The Impact of Leadership
As you finalize your strategic planning process, you should first listen to what the market is telling you. Start the planning process understanding the forecasts in the sectors you play (or could play) in. This gives you a basis for financial assumptions. You also need an annual VOC stream of data to see what experience you are creating for your customers. While these are both important to set context, the most important part of the strategic planning process is what you do with all this data. The goal is to develop key insights that will fuel how you develop your strategy and plan.
Your accountability in the process is simple — take all you learn and develop a clear and structured plan that leverages your resources and assets to outperform the market. If you merely assume you will ebb and flow with the organic market, e.g. be impacted negatively by weather or lower starts or labor issues, leadership and shareholders won’t really need you. So, avoid these common pitfalls and create a strategy that leverages market changes into opportunities for your company.
The Impact of 1%
The market is clear on how it will perform. While all forecasts are slightly different, most forecasters are saying that new construction starts will drop by 1%, and remodeling will “only” grow by 1% (versus the 4-5% they forecast 12 months ago).
Let’s talk about what that could mean for you.
New construction starts last year were approximately 1.25 million. At a 1% decline, that means 12,500 fewer homes will be built in 2020. So, what’s the value of these homes?
To the builder, every home is worth on average $310,000 of revenue. For a regional builder building 500 homes last year, 1% less means 5 less homes, or $1,550,000 of lost revenue ($310K x 5).
And what does this downturn mean for manufacturers? Let’s look at approximate averages for a few key product categories as examples…
- Cabinets: value of $7,000/home, loss is $88 million ($7K x 12,500 homes)
- HVAC: value of $3,500/home, loss of $44 million
- Drywall: value of $2,000/home, loss is $25 million
Now, the individual manufacturer’s share will dictate what that specific company’s potential loss will be — if you have 20% share in drywall, your loss to overcome is approximately $5 million (20% of $25M).
When you as a manufacturer look at the 1% loss of homes, what is your plan to make this up? Cost out initiatives, share gain? Those are the usual go-to strategies which tend to yield downward results when all is said and done. It may load your plant, but share gain usually comes with lower prices and lower margin, sometimes impacting a larger chunk of your business than you planned, so be careful chasing share. Also, be careful cutting salespeople or marketing investments, as when you stop engaging with your customers and prospects, know that someone else will continue to engage them through the down cycle.
A stronger strategy is to optimize your mix of products. A 1% mix change to a high-value product can more than make up for the downturn, and it helps take your overall price index up.
Note: High-value products typically have 2-3x higher margins than your commodity product offering. Therefore, converting a mere 2-3% of your SKU mix to high-value margins, will have a dramatic impact on your profit dollars (which is the only thing that really matters).
Now, a 1% change can work for you another way when it’s a positive 1%. In the R&R sector, they have forecast a continued growth trajectory. Albeit it is slower than the 4-6% we have seen over the last few years, it is still a positive number, 1% growth. There are a few factors why the R&R sector is a strong bet and one to help make up for the new construction loss impacting your business.
R&R Success Factors
- Longer Home Stay - Homeowners are staying in their homes longer. The 20-year industry average used to be 7 years, today that number is closer to 10 years. This longevity is driving people to continue to update and improve their existing homes.
- Existing Home Sales - Sales remain strong and consistent at 5.5 million homes a year. Due in part to low inventory issues for starter homes as well as millennials wanting to buy existing homes. And statistics show new home buyers will spend nearly $9,000 in the first 9 months. So, the challenge is, how do you get your product into that consideration set?
- Homes Getting Older - Over 80 million of the US homes are over 20 years of age, which is the age of replacing HVAC units, roofing, siding and doors. Also, the peak of new construction starts was in the mid 2000s of 1.8-2.0 million homes (you know, right before the crash). These homes are coming up on 15 years old needing repairs, replacement and remodeling.
The R&R market is nearly $350 billion, with over 55 million projects happening each year – at an average of $6,300 per project. At 1% growth, that is another $3.5 billion spend happening, or 550,000 more projects. As you develop your plan, what are you doing to leverage these R&R growth factors with your products?
Hold the Helm
Don’t just grow or decline with the organic market, control your own destiny. Market leaders (not necessarily share leaders) find a way to continue to grow and optimize their business and leverage the change (good and bad) happening in the industry.
In your planning process, find your own unique opportunity to look at the market and your offering in a different manner. Because in the end, your senior leadership doesn’t care about excuses of weather or down cycles, they look for true leaders able to advance their company. Anyone can hold the helm when the sea is calm. True leaders aspire to hold it in turbulent waters. So, step up, hold the helm and challenge your team to enhance the planning process to create unique differentiation and a path forward to outperform the industry.