Market Leaders 2009 Report Shows Downturn Hit Even the Biggest Firms

It's no secret that 2008 was a tough year for remodelers, and the 2009 Professional Remodeler Market Leaders report shows that even the biggest companies felt the pain.

The Market Leaders list, which identifies the largest remodelers in 20 top remodeling markets, was compiled through a combination of research by Professional Remodeler staff and information provided by the listed companies.

For our third annual list of Market Leaders, we expanded the survey to ask for more details about the companies' operations and business so we could compare these leading companies to the industry to the data we gather from our annual Business Results study. (For more on this year's Business Results study, which we published in April, visit www.HousingZone.com/bizresults.)

The average Market Leader saw a drop in volume of more than $1 million in 2008 after peaking in 2007 at $6.7 million.

2008 was bad; 2009 looks no better

More than 60 percent of our Market Leaders saw a decline in business in 2008 and nearly that many are expecting 2009 to end up being even worse. The median installed volume of this year's Market Leaders dropped by nearly 15 percent from $6.7 million to $5.7 million.

Those numbers are even worse than those from our Business Results study, which found 50 percent of remodelers with a drop in business in 2008 and only 43 percent expecting a decline this year — although it's worth noting that number was recorded in January of this year, when remodelers may had been more optimistic that we would see a quicker turnaround in the market.

Lead activity was also down for most Market Leaders, with 56 percent reporting a decline in leads in 2008, although 28 percent actually reported receiving more leads last year. There was no clear trend in how Market Leaders did in closing on those leads, though. The largest group (38 percent) said their closing ratio was basically unchanged. Another 37 percent saw a decline and 25 percent saw an increase. As a group, Market Leaders converted an average 30.8 percent of their leads into sales.

Less than a third of Market Leaders saw an increase in business in 2008 compared to 2007.

Although Market Leaders boast a higher average job size and get a significant amount of business from large whole-house remodels, they’re also more likely to generate business from a single line of products such as windows or siding. They also are less reliant on other sources of income than the average firm.

Market Leaders and other firms spend at relatively the same levels on major expenses — with one glaring exception: Market Leaders spent nearly five times as much on marketing in 2008 as the average firm.

How they build their business

One way in which these larger Market Leader firms is strikingly different is marketing.

Market Leaders spend about 5 percent of their budget on marketing expenses, compared with the 1 percent the average firm spends. In fact, 15 percent of Market Leaders reported spending more than 10 percent of their budget on marketing. Clearly, these companies have recognized the value of marketing as part of a growth strategy.

In other expenditures, Market Leaders are relatively similar to the average remodeling company. Both groups spend about 70 percent of their budgets on labor and materials, although Market Leaders are more likely to opt for subcontractors than other companies. This same trend appeared in our Business Results study — the bigger a company was, the more likely it was to sub out work to trades instead of keeping labor in-house. Market Leaders also have slightly higher overhead in office salaries, spending about 8 percent compared with the 3 percent other firms spend.

That higher overhead probably accounts for the larger gross profits Market Leaders aim for. They had a target gross profit of 33 percent per job, hitting 32 percent on the average job. The average remodeling company instead was looking for 28 percent and slipped to 22 percent in reality.

Despite that higher gross profit, Market Leaders have smaller net profits, at least on a percentage basis, aiming for 7 percent for 2008 and achieving 4 percent on average, compared with a 12 percent target and 8 percent actual net profit for other firms. All told, 8 percent of Market Leader lost money in 2008 and 22 percent had net profits of less than 1 percent.

Our report on the industry's leaders shows no one's been immune to the downturn