It's not going to be a walk in the park

Feb. 1, 2010
ALTHOUGH WE ran our 2010 forecast story in last month's issue, we have two stories in this issue that continue to mull over what will happen this year.

ALTHOUGH WE ran our 2010 forecast story in last month's issue, we have two stories in this issue that continue to mull over what will happen this year.

On page 3 of this issue, Candace Roulo reports on Grainger's customer event in Orlando where attendees were told to expect a flat 2010.

The event opened with an address by James T. Ryan, chairman, president and CEO of Grainger, and presentations about the economy by guest speakers Nigel Gault, chief U.S. economist, and David Manthey, a senior analyst at Baird, a wealth management, capital markets, asset management and private equity firm.

Both Gault and Manthey told attendees to expect the economic recovery to be subdued. Gault said manufacturing indicators are improving and the inventory-to-sales ratio is now approaching normal levels. But despite this positive news, Gault said construction would continue to lag in 2010 since there is no demand for more retail and office space since the construction boom, and the worst sector at this time is non-residential construction.

Attendee Rebecca Jenkins, contracts manager of national agreements at Emcor Group Inc., Fort Wayne, Ind., noted that, "Industry will be flat through 2010, and though some markets are seeing a slow up tick, the demand for commercial, residential construction is still lagging. Company diversification has been very helpful to get through the down time."

On page 7, we report on a survey of 22 plumbing and HVAC contractors conducted by ad guru John Sonnhalter.

In addition to cutting staff and watching expenses, the contractors have been looking at new markets and evaluating where they are spending their promotional dollars, Sonnhalter reports. One of their main concerns is keeping existing crews busy. Most have either started an incentive program or re-emphasized current incentive programs to sell the company's brand. Increased competition is hurting their margins.

Lack of credit, lack of qualified people and overreaching by government are what keep the contractors up at night. Business had declined in 2009 for 20 out of the 22, with most falling into the negative 7% to 15% range.

Most of the contractors are cautiously optimistic that 2010 will be a better year, Sonnhalter found. Current government programs and how they will impact business are of concern. They all agree that they will have to work smarter and be more aggressive, but believe the opportunities will come either from new business or from competitors going out of business. According to the survey participants, residential repair/replacement markets should see a continued growth since the stimulus is still in effect for 2010. Industrial/commercial markets, other than new construction, will see a slight uptick, which has already been seen in the last quarter of 2009 in most markets.

Many markets will not improve until 2013, said construction industry consultant FMI in a special report we just received entitled, "Contractor Strategy: Emerging from the Perfect Storm."

While the FMI report focused on larger contractors, many of them GCs, it contains nuggets worth thinking about even if you're a small shop. Among them are four common strategic myths:

1. The future is likely to mirror the past.
2. Yesterday's strategy will be sufficient to guide our organization into the future.
3. If we can just make it through 2010 and early 2011, we will be fine.
4. Now is not the time to make bold changes.

"One of the most common flaws in strategic thinking comes from human cognitive bias; in other words, we all have an innate faith in our ability to predict the future based on our prior experiences," the report notes. "The standard paradigms for thinking about the future are currently under attack, and some of the assumptions that we took for granted in developing past strategies are simply no longer valid."

In other words, this isn't like 2001 or even 1982; this is new. FMI likens the collapse of construction to the tech bubble of 1999. The dot coms around today are the ones who can actually make a profit selling a product. Similarly, the structures being built and rehabbed in 2012 and 2013 will be the ones that actually make economic sense for their owners and occupants, not because of overheated lending and speculation.

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