As I wrote in my previous article, Davis Lumber, our family owned company, was hit 30 years ago with a downturn that lasted more than 12 years. We survived and eventually sold out to Star Lumber of Wichita, Kan., where I remained as an executive for many years. During my tenure at Star we faced several severe sudden downturns of up to 25% in annual single family housing starts caused primarily by the cyclical nature of the aircraft industry. We survived those as well. Now I'm a consultant. What follows are some of the key strategies my clients are employing that I utilized in my own business and at Star Lumber to survive periods of extended severe business downturns.

Jon Davis

Market Research

Realistic appraisal of the harsh new business environment. It is difficult to face the severity of this type of downturn realistically. Significant improvement may be at least two years away, and in many areas it will be a slow improvement ,not a significant rebound. A realistic appraisal of your market conditions utilizing data from a wide range of sources is a crucial first step to your survival.

This evaluation should include these elements:

  • housing permit trends for the last five years;
  • number of months of unsold new homes for sale based on your current level of new permits issued annually;
  • projected foreclosures in your market that will be dumped in the existing homes for sale;
  • strength of your competitors (who will succeed and who will fail); and
  • condition of your key customers (will they survive?).

Short Term Action Plans and Long Term Strategic Planning

Once you have established a realistic appraisal of what your primary market will look like at the end of the next three to five years, it is imperative that you establish a well-thought-out strategic plan to ensure your survival. If you are in a severely depressed market where recovery appears to be years away, you should force yourself to focus on survival first and prosperity later.

If a significant recovery is at least two years off, your planning focus will tend to be short term. I work with the senior management team of my strategic planning clients to jointly develop an annual action plan for the upcoming year by establishing four or five major measurable goals for the year with a subset of key objectives for each goal and a breakdown of tasks that must be accomplished for each objective. Each goal, objective and task has a target date for completion and responsibility for the major goals is assigned to various members of your management team.

Companies should have the discipline to develop an aggressive long-term marketing plan focusing on their vision of how they want to be positioned in the future. Companies with a well-thought-out marketing plan dealing with the complexities of today's market will invariably make better decisions than those that hope things will get better and hunker down, cut expenses and scale way back on their marketing efforts.

It is beyond the scope of this article to go into depth on what strategies should be considered. If you have not been through this type of planning, working with a consultant experienced in our industry will eliminate many missteps.

Possible Trends

  • There are many classes of customers that aren't homebuilders. These include remodelers, general contractors, government (local, state &/or national), military, and manufacturers. You should should evaluate if any of these customer classes represent an opportunity for you today or in the future. If so, part of your marketing strategy planning should focus on what to do to be an effective supplier to the customer segments you choose to pursue.
  • If you don't provide value added services like installation and builders' showrooms, you may be at a serious competitive disadvantage when this downturn is over.
  • If green building has been a trend you have ignored, strategically now is the time to begin your education process and be prepared to capitalize on it.
  • The use of technology to interface your computer system with your builder/ remodeler customers to improve supply chain management is already a reality with many of the large national builders and pro dealers. It is a trend you should consider capitalizing on as a value added service for your customers.
  • Effective builder incentive reward programs combined with true vendor partnerships (which include significant vendor funds and in depth vendor planning sessions to assist in growing market share) will be a key part of many progressive pro dealers strategy in the future.

Continuing Education

  • Read the major industry publications like ProSales regularly.
  • Obtain a copy of Greg Brooks' Construction Supply Outlook 2008 for an in-depth analysis of past downturns, where we are today, where the industry is heading and strategy implications for forward thinking pro dealers. (See more below.)
  • Subscribe to Bill Lee's management newsletters as well as NAHB online, the Shinn Group newsletter, and the John Burns Real Estate Consulting newsletter.
  • Get a copy of the latest Harvard Housing review and study it carefully for the long term trends they are predicting that directly impact your business.

Brooks' Construction Outlook

I highly recommend obtaining a copy of Greg Brooks' "Construction Supply Outlook 2008" for an in-depth analysis of past downturns, where we are today, where the industry is heading and strategy implications for forward thinking pro dealers. Among his notable findings:

  • Attrition among building material dealers has been concentrated primarily among those who were over-dependent on national production builders.
  • In the last severe national downturn of similar magnitude, 1979-82, pro dealers responded by diversifying into retailing to protect themselves from housing cycles. Most jumped back into the pro market when Home Depot and Lowe's emerged as the dominant warehouse retailers in the early '90s. However, this emerging boom in residential new construction made it easy to "ride the wave" and ignore other market segments.
  • Home building and construction supply are inextricably linked, but they are very different businesses. Home builders have the ability to downsize to weather almost any market situation; asset heavy suppliers don't.
  • Suppliers survive by targeting every market segment that fits their skills and infrastructure, and by incrementally building on their skills and infrastructure to target those that don't fit. If suppliers take that lesson to heart, it will alter both the structure of the supply chain and the dynamics driving channel relationships when the next boom finally does arrive.
  • Page 25 in his report points to three major trends emerging in the next decade: homes will decline in size; urban infill and higher density mixed-use communities will gain market share vs. suburban subdivisions; and green building will gain ground. Their impact won't be felt overnight. But as they play out, they will ultimately have a major impact on the distribution channel. As the changes start to take hold, they will create new opportunities for both builders and their suppliers.

As you evaluate the future direction of your company, be open to the things you can learn from these various publications. Save articles that are of immediate interest or may be something you wish to pursue in the future. Establish a filing system for these saved articles so they are readily accessible. If the numbers are available and you are not already doing so, track single-family and multifamily building permits by month and year to date compared to prior years. See if you can buy market data broken down by subdivision. Knowing this information about your market in detail will give you a competitive advantage to your competitors who do not track this information. Wherever possible, identify ideas from builder publications that can help your customers and share these ideas with them. This can be done by mailing your customers articles, offering seminars with industry experts etc.

Next: Developing breakout profit center analyses.

To order a copy of Greg Brooks' "Construction Supply Outlook 2008," call Greg at 303-845-4880 or e-mail him at [email protected]. The report costs $199.