Renovation Products and Services in Select U.S. Markets

Summary

Canada Mortgage and Housing Corporation (CMHC) recently completed a study on the United States renovation market for housing products and services in major metropolitan areas located in the following States: Illinois, Minnesota, North and South Dakota, Colorado, Utah, Nevada and Arizona.

Key findings of the study, commissioned by Christa Andraos of CMHC to The Building Supply Channel, Inc., are summarized below.  Information on how to get the full report is provided at the end of this document.

The purpose of this study is to provide exporters of Canadian building products with an understanding of the residential remodeling/renovation industry and the supply chain serving it. Several U.S. metropolitan areas are the focus markets of this study. They are: Chicago, Rockford, Peoria, Moline, Bloomington-Normal, Springfield, Decatur (in Illinois), Minneapolis/St. Paul, St. Cloud, Bemidji, Duluth, Rochester (in Minnesota), Fargo, Bismarck (in North Dakota), Rapid City, Sioux Falls, Pierre (in South Dakota), Denver-Boulder, Ft. Collins, Colorado Springs, Vail, Aspen, Grand Junction (in Colorado), Salt Lake City, Ogden, Provo (in Utah), Las Vegas, Reno (in Nevada), and Phoenix, Flagstaff, Tucson (in Arizona).

The study explores key aspects of the U.S. renovation market and its opportunities for Canadian manufacturers. It covers the following topics:

• marketplace structure and trends;
• types of remodeling activity;
• factors driving remodeling activity;
• key growth areas;
• structure of the remodeling industry and the supply chain serving it;
• remodelers’ needs and purchasing patterns;
• market activity and opportunities in each focus market; and,
• recommendations on how Canadian exporters can most effectively penetrate the renovation market in general and in each focus market.

An analysis of the opportunities in each of the focus market is presented in the full report, along with contact lists among large remodelers and dealers.

The study compiled data from the major U.S. entities engaged in examining the remodeling market and industry, and from recognized industry experts. Interviews were conducted in the focus markets. Conclusions and recommendations were developed based on the data gathered.

1. U.S. Renovation Is a Large But Difficult to Reach Market

Residential remodeling expenditures in the U.S. are projected to reach $275 billion in 2005, over 2 per cent of the total U.S. economy. Nevertheless, surprisingly little definitive data on the industry exists beyond the national level, for three primary reasons: 1) the relatively recent emergence of remodeling as a profession separate from home building; 2) inconsistency in regulatory and reporting requirements; and 3) extreme industry fragmentation — over three-quarters of the nation’s 800,000+ remodeling firms are too small to have payroll.

A lack of definitive information makes the market difficult to reach and, consequently, remodelers have been relatively ignored and underserved by the U.S. supply chain compared with new homebuilders. This situation represents a vast potential opportunity for suppliers who are willing to understand and meet remodelers’ needs.

2. The Opportunity for Canadian Exporters Exists

The opportunity will only exist for a limited time. As homebuilders consolidate and new construction activity slows, many in the U.S. supply chain will refocus their efforts on the home improvement marketplace. But for those capitalize on the current environment, the underlying economic, social, and demographic factors driving remodeling activity are strong and getting stronger: the highest homeownership rate in U.S. history, income polarization, a huge pool of home equity dollars, and favorable attitudes toward home improvement among the Baby Boom and Generation X generational cohorts.

The key question for Canadian manufacturers is whether remodelers will be receptive to products that are not yet established in the U.S. In general, indications are that they will — under certain conditions.

Remodelers are willing to evaluate products on their own merits, and they are confident of their ability to convince clients to accept unknown brands if those products offer clear advantages. Remodelers will tend to be more receptive to innovative products that offer unique features not available from mainstream U.S. manufacturers.

This dynamic potentially favors Canadian manufacturers. At the same time, because remodelers rely so heavily on past client satisfaction in their business, they tend to be extremely cautious when evaluating new products.

Opportunities in each of the 31 focus markets are discussed in the full report. Minneapolis/St. Paul is probably the metro area that presents the best opportunity of all the focus markets. Remodelers use a variety of products, but branded products (by opposition to commodities) have a better chance to penetrate the renovation market. Some opportunities are discussed in the full report regarding the following products: siding, windows and doors, cabinets, decking, and molding and millwork.

3. Who Are the Remodelers?

All remodeling firms may be categorized into one of following three segments:

1. full-service remodelers who engage in a broad scope of activity,
2. specialty remodelers who limit themselves to a narrow range of projects, and
3. insurance restoration firms who align themselves with insurers and offer specialized services.

Remodelers rarely buy directly from manufacturers not only because of their small purchase volume compared with home builder, but also because they are frequently unable to determine their needs until after the project begins, and as a result, require shorter lead times. Because availability is so critical, the ultimate decision-maker is the dealer or distributor who chooses whether to offer a given product.

That changes the dynamics for a Canadian manufacturer because the vast majority of dealers serving remodelers are generalists who also serve homebuilders. Builders are typically their largest clients, and as a result, their attitudes toward manufacturers are shaped by builders’ priorities.

4. What Are Their Needs?

Remodelers’ purchasing patterns are universal in the industry. Ready availability of products and timely delivery are critical because structural problems are frequently hidden and not uncovered until after the project begins. Selection is important to accommodate each client’s unique preferences. Reliable and responsive suppliers are critical because a remodeler’s clients are typically living in the home during construction.

According to a survey conducted in 2004 by ProSales magazine, the most important criterion in choosing a supplier is “products in stock” (71%) followed by “timely delivery” (68%). A key issue is the availability of a broad selection of products, reflected in the third- and fourth-most-important criteria, “special orders” (66%) and “product selection” (63%).

Identifying remodelers’ needs is relatively easy; meeting them can be a challenge because the potential base of dealers and distributors is often limited. The U.S. supply chain has been focused primarily on new construction for over a decade, and many pro dealers lack not only the infrastructure to serve remodelers effectively, but also an interest in serving them.

5. Future Trends in Reaching Remodelers

But this situation is gradually changing for two reasons. First, it creates pressure toward consolidation in the remodeling industry that will make remodelers more desirable customers to the supply chain. Large remodelers are better able to attract pro dealer suppliers, and receive services that make them more efficient and thus increase their advantage over smaller competitors who buy from warehouse retailers. Second, as the production housing market has matured, profitability in the supply chain is declining, causing pro dealers to pursue more profitable opportunities in the home improvement market.

6. General Approach for Canadian Manufacturers

Tapping the remodeling industry in a given focus market requires a combination of techniques. Although incomplete, reported market data helps suppliers identify promising potential opportunities. Once a potential target market is identified, each supplier must conduct on-site research to understand nuances in local construction practices and material preferences, and cultivate personal relationships.

The current environment in the U.S. home improvement marketplace has created favorable conditions for Canadian building product exporters; the challenge is to establish a presence before U.S. suppliers turn their attention away from the new construction market.

Canadian companies are likely to find a receptive audience in remodeling contractors who have been underserved by the U.S. channel and are therefore hungry for suppliers willing to focus on their unique needs. It will be difficult initially to attract support from pro dealers and distributors, but as profitability declines in the new construction market, the supply chain will begin to seek alternatives.

By establishing close relationships directly with the remodeling community, Canadian exporters can position themselves to deliver a more profitable customer base to U.S. dealers and distributors while maintaining the loyalty of the end users of their products.

7. Specific Recommendations

Penetrating the specialty remodeling market. Replacement contractors are easier to identify since they are typically also distributors with showrooms and warehouses, but they are also frequently closely aligned with the manufacturers they buy from.

The first step in reaching them is to identify those who sell and install multiple brands and determine whether your product line fits into their existing selection. If there is a potential fit, the dynamics of developing a relationship are almost identical to those in dealer sales: First, convince salespeople they can sell your lines, then convince managers, executives, and buyers that your company is a viable partner.

A second approach is to target smaller replacement contractors without their own distribution infrastructure (e.g., typically subcontractors, as well) and set them up as distributors on a franchise basis, as many U.S. manufacturers have done. Most specialty remodelers were once trade contractors themselves, who found a manufacturer willing to help them get their businesses set up.

Penetrating the full-service remodeling market. In the full-service market, where the manufacturer must influence both a remodeler and his/her supplier, it is a two-step process that should begin with the remodeler if possible.

The most efficient way to establish relationships with full-service remodelers is to join and participate in the local chapter activities of the National Association of the Remodeling Industry (NARI) by consulting: www.nari.org

Many U.S. markets do not have NARI chapters. If not, they are more likely to be relatively weak markets for full-service remodeling, but may well be strong replacement markets. Only about 10 per cent of remodelers nationwide belong to NARI but the group is typically made up of larger, well-established remodeling firms. If this approach is possible, it makes good sense to build relationships with remodelers before approaching dealers.

The objective is to get a general agreement that the remodeler is interested in a new product lines, and second, to get permission to talk to his or her supplier.

Penetrating the pro dealer market. A first approach is to convince the remodeler and then approach their dealer. If the dealer knows that there is a demand from their customer for the new product, all that remains for dealer is that his or her service standards are met. In some markets, major additions and alterations are completed by custom homebuilders. If a manufacturer’s product lines are appropriate for remodelers, they are also likely to be a good fit for custom homebuilders.

It is also possible to penetrate the dealer market first, and then focus on the remodeling market in partnership with the dealers. The advantage to this approach is a better coverage for the time invested. Only 10 per cent of remodelers belong to an industry association while roughly 50 per cent of pro dealers are association members. Particularly in markets where the remodeling industry is highly fragmented, a dealer-first approach can be more effective.

Dealer associations in the U.S. are structured as follows: Dealers belong to one of 23 state or federated (regional) associations, which in turn are members of the National Lumber & Building Material Dealers Association ( www.dealer.org ). With a very few exceptions, all state and federated associations actively seek financial support for their events from associate members who may be wholesale distributors, manufacturers, insurance providers, or other vendors.

Contact Canada Mortgage and Housing Corporation for Export Assistance. An active member of Team Canada, CMHC provides foreign market intelligence, strategic advice and practical support to Canadian exporters.

To get a copy of the research report entitled Renovation Products and Services in U. S. Select Markets or for more information on CMHC initiatives regarding the United States, please contact the CMHC regional office nearest you or use the email address below.
Email: international@cmhc.ca