BIA Executive Insights
Analysis, strategy, and insights for decision makers in the building products industry.

September 2019
Where's the Economy Headed? Employ Multiple Stats and Perspectives to Get What Matters Most
By Michael Collins, Managing Director, BIA
A manufacturing company’s board where I’m a director asked me recently to present my views on the economy. Once I had collected my numbers, I recognized that I had created something that I fear many building material suppliers and investors don’t duplicate when they consider an M&A deal.

Call it the 3-D view, because it looks at the economy in three different dimensions:

  • From a national perspective; 
  • Close up; and
  • Over both short and long periods of time.

For instance, it’s important to know how the stock market is doing now (up 18.8% through Sept. 6), but I also wanted to show how the market had changed over the past three years (up 39.3%) and even over the last five years (up 48.4%). 

Likewise, just as it’s good to know that the NAHB Builder Confidence index had risen to 66 in August vs. 65 in July, I also felt it important to cite that the index’s average score from 1985 through 2019 was 50.4. That long-term average gives important perspective to the latest figures.

The numbers about construction and remodeling we hear about most are national in scope, but there’s no such thing as an average American housing market. Every part of the country has a different mix of new single-family, new multifamily, and existing home and apartments. A handful of states account for the bulk of all new homes erected every year, while some counties elsewhere count themselves lucky to get a single start. Thus, when I talk about housing, I cite national projections but also get granular about the parts of the country where my board’s company operates today and where future opportunities might lie.

I also add certain data and skip other numbers based on these regional differences. If I’m working on a deal where the market has a lot of repair and remodel business, I’ll seek to learn the age of the market’s housing stock, how many homes there are, and how much urban infill is taking place. In areas where multifamily housing matters, I’ll push to learn the average rents and vacancy rates. But if the market I’m working on is all about single-family housing, I’ll ignore the remodeling and multifamily numbers and focus on other indicators.

It’s human nature to take the easy road and make decisions based on one number. I remember from college how economists called copper “the metal with a Ph.D.,” because a rise in its value was seen as a sure indicator the economy was heating up, because people would need copper for new machines and buildings. Similarly, you’ll recall how the market sank a few weeks back when we had an inverted yield curve, caused when interest paid on a two-year government bond is higher than what’s being paid for a 10-year bond. An inverted curve is a near-certain indicator that a recession is coming, past history shows. But lengthen your perspective: Note that those past recessions typically followed periods of several months during which the curve was inverted. This year’s inversion lasted about a week.

My presentation also stressed that history may provide insights into what will happen and how you should respond, but it won’t give you a completely reliable forecast or game plan. This is especially true when people think back to the last recession. Its pain and pervasiveness left a lot of scars, making them particularly fearful of what life will be like when the current economic cycle wanes.

But, as the Greek philosopher Heraclitus said, you never can stick your foot into the same river twice. The last recession became far worse than usual for housing because only a few people had any inkling of how many toxic mortgages were poisoning the system. Of course, we still could have surprises; a major terrorist action is always a possibility. But this time, I don’t see anywhere near as many potential pins that could pop the economy’s ever-growing balloon.

When patients enter a hospital, they’re hooked up to machines that measure a lot of vital signs at once, and then are read by people who, relying on years of experience, look for both short- and long-term changes. We do the same with the economy, only it takes a month for all the key numbers—unemployment, spending, credit card debt, investment, and more—to finally get produced. Because they come so slowly, it can be tempting to react too strongly to just one number, particularly one that might get revised a month later. As you look at the economic body, make sure you do it while wearing 3-D glasses.
This Tennis Great Has a Message for You
To Help You Overcome a Common Problem
By Craig Webb
President, Webb Analytics
I read a quote from Billie Jean King the other day that I expect I’ll carry with me the rest of my life: ”Pressure is a privilege.”

“Usually if you have tremendous pressure, it’s because an opportunity comes along,” the tennis legend told a writer in a soon-to-be-published book about activists . “I remember thinking about this, actually, when I was at Centre Court at Wimbledon. And I said, ‘All right. You’ve been dreaming about this moment. Is it a lot of pressure? Yeah. But guess what. It’s a privilege to be standing here.’

“Most of the time, in work or play or anything, if you really think about it, usually it’s a privilege,” King continued. “That I want-the-ball feeling. Not ‘please double-fault.” Give me the ball. Give me the problem to solve. Let’s figure this out. Let’s go.”

I like King’s words both for what they state and what they imply. For lots of people, pressure isn’t pleasant. It causes sales people to crumble and workers to make promises that they’re hard-pressed to fulfill. Pressure forces people to do things they’d rather avoid.

But when King sees pressure arrive, she sees something else accompanying it: The chance—sometimes a long-sought chance—to achieve something worthwhile. Thus her willingness to grapple with the former in order to grasp the latter.

What King doesn’t say is that pressure’s arrival also signals that you already have accomplished something: You got that meeting with a prospect, or you marketed your operation in ways that brought a customer through the door. Barring the occasional lightning strike of good fortune, it means you did something right. So take pleasure on reaching that rung as you move up the ladder.

Note also how King relishes the challenge of figuring out how to solve a problem. That implies constant learning of new skills and the honing of existing ones. She doesn’t fear pressure because she prepared and trained for it, and her arrival at Wimbledon’s Centre Court simply bears witness to that hard work. Sometimes you can get by on bravado; Golfing great Lee Trevino recalled his days as a young hustler on the greens when he said “You don’t know what pressure is until you’ve played for $5 a hole with only $2 in your pocket.” It’s a funny quote, but not a great precept to live by. King is a better role model.

I spent nearly 11 years at an international wire service where it was said that there’s “a deadline every minute.” I felt pressure racing against other journalists to report faster and better than my rivals. But I also relished that pressure, because it meant I was testing myself against some of the biggest names in the business. 

So much of success in life depends on preparation and attitude. With the right amounts of both, pressure becomes something to be welcomed—even enjoyed. Pressure is a privilege.

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There's Been No Letdown in LBM M&A Activity; We're Seeing Deals Galore Across Many Sectors
We count more than 270 construction supply facilities that were involved in acquisitions, greenfield openings, or closures so far this year. That's slightly ahead of last year's torrid pace. Of those locations, 158 were involved in M&A deals, 85 opened their doors for the first time, and 29 facilities closed.

More than 75 ownership changes have taken place just since July 4. The biggest single transaction saw SRS Distribution acquire 21-branch Travis Roofing Supply . SRS also bought Slover Roofing Supply , a two-unit operation in Texas, and Schultz Roofing of St. Joseph, MI.

Here are the other most notable deals since mid-summer:

SRS' Heritage Landscaping Supply Group bought Normac , which has eight facilities in California.

A new investor came on the scene when Fulcrum Building Group of Southern California came to life and purchased a pair of dealers on the Gulf Coast: Navarre (FL) Lumber and South Bay Lumber of Santa Rosa Beach, FL. Fulcrum says it's looking to increase its holdings.

BMC expanded in the Sacramento area by acquiring Heritage One Door & Hardware of North Highlands, CA. Back east, Timberline Enterprises bought Braintree (MA) Lumber while a millwork specialist. Randall Brothers , took in Marietta, GA-based PMC Building Materials.

Two divisions of Building Industry Partner s did deals. Homewood Holdings acquired Total Trim Construction of Auburn, CA, and U.S. Fence Solutions bought Western Access Controls of Northglenn, CO.

This summer saw two instances of co-location: L&W Supply and its parent, ABC Supply , began operating out of the same address in Boise, ID, while Universal Supply opened a new facility in Kimberton, PA, in space that had been fully occupied by fellow US LBM company Shelly's.

ABC Supply also opened stores in Stockton, CA; Auburn, NY; Sharonville, OH; and La Mirada, CA. L&W Supply did the same in Modesto, CA; Green Bay, WI; and Fishersville, VA. Meanwhile, gypsum specialist GMS said its Cowtown Materials unit set up shop in Wichita Falls, TX; while its New England Gypsum branch entered Manchester, NH.

After announcing four greenfield openings on July 1, SRS revealed six more between Aug. 5 and Sept. 20. Those new stores are in Colorado Springs, CO; Indianapolis; Dayton, OH; Fayetteville, NC; Saxonburg, PA; and Sun Valley, CA.

Foundation Building Materials expanded in Texas by opening facilities in Corpus Christi, New Braunfels, and Lewisville.

Other greenfield openings by bigger dealers included: McCoy's Building Supply in Bay City, TX; Curtis Lumber in Richmondville and Sidney, NY; Kuiken Brothers in Newark, NJ; and Arrowhead Building Supply in St. Peters, MO. Meanwhile, Eldredge Lumber said it plans to open a store in Sanford, ME, by year-end.

There were several smaller dealers that launched: Minardi Lumber, Hermatnown, MN; Bazooka Lumber and Livestock , Thermopolis, WY; JR's Building Supplies , Texarkana, TX; LumBros. Building Solutions in Detroit Lakes, MN; and Local Lumber and Supply , Williamson, WV
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Three stores have posted notices saying they're up for sale. One is Walker Lumber Co. and Do it Best Hardware in Minong, WI, ( sale notice ) another other is Hackensack (MN) Lumber and Hardware ( sale notice ), and the third is an unidentified store in Hialeah, FL ( sale notice ).
A Gilded Canary in a Coal Mine? Some See Troubling Signs the Rich Are Spending Less
We’re hearing conflicting messages these days—sometimes from the same source—regarding what’s happening with America’s wealthiest. The clouds in this picture could make things tough in 2020 for operations that cater to the top of the housing market..

CNBC reported Aug. 28 on numerous indicators that the rich were cutting back spending. Luxury real estate was having its worst year since the Great Recession, CNBC said. High-end retailer Barney’s has filed for bankruptcy, million-dollar cars went unpurchased at prestige car auctions, and art auction sales volume dropped for the first time in years during the first half of 2019.

Gyrations in the stock market and the wealthy’s outsized exposure to trade spats are two of the reasons being cited for the slowdown in spending by the wealthiest Americans. The middle class is far less invested in stocks and far more insulated in its exposure to trade wars. Indeed, consumer spending and consumer confidence in general remain strong. 

But economists see the wealthy as trend-setters in spending as well as in style.

“If high-income consumers pull back any further on their spending, it will be a significant threat to the economic expansion,” CNBC quoted Mark Zandi, chief economist at Moody’s Analytics, as saying. The top 10% of earners account for nearly half of all consumer outlays, Zandi told the network. 

There are roughly twice as many homes on the market costing $800,000 or more than there are annual closings for that price category, Mark Boud, chief economist at Metrostudy, during his quarterly housing forecast delivered Aug. 13. Anecdotally, we’re hearing from some dealers that cater to wealthy areas that sales are running behind expectations, even after factoring the comedown from last year’s sky-high lumber prices as well as a winter and spring that featured rougher weather than usual.

The housing market in general is “top heavy,” Boud said, with demand outstripping supply for homes costing $150,000 to $400,000 while the expensive stuff goes unsold. One result has been that the average size of a new home sold today is 2,465 square feet. That’s the smallest we have been since America started coming out of the Great Recession. 

Generally speaking, with starts pretty much flat-lining these days, a higher share of lower-priced homes in the overall number means there are fewer opportunities to do the high-end, high-margin, prestige doors and windows. In 2018, the share of homes completed that were 4,000 square feet or bigger dropped to 9% of all completions. That’s down from 11% in 2014 through 2016. The recent decline in mortgage rates is likely to benefit the smaller- and mid-sized home market more than the luxury end of housing, as the wealthy are less sensitive to rate changes than are people with less cash. 

But don’t give up on the rich yet, particularly if the economy cools. Boud noted that the federal government’s tax cuts will bring $16,660 worth of benefits over the next 10 years to the top 20% of Americans—people earning more than $143,000 per year. And for the top 1%—the cutoff here is $699,000 per year—the money saved over the next decade will total $214,000 per person. All told, the top 20% of earners will get 77% of the tax cut’s benefits, Boud estimates.

“Let me tell you about the very rich,” F. Scott Fitzgerald once wrote. "They are different from you and me.”

“Yes,” Ernest Hemingway replied in a story years later. “They have more money,” Those two authors couldn’t agree on whether the wealthy are a class apart or the head of a more general class of American consumers. The debate continues.
Pursue Technology Enhancements, But Work
on Improving the Human Touch, Too
A friend of mine takes pride in declaring that in years of hiring people, he never brought in a Harvard graduate. They often showed plenty of intelligence, he says, but they lacked the street smarts and hunger that was required for the jobs he was filling.

This colleague’s blanket bias against people schooled in Cambridge, Mass., is just one more rock in the mountain of hiring shibboleths one sees today. They’ve long been based on creed or color—descendants of the 19th century’s “No Irish Need Apply”—but now they’ve taken on a technological tinge through the rise of systems that seek out candidates as well as promote/reject resumes based on key words and other characteristics.

“Businesses have never done as much hiring as they do today,” Peter Capelli says at the opening of his article in the May-June Harvard Business Review. “They’ve never spent as much money doing it. And they’ve never done a worse job of it.”

Capelli, director of the Center for Human Resources at the Wharton School, blames part of this condition on Recruitment Process Outsourcing (RPO), where an employer goes beyond hiring staffing companies or search providers by farming out all or part of its recruitment processes to an external operation. These RPO firms search through social media sites to spot people who already have jobs in which they are using skills desired by the RPO firm’s client. The RPO contacts the targeted person and pushes them to apply for a job at the client’s firm at a certain salary. (“The recruiters get incentive pay if they negotiate the amount down,” Capelli notes.)

Research into RPOs by Korn Ferry’s Futurestep and HRO Today magazine found that, in a survey of HR officers, only 41% were satisfied that what RPOs did for them aligned with their business objectives, like boosting revenues, cutting expenses, and making customers happier.

Capelli also sees trouble at firms that have retained a recruitment role but increasingly are using tech tools that claim the ability to sift through resumes automatically to detect the best candidates. In TV ads, employers and candidates sure look happy with these programs. But while these services can sort candidates based on arbitrary rules—like 5 years’ minimum job experience or possession of a commercial driver’s license—they don’t do well on the intangibles, such as willingness to learn. As a result, your search has to be general, and the funnel widens to a flood.

If outsourcing and tech fumble the ball, what should you do? Capelli and others suggest these:

Promote from Within. This used to be common at most industries, but the practice has waned in popularity for several reasons. Probably first among them is that the Great Recession forced companies to lay off a generation of workers who could have been the next managers and executives. Second, continued lean operations have cut rungs out of corporate ladders. And third, training budgets have been slashed.

Upgrade Your Corporate Culture. Do your workers sense they have a long-term future at your company—for instance, by being able to see all internal job openings? Do you seek to give lower-level staff as much authority as possible? (Most millennials crave a feeling of responsibility for the success of a task or a project, rather than being a meaningless cog in a machine.) And do you provide training so they can move up?

Widen Your Search. Leadership in the building products industry is virtually all white and overwhelmingly male. The workers on the factory floor tend to be more diverse, but you ain’t seen nothing yet. A July 30 report by the Pew Research Center noted that the most common age in the U.S. in 2018 was 27. That’s also the most common age for blacks, while for Asians the most common age is 29, and for Hispanics, it’s 11. The most common age for whites? 58 years old. 

We Can Answer Your Most Pressing M&A Questions

* How do the most active buyers in today’s market value my company?
* What parts of the business should I change to improve its valuation?
* When is the right time to sell?

These are questions that are commonly asked by the owners of building products manufacturers and distributors. Our work in selling and raising capital for companies puts us in a unique position to help answer these important questions. Regardless of when you might decide to approach the market, please contact me to have a confidential discussion about your company and ways to maximize its value for the owners. 

Michael Collins
Work 312-854-8036
Cell 312-282-5462