Consolidation: Coming Soon

It happened in real estate. It's happening in home building. Could remodeling be next?

Consolidation, the spooky specter hanging like a storm cloud over the nation's small- and mid-sized remodelers, seems to be everywhere in housing-related industries. Even segments of remodeling — replacement, insurance restoration, and sunrooms, to name a few — have experienced it, in the form of franchising, during the past several years. But the full-service additions and alterations segment remains largely unaffected.

That could rapidly change as big box stores like Lowe's and The Home Depot get involved and franchises become increasingly successful. “I love the little guy, but consolidation is inevitable,” says Mark Richardson, REMODELING columnist and president of Bethesda, Md.-based Case Design/Remodeling.

Richardson's opinion is a popular one, and for many, the question is not whether the industry will see consolidation, but rather when and how.

Franchising — running several operations across a region or the entire nation under the same name with the same business systems and procedures — seems a likely avenue. There is a substantial list of specialty franchises that have seen success in recent years. These products include replacement windows and siding, bathtub liners, gutter protection systems, decks, and sunrooms.

But these products are relatively easy to franchise because of their uniformity; a streamlined process from sale through installation is a must for any successful franchise. Indeed, most attempts to franchise more complex, full-service remodeling projects have failed rather quickly.

That landscape is beginning to change, however. DreamMaker Bath & Kitchen, which is owned by national franchisor Worldwide, has been doing more involved single-room remodels since the late 1990s. And earlier this year, Case announced plans to franchise its full-service arm using a model similar to the one it uses for its handyman franchise, which currently has 66 locations nationwide.

“This is a complex business, a tough one to franchise,” says Doug Dwyer, president of DreamMaker. “You have to have people who know how to market, to generate leads, to sell, and to design. Then there's production — ordering a wide variety of products that are coming from different places, trying to get them to arrive at the same time, and then dealing with subcontractors.” In short, there's a lot that can go wrong, and it's hard to streamline the process with so many people in so many locations.

Still, it's not impossible. “Insurance restoration firms have to deal with every trade that someone doing additions and alterations does,” says Seymour Turner, executive vice president of Chicago-based Airoom, one of the largest full-service remodelers in the country. And the insurance restoration industry has a number of successful franchises. If they can do it, why can't remodelers?

That's basically the question that Scott Baker, president and CEO of Paul Davis Restoration — a large national insurance restoration chain headquartered in Jack-sonville, Fla. — asked himself. Finding no really good answer, Paul Davis started a pilot program that had eight franchises doing remodeling. After a two-year period, which vice president of operations Robb King calls “very successful,” they decided to extend the program to more of their contractor network, and now more than one-fourth of the company's 223 franchises do some work outside of restoration.

“We thought it was a good position for the company,” King says. “Project management is one of the core skills [in both insurance restoration and remodeling].” Franchisees have the benefit of shared systems and learning from one another's experiences.

After about a year and a half, it seems to be going well. “It's been difficult for other remodeling franchisees to get consistency and deliver a product that is fairly uniform,” Baker says. He adds that due to Paul Davis Restoration's existing infrastructure and support system for the restoration franchises, it is one of a handful of companies able to do just that. It's for a similar reason that Richardson believes the Case full-service franchise will be successful —and so far, through a pilot program, it has been.

Because so few companies are in positions similar to Case and Paul Davis, most consolidation in the additions and alterations segment will likely be attempted by either large remodelers buying several smaller companies (as has happened in home building) or an outside investment group doing the same thing, despite the challenges facing newcomers. “There's too much money in remodeling to give up,” Dwyer says of the latter.

There are some fundamental problems with these strategies. Richardson tells of a group of remodelers who, about 10 years ago, began meeting with the intention of creating systems they could all use in their own businesses, eventually marketing them to other remodelers. After a couple of meetings, however, the group realized that the individual cultures were too different. “We'd have had to reinvent one another's companies,” Richardson says.

Baker likens buying up remodeling companies and running them under one umbrella to “herding cats.” He says that “if you try to bring a bunch of contractors who are used to being their own bosses under one organization, it's going to be difficult to get the uniformity you need to be successful.”

On a local level, Dwyer says he's already seen remodelers buying up their smaller competition for one purpose: labor. Then, regionally, he expects that the bigger remodelers will buy up smaller ones for labor and sales, looking to expand and grow. But nationally? “That's harder to predict,” he says. Both Richardson and Dwyer point to the Remodeler's Guild — an unfulfilled attempt to aggregate large, high-end remodeling companies — as an example of the difficulty of this strategy.

It may all sound scary to the smaller remodeler, but consolidation isn't necessarily a bad thing. “Consolidation would benefit both remodeler and customer,” Turner says. There are a number of reasons why, and they all go straight to the bottom line.

The first reason is one of the biggest challenges facing remodelers today, and one of their biggest expenses, too: workers' compensation and health insurance. Rates are at record levels, but you can earn discounts by implementing certain safety programs. The problem, says Turner, is that “it's impractical for a small remodeler to have a safety plan in place that is adequate for a discount. But being part of a larger company with such a program could save $5 to $7 per $100.”

Secondly, being part of a large organization would give small remodelers more clout with manufacturers and distributors. “[Smaller remodelers] could develop efficiencies in buying materials,” Turner says. “Volume buying and direct distribution often aren't offered to the little guy. They're paying close to retail, and since the client has a threshold, the remodeler is losing gross profit.”

Being a big dog is also advantageous when a problem arises with an order. If you're a bigger customer that has a closer, more substantial relationship with the manufacturer, you don't have to worry about dispute resolution. “If you see something wrong, you can fix it, knowing the manufacturer will back you up,” Turner says.

There are a few dissenters, but far more people believe that consolidation is coming, sooner or later. There are many good reasons for why it might or should happen, but nothing is more convincing than empirical evidence. Richardson says that, in the past, Case has received occasional calls from investors looking to buy the company. He now receives five or six times that many inquiries, and he says he knows his company is not the only one fielding such offers. “I've talked to others who say the same thing.”

Dwyer notes some of the new entrants into the marketplace as a sign that consolidation is coming. “Owens Corning decided it was going to franchise that basement system,” he says, referring to the very successful product that the company has rolled out in recent years. “When a large corporation like that decides to get into it, that tells you there are some big hitters coming.”

Then+Now:

Major retailers

1985

The Home Depot: 50 stores, $700 million in sales

Menard's: 31 stores, $350 million in sales

Lowe's: 282 stores, $2.072 billion in sales

2004

The Home Depot: 1,677 stores with Contractor Services available at 1,419 locations, $73.1 billion in sales

Menard's: 198 stores, an estimated $7 billion in sales

Lowe's: 1,087 stores, $36.5 billion in sales.

Lowe's was the largest home improvement retailer in the country in 1985 and it held onto that ranking until 1989, when The Home Depot surpassed it. The following year, Lowe's opened its first full-blown warehouse-sized store.
Source: Lowe's and Menard's data from Home Channel News; The Home Depot figures from the company