Many eggs, many baskets

Jim Huston

Finally, after five years of doom and gloom, there’s some good news coming from the housing industry. So says a January 16, 2012 front page story in USA Today entitled, “Housing outlook is more upbeat: Experts predict a turnaround is near.” The article goes on to say that while the “Recovery is expected to be slow, and home prices are widely expected to fall this year,” it is a recovery nonetheless. Existing home sales are expected to rise 12 percent, and construction of single-family homes are anticipated to increase 37 percent. All of this adds up to robust pressure on stocks as the article goes on to say, “The S&P 1500 homebuilding index is up 38 percent since mid-October, vs. 7 percent for the S&P 500.” While things may be turning around, read on and find out how to avoid falling victim to another housing crisis.
 

What Happened? In the late 1980s and early 1990s, I worked with a number of landscape companies that primarily installed landscapes on new home production lots, models and common areas (streetscapes, small parks). New home sales were booming and there seemed to be no end in sight to the good times. One Southern California home builder, in particular, predicted that it would build and sell 500 homes in 1990 ranging in price from $300,000-$500,000. It built 500, and sold fifty.

A company that I was tracking saw its installation revenue plunge from an average of $120,000 per month in January 1990 to less than $20,000 per month by July. It happened just that quickly and, like the current recession, no one saw it coming.

Recently I worked with a number of clients in this market. Their story is eerily similar to that of the early 1990s. Three landscapers in the Southwestern U.S. completed hundreds of new home lots each month. Many more new home permits were being approved, as there was plenty of work for everyone. Unexpectedly, it all but dried up within a few months.

A new single-family housing development in the mountains of Colorado, where new homes were selling for $400,000–$500,000 in early 2008, saw production literally stop overnight. Thirty homes, in various stages of construction, were abandoned by contractors. Stacks of sheetrock, buckets of nails and hundreds of roof trusses littered the site. Four years later, not much has changed.

Many landscape contractors who did not have a diversified base of maintenance and service work to supplement their installation base went out of business. Many more suffered greatly as cash flow dried up in conjunction with their vanishing construction backlogs. In desperation, many contractors jumped into maintenance and service work. New to the market, they could not compete based on their record for quality of work. So they competed based on being the lowest price in town. Quality and margins were sacrificed as a feeding frenzy mentality intensified.

Lessons learned. The primary lesson from all of this is diversify, diversify, diversify. In football they say, “If you live by the blitz, you’ll die by the blitz.” It’s the same in business. If you live by installation alone, sooner or later, you’ll probably die by installation alone. Diversification isn’t easy but if you’re going to avoid the pitfalls of recessionary cycles, diversify you must. Too many contractors focus on doing only the type of work that they enjoy. Installation contractors usually do not like maintenance or service related work. They thrive on the “rush” or the chaos of doing installation jobs. It’s just the opposite for most maintenance contractors and service providers. They prefer predictability to chaos. However, the smart thing is to do both.
 

Conclusion. The contractors in the new home landscape installation market that I recently met with have all weathered the current economic storm. They’ve widened their product mix to include much more maintenance and service work. For some, it has been a very painful adjustment. Most are attempting to achieve a 50/50 installation versus maintenance book of business.

I tell my clients who are primarily focused on doing installation work that the first thing to disappear in a recession is installation work. You may not like doing service or maintenance work but it will make you money in a down economy. I also tell them, if it’s excitement that you want, remember, if you’re making money, you can always buy excitement.