Tuesday, February 26, 2019

7 Ways the Modular Home Industry Needs to Prepare for the Next Downturn

Just as sure as the sun will rise each morning is the cyclical world of modular housing in the US. There have been many changes in the modular home construction over the decades. Sometimes the changes are gradual, but frequently they can be swift in both upswings and downturns.

As one modular builder recently told me, “If you can’t make money today, you’ll probably never make money.”

Both the modular factory owners and the modular home builders hope that current conditions will continue for a long time, it is inevitable that it cannot continue forever.

Here are 7 things to do to prepare now for what is the inevitable downturn in construction that follows an upswing.

Identify Your Most Profitable Markets
For the modular factory that would be the developers and builders that consistently give your factory the best return on your investment. Some factories do a great amount of business with a small group of customers and go out of their way to keep them happy through huge discounts and extra perks while seemingly smaller builders that don’t require those discounts, don’t strain your service department and give you 20 homes a year while giving your bottom line the profit it needs are ignored.

Modular home builders also have niche markets that bring them good profits with fewer problems. If you are the builder that jumps on every potential buyer that walks in your door and closes the sale with low pricing, guaranteeing a rock solid move-in date and undercharges for extras, all I can say is “Stop that ….NOW!” Those slim margins will not see you through even a modest downturn. Those type of builders will always find work at Lowe’s and Home Depot or doing replacement windows during the downturn.

Conserve Cash Do not pay bills before they are due. The only exceptions would be if there is a discount being offered for early payment or a discount can be negotiated by pre-paying future installments early. However consistently being late on payments during the good times make you suspect when the next downturn hits and your vendors may tighten your credit limits and time.

Stop Buying and Leasing Trucks and Cars If purchasing or leasing trucks on four or five-year agreements, the last few years of payments will be brutal if there is a quick downturn. The situation is amplified if there is also over-buying for partners and/or key employees. Employees would rather drive a F150 for 10 years than a King Ranch for three years than have no job.

Secure a Line of Credit Most modular home builders are stronger financially now than they have been in nearly 10 years. It is best for you to establish a line, or improve on a current line, when they don’t need it.

Control Your Marketing Marketing budgets and expenditures tend to swell when times are good. It is a bit counter-intuitive that companies tend to spend the most on marketing when they need it the least.

If a modular home factory or builder is having a hard time finding employees, or maybe even turning away work, then why spend more on marketing? It doesn’t typically make sense, but it is a common occurrence.

Your Typical Narrow Margins Need Protected You know what your bottom line profit is and it’s probably nowhere near what you would like to see it even in this good economy. What do you think would happen to it if housing dropped just 10%? And what would it be if all of a sudden it dropped 30%?

Develop realistic worst-case scenarios and come up with a set of warning signs that your business needs to pull back quickly and efficiently to at least a stable position. Some of these signs could be a shrinking backlog, fewer visits to your showroom, fewer appointments and more lost sales due to the economy.

Your company must adjust discretionary spending at more frequent intervals; for example, quarterly, or even on a rolling basis. Company trips to sporting events, team dinners and vacation trips for management are just a few of the things that have to be curtailed in a downward moving housing market.

Be Ready to Shrink to Survive The list of things a modular factory owner or builder needs to plan out in order to survive a downturn is long and can seem daunting.

You must avoid disassembling what has made you successful while accepting the necessity of shrinking your business for the near-term. Navigating your business through such a crisis may require some skills that have been rusting in your managerial toolbox.

In the event of a downturn, you’ll no longer be insulated by growth. Disciplined decision making will be essential. You’ll need to lead with the right proportions of cost-conscious frugality and bold innovation.

Let’s hope that 2019 continues to be a banner year for the modular housing industry but you also need to be realistic and prepare for even a modest downturn in housing.  

1 comment:

Tom Hardiman said...

Interesting. No mention of training your staff to be the most effective and efficient workforce possible - while times are good. No mention of streamlining processes and procedures or investing in new technologies while times are good. Ask your employees to identify ways to save time and money - and then share it with them. Make yourself invaluable to your customers by providing outstanding service.