By John Caulfield. Jim Walter Homes, the venerable builder of affordable homes in the southeastern United States, is laying the final ground work to recapture a broader slice of the affordable home market. Banking its future growth on a revamped business model, a methodical overhaul of its operating organization, and new brand marketing strategy, company officials are convinced it can expand its reach to potential home buyers by more than tenfold, setting the stage for sustainable growth and a much improved bottom line.

Having "bottomed out" four years ago in its ability to increase profits as the number of homes it built leveled off, Jim Walter embarked on a comprehensive transformation to wedge itself into a higher home-price bracket -- and, therefore, a larger market of buyers -- without dislodging itself from the position in the affordable housing sector Jim Walter has solidified throughout the company's 57-year history.

"We're looking to redefine affordable housing, but we're trying to disrupt our core business as little as possible," said Michael Roberts, president of Tampa, Fla.-based Jim Walter Homes. He pointed to data which indicate that each year there are 125,000 potential buyers of homes priced less than $150,000 in the markets where Jim Walter builds, compared to 11,000 potential buyers of homes priced in the $50,000 to $60,000 range, the sector where this home builder has resided historically.

Jim Walter's game plan, which kicks into a higher gear this summer, has three major components.

  • The company is gravitating for the first time into subdivision development and spec home building. It also has shifted the management of all construction from its sales department into its "supply chain" department, which handles building materials purchasing.
  • Six years after acquiring three home building companies -- Neatherlin Homes, Dream Homes, and Crestline Homes -- Jim Walter is coordinating the management of those brands with its own through a reorganization of its field sales network. The network is composed of seven regional sales offices and 108 model home display parks. That reorganization began early this year. By July, the network should be connected by an enterprise, research, and planning (ERP) system which will streamline the display parks' selling and administrative efforts. That system, say company officials, should facilitate the company's plans for later this year to expand Neatherlin Homes and Dream Homes into markets beyond Jim Walter's current 17-state bailiwick.
  • A multimillion marketing and public relations campaign the builder launched in March is attempting to change the minds of home buyers who still view Jim Walter primarily as a provider of low-end prefab and modular dwellings. Jim Walter, Neatherlin Homes, and Dream Homes now have brand managers who are responsible for increasing customer awareness and creating new markets for each brand.

By early April, a sleeker Jim Walter Homes had begun to emerge, and its reshaping stirred up "a lot of excitement" in the field, said Lane Cabes, a 17-year veteran whom the company promoted to regional sales manager overseeing 16 branch offices in Louisiana, Mississippi, and eastern Texas. Cabes says he is particularly enthused about the ERP rollout, which he anticipated would "eliminate a lot of duplication and should enhance the sales process."

Waterfall Effect

Walter Industries, Jim Walter Homes' parent, has a lot riding on the success of its home building and financing divisions, which generated more than a quarter of the parent company's $1.9 billion in 2002 revenue and $72 million in operating income. In the first quarter of 2003, which ended March 31, revenue for the home building segment inched up by 1.6 percent to $64.5 million, but the number of homes built declined to 979 from 1,020, and operating income declined by 21.9 percent to 2.4 million. Revenue for the financial segment declined by 2.1 percent to $59.2 million, while operating income jumped 27.5 percent to $15.2 million. Walter Industries is providing working capital for Walter Mortgage Company, its two-year-old subsidiary that provides land and home financing to buyers. That investment will start paying dividends only if the changes at Jim Walter Homes create what Joseph Troy, the company's senior vice president of financial services, referred to as a "waterfall effect" that stimulates more home sales from a diverse mix of buyers. "To grow the business, we need to grow the portfolio," Troy said.

Photo: Matthew Pace

"... we're trying to disrupt our core business as little as possible." -- Mike Roberts, president, Jim Walter Homes

The home builder's average home price has been creeping upward, to $65,900 in the first quarter of 2003 from $55,800 in 1999. While first-time home buyers will be Jim Walter's bread and butter for the foreseeable future, the company has trained its eye on -- and has expanded its financing options to accommodate -- buyers who can afford homes in the $90,000 to $120,000 range. The Commerce Department estimates show that 31 percent of the 449,000 new homes sold in the South in 2002 went for less than $150,000, whereas only 11 percent sold for less than $100,000. Currently, between 15 percent and 20 percent of the 55 home models the company offers under its three brands are priced at more than $100,000, and that portion will get larger. Ducking under the $150,000 price threshold should keep Jim Walter out of firing range from competitors stalking more affluent home buyer prey. Consequently, the home builder is confident that once its strategy is running at full speed, it should be able to double the number of homes it builds annually, from 4,267 in 2002 to about 8,500 units in three to five years. Ultimately, Jim Walter wants subdivision and spec building to account for half of its construction activity.

"Their plan seems reasonable," said Harriet Baldwin, an analyst with DeutscheBank, in New York. "They aren't trying to become a major home builder, but they are looking at markets on the edges of where home building has been taking place."

Averting a Steady Slide

The latest evolution of Jim Walter Homes began in late 1999, when Walter Industries' CEO, Don DeFosset, urged Roberts and his team to explore new growth avenues.

An impediment to growth had always been the home builder's business philosophy, which limited its clientele to land owners. "If we had 10 people walk into our display parks, nine didn't have free and clear ownership of their property," recalled Roberts. Another limiting element, said Troy, was the structure of Mid-State Homes, the company's finance subsidiary, which lends money for home purchases on a kind of installment plan.

Jim Walter remained committed to its on-your-lot business but didn't want to be tethered to it exclusively. So in May 2001, it contacted two Texans -- Gene O'Bannon and Robert Harry, whose extensive mortgage banking experience included the founding of TransAmerica Corp.'s residential mortgage subsidiary -- to help Walter Industries establish a new mortgage financing division through which buyers could purchase the land and the home. The offspring, Walter Mortgage, started writing business in October 2001, and through Dec. 31, 2002, its portfolio had grown to 192 homes and $15.6 million, with another $25 million in loans in the pipeline. This spring, the Department of Housing and Urban Development granted Walter Mortgage licenses to write business in every market in which Jim Walter Homes builds. Walter Mortgage has also started buying seasoned mortgages from other lenders.

Armed with more flexible financing, Jim Walter executives could envision life beyond the "on-your-lot" universe. That led to the decision to venture into land development for subdivision and spec building. Jim Walter has access to 47,000 acres of land owned by the corporation, of which Roberts said that about 7,000 acres may be usable for subdivision development. In May 2002, the company broke ground on some of that real estate for its first subdivision, a 22-home development in Brookwood, Ala. Seven months later, it started a 49-home subdivision in Houma, La.

The company is seeking development opportunities beyond the corporation's land holdings. "We're looking for smaller cul-de-sacs in secondary markets," said Roberts. "For example, all the major home builders operate in Tampa, but 40 miles out not so much. There are plenty of five- to 10-acre tracts in markets" on the outskirts of metro areas, he said.

The Brookwood homes sell in the mid $90,000s, and the Houma homes are expected to go for between $90,000 and $120,000. Those prices are more rarefied than Jim Walter is used to, so it sought outside advice about which models to showcase. In Brookwood, potential buyers were polled online about which features they wanted in a home. "That definitely affected the design of those houses," said Rob Aguis, vice president of Coast to Coast, Jim Walter Homes' in-house ad agency. For Houma, the company hired a design consultant.

Jim Walter Homes is also building spec homes in the southeast and eastern United States. Roberts said the company has purchased about 100 lots, mostly in Texas, and plans to build around 200 spec homes annually. About half of the company's display parks promote speculative homes, said Kyle Parks, a company spokesman.

Working as One

The operations and image of those display parks are getting a makeover to inject more uniformity and consistency into their sales efforts and to create what Troy called "a one-stop-shop business model."

Until early 2002, the company divided the management of its parks into seven divisions: four for Jim Walter Homes that fell along geographic lines; one for Neatherlin Homes; one for Dream Homes; and one for Crestline. The archaic information technology each division used was "disparate and [we] couldn't talk to each other," said Frank Hult, Jim Walter Homes' executive vice president. He noted that salespeople at some branches were filling out contracts by hand. That paperwork often had to be filled out several times as the process moved from the order to the construction to the delivery of the home to the customer.

To rectify these deficiencies, Jim Walter reorganized its selling network into seven regional sales offices, each overseeing about 15 branches and, more importantly, multiple brands. (Crestline sells modular homes through a separate dealer network and functions under its own operational structure.)

In April, the company began rolling out an ERP system to link each branch and regional office electronically. Other home builders have complained that ERP systems haven't lived up to their advanced billing when applied to businesses, which may explain why Jim Walter evaluated systems from 14 different suppliers before it chose Germany-based SAP, a provider of business software solutions. Hult said SAP's suite of products was attractive because "it allows us to take information and populate one set of documents from the sales quote to the sales order to lot preparation to the tendering of the house to the customer."

This system is expected to reduce the amount of post-sales administrative paperwork these transactions generate. Hult forecasted that Jim Walter's average cycle time for each transaction could be cut by 25 percent, to 60 days, once the ERP system is fully implemented. He added that the ERP system may eventually track the effectiveness of the company's telemarketing, although that has yet to be funded. This system also doesn't incorporate mortgage processing, which Mid-State and Walter Mortgage manage separately using an FICS system, according to Parks.

A New Message

The way the parks marketed themselves had been widely autonomous and their messages weren't clearly focused. "Here's a company with 91 [Jim Walter Homes] sales centers in reasonable traffic areas, but passersby didn't realize what its products were about," said Scott Tegarden, co-owner of Daugherty, Tegarden, and Hanley, the Indianapolis, Ind.-based agency that's been instrumental in developing Jim Walter Homes' new marketing and advertising campaign.

New signage now identifies these parks as "New Home Galleries." Applying Six Sigma productivity disciplines, the company has trimmed the number of models these parks display to less than 30 (Neatherlin Homes offers 15 models, Dream Homes 10), and is rearranging some parks to resemble subdivisions. Roberts noted that more models are appointed with furniture and other amenities, a bold step for a company that started out making shells of homes.

This spring, Jim Walter Homes launched a television ad campaign that, for the first time, aired in all 68 markets in which the company builds. One 30-second commercial, shot in San Antonio with real framing crews, played up the value of Jim Walter Homes' stick-built -- not prefabricated, as some consumers still perceive -- houses and the financing available to purchase them. The other TV ad reinforced Jim Walter's on-your-lot business.

"We have a message to tell, that we've changed a lot and that consumers' perceptions didn't match that," said Roger Crabb, the home builder's vice president of marketing. The TV ads, which ran through May, were designed to, in Aguis' words, "plant the seed" that would be watered by radio, print, and direct mail campaigns running through the remainder of this year. Interestingly, this marketing campaign does not mention Neatherlin Homes or Dream Homes, which Crabb explained have somewhat different customer bases and media mixes.

"We're working towards brand management segmentation," he explained. "Each [home building group] has its own marketing plan, and we don't want to change that." The message, however, will change as Jim Walter refines its product assortment. Crabb noted that the company's on-your-lot business will break through the 2,000-square-foot barrier with a 2,100-square-foot model sometime in 2004. Neatherlin Homes and Dream Homes offer models as large as 2,800 square feet.

The managers assigned to each brand are responsible for new product development, pricing, and "driving growth into new markets," said Crabb. Later this year, the Neatherlin Homes and Dream Homes brands will be extended into states east of, but contiguous to, Jim Walter's current market coverage.

Which markets and when, though, have not been disclosed, as Jim Walter officials are keeping their plans for the future pretty close to the vest. However, Tegarden indicated that as advertising qualifies the customer who walks into a display park, and as that customer becomes better informed about what Jim Walter Homes sells, the next step will likely be "on the sales level, to improve conversion rates."

With all that is now in place, it would appear Jim Walters Homes is poised to convert more of its customer traffic into new-home and mortgage buyers.