Cash and carry | Materials suppliers revamp the way they do business to survive the recession
Photo/David A. Rodgers
Gary Koocher, controller at Applicators Sales and Services, says the company is cutting costs and collecting bills immediately to keep accounts current
A precipitous decline in construction projects and materials values has left building materials suppliers struggling to find new clients and cut expenses. Some of the state’s oldest and most established materials suppliers say the current recession is the most challenging in their multi-decade histories, and that it’s a shakedown only the strong will survive.
“New construction is very challenging right now; renovations are OK,” says Gary Koocher, controller at Applicators Sales and Service, a 51-year-old wholesale building materials company based in Portland. “It’s very competitive and a lot of our customers are experiencing cash flow issues.”
Applicators serves a primarily residential market, and its staples include roofing materials, siding and Paradigm windows, which Koocher says have sold well because they are eligible for a new energy-efficiency tax credit. The company’s 2007 revenue was around $100 million, but sales have declined by about 5% since, with much of the decline occurring since the financial markets began stumbling in September of last year, Koocher says. The company last fall had to lay off some of its staff, though he would not say how many or how large the company’s staff is.
To deal with the downturn, which Koocher says has decimated sales for non-essential materials like vinyl siding, the company is cutting costs by, for example, consolidating freight routes. It is also trying to collect immediately from clients to keep its accounts current. Will those cuts make the company profitable this year?
“We hope so,” Koocher says.
Materials suppliers like Applicators are dealing with a double whammy — fewer projects and decreased materials values. According to the Associated General Contractors of America, while new construction starts were up 5% in March over February, total starts for the first quarter of 2009 have tumbled 40% from starts during the same period in 2008. The March boost is due, the AGC says, to public works construction (a reason some Maine materials suppliers are keeping a close eye on stimulus funding for shovel-ready work), while nonresidential building and residential building slipped — residential down 8% in March and 52% year-over-year in the first quarter, and nonresidential down 3% in March and 47% for the first quarter.
The AGC predicts only power, military base realignment work and stimulus-funded projects will be the hot spots in construction for the next several quarters, and that single-family homebuilding will be the first sector to revive, perhaps as early as the end of 2009 thanks to stimulus incentives for home ownership, followed by retail construction bouncing back early next year.
Coupled with the drop in new projects is a decline in most construction materials prices that began in 2004 after years of double-digit increases. The drop in the value of many materials — including asphalt and steel — continued its steady pace last month: Prices for nonresidential building materials declined 5.8% from March 2008 to March 2009, according to the Bureau of Labor Statistics, and by 0.8% for multi-unit residential construction materials over the same time period. Though prices for single-unit residential materials have increased year-over-year by 1.9%, they have declined in value by 1.1% during the first few months of 2009.
The drop in demand and price means materials suppliers, like most sectors of the intensely symbiotic construction industry, are competing for far fewer dollars than were available just one year ago.
“It’s likely that we’ll see some consolidation, maybe some outright closures,” says Kathleen Newman, president of Associated Builders and Contractors’ Maine chapter. “Businesses that aren’t flexible and creative are not going to make it.”
Caught in the building cycle
One year ago, Bob Roy was sitting pretty. Roy, CEO of Steel Service Center in Lewiston, watched prices for steel soar, he recalls, 15%, then 45%, then 50% in part because of demand in developing countries like China and India. But, as Roy says today, “all good things come to an end.” Prices have since sunk back to 2007 levels, and demand for Roy’s steel has declined by about 25% since January, especially over the last two months. The company, which was founded in 1964, generated between $11 million and $15 million in revenue in 2008, and Roy says so far in 2009, revenue has kept pace with last year because the company is still filling orders for projects that were contracted several months to a year ago. Steel Service Center hasn’t had to lay off any of its 18-person staff yet, but did put four of its employees on a four-day work week beginning in mid-April and cut back warehouse staff hours by about one quarter. The remainder of 2009 worries Roy, who thinks steel prices could drop even more in the coming months and that the credit crunch will continue to significantly hamper residential, commercial and industrial construction. Roy says he’s lately getting calls from “people we haven’t heard from in years,” former contractor and subcontractor clients who are desperate for a new supplier. Roy quickly found out why — most of these new clients don’t pass Steel Service’s credit check because they’re in the hole with other suppliers.
One of the challenges Roy faces is to unload steel he bought months ago at a premium that today won’t go for half of what he paid.
“Sometimes you have to basically give the store away if you want to move that product and keep going forward,” he says.
Michael Griffin, northeast division director of Connecticut-based construction materials supplier A.H. Harris, says sales in Maine have declined more than those in A.H. Harris’s other northeastern states — New Hampshire, Vermont and Massachusetts — at a rate of about 15% from last year, or about $6 million of 2008’s roughly $40 million in Maine sales to clients like Cianbro Corp. in Pittsfield and Reed & Reed in Woolwich. Griffin chalks the decline up to the economy and what he calls a “true, honest winter” that was long and bitterly cold and that virtually ground construction in Maine to a halt. Contractors are these days only stocking for imminent projects, rather than stocking up several months in advance as had been the norm. A.H. Harris has launched a three-pronged strategy to protect its bottom line — try to hang onto existing clients by improving customer service and pricing competitively; target the recipients of stimulus funds as new clients; and streamline operations by combining freight routes, cutting travel and entertainment expenses, consolidating regional offices from eight to five and reducing the company-wide work force by 10%, mostly through attrition.
Griffin is cautiously optimistic that the recession is already turning around. In April, Griffin says region-wide sales for bridge and road projects jumped 26% over sales in March. He says this is proof the stimulus package is working, and that sales for transportation projects will offset the decline in residential, commercial and industrial construction.
Market adjustments
Planning ahead has helped Hancock Lumber, based in Casco, limit its losses so far this year, says company President and CEO Kevin Hancock. Back in fall 2007, Hancock and his management team decided that the company shouldn’t wait for the market to correct itself, but instead adjust to the market.
Changes included adding 10 staff to Hancock Lumber’s sales team, bringing the total full-time salespeople to 30, and increasing the marketing budget to add clients, particularly in areas the company hasn’t previously targeted, like Augusta and North Conway. Hancock Lumber generated $120 million in revenue in 2008, but 2009’s first-quarter sales are approximately 20% below 2008’s first quarter, Hancock says. Cost-cutting measures have included laying off an undisclosed number of the company’s 425 employees and instituting furloughs for some others. The company also launched a program through Wells Fargo bank that allows customers to apply for home improvement loans at Hancock Lumber’s nine outlets, in a bid to better compete with chain stores like Lowe’s and The Home Depot, which offer the in-store loan option.
“While this market is very difficult, it also has embedded in it what’s a great blessing because the things you have to do to be successful in this market, in this situation, they are all things to do to grow your company in the long term,” Hancock says.
Sara Donnelly, Mainebiz managing editor, can be reached at sdonnelly@mainebiz.biz.
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