I used to joke about how the construction market's slump will show us who memorized the Bible story about the seven fat years and seven lean years, but this is no longer a laughing matter. Housing starts have shrunk for 24 months now, and we could see another 12 months of declines before we bottom out. Expect this year's ProSales 100 to show marked declines in revenues, employees, and facilities. As one owner of an Ohio lumberyard told me, "In 30 years, we have never been as vulnerable as we are now."
Some dealers, like some creative artists, seem able to perform admirably under such altered states. Others have a high tolerance for risk and, more or less, accept the consequences. But for most of us, too much of a good thing–like an over-reliance on one lucrative revenue source–is an addiction best avoided if you want to build a business that will outlast you.
I am asked regularly whether, in these hard times, I've found any lumberyard that is doing well. Yes, there are some. Those that I've found on my travels nationwide usually have at least one of these qualities:
Competitors that closed or left. The Midwest in particular has towns that national LBM operations abandoned and where local businesses are profiting–even expanding into the big guys' old yards.
Showrooms that draw retail customers. Dealers routinely tell me they've underestimated how much people will spend on kitchens and baths if folks can see the product beforehand.
Service to remodelers. Harvard's Joint Center for Housing Studies says spending in this area is steady in contrast to construction spending's plunge.
Very wealthy customers. Dealers in areas serving the super-rich, custom-home market haven't seen a big dropoff.
An isolated market. There are still plenty of places in the United States where The Home Depot that is closest is 40-plus miles away, and the local LBM operation is the community center for just about everything that's home related.
A niche not directly related to home building. I read of a home center in Indiana that also sells fishing and hunting gear. A yard in New Hampshire showcases wood stoves in the winter and relies on an ice cream store for summer income.
Even dealers with these traits haven't been able to avoid red ink, but they have managed to avoid closing branches or cutting staff. Aside from the obvious common thread that runs through these qualities–namely, none relate to tract builders–they also suggest that LBM dealers seeking lasting success should engage in the same kind of portfolio management that is touted by financial advisers.
Just as investors know their best chance of long-term success is to spread their money among big and small stocks, bonds, funds, real estate, and other assets, the LBM dealers that are built to last draw their revenues from a combination of big and small builders, remodelers, retail customers, and specialty buyers. And don't forget installed sales, small commercial projects, and (as we report this month) multifamily housing.
The new-home business will revive eventually. The traditional drivers of new construction point to a need over the coming decades for close to 2 million housing starts a year, about where we were at the market's latest peak. Will you be around to see that? The answer almost certainly depends on whether you've done one of two things: you've built a diversified business, or you've piled up reserves that can sustain you through the lean years.
Craig Webb, Editor 202.736.3307