Preparing for the .... ?
Fabricators sense a market change. How and when is the challenge.
Photo by Robert Linder from Unsplash
By K. Schipper
COVID. Inflation. Supply chain issues. Labor shortages. Talk about a veritable stew of issues that can keep any business owner awake at night….
Stone Update contacted some of its sources from previous articles to talk about where they see business today, and – based on experience dating back to the 2008 Great Recession or before – where they see things going.
Frankly, some of their answers surprised us. There was little “doom-and-gloom” coming from most of them, and responses were generally upbeat.
Will the industry continue to ride the surprising boom that COVID and people isolating in their homes brought? Even our own Hard Surface Report shows import numbers for June remain strong. In a perfect world, they’ll remain that way. And, if not, these business owners offer some insights to chew on.
KEY PERFORMANCE INDICATORS About every business owner – and every economist – has indicators that supposedly give a clear eye on the market. No less a personage than former Federal Reserve Chairman Alan Greenspan contends that falling sales with men’s underwear points to economic busts. (A 2011 study from the United Kingdom indicates, however, that this theory may be limited to the United States.) In the stone industry, among the best indicators that things aren’t what they could be are bid requests and backlog. “We obviously track the number of new jobs coming in the door,” says Jerry Lee, owner of Canaan Stone Works in the Kansas City suburb of Shawnee, Kan. “But that only gives us about a 30-45-day window – maybe 60 days at best – to really understand what the markets look like.” Lee also follows statistics put out by the National Association of the Remodeling Industry (NARI) and the Home Builders Association (HBA) of Greater Kansas City. Several states to the east, Brian Rooney of Suburban Marble and Granite in Warminster, Pa., just north of Philadelphia, says his best indicator is retail customers walking into the showroom or requesting appointments. “Retail is my best indicator that the economy is doing well,” Rooney says. “People are wanting to spend money and redo their kitchens, bathrooms, and basements. That’s the first area where I see things slowing down, and that’s happened in the last month to month-and-a-half.” He adds that, at least for now, his wholesale and commercial business is remaining steady. One economic indicator Rooney follows is new housing starts, and while the numbers nationally weren’t good in July or August, that hasn’t been the case in eastern Pennsylvania. Another thing he has noticed: “I get a good sense of things from deposits from retail customers, and they’ve dropped off significantly in the last two months.” Rooney is lucky that his commercial work has stayed strong. Edward La Puma, owner of 77 Stone in El Paso, Texas, who does both residential and commercial work, says his commercial numbers are off, but “that was more of a pandemic issue as a lot of projects weren’t started.” Ron Horn is the owner of Denver-based Colorado Custom Stone, which specializes in commercial stonework. He says he watches his bid numbers, but at the same time takes them with a grain of salt. “They can be skewed, because in a down market we tend to actually bid as much, if not more,” Horn says. “That’s when we tend to swing for the fences a little bit, and I might bid on projects outside of what I typically call our sweet spot.” Horn says he works with several key performance indicators (KPIs), as well as following national figures such as the Dodge Momentum Index and the American Institute of Architects Architectural Billings Index (ABI). Another man, who prefers to be identified simply as a West Coast contractor of stone and the steel that it utilizes for large facades, says that an important indicator for imports of foreign material is exchange rates. “We bring in a lot of foreign goods, and none of us anticipated that exchange rates, and particularly the U.S. dollar versus the euro, would be near parity,” he says. “If nothing else, it indicates there’s likely to be a shift in some of our suppliers from China to Europe. Europe is open for business, and travel there is convenient right now if you’re willing to pay the price, whereas China is suffering from its own issues.”
“I get a good sense of things from deposits from retail customers, and they’ve dropped off significantly in the last two months.” Brian Rooney Suburban Marble and Granite
OUT OF WHACK? Inventory of stone and other façade materials isn’t a particularly big issue for the West Coast contractor because, he explains, those materials aren’t ordered until the job is awarded. However, it’s not that simple with the steel side of his business. “Materials such as anchors, channels, and grid components are kept in inventory,” he says. “And pricing has been difficult to anticipate because metals prices have seen a tremendous surge over the past 10 to 12 months. Lead times have been extended and price quotes are valid for only very short periods of time. So we have to navigate very carefully and order metals on a job-by-job basis while hoping for some stability in the market.” As another commercial operation, Horn, too, says he likes to buy by the award rather than bringing in too much inventory. However, that has changed some. “We’ve loosened up some of the criteria that we’ve held near-and-dear in past years regarding inventory turns,” Horn says. “Because of lead times and price increases that can come at a moment’s notice, we’re more apt to bring material in and warehouse it for 90 to 120 days, where before it was 30 to 45 days.” On the retail side of things, inventory can get to be a big issue. Or not. La Puma recently picked up the assets of another stone operation in New Mexico about 45 minutes from his El Paso location, and he says “that has kind of filled up our inventory.” However, both Lee and Rooney are concerned about the amount of inventory they’re carrying right now. Lee admits to bringing in extra material in certain colors to make sure his company didn’t run out during the COVID boom. “When you do that, it’s easy for things to get out of whack,” Lee says. “Right now, we’re carrying too many dollars in inventory and we’re not getting the turns we need. However, this would be an adjustment I would be looking at making whether I expected a slowdown or not.” Rooney says he is currently carrying more inventory than his company has ever had before. He attributes that to concern about several things, from high lag times in overseas shipping to delays from other contractors, such as the installation of cabinets. “I’ve slowed down ordering containers of stone from overseas – tried to space them out better,” he says. “Fortunately, I’d say three-quarters of my inventory is sold.”
“We’ve loosened up some of the criteria that we’ve held near-and-dear in past years regarding inventory turns.” Ron Horn Colorado Custom Stone
PLAY TO YOUR STRENGTHS Anyone who’s bought groceries or a tank of gas recognizes prices are going up. And, if the crew also sees less work coming through the door, at least a few are going to start worrying about their jobs. All these business owners agree it’s important to keep workers updated on what’s going on. The West Coast contractor says it’s critical to be upfront with both the office staff and the people in the field. “We don’t want uninformed employees operating on just rumors or hearsay,” he says. However, it has been a challenge to bring in additional qualified staff. “When you bring in new people, their expectations may be higher than your current pay structure can accommodate,” he adds. “And just as prices of materials fluctuate, so too with salaries. The current market favors the employee, and you have to confront that while still attending to the veterans on your staff.” Colorado Custom Stone’s Horn agrees that communication is critical, but compares is to when a company adds new equipment. “We’re lucky to have employees who have been here for a decade or longer, but you’ve got to get out in front and reassure everybody,” Horn says. “You have to make sure that everybody is a part of that.” Still, he says that one of the things he’s learned is the importance of cross-training employees. “We’ve been very mindful about not adding too much staff when volume has been double and triple,” Horn says. “Our goal is always to develop our employees and we’ve always looked at cross-training, but now we’re doing it with three, and in some cases four, positions.” What else have these business owners learned from the Great Recession? For many it could best be summarized as “play to your strengths.” For 77 Stone’s La Puma, that meant moving away from builders doing commercial projects. “We became more of a retail force,” he says. “And, we went into higher-end products, versus low-end products. There’s always going to be somebody who does things cheaper, but this is not the time to do it.” Suburban Marble’s Rooney concurs. He explains that before 2008, he had as many as 150 employees in two-and-a-half shifts. Today, he has 50 employees in one shift, and the company is more selective in the work it takes on. “We were really heavy with some of the big builders, many who went out of business and filed for bankruptcy,” he says. “We walked away from one huge homebuilder because we didn’t want to be married to them. But it allowed us to go to the smaller builders, the high-end builders and not be married to one company.” On the other hand, the West Coast contractor says as large projects were being canceled during the pandemic, he opted to diversify his product mix by expanding in the sheet-metal business. “We’ve found the more we can offer a general contractor on a bid, the better chances are of prevailing on that bid in some fashion,” he says. “We’ve done several jobs that have included sheet metal and have more on the books; combining trades is attractive to general contractors on larger projects.”
“There’s always going to be somebody who does things cheaper, but this is not the time to do it” Edward LaPuma 77 Stone
WATCH THE DOLLARS Another lesson that both Rooney and Canaan Stone Works’ Lee have taken away from the Great Recession is to mind their cash flows. For Rooney, he chose to get rid of old debt while cutting his reliance on bank lines-of-credit. “I created my own money-market account where once a week, I put in 1% of the company’s sales to create my own pool of money,” he explains. “That’s my own line-of-credit that I can dip into if I have to. And I used some of the government funding we received during COVID to pay down and pay off debts to allow ourselves to be as lean as possible.” Lee agrees that if the economy weakens, cash is king. He, too, has focused on developing good cash reserves. “The thing is, if you pay something off, you lose that cash,” says Lee. “The trick Is to establish lines-of-credit so they’re available to you when you need them. If you wait for the downturn, you can’t get them. You have to prepare yourself financially.” However, whether preparations are really in order is still up in the air. The Fed talks about a “soft landing,” but both Lee and La Puma say they're confident their markets remains strong – and that’s what they’re focusing on. La Puma says, “There’s nothing grim in our indicators at all,” and Lee says, particularly with the information he’s getting from his local homebuilders’ association, the reverse may in fact be true. “We’re not seeing a housing recession in Kansas City,” says Lee. “We’re not even starting to see it. If you look at the market compared to a year ago, it’s not extremely heated, but that market wasn’t sustainable. Here, builders still can’t get houses done before people want to buy them. At any other time, we’d be amazed at how good the market is.” And even the West Coast contractor – who says his past years in business really hadn’t adequately prepared him for the months since the start of COVID – isn’t entirely without hope. “This time around we have to exercise even more care, remain nimble, consider all options, and imagine the circumstances that would make something go wrong” he says. “But I’m pretty confident that the worst is behind us, and we’re going to continue to grow and thrive.”
