Small Builders Outperform Giant Firms
Small building firms, with a little old-fashioned seat-of the-pants guidance, can still outperform the big guys in the business, especially where it counts--selling the product.
That seems to be the case after looking at the recent history of the nation’s major home building companies.
It shows that smaller builders can continue to operate effectively opposite their larger, better-financed competitors by outperforming them in marketing, particularly in design and local market knowledge.
The large firms cannot match small builders in at least two important categories. They haven’t attained significant efficiencies in construction technology over their smaller competitors and they don’t set the pace in marketing, according to a survey by Robert Charles Lesser & Co., the Beverly Hills-based firm now in its 20th year of realty consulting.
Citing a recent Builder magazine marketing competition among the nation’s builders, Chris Leinberger, president of the Lesser organization, noted that none of the seven winners was from the nation’s top 20 major builders and only one winner was from the top 100.
That discrepancy, he said, indicates the size of the gap between the big and little firms. A contributing factor, he added, was that the top 100 appear eager to enter many new areas, rather than concentrating in several established housing markets, and unless the larger companies achieve better economies of scale in production and marketing, the status among the industry’s leaders will remain unchanged.
Leinberger had wondered if the housing industry would ever be dominated by a few giants, such as in the automotive, steel and finance fields.
The market share captured by the top 20 and top 100 builders has not changed significantly since 1969. Among the top 20, only 52%, on average, stayed in that elevated position after five years and only 35% remained after 10 years.
Of the top 20 builders in 1969--when specific construction accounting began--only four remain in the elite circle. They are Centex Corp., of Dallas, Fleetwood Enterprises of Riverside, Lincoln Property Co. of Dallas and Ryan Homes of Pittsburgh.
In addition to Fleetwood, ranked 12th in the 19th annual listing of building “giants” by Professional Builder magazine, the other ranking California firms in the top 20 are A. G. Spanos Construction, Stockton, 13th; American Diversified, Costa Mesa, 16th; Kaufman & Broad, Los Angeles, 17th; Robertson Homes, Stockton, 19th, and William Lyon Co., 20th.
The consolidation of some large firms in recent years resulted from the rapid growth of many builders, Leinberger believes, while at the same time, some larger, old firms are becoming smaller, resulting in constant changes among the leaders.
What else causes changes at the top? At least four reasons:
--The comparative low cost of entry into the business, printing business cards and having a little nerve.
--Conversely, the low cost of “leaving the business,” at worst “you give the keys to the bank.”
--Local market orientation, working to the advantage of the local, knowledgeable and usually smaller builder.
--Success. “Small to medium-size builders can make so much money that they often don’t have much incentive to get bigger,” he added.
To survive the various cycles of the industry and economic uncertainties, the large builders have had to delve into innovative financing, centralized their lines of credit for working capital and have pioneered the use of mortgage-backed bonds and interest rate hedging. Some have developed their own banking sources by taking over savings and loan institutions or by starting up real estate investment trusts.
Large firms are able to attract and retain talented personnel by offering them top pay and security. But they find it tough to surpass the little firms in the two aforementioned areas, significant efficiencies in construction technology and marketing.
Fittingly, Leinberger quotes from the Blue Book of major home builders, which says “There are only two kinds of builders--big ones and small ones.”
