Last month in this space, I reviewed a series of market projections for 2014 from Harvard University as well as the industry’s leading associations.
The Family Business
The very first remodeling company was a family business. As long as there's a remodeling industry, there will be family businesses. But as more corporate entities, franchises and large regional firms emerge on the landscape, the question begs to be asked: what is the future of the small, family-run remodeling business?
The very first remodeling company was a family business. As long as there's a remodeling industry, there will be family businesses.
But as more corporate entities, franchises and large regional firms emerge on the landscape, the question begs to be asked: what is the future of the small, family-run remodeling business? And what strategies can help these businesses succeed in an increasingly competitive and professionally run marketplace?
Harvard University's Joint Center for Housing Studies reports that only 12 percent of the full-service remodeling contractors in the U.S. generate more than $1 million in volume annually. These larger contractors, however, account for more than 40 percent of total employment and almost 60 percent of volume industry-wide. Most family-run remodeling businesses are relatively small operations, so although they still make up the lion's share of the industry's companies, they continue to produce a very small portion of the industry's total revenue pie.
Will there be a day in the not-too-distant future when these small, family businesses are being driven out of the industry by larger, more professionally run companies? Unlikely, say industry experts.
Mark Richardson, president of full-service Case Design/Remodeling and franchise Case Handyman and Remodeling, sees three areas for concern: "One, the number of home-related franchise services has increased by many times over the last few years. Two, with the complexity of technology and the growing importance in business, the larger companies will be able to invest and differentiate themselves in the future. Three, business in general today requires more sophisticated management training and systems which the smaller family businesses are less likely to possess."
Doug Dwyer, chief stewarding officer of remodeling franchise DreamMaker Bath & Kitchen by Worldwide, agrees.
"I don't necessarily see a major shift but I do see fewer family-owned and operated remodeling businesses [in the future]," Dwyer said. "I also see more professionally run operations, meaning the caliber and the expectation of a higher level of performance will continue to increase."
Family remodeling business owners have basically two options when it comes to bolstering their companies for increased competition: rely on family members or hire from outside the family.
With family, what you see is what you get, and frequently their business knowledge is lacking compared to what an outside hire could do. That's where education comes in. Both NAHB and NARI offer business courses and certifications, and small companies can also join one of the industry peer groups such as Remodelers Advantage or Business Networks.
Another option, which more small companies are doing with success, is to make the transition to larger operations by relying more heavily on employees and ownership partners that are not blood relatives. Alure Home Improvements in East Meadow, N.Y., one of the nation's largest remodeling firms, is one such company.
"Our competition is going to change quite a bit," says Sal Ferro, president of Alure and part owner hired by Carl Hyman, whose father founded the company. "Traditionally, this has been an industry of mom-and-pop companies, guys who grew up swinging a hammer. We are getting more profitable as an industry and that means we're going to see more owners who are business oriented.
"It's no longer the guys who swung a hammer. We're going to have more businessmen who see this as a way to make good money. This is going to force remodelers to become more professional."
Both Victoria Downing, president of Remodelers Advantage, and Les Cunningham, CEO and president of Business Networks, believe the small family companies will be able to not only compete but thrive in the same markets as larger remodeling firms.
"Family-run business can compete with corporate entities because they have advantages that larger, more corporate companies do not have," Downing said. "They are more nimble; they have personal relationships that they can leverage; they can stay lean and mean and outsource areas of the business like HR, legal, etc., so that their overhead does not balloon."
"I believe the family unit is always able to beat a large firm, especially because of the fact that family members have a lot more skin in the game and usually a lot more to lose," says Cunningham. "Smaller companies are usually able to move much more quickly than large companies when they see a need to respond to what is going on in the daily stream of business."
One factor that can't be overcome by outsourcing, however, is the advantage larger firms get from efficiencies of scale. Larger operations garner many savings in overhead costs that can't be made up easily, leading to smaller net profits and less available capital when the going gets rough, as is happening in today's economy.
"The biggest business problem that remodelers face is managing the company through business cycles," says Kermit Baker, director of JCHS's Remodeling Futures Committee. "They expand their operations during the good times and get caught with too much overhead and payrolls that are too large when the downturn hits. Alternatively, they don't expand during the upturns and then are unable to manage the growing workloads and increasing customer demands."
All agree that small, family-run remodeling businesses will be able to survive the industry's growing trend toward larger, more professionally managed firms. But because the failure rate of small remodeling companies, according to JCHS research, is much higher than larger ones, the trend likely will continue toward fewer family businesses overall.
"I believe that the tide will turn toward larger businesses overall in this industry, leaving the traditional mom-and-pop operation as a smaller niche player," says Baker.
Dwyer compares the future of the remodeling industry to what has happened in the real-estate industry.
"I believe the remodeling industry will be much like the real-estate industry where there are companies like Coldwell Banker, Century 21 and Re/Max, who have captured a major portion of the market," he says. "Yet there are still the well-run, locally-owned real-estate companies that have good market share and visibility."
Downing, again, points toward the differentiating factor of strong systems and business management as the wild card, but a long time down the road, if at all.
"Perhaps in 20–25 years," she says, "the owners of these professional companies that rely less and less on the owner's personality and more and more on systems and business practices will see the advantages of banding together for the growth, profits and success of all."
"No matter the scenario — corporate, franchise, or locally-owned family business," says Dwyer, "those owning a remodeling company will have to make an investment of time, money and hiring strong talent to stay competitive and/or capture greater market share as the bar continues to be raised in this industry."