CHOOSING WHICH NEW markets to move into is about more than just going where the jobs are—and are growing. While it is all too easy to overanalyze any business decision, prudent planning is not a four-letter word when it comes to plotting geographic expansion strategies.
Beware: Bigger isn't always better. Markets where no company has succeeded in capturing a large market share do not necessarily offer the best opportunities to grow revenues.
Big builders making decisions about where to expand should eschew such simplistic guides in favor of hard facts. They should consider a range of factors that may make the less obvious choice the better choice.
By moving into new markets, big builders can diversify risk, test the waters in unfamiliar markets, or bring a strategic advantage over local competition. All these factors ought to influence your expansion decisions.
BIG FISH The largest builders have not ventured much beyond the top 50 home building markets. Yet in these markets, they often build only 200 to 400 homes—often fewer. It is also possible to achieve these same production levels in much smaller markets.
Furthermore, market concentration varies by place. As a result, some smaller metros have builders that build more homes than builders of comparable rank in larger metros. Take Albuquerque. Even though it was 49th on the list of places for building permits in 2004 (based on U.S. Census Bureau data from the same year), its 10th largest builder built more than 500 units. At that same time, the 10th largest builder in Minneapolis—the 11th largest market—built only about 400.
But why stop at the top 50? There are 361 metropolitan areas. The 50th largest market by new census definitions had 8,300 permits in 2004. But the 75th largest market boasted an impressive 5,300 permits, and the 100th posted a respectable 3,800. Depending on the competitive landscape in these places, getting to scale is a distinct possibility.
In fact, smaller metropolitan areas may be the places to gain a strong foothold before large players get them on their radar. It is in these places where big builders stand to bring the same advantages that have worked so well for them elsewhere—access to long-term corporate debt, national purchasing power, and expertise in managing land positions—to places where there is a little competition from other big fish.
MARGIN MANAGEMENT Size really isn't everything. You cannot make up on volume what you don't earn in net operating margins. The goal is to deploy capital so it achieves its highest and best return. That means searching for places where margins are already good, or where there's reason to believe a new entrant can beat existing margins.
It takes a lot more effort to gather information on margins than it does to tote up the number of permits in a market and who pulled them. It takes competitive information and intimate knowledge to draw margin conclusions. Marketing consultants and industry analysts can help, but there is no substitute for direct on-the-ground knowledge.