One of the nation's leading LBM consultants and one of its most successful LBM industry owners are calling on dealers to take action now to protect their businesses against the coronavirus' health and economic perils.
The advice from Ruth Kellick-Grubbs, head of the Kellick and Associates consultancy, and Matt Ogden, a managing partner at Building Industry Partners, comes as economists and bankers predict the U.S. economy will plummet in the second quarter and put the U.S. into recession for the year. For instance, Goldman Sachs now forecasts a 24% drop in quarter-on-quarter annualized growth rates for the April-to-June period, while Morgan Stanley forecasts a 30% drop in the gross domestic product in the second quarter. The National Association of Home Builders' chief economist estimates that 40% of the nation's gross domestic product "is on pause or partial pause" and the unemployment rate will roughly double in the second quarter to nearly 7%.
Anecdotal reports from dealers nationwide suggest business was robust in January through mid-March, then ramped up even further as news about COVID-19 spread. But by March 19 and 20, there were signs of sales tapering off.
What should you do now?
Priority #1 Is Safety. Mitigate and Manage the Health Risk
Work Hard to Keep Coronavirus Out of Your Company The first case--even the first suspected case--requires you start sending home not just the worker with the virus but also notify all those who regularly interacted with that person. Those persons in turn might decide to leave. As a result, small companies could end up losing a significant percentage of their workforce.
The best way to keep that from happening is to follow health experts guidelines on keeping spaces sanitized and workers as far away apart as possible--working from home, preferably. That includes having at least one manager working remotely, Kellick says. That way, if you get sick, another leader can take over.
Follow CDC recommendations with vigor. Sanitize at least hourly cash registers, credit card terminals, time clocks, vending machines, coffee stations, clipboards, and phones. (Some dealers have stopped requiring customer signatures on credit card terminals.) Clean several times a day your trucks, forklifts, saws, and the like. Professional cleaning services offer sanitizing mist that they can come in and apply after hours.
Close your showrooms. Stop doing installed sales to existing homes; If you do installation work at new homes, keep in mind that most states still permit construction work; just continue if you use the social distance and hygiene protocols.
Enforce the six-foot distance rule enthusiastically in your sales areas, using tape or cones to help provide guides. Urge your customers to call in orders for pickup or delivery. And when you deliver goods, have the customer identify an area where the product is to be left, take a picture of what you've done, and arrange for the order to be paid by account or credit card. Push for similar contactless exchanges when receiving deliveries from vendors.
Priority #2: Mitigate the Economic Impact to Your Business
Stress-Test Your Finances, Then Act Accordingly Ogden is advising Building Industry Partners' companies to estimate the impact if monthly sales fall by one-quarter, one-half, and three-quarters of what they were last year. He also wants his companies to imagine what would happen if sales fall 90% from last year sometime in the next two months, stay there for two to three months, and then climb back to levels we saw in the Great Recession--say 50% to 75% of 2019's annual sales--for an extended period.
“Right now, federal, state and local government appear to be increasingly focusing on 'shelter-in-place' edicts, to slow the rate of contagion and stave off the catastrophic health impact that could otherwise result from healthcare system capacity overload," Ogden says. "These shelter-in-place program cases all seem to project peak infection rates occurring two-plus months’ out from time the program is put in place, and then taking many weeks to reduce dramatically further. So it’s reasonable to expect that once these edicts are in place, the resulting economic pause will sustain for months."
While many states that have issued stay-home orders have designed LBM businesses as
essential and thus able to remain open for business, even essential businesses "will be facing unprecedented economic pain and anxiety, and consumer demand for houses or any substantial project expenditures will nosedive substantially in the months ahead on our current economic course," Ogden adds. "Business owners and managers need to be preparing for this case."
"There is great disparity we’re seeing right now in terms of levels of preparation LBM business owners are taking related to this crisis," Ogden continues. "It’s very geographic-specific. In states where infections lag so far or governments haven’t taken proactive social distancing action, dealers’ sales have continued robustly, and business owners are not preparing for the potential economic tsunami that is headed their way. We are strongly encouraging all LBM dealers to be preparing downside cases, assuming that their market could face substantial disruption beginning in the weeks ahead."
One way to get started is to use the Stress Tester spreadsheet posted on Webb-Analytics.com. This spreadsheet, first developed by industry consultant Jim Enter, shows what could happen to a company's operating profit if sales decline 20%, 33%, or 50%. The sheet also makes it possible to manipulate certain numbers, such as payroll, occupancy, and administration expenses, to see how changes in those expenses will buoy or sink the overall profit.
Ogden says: "As incoming order and sales volume declines materialize, believe them and cut expenses to match to those top-line volume indicators. Unlike 'normal' market environments, do not expect top-line volumes will go back up, for quite some time, once they start declining. In order to survive if worst case scenarios materialize, believe the declines will persist until you have demonstrated multiple-week evidence that they are rising again."
Companies like California's Ganahl Lumber got through the Great Recession in part by doing something Ogden recommends: keep cutting the expenses at your business to reflect the new realities of revenue. Ganahl, for instance, decided that personnel costs couldn't be permitted to be above a certain percentage of revenue figure. When that happened, cuts were made.
Repeat to Yourself Regularly: Cash Is King
While you do the "what if" work, take action now to generate and preserve cash. "Do a cash-flow forecast with downward revised sales forecasts and act when and as necessary," Kellick advises."Watch A/R, negotiate A/P, encourage credit card transactions."Require 50% or full price on special orders, regardless of the client; that should help reduce cancellations. Freeze hiring and CapEx.
Get more stringent on credit requirements and focus actively on collections, Ogden says, because you can expect payments to deteriorate during a recession. “Paper sales” that cost money to fulfill, but in the end don’t end up getting collected, are more harmful than no sales at all, he says. Meanwhile, "buy only what's necessary to run the business to your newly reduced projected sales levels, by managing your purchases and inventory levels closely, in line with your visibility on incoming sales volumes. And because cash will be king to your businesses' survival if extended economic pauses materialize, don't pay payables faster than they are due unless you have abundant cash resources on the sidelines to last downside cases--an economic pause followed by extended downturn."
"But managing down working capital doesn't help if the business bleeds cash by insufficiently right-sizing expenses with sales volume declines," Ogden says. "So first and foremost, businesses need to be proactively right-sizing their business expenses to enable the business to survive."
Managing, Leading, and Encouraging Employees
Kellick supports the move being made by dealers across the country to reduce their hours, particularly by closing on weekends if they are primarily a pro yard. "It's about conducting business safely and limiting exposure," Kellick says. In addition, "Divide up the facility into zones that employees don't cross in/out of." That restricts potential transmission of the virus. Consolidation of shipping into one or two locations also will help, Kellick says. Above all, preserve your ability to run the business.
Begin thinking about how best to help employees with their financial strains, but don't make blanket promises to support them for the duration of the pandemic; some experts think we won't see the other side of this until July or August. Ogden suggest you pay attention to the rescue packages coming out of Congress. Several programs from Washington, from unemployment benefits to business loans, could help ease the pain.
If you do have to reduce staff costs, remember there are ways besides issuing pink-slips to do that. They include renegotiating service contracts, renegotiating purchase contracts or terms, asking for voluntary layoffs, or instituting rolling layoffs.
Editor's Note: Building Industry Partners is an investor in Webb Analytics