Friday, September 25, 2015

Blu Homes Withdraws from National Market

Modcoach note: This is directly from the Blu Home blog.

September 15, 2015


By Maura McCarthy - Co-founder

This fall we’ve made the decision to design and deliver Blu homes in Northern California, only, for the next 18 months.
Why hunker down in the Bay Area, now?  In many respects we’ve already developed patented  technology, used it to economically ship homes cross country from our state-of-the-art factory in Northern California, and proven we can deliver our products in 17 states and two Canadian provinces – more geographic breadth than some of the largest homebuilders in the U.S. We are the biggest firm in the premium prefab industry today. Wouldn’t it be easier to keep expanding as the housing market and customer interest grows?

We’ve realized the answer is quite simply, no, and here’s why:

While the promise of prefab to radically change the customer experience of designing and building your dream home is remarkable—including dramatically better quality, design, energy use, and speed (4-6 months post permit vs. 14-24 months for traditional custom homes) – it can only be upheld by mastering the full project, including a process for distributing and servicing homes that provides long-term customer satisfaction. This means that we are focused on more than just homebuilding. We are focused on providing exceptional customer service through design centers, user technology, supervisory staff, and delivery teams, in order to provide a world-class customer experience.

The New York Times recently published an article about a company that had built a single beta prefab home in the Hamptons, with plans to ship from China and a promise from the founder, "if you order it tomorrow you will see it in less than 16 weeks.” Regrettably, this kind of quote—and a legacy of overly ambitious industry promises—misleads customers about the project execution required to build a premium prefab home. While the “promise” of prefab does include speed of factory construction and less hassle on site, it still requires months of pre-permitplanning and execution for local site and foundation design, government approvals, and site preparation.

The U.S. Census Construction Surveys provide some insight on this: For nearly 40 years they have tracked the length of time to build traditional homes from Authorization to Start (i.e. after receiving a building permit), to Completion. This shows approximately a third of custom-built homes in the western U.S. take 14 months or more to complete after receiving a permit. Anecdotally, trickier locations often take 18-24+ months. But the Census does not even attempt to collect data on the time it takes to acquire a building permit because it varies so widely – in rural Alabama it may add as little as 1-2 months, in the Hamptons 5-8 months, and in Malibu the coastal commission can add as much as 2-3 years!

No company controls the local government or design review requirements, but with hundreds of projects under our belt across 17 states and two Canadian provinces, we have learned from experience the importance of communicating practical project timelines. By clearly defining a realistic promise of prefab, our goal is to meet and exceed customer expectations.
Anyone who has walked into a Blu home understands that our product is quite different than traditional factory-built homes. Our patented building technology allows us to build premium, green homes that break the mold of old-school prefab. For example, a Breezehouse with 15-foot high ceilings, huge expanses of glass, high-end finishes, and that produces as much energy as it consumes can be built in weeks, shipped to a site in a small package, “unfolded” onsite in a day, and finished eight weeks later.

While the aesthetics and quality of our homes have little in common with traditional factory-built homes, there is an aspect of that industry that we can learn from: What firms like Clayton Homes have demonstrated consistently over the last 50 years is a business model for distributing, servicing and financing tens of thousands of traditional manufactured homes annually across the U.S[i]. Their model is simple: they sell products designed & built in their factories through a network of locally based sales centers that deliver fully-executed projects. Projects are managed from start to finish through these regionally disbursed centers where teams have the local experience necessary for bidding site work and meeting local permit requirements.

We have decided to focus on building company-owned design centers and are deliberately starting with Northern California where our backlog and customer base are the strongest. We now have a Design Center and Breezehouse model home at our factory headquarters on Mare Island in Northern California, and this summer we added a new “beta” Design Center in Silicon Valley.
Our prototype Blu Design Center is in Redwood City, California, in the heart of Silicon Valley, and is open six days a week with a well-trained, friendly sales staff. Our Sales Consultants can answer product questions on Blu’s homes as well as project-specific questions like what sites will work best, how to design for net zero energy use, and what to expect for local site costs and permit timeframes. Sales Consultants are not incented toward pressure sales. They are trained to help customers, on whatever time frame works best for their family, to start and complete afeasibility study – essentially a 4-5 week package that costs $2,500 and includes conceptual design, code checks, and a full estimate for their project. As it is, Blu’s feasibility study slots are backed up due to demand in Northern California– another reason we are focusing our resources, here, over the next 18 months.

Ultimately each of Blu’s Design Centers will be configured to provide an interactive and informative experience through knowledgeable sales staff, unique 3-D design technology which lets customers personalize their home finishes, and onsite model homes that customers can walk through to touch & feel the quality of the product, in-person (the Silicon Valley Design Center can hold up to three model homes, which we expect to add over the next 12 months). And, with a service team for each Design Center of professional Construction Managers, Blu customers get dedicated project supervisors who have the experience necessary to navigate their local design requirements, permitting, subcontractor bids and site preparation.  This unique combination of service, technology, and a premium quality product, we believe is the key to providing a radically better experience for customers designing their dream home.

If you can do it in California, you can do it anywhere.

By focusing today on Northern California we believe we will be able develop the smartest system for building, distributing, supervising and servicing our homes, that can scale to future locations.  California has some of the toughest local building requirements in the nation, and extreme site conditions ranging from wildfire zones to mountainous snow areas and cliffside coastal regions.
Having delivered hundreds of products successfully in the field, we also understand that to keep the promise of prefab – including dramatically better quality, design, energy use, and speed – will require increased time and R&D investment in product refinements that optimize site work and minimize project timeframes.

We are very focused on providing the best customer service for the families for which we are building today in Northern California, and on achieving our mission of providing buyers with green buildings that are beautifully designed, high quality, healthy, and economical to live in.
We are grateful to all our customers over the last five years, to whom we dedicate our work.  
And we look forward to delivering in your state, soon.
[i] Traditional factory-built home companies sell various forms of manufactured housing to end-buyers through retail dealerships.  Think Clayton Homes (a Berkshire Hathaway company) or any of the mobile home lots one may pass by in more economically-challenged areas across the U.S.  There will be approximately 65,000 of these homes built in 2015, and at the recent housing market peak in 2006 it was approximately 2x that number.  Many of these companies have been operating since the 1950s when inexpensive post-war housing needs were high.  And firms like Clayton have grown to more than 1,700 retail outlets selling 20,000+ homes annually.
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Franklin Etters said...

It was gracious of you to not gloat. I know it was hard.

IL said...

As I read this post, I can't help but think that this is an opportunity for Blu Homes to do something that Andy Gianino has been talking about recently. Blu Homes is a highly capitalized company that can afford to invest in building out its distribution system in a professional and highly integrated way, just plug and play with what Andy has proposed, and send the fella a nice consulting check. The trick is that to truly take advantage of this opportunity, Blu Homes should work with and build independent dealerships to build entrepreneurship and ownership of the organization of their retail centers. Retracting from national delivery and declaring that they will be like Clayton is strange and probably should be called into question (and logically would be by most critics here, IMO).

The penetration of the high-end "prefab" market is not a problem with California versus the fly-over states. There are plenty of niche markets with high building costs and low-labor capacity where such Blu type homes should be appreciated and purchased. The problem is that the penetration of scattered lot custom construction market is too much work for one organization to handle from the top-down, from fabrication to complete site-work. This is especially true when using a highly proprietary technology that can be messed up by a rookie set crew.

Full vertical integration is difficult to prove as a business model in the off-site / prefab / modular world. While Warren B and his Clayton Co. may have proved that this model can be done with a highly standardized product, it is impossible to compare a market of trailer parks in the California Central Valley & Inland Empire to the resistance to building and development and expense / time associated with obtaining permits in the California Coastal Commission zone and high-end towns throughout California. It's like every town is having a "cutest town in America contest" which requires them to be a pain in the ass at every turn.

It ain't gonna be a "Modesto permit process" (excuse the Georgian here), and the likeliness that projects on the Blu books as "pipeline" deals will materialize as actual constructed homes is dramatically less in this market segment than what the mostly east coast readers of this blog would be used to (33% is my guess, IMO only, based on our historical data on this type of home constructed versus designed and planned and NOT constructed).

The whole idea of this change from Blue is something that I doubt will result in a successful, income-generating business model. It is likely a first step out of the marketplace for this firm, and if I was a stock-picker and I knew of their debt or capital raises, high overhead, and constraints on the potential future revenue generation I would put this company firmly in a "SELL!" rating.

Firms like this can recover, but it will require and innovation and cost savings approach without sacrificing service or quality that will be difficult for Blu to achieve. I admire Blu for what they have done so far, and anyone that loves the dream of systems built construction should appreciate some of their accomplishments. But Martha, is your firm ready to look deep within and question everything and everyone you have and hold dear? I will enjoy watching it unfold either way, sitting quietly in our niche and continuing to do exactly what we have done in this marketplace as the others come and go. Don't forget Martha that all you have to do is literally copy Andy Gianino. Pick up the phone and call the guy. I bet he would be happy to show you how to get it done.