The Road That Lies Ahead . . . and The Road Less Traveled.

“Where is the homebuilding industry headed over the next five to ten years on the issues of growth, consolidation, and supply chain management?”

Actually, not a current set of questions. At the dawn of this century, Mike Hollister and I posed these and other questions in a volume of Reference Point, our then-periodic study of management practices in the homebuilding industry, conducted among the senior management of a select group of large building companies.

At the time, Mike and I were doing consulting work with Fortress Group, which is probably another story worth telling, someday.

Anyway, 11 years later, as we wait for the inevitable assertion of power – the imposition of will – that will finally herald the dawn of the Era of Consolidation, when the publicly-held homebuilding companies that survive the Great Homebuilding Recession get serious about consolidation, and take over the industry, I thought it might be worthwhile to look back and to summarize some of what builders told us then, and how we observed and commented on those findings:



” . . . almost three-fourths (71%) of these executives predict that their own building operations will become “much larger”; almost everyone else (27%) predicts that their operations will remain about the same size . . . overall, these findings are very consistent with the findings from [one of our previous studies].”

“We thought it would be interesting to see how all of this growth is going to materialize. When we asked these executives what primary strategy they will use to meet their growth projections, 41% identified “geographic expansion into new markets”, and 39% selected “higher market share in current markets and buyer segments”. The remaining 21% identified “new market share in additional buyer segments”; not a single [executive we surveyed] identified “vertical integration” – a decision to supply more of the component parts themselves – as a primary strategy.”



“At separate points in the study, we asked two questions designed to determine the extent to which industry consolidation – some combination of growth, merger, and acquisition – will reduce the number of active building companies in the years ahead.”

“Our first question: Long term (10 years +), could they foresee the type of widespread consolidation that has already occurred in other industries? Overall, more than 70% of these executives said they [could] foresee the circumstances for such a consolidation.”

“We then asked these senior managers whether they thought the number of homebuilding operations in their markets would increase or decrease in the next five to seven years. Overall, almost half (49%) think there will be fewer building companies, while more than one-third (38%) think the number of building companies will remain about the same; about one-in-ten (13%) believe the number of builders will actually increase.”

“Their responses differ in significant respects from those expressed [in our previous studies] . . . at that time, less than one-in-ten (9%) thought there would be a significant decline in the number of builders . . . for those who thought there would be an increase . . . the situation has been reversed.”

NOTE: Let’s see. Seven-in-ten thought their own companies would be “much larger”, but more than half thought the number of building companies in their markets would either increase or remain the same. Hmmm.



“We finished by asking two questions related to distribution channels and supply chain management. We wanted to know whether builders view these two issues – closely related to change in many other industries – as something the homebuilding industry will need to address within the next ten years.”

“Asked whether they could foresee . . . changes [that could include] the circumvention of established delivery systems similar to what has occurred in other industries . . . a slight majority (54%) believes the industry will have to deal with this issue in the next ten years; the rest do not see this as an important issue.”

“On the matter of supply chain management, [there was] much stronger agreement. Asked whether they could foresee homebuilding companies taking the lead in collaborating . . . to manage all of the activities in the process of creating the housing product . . . an overwhelming majority (80%) expect the industry to move in that direction.”

We then offered the following comments and observations:

“The Road Less Traveled”

“Even if builders choose to reject the notion of widespread consolidation and outright circumvention of established delivery systems, and dismiss the level of growth projected by such a high percentage of builders as collective boardroom fantasy, the dependence of so many builders on growth strategies aimed at geographic expansion and higher market share in current buyer segments ought to raise a couple of red flags:

“[First], assuming that a strategy based on expansion into new geographic markets represents real growth, and not just the transfer of demand through acquisition or merger, then it will have the effect of forcing more competition on the existing level of demand. The first victims will be the builders that cannot compete for the available lots. But, then what? How will the builders that survive assert themselves in the market? Price? Product Quality? Customization?”

“[Second], a strategy based on capturing a higher share of the market in current buyer segments asks a more naked version of the same question – how do builders acquire more business – in the same buyer segment, in the same geographic market? Can those types of gains be sustained?”

“Growth fueled by a strategy of geographic expansion and higher market share in current buyer segments is essentially a strip-mining operation – an attempt to create value out of something a mile wide and an inch deep. But what choice do builders have? As an industry, we have outsourced almost every value-added activity in the building process.”

“Moreover, we can talk all day long about the need to increase productivity, but, first, that is a difficult proposition when someone else is doing all the work, and, second, there is no real point in improving productivity unless a productive use can be found for the additional capacity. And, besides, just where will all that additional production capacity be invested? In more expansion? In higher market share?”

“When we look at it in these terms, there has to be a better way.”

So, today, I suppose that Antoine Dodson would put it this way: “Well, obviously, we have large, publicly-held homebuilding companies in your area. They’re climbing in your communities, they’re snatching your business up. So, hide the lots, hide the buyers, hide the banks. And, hide your employees, too, because they’re buyin’ everybody up around here.”

Well, obviously . . . a degree of consolidation has occurred in the homebuilding industry, and that merger and acquisition activity had occurred, has occurred, before and after this edition of Reference Point, 11 years ago. But, consolidation on a massive scale is still not a bet that I would necessarily take.

There is evidence against the inevitability of that outcome, despite the fact that it resonates in almost every other industry vertical. There are plenty of reasons why large-scale, industry-revolutionizing consolidation in homebuilding has not happened, and those reasons remain the obstacles and challenges that would prevent it from ever happening. And, those obstacles and challenges – some which are self-imposed – remain the subject for more discussion.

Not saying that it cannot happen. Just questioning whether it ever will.