Before we concede the inevitable assertion of overwhelming power, heralding a new age in home building, and an inexorable and irresistible shift in favor of a few, mostly publicly-held Big Builders, we should ask this question. Can such an era occur without the home building industry--with its notoriously fragmented supply chain--acquiring, finally, the consolidated share-of-market profile observed in almost every other industry.
Yes, consolidation is occurring. In 2013, the three largest home building enterprises by units sold (DR Horton, Pulte, and Lennar) had a 14.4%, up from 13.3% in 2012 and 9.0% in 2003. More significantly, the Builder 100 had a 47.8% share of market, up from 44.2% in 2012, and 34.4% in 2003.
But, even though consolidation has occurred, the industry still doesn’t have the market share profile of most verticals, where the top three companies would likely have over 50% market share.
We should also ask what type of business operating model would be required, in order for a home building enterprise to permeate every SMSA, not just the 20 largest housing markets--or five of those markets, or 10 of those markets; otherwise, industry consolidation is just circles on a map, with a lot of excluded areas.
Consolidation of that magnitude and extent has a long way to go. If it ever occurs, we don’t know how many Big Builders that will represent; we don’t know how many de minimis Niche Builders will remain.
What we know is this: Given the parameters and characteristics of the home building industry, consolidation of this magnitude and extent will occur only if it is allowed to happen; it will occur only if some builders capitulate to the outcome. Regardless, the dynamics and imperative of dealing with the core issue doesn’t change.
From as far back as 2000, I have analogized this question of expansion and consolidation as a prospect resembling Life on the Serengeti. And, the analogy begs the question: What happens to the lions when there are no more zebras, impalas, or wildebeest? What happens when there aren’t any more easy targets?
Would big still be good enough? How big? Would well-financed be sufficient? How sufficient? Balance Sheets laden with cash? How much? Access to equity markets? Successful adoption of so-called “industry best practices”? The easy existence found in a “more-for-more” proposition, in which an increase in the number of units built and sold simply requires commensurately more work-in-process and more production capacity? Progress achieved only on the margin side of economic return?
I don’t think so.
That list of conditions might be necessary, but it is not sufficient.
True, sustainable competitive separation is the result of doing what your competition will not do, what they cannot do. Things that are too tough, that require too much rigor, too much discipline, too much resolve. Margin is important, but it is not the difficult part; it is the more natural part, where builders’ inclination lies.
No, that degree of separation requires much more; it requires the difficult part, the part to which builders are less-inclined. It requires continually and relentlessly finding ways to become more productive, finding ways to do more with less. It requires being as proficient on the velocity side of Return on Assets as the margin side of ROA.
In and of itself, size has not one single attribute that is to be coveted, or any advantage that cannot be overcome. From a competitive assurance standpoint, size assures nothing.
Velocity is the antidote to size.