Builders FirstSource included the table above during its latest earnings call presentation to make sure the financial community understood how dramatically changes in lumber prices can affect the dealer's revenues and profits. BFS' financial guidance for the rest of 2022 is based on $400 lumber--a steep drop from what sales of the commodity brought it last year. The questions for fellow dealers are: What assumptions are you making, and what changes should you make as business conditions change?
How you answer these questions will play a big role in how your business fares coming off not just two years of the COVID boom but also close to 15 years of rising business prospects and low interest rates.
Because of product allocations and high demand, some dealers stopped prospecting, and half a generation of sales reps have never worked in a downturn. I'm hearing from LBM operations that did a ideal on Monday and then, because of lumber price drops, found they had lost money on the sale by Friday. You might have builders who are having a harder time securing bank loans and/or have unilaterally decided to stretch your payment terms.
Last month, I said dealers were "positively nervous" about the future, largely because their current business was strong but others' talk of troubles ahead made them jittery. This month, there are more reasons to be nervous, but I still believe that most dealers will do fine provided they stick to core business basics. Here are five prominent things to do.
* As you make decisions, focus more on improving the balance sheet and bottom line and less on what's happening with revenues.
* Create "what if" scenarios with this LBM Stress Tester to see how changes in revenue will dent your profits and how adjustments to expenses could get you back in the black.
* Revive sales reps' prospecting, as the slowdown in sales and improvements in the supply chain means they'll be spending less time sourcing products and updating customers. On Aug. 30, I'll be interviewing a panel of experts on this issue in a special webinar.
* Track the numbers that matter most to you. National starts numbers get swayed by what's happening with the biggest builders in the largest markets. What happens with them generate the headlines. But the vast majority of dealers don't sell to the D.R. Hortons of the world. They sell to small and custom builders, the folks who together have accounted for 18% to 20% of all starts these past five years. And according to a report by the National Association of Home Builders, custom home starts over the past four quarters is 9% higher than the previous four quarters. Just because the nation is having a downturn doesn't mean you will.
* Continue investing in your people, processes, and your technology. E-commerce is one of the most cost-effective ways to market and sell more. Embracing lean principles will shave expenses. And a less frenzied work environment will give you more time to develop staff. In it latest. Take a cue from Trex. In its latest earnings report, the manufacturer said it was using an expected slowdown in sales to launch "several high return cost-efficiency programs, which we have been unable to implement while running at elevated capacity levels." In other words, this is a time to plant seeds for growth even if you currently are shrinking.
Yes, conditions will be harder. There likely will be more haggling over price, more time needed to close deals, more pessimism in the air. But the core forces driving demand for new and remodeled homes remain in place, and we still have a big backlog of projects under construction that need finishing. Disciplined leadership will help your company thrive in whatever is the New Normal.