BY BOB MIODONSKI of CONTRACTOR’s staff
SAVANNAH, GA. — The nation’s 10 biggest home builders will continue to grow at the expense of medium-sized builders, consultant Carl Cullotta told members of the Plumbing Manufacturers Institute April 12 during their spring meeting here. Small builders that put up a limited number of custom homes also will grow in importance in the coming years, he said.
“The large builders will continue to acquire the next larger builders,” said Cullotta, vice president of Chicago-based Frank Lynn & Associates. “The market will be marked by polarization with 10 or less at the top and then the small custom builders at the bottom.”
Pointing to other industries where consolidation has occurred, he mentioned home-improvement retailers, buying groups, discount retailers and grocery stores. What drove these industries to consolidate was economy of scale as well as efficiency.
These factors are at work in the home-building industry, he said, although large builders have other advantages too.
“The top 10 builders have gotten so large that they have created a gap that can’t be crossed,” Cullotta said. “Public builders have greater access to capital. Management of land is a primary reason for consolidation.
“Bigger builders can hold onto land longer before turning it into a sale.”
The nation’s largest builders also have transformed their market outlook, he said. They are more diversified than they used to be.
“Builders traditionally were one-trick ponies,” Cullotta said. “Now, bigger builders are looking to diversify by acquiring smaller builders who
specialize in second homes, adult communities, etc., or for access to their land.”
More large builders are adopting what Cullotta described as a “marketing model” in that they are viewing consumers as long-term customers rather than as one-time homebuyers as they did in the past. These builders want to sell people their starter house followed by a step-up home, vacation home and active-adult residence.
“Expect to see builders experiment with maintenance contracts,” Cullotta told PMI members. “Builders view homes and customers as an annuity stream.”
In 1998, the top 10 builders represented 10% of all closings on new homes. By 2003, that percentage had grown to 19% of all closings. Meanwhile, the nation’s No. 11 through No. 200 builder experienced little change in market share.
“The action has remained concentrated at the top,” Cullotta said.
He added that he expects that trend to continue for at least the next five years. It’s just a question of how large a gap the top 10 builders will create between themselves and their next largest competitors.
The effect of this consolidation on plumbing manufacturers — and the plumbing market itself — will be margin erosion in the supply chain as big builders use their leverage of scale to get access to well-known brands and a better price from manufacturers. National contracts between big builders and large wholesalers such as Ferguson Enterprises will become more prevalent, he said.
Cullotta said he foresees the emergence of national installers for specific building products, noting that some of these companies already exist. None, so far, are in the plumbing business, he said.
Plumbing manufacturers cannot ignore builders at the other end of the spectrum, Cullotta said. Describing this category as a “highly fragmented group of thousands of small builders who retreat to a defendable niche,” he told PMI members that doing business with smaller builders could mean bigger profits for them.
“Small builders will still own 50% of the market,” he said. “The gap in the margins between small and big builders will increase. You have to pay attention to small builders.”