Precast Inc. Magazine

Managing in an Economic Downturn

Precasters should have specific strategies for managing in weak times as well as strong.

By William Atkinson

As last year ended, most construction economists were convinced that when the numbers for 2007 are finally tallied, it will mark the first down year in the industry since 1991. Depending on who’s doing the estimating, the overall construction industry in the United States was projected to decline anywhere from 3 percent to 8 percent.

The persistent slump in residential housing has been well-documented as the cause of the slide. What has been less publicized is the fact that the commercial and public sectors of the construction market did quite well in 2007, growing by a whopping 18 percent. Even that dynamic growth was not enough to offset the huge housing market’s double-digit decline. As the curtain draws back on 2008, most precasters are likely wondering what the mixed market means for the future, and what are the best strategies going forward.

Ty E. Gable, NPCA president, pointed out that the housing troubles are deeper and more enduring than most experts were predicting even six months ago. “As we’re looking at the numbers for 2008, it now appears that housing will not pull out of its slump at mid-year like we once thought,” Gable said. “The mortgage crisis in housing looks like it could drag down the market all the way through 2008.”

The Canadian housing market is also experiencing a slowdown, though not nearly as severe as in the United States. Canada’s nonresidential sectors are picking up the slack, especially in the major cities. The Canadian government’s strong financial status means that infrastructure projects and institutional building will continue to grow in 2008, along with a new wave of electric power plant construction set to begin across the country, according to Reed Construction Data. Sewer and water work will fall off slightly with the housing slowdown, but overall there is a lot of potential in the 2008 construction market for Canadian precasters in most nonresidential sectors.

The good news for U.S. precasters is that the nonresidential sectors will continue to grow in the states as well during 2008, although likely at a slower rate. The collapse of the subprime mortgage market and the resulting fallout among major financial institutions, along with fears of a possible recession, may cause credit to tighten up and keep some commercial projects on the shelf for 2008, Gable said. “This will cause commercial building to slow down, but we should still see overall growth in that sector,” he added. Public works projects could also grow by a few percent, especially in municipal sewer and water infrastructure, bridges and highway projects.

Ken Simonson, chief economist for Associated General Contractors of America, also credits nonresidential construction with holding up the industry in the face of lagging housing markets. Reporting on the third quarter 2007 numbers, Simonson pointed out that the 12 percent increase in nonresidential construction was the eighth straight quarter that the category outpaced gross domestic product growth.

“You have to go back to the mid-1950s to find another period when private nonresidential construction was so persistently robust,” Simonson said. “Over the next several months, I expect investment to slow in income-producing properties, such as office, hotel and retail structures,” he added. “Accelerating investment in energy and power projects, plus continued strength in hospital and educational construction, should keep the nonresidential totals up.”

Associated Builders and Contractors, Arlington, Va., sees similar trends. “Certainly, the housing market continues to be very weak,” points out Jeff Taylor, chief economist. “One reason is that contractors overbuild, and there is just too much inventory out there.” A second reason is the increasing number of foreclosures, and a third, according to Taylor, relates to the subprime issue. “I think the housing market will remain weak until 2009, and that is assuming that the economy recovers in 2008, which means that we don’t go into recession, and that inflation stays under control,” he says.

The nonresidential sector has grown significantly over the last couple of years. “Most segments have seen double-digit growth,” says Taylor. “This will slow down, because you can only build so many things – there is only so much demand. Having said that, though, we don’t see a pullback similar to the residential side. Rather, we see a modest pullback.”

Because of concerns that the economy is entering recession, lending standards are tightening a bit. This is causing people to question whether they should go ahead with projects or not. “I think this uncertainty will remain for another quarter or two,” he continues. As such, most good projects will get done, but they may be delayed a bit.

Certain segments will remain strong, through, according to Taylor. These include education, health care and lodging. Slowdowns will probably be in office, public safety, religious and amusement/recreation construction, because they have grown so much in the past couple of years. Retail is somewhat of a wild card, he admits. “They may want to wait with their projects until they see what happens on the residential side and see where people end up moving.”

The outlook for infrastructure (power, water, highways, etc.) is fairly positive, he believes. Most states are in pretty good shape, but there isn’t much information yet on what funding will be like for projects in 2009.

Overall, he concludes, the nature of the construction business itself benefits participants. “Most of the time, when one side is weak, the other tends to be strong, so they can offset each other,” he explains. “It would be rare for both the residential side and the commercial side to be running in the same cycle.”

Precaster perspective

One might think that, with so many unfavorable reports of the residential market, precasters who sell into that market would be hurting. That’s not necessarily the case, though. Specialty Precast Co. Inc., Prospect, Pa., for example, specializes in serving customers who are residential builders. “We haven’t seen a slowdown in the residential market around here the way that other parts of the country have,” says Dave Altmire, treasurer. “As such, we haven’t made any adjustments. We have a steady group of contractors who continue to keep us quite busy.”

Whether a particular segment is strong or weak, it is important for precasters to focus on strategic business plans and marketing programs, and to focus their strategies on current and anticipated markets.

Strategic business plans

One company that pays a great deal of attention to strategic business plans is Speed FabCrete Corp. in Kennedale, Texas. Speed FabCrete is an integrated precast manufacturer and design/build company in that it integrates the products it manufactures on the precast side into the design of its projects. Each year, management schedules an off-site strategic business planning meeting to plan for the following fiscal year, which runs September through August. “During our planning sessions, our expectations for the strength or weakness of the market for the next year have a bearing on the capital improvements we plan to make and the equipment we plan to buy,” says David Bloxom, president. “The more profitable and productive a year looks, the more likely we are to make major purchases.” Management in the company is very positive for this next year and, two months into its first quarter, it is already ahead of its quarterly plan. “Despite the bubble-busting in the housing market, we see no downturn on the commercial/industrial side,” explains Bloxom. “In addition, home prices were not appreciating in this part of the country as fast as the two coasts. As such, I don’t think it will take as long for our housing sector to recover.”

In fact, management is so positive about this next year that it has made plans to purchase a half-million dollar batch plant to replace its old one and also to purchase a large tractor and trailer to haul aggregate to its batching operations.

Part of the company’s strategy is to maintain growth by keeping itself fresh in the marketplace. It does this by constantly looking for new products and services that it can begin to offer. “We attend industry trade shows on a regular basis and read the industry magazines to find additional products that could complement our precast plant,” says Bloxom. “Recently, for example, we have taken on two precast products that we didn’t used to make. One is precast retaining walls for bridge cuts and stack walls on highways. We also manufacture precast short-span bridge sections for new and replacement bridges.”

Marketing plans

One company that has been placing marketing more and more in the forefront in recent years is Hy-Grade Precast Concrete, St. Catherines, Ontario. “A lot of precasters tend to focus on production and other operations, with not much emphasis on marketing,” observes Gina Lathan, North American sales manager. “One reason is that most of them have a niche market, so most people already know what they do.” However, this can be a narrow attitude to take. That is, most of the precasters she has worked for over the years have come out with new product lines, become diversified and/or wanted to expand their markets. “As such, it was important for them to focus on marketing too,” she says.

Marketing at Hy-Grade is very formal these days. Management looks at its sales each year, determines what it wants its growth to be, then determines the appropriate marketing budget. “We have a plan for every month of the year in terms of shows, presentations, etc.,” adds Lathan.

Some of the most effective marketing strategies for Hy-Grade, says Lathan, are:

• The creation of the business development position. This person reports to Lathan and focuses on marketing and new business development.
• A constantly updated Web site. “We revamp it every couple of years to keep it fresh,” she says.
• E-mail. “We don’t do a lot of bulk mailings,” she notes. “These turned out to be very costly and time-consuming, and never seemed to get much of a return. Instead, have e-mail campaigns. We also have a monthly newsletter, which we send out to our e-mail database.”
• Lunchbox presentations. These are very effective, according to Lathan. The business development rep finds design firms that are working on projects that fit Hy-Grade’s product line. The company then sets up a lunch presentation, then goes in and provides the lunch and gives a presentation.
• Trade shows and association conferences. “We do trade shows especially when we introduce a new product line,” she says. “The association conferences give us the opportunity for more one-on-one exposure.”

As a result of its marketing strategies, Hy-Grade has been able to almost double its sales in the past three years.

While business is booming for the company, Lathan admits that, like most precasters, there are seasonal slumps, which, for Hy-Grade, tend to last about three months. To make the most of this phenomenon, the company operates almost as though it were two separate companies. “I have to look at two sets of numbers each month,” she explains. “The production numbers show what we need to make and what is shipping, and this usually shows a three-month slump. However, the numbers on what my sales team is closing and selling stay pretty consistent.”

To adjust, the company has standardized some of its product lines, which lets it even out its production cycle, making these products during the slower times of the year. “We do have to operate on a fine line here, though, because we don’t want to build up more inventory than we will need,” she says. “We work on fine-tuning the numbers each year.”

Also during the slow months, the company spends a lot of time in marketing efforts. “For example, we do a lot of our presentations (during slow periods), because this is when customers need the information so they can gear up for the next year, and they need pricing, etc.,” says Lathan. “We also do a lot of follow-up.”

To prepare for shifts in the economy as a whole, Hy-Grade is equally farsighted. It focuses on diversifying. “We don’t kid ourselves, just because we are doing so great now,” she emphasizes. “We look five years ahead.” For example, its precast stair systems are selling very well. Toronto and other nearby cities have 30-story buildings going up every day. “This has been very steady for the eight years I’ve been here,” she says. “However, we realize this can’t last forever. We are always looking for the next product line that we can expand on or could meet a need, where we could be the first in the area and lead the way.”

Hy-Grade always has one or two potential products it considers as diversification tools to add to its product line. For example, it is reintroducing an existing product – an economical concrete storage modular building – by gearing it to a whole new market. “The market we have sold it to for the past five years, which was schools, has started to dry up,” says Lathan. “They had grants, but the grants aren’t available anymore.” Now the company has found a new market that has new regulations for storage. In fact, the opportunity came as a result of one phone call that the company capitalized on. “We didn’t let the idea die,” she says. “We researched it, and realize it now has huge potential to open up new business.”

Perspective

Currently, as noted, the commercial/industrial and public sectors seem to still be doing well, while it looks like the residential sector will not rebound until 2009.

So what is the best approach to managing business when faced with a weakened sector, such as housing? One key is to maintain perspective and not overreact or automatically assume defeat.

A popular story that made the rounds in business motivational literature of the 1940s to 1960s illustrates this point. A farmer with a roadside stand was making a good living, selling corn, tomatoes, melons and numerous other vegetables and fruits to passers-by. One day, though, he heard on the radio that the economy was in trouble. To protect himself, he decided that he didn’t want too many fruits and vegetables on his stand each day. After all, they might rot. He cut back. He also cut back on the number of hours he was open. Soon, the number of customers stopping by each day began to diminish. “I guess the report was right,” he told himself. He cut back even further on his produce and his hours. In turn, fewer and fewer customers began stopping. Soon, he had nothing available but a few ears of corn and a few tomatoes and was only open a couple of hours a day. Eventually, he had no customers. “I’m glad I listened to that report when I did,” he told himself, as he put up the “Out of Business” sign on his now-empty fruit stand.

When faced with a slowing of business, there are some specific strategies precasters should implement, according to William Ray, president of Precast Consulting Services, Snellville, Ga. (www.precastconsulting.com).

• Renew your relationship with all your established customers. There is no substitute for personal contact. Make calls. Toot your own horn about your quality and on-time delivery. “Be sure you are strongly connected with your core customers,” he emphasizes. “If you’re not, now is the time to reconnect. Make some goodwill calls. Find out what they have coming up. This may not be a lot, so you need to know about everything.” Make a call to each customer. Before you make that call, though, create a specific plan in advance so that, when you go in, you have thought through all the business you have done with them and can point out to them the advantages of continuing to do business with you. Also remember that competitors will be contacting your customers to try to generate new business, so you need to be sure your relationships are strong so that business doesn’t get stolen away.
• Look at your costs proactively. That starts with personnel. “You may be reluctant to let some people go, but this is the time it is important to go back and look at actual performance, and make some changes based on performance over the past several years,” suggests Ray.
• Do the things in operations that you know need to be done. Many producers have a lot of wasted motion and repetitive handling that can be eliminated through an analysis of operations across departments. “During a weak market, precasters will be under pressure to cut costs,” says Ray. “Go back through the plant and look for processes that have been in place for years and have become inefficient.”
• Finally, manage working capital carefully. Be aggressive about collections (firm but friendly). Manage finished goods inventory. “Don’t build anything to stock; build only for orders,” he concludes.