Beginning in the 1990s, the tendency in new construction and in the distribution chain that supplies it has been toward fewer companies controlling a larger and larger share of the market. Is a similar consolidation in store for the remodeling industry?
Yes and no. Some think it's inevitable, and a story in this month's news section, as well as a feature on franchising, suggest one of the ways it might happen. But remodeling differs from new construction in ways that may postpone if not prevent consolidation.
For starters, there is not yet anything analogous in remodeling to the new home industry's publicly traded companies and speculative developers. Land acquisition and infrastructure development is a major driver of consolidation among new home builders, but few remodelers own the properties they renovate, and none on a scale anywhere near new construction. Replacement contractors, for example, are among the largest remodeling companies. The combined revenue of the top 100 replacement companies in 2002 totaled about $1.5 billion, less than 3% of total revenue from major replacements. Compare that with the top 100 national builders, who control nearly 40% of the new home market.
On top of that, remodeling projects are not standardized products like production homes. The range in dollar size and scope of remodeling work creates demand for a wide variety of practitioners. A company that can efficiently produce a $150,000 master suite addition is not well-suited to completing a $40,000 bath remodel or a smaller-still roof repair. Even in the replacement sector, where the final product is standardized to a high degree, economies of scale don't kick in until a job approaches a minimum size. A window replacement company wants to install at least eight windows per job; a small independent operator is happy to replace those eight windows two at a time.
Remodelers also have less control over the site than new home builders. Projects are scattered geographically, and homeowners are living on the premises during construction. This creates a unique set of project management and customer relation challenges that are virtually unknown to new home builders. Solutions to these problems depend on systems that are difficult to perfect and hard to package for use in a branch office.
Fourth, consolidation requires ready buyers and willing sellers. Most remodeling companies take in less than $1 million in revenue, but even those doing $5 million to $10 million are too small to qualify for either side of that equation.
Part of this issue is semantic. If consolidation refers only to smaller companies being taken over by larger companies, then it is already taking place, especially in the insurance restoration and exterior replacement segments. But true consolidation has to do with control of production and access to services. The auto industry, for example, is consolidated because the number of options for buying a new car is limited to a relatively small number of car producers. In many markets, the same is true for buyers of new homes.
But this is nowhere near the case for remodeling customers. The nature of the demand for remodeling services reinforces an industry with many small practitioners, and the barriers to entry into the remodeling business are still fairly low. True, this is changing rapidly, and a number of forces are at work that will change the landscape. There is pressure on the supply side, as big box retailers gain control of material distribution and take on small-scale installation. Tougher licensing and permit requirements are also making it more difficult for small operators to get started in the business. And skyrocketing insurance costs are pushing some established firms out of business.
Even so, consolidation that limits access to remodeling services to a small number of very large companies is a long ways off. It's worth keeping an eye on, but maybe it's time to stop worrying about what the remodeling industry will look like when it finally consolidates and start thinking about what to do if it never does.