Dead on Arrival

Les Cunningham has a perspective on the remodeling industry that no one else can match: He was a remodeler for 15 years, and a 14-time CotY award winner. Cunningham founded the peer-review firm Business Networks over three decades ago, and served as NARI’s national president in 2000. With a degree in chemistry and years of experience as a military and commercial pilot, Les’s rigorous intellectual standards are reflected in the way Business Networks operates. Group members have to regularly submit performance data, which is plugged into a proprietary database designed by Les and his team. The updates establish evergreen benchmarks, against which members compare their performance in a continuous process of review and analysis. So when Les Cunningham shares his thoughts, remodelers are wise to listen closely.

“The remodeling industry as we know it is dead.”

Savor that quote in the light of your own experience and what you’ve worked for all these years and your plans for the years ahead. Should you stop and consider the meaning of that for your company, your financial health and your future?

Cunningham looks to historical patterns to help explain his thinking. Remodeling in the 1960’s consisted mainly of “bolt-on” home improvements such as windows, roofing and siding. The industry as we know it today developed in the 1970’s as a housing shortage caused rapidly rising home values–providing the economic fuel for discretionary design/build remodeling. The mindset was that the good times would never end. “The 1981-82 recession put a nail in that idea,” says Cunningham. “But after the recession ended, the same phenomenon took off again.” The recessions of 1990-91 and 2001 repeated the same pattern, bringing us to the market collapse in 2008.

This time though, there is a glut of houses on the market and property values have dropped so much that the equity homeowners used to borrow against has virtually disappeared, eliminating the primary driver of discretionary purchases. With the resulting drop in appraisals, banks have almost stopped lending. “And if you have money, the last thing you’d do is spend it,” says Cunningham. “The old days of a remodeler telling a prospect ‘if you don’t come to my office’ or, ‘if you don’t give me a design fee’ are gone.”

With the severe reduction in the amount of business available, many remodelers who were order-takers in good times find themselves ill-equipped to generate business. With the number of remodelers staying constant in a severely shrunken market, competition has increased. This means that quality work is no longer the primary competitive differentiator. Cunningham explains, “The only dollars now being spent are being spent more wisely because the consumer has the Internet, which gives them more choice. Price has become the deciding issue. Now, most remodeling is needs-based. If there’s a kitchen remodel, it’s financed by savings – not debt. For those that have money, it’s in vogue not to spend. We’re not going to hit the bottom until foreclosures have been soaked up by the market; and not by speculators, but by people who live in those previously-foreclosed homes.”

So with all this gloom, what’s a remodeler to do? Cunningham says “You have to become a home improvement contractor, vis-a-vis the 1960’s…the ‘bolt-on’ products. You must be more of a businessperson, running your company by the numbers. Take every job you can get and keep your costs as low as you can.” He believes that this bodes well for construction franchises that have proven systems and a respected brand, because consumers will opt for a company that they believe will stand the test of time.

All this requires a mental adjustment to the economic realities of life; an adjustment that Cunningham fears many remodelers won’t make. Will you?