“Housing Markdown”
“Mortgage Mayhem”
“Jobs Decline”
“Oil Prices Hit All Time High”
“U.S. Very Near Recession”
The headlines dominating major newspapers and magazines across the country lately don’t necessarily make the average landscape company owner feel good about the growth of his or her business now and into 2008.
But as history illustrates, the industry is surprisingly resilient. Most of the year brought more than enough work and adequate profit for the majority of landscape contractors, according to
| STATE OF THE INDUSTRY |
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And the numbers support this theory. The average net revenue increase for landscape contractors this year is 16 percent with a 10.9 percent net profit margin, according to Lawn & Landscape State of the Industry research, conducted by independent research firm ABR Research with more than 700 contractors responding. And contractors are calling this “not excellent, but good.” So while the figure is certainly healthy for a typical small business, the confidence of the average landscape business owner is a bit fragile. But for any entrepreneur in a slightly shaky market, maybe this is the best mind-set to have, suggests industry consultant Jim Huston. “The general trend is pretty positive, but I always remind people, it’s America – there are always wrinkles,” says the owner of J.R. Huston Enterprises, Englewood, Colo. “The economy is pretty strong, in spite of the recent stock market shift. In fact, 2007 started out stronger than anticipated. It’s softened up a bit in the last couple of months, but generally it’s been good.”
It’s these “last couple of months” that seem to have contractors’ nerves tensing up.
GROWTH GOALS. Most of the landscape contractors we talked to across the U.S. cited 10 to 15 percent revenue increases, pretty much in line with the research average. Again, this is considered healthy growth by many industry and business consultants. However, the recent news has contractors feeling less enthusiastic about their success. For instance, Dan Cheslock, president of $1 million Mountaineer Lawn Care in Morgantown, W. Va., calls his 10-percent growth years in 2006 and 2007 “good but not outstanding. On the national level, with the foreclosures and house building being down, it’s not good for the industry, but in landscaping we tend to be a little insulated from that.” Cheslock’s business is 80 percent chemical lawn care for 90 percent residential clients.
In Massachusetts, Michael Ciccarelli, owner of Ciccarelli Landscape in Woburn, also experienced about 10-percent growth this year. With an 80-percent maintenance business and 80 percent residential customers, he says, “customers may not be willing to spend the big bucks to rip out a landscape and redo it, but they are willing to spend the money to maintain and add to what they have.”
Contractors who do predominantly commercial work are touting similar figures. Bruce Birdsong, president of $10 million Precision Landscape Management, Dallas, cites 10- to 15-percent growth for his 70-percent commercial maintenance business.
Even for predominately residential design/build and renovation/remodeling businesses, which some say should be feeling the effects of the unstable housing market the most, growth has been stable. Business is up about 10 percent for Surroundings by NatureWorks in Carmel, Ind., says President Randy Sorrell. However, recent stock market news does make him nervous about his high-end customers. “The economy is a little tenuous, so I’m not quite as confident as I was a couple of weeks ago but we are booked out pretty far with some projects so that puts us in a good position,” he says. “Though 99 percent of our business is cash and check, I’m worried about the credit market for 2008. A tight credit and bond market tends to make people nervous, so they may not spend as much.”
Bill Lillie, owner of Sprigs & Twigs Landscapes in Gales Ferry, Conn., feels the same way, despite the fact that his $410,000 business is enjoying a 32 percent increase over 2006, exceeding sales goals in all business segments – mostly installation, design and maintenance to 90 percent residential customers. But just as contractors are getting worried about the recent headlines, so are customers, and Lillie has noticed this in his region.
“Overall, the economy has had an adverse affect on our business, even though our sales are up significantly for the year,” he says. Customers are out there, but they are harder to get. We are seeing more tire-kickers and do-it-yourselfers. For the first time this year, we traveled out of state to New York and Massachusetts to serve qualified customers. The housing market is poor – there are many homes for sale with no apparent sales activity for many months. While home sellers should be spending money improving curb appeal, there seems to be a current reluctance to spend money on landscaping. But I expect this to change fairly dramatically as the housing market further weakens and sellers come to realize they must do everything possible to sell their homes, especially by improving curb appeal with landscaping.”
In fact, fickle is one word many use to describe today’s homeowner, who is much more susceptible to short-term planning and the emotions the economic concerns evoke and therefore much more volatile compared to their commercial counterparts, Huston says.
According to the U.S. Commerce Department, consumer spending is modest. Retail receipts grew 0.3 percent in August, the same pace as in July. Looking at some specific markets, motor vehicles and parts sales grew 2.8 percent, furniture purchase receipts grew 0.5 percent, electronics grew 0.4 percent and health care grew 0.3 percent. Building materials spending, as expected in response to the housing slump, dropped 1 percent; clothing sales dipped 0.1 percent and gasoline receipts plunged 2.4 percent.
Overall, these reasonable spending levels don’t scare contractors too much. “It’s still a good, strong market,” points out Chuck Carr, president of $1 million Carr Landscape Management, Porter Ranch, Calif. “The difference recently is people are shopping a bit more than they would last year. They are getting more proposals and taking longer to approve them. There’s a little nervousness with the whole mortgage issue – people are being more cautious. They’re still spending, but just taking longer. There’s still plenty of work out there.”
When people take longer to make decisions, “that is not a sign of an economy that I would call robust,” adds Huston.
SERVICES & CUSTOMERS. While there are contractors touting positive growth from every service segment, the one area in which owners might be feeling the biggest impact because of housing’s slowdown is new design/build/installation projects. Contractors offering that service as their main focus might want to start looking at other areas like maintenance and existing landscape renovations/enhancements to keep business at current revenue and profit levels and/or grow business, Carr suggests.
“People who pulled big equity loans out of their homes in the last two to three years to finance toys and wants like big landscaping have blown their wad and have nothing left now – that would account for the slowdown in nonessential-type jobs,” explains Todd Patton, president of Patton Property Maintenance in Heymarket, Va. “But the people who really had money before still have money and are getting the regular maintenance-type work done.”
Jamie Bush, president of Jamie’s Lawn Service in Plano, Texas, agrees. “People are going to cut many other expenses before their own lawns,” he says. “Even in the worst case scenario, residential maintenance will be OK.”
Landscape maintenance is the most profitable service for Ciccarelli. “What I’ve seen is the construction end slow down and the maintenance end pick up,” he says.
“Not as much as what was getting spent is being spent on installation, I agree,” says Paul Wieting, owner, Seagull Lawn Services, Houston. “But when people start cutting back on big landscape projects, it will free up enough of the money that is left that they will do what they can to make what they already have look better.”
The rapid move of more contractors offering maintenance services as housing problems worsen can negatively affect current maintenance contractors by increasing competition for clients, meaning job profitability could decrease, points out industry consultant Bruce Wilson, Wilson-Oyler Group, Thousand Oaks, Calif. “They start coming in and bidding pretty competitively on maintenance, so it does eventually affect the maintenance contractors. It always has and probably always will.”
And, according to the research, contractors already feel the competitive pressures in their respective markets with 65.3 percent calling their markets oversaturated and another 9.1 percent referring to them as extremely oversaturated.
According to the research figures, all service segments queried showed net percent increases this year, with chemical/fertilizer services taking the lead at 13 percent, followed by lawn maintenance, design/build and irrigation all at 12 percent, snow and ice removal at 11 percent and arbor/tree care services at 7 percent.
Beyond the staple services like construction and maintenance, specialty services like landscape and holiday lighting, water features and deer control, will continue to grow, predicts industry consultant Ed Laflamme, Grass Roots Consulting, Wilton, Conn. In fact, waterscapes topped the list of new services companies plan to offer in 2008, followed closely by irrigation, according to Lawn & Landscape research. “As contractors try to grab more market share from their existing clients, these kinds of services are solid, encourage recurring revenue and they aren’t affected by the economy as much,” he says.
Lee Helmberger, owner of Lee’s Lawn Service, Omaha, Neb., is one such contractor who has added on a niche service – gutter cleaning – to his 60-percent maintenance, 40-percent tree and shrub business. Customers asked the company, which plans to bring in between $70,000 and $100,000 in revenue this year, to perform the service while it was out trimming trees, and Helmberger says it’s been profitable. “It’s something a house with a lot of surrounding trees on the property might need two or three times a year,” he shares. “We already have the equipment – a backpack blower – and we’ve been able to wrap the service into our fall cleanup services.”
Another service opportunity on the horizon is irrigation. “Water is an issue more everywhere with higher demand for water because of drought – there is just not going to be enough water,” Wilson says. “The ability to manage water is eventually going to become a core competency that contractors are going to have to have.”
This all points toward the general trend in corporate America to offer customers a one-stop shop, Arlington points out. “The ability to offer the customer one contract and manage everything from there is huge,” he says.
In terms of client segments, while the residential market is experiencing some waves as a result of real estate challenges, “the commercial market is relatively strong,” Huston says.
Brett Lemcke, vice president of $2 million RM Landscape in Hilton, N.Y., agrees, saying his commercial clients seem to be spending a lot more than they have in the past.
Wilson, however, feels the commercial market will feel the effects of the tighter credit situation at some point – just later than the residential market. “I think the commercial market is starting to slow down,” he points out.
This is one reason Ciccarelli isn’t expanding into the commercial market as quickly as he could because he’s worried property managers will soon become overly price conscious.
“I’ve been offered large commercial jobs and I’ve refused because it’s too easy to lose that business the first time someone else comes along and underbids you,” he says.
What strategies do consultants offer for contractors to lessen the blow of the unstable residential market, the potentially volatile commercial market and an increasingly competitive maintenance service segment? Don’t try to outbid the other guys,” Laflamme suggests. “The best strategy is to market additional services to existing clients. See if they will incrementally spend 10 to 15 percent more – that will offset any losses.
“It would be smart to tighten your belt a little, and if backlogs are starting to shrink, bid tighter,” Wilson advises. “And bid more work because you’re not going to close as much. Increase your sales activities and then tighten your belt.”
“Focus on your own plan and how you’re going to execute it,” Huston adds. “How contractors fare in this economy will have less to do with the external economy and more to do with their training, computerization and systems.”
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