aging population as they reside in their final homes longer. For example, their homes require numerous accessibility improvements in order for them to age in place. And while Boomers aren’t necessarily driven by technology, their children want better ways to monitor and communicate with them in their homes.
Every opportunity paves the way for new challenges. For example, we’re already seeing the existing home inventory diminish. To date, there are only 1.65 million existing homes available for sale, which is the lowest level since 1999. The increased demand benefits sellers and contributes to the rise in home prices. Three years ago, it took several months to sell an existing home. Today, it takes an average of 50 days to make the sale. As new home starts to grow, we’ll start to see this challenge diminish.
And let’s not forget the biggest challenge for our industry — the availability of skilled labor. The lack of trade talent is the industry’s largest constraint. It’s holding back growth and momentum across all channels. We need to attract and train new contractors to come into the market. In addition, existing specialty contractors need to be cross-trained to sell and install other R&R projects. For example, a roofing contractor can be trained to sell and install doors. In light of the labor shortage, the companies that recruit and retain skilled workers will be the industry winners.
If your company is not leveraging the sustainable growth of the R&R market, you’ll likely miss valuable business opportunities. Increase your focus and resources in the segment within your strategic planning process and resource management to take advantage of all the untapped potential.