One man gave KB Home its name, and another gave the company its stature as one of the Top 5 most powerful home builders in the country. A third man, Jeff Mezger, has gotten the call to give the company a future. But to do that, he must leverage the company's 50-year legacy of success and innovation as well as outgrow it.
The contrasts that set Mezger apart from his predecessors are stark. Founder Eli Broad and later chief executive Bruce Karatz ruled the company with iron fists and the fiery power of their expansive egos. Mezger has made his initial mark as an operations guru who can talk shop and make Wall Street feel good.
Fifteen years ago, he would never have been caught dead wearing a suit to work. As a division president with U.S. Homes in California's Antelope Valley, he was a hands-on field master who swore he'd never sell out. "One of my commitments to myself back then was that I would never work in a corporate office," Mezger says. "I was a people person, and I loved to be out in the field, kick dirt, and be creative. Corporate offices didn't symbolize that for me." But as fate would have it, it was precisely his operational savvy, ability to build a team, and blue-collar charisma that landed him in the C-level suite at KB Home's Beverly Hills head-quarters.
As the company's KBnxt CEO, Mezger has come toe-to-toe with a raft of heavy weight challenges. New- and existing-home inventories are at record highs, home and land prices are falling, mortgages are increasingly hard to come by, cancellations are burgeoning, and buyers are noncommittal. Without a doubt, these early years of Mezger's tenure will prove to be his defining moment. How well he will blend sweat and magic of the kind that Broad and Karatz brought to the company's genesis in the 1950s and its coming of age in the 1980s and 1990s will go far toward telling whether KB has another 50 years in it or not.
The legacy that Mezger must measure up to begins with Eli Broad, who got into home building to make beaucoup bucks. It was 1957 in Detroit, and Broad was making $74 a week as the youngest certified public accountant in Michigan. He had some builder clients who were making several times his salary, seemingly despite themselves.
Confident he could do better, Broad went to Donald Kaufman with his idea. Ten years Broad's senior, Kaufman was a close family friend; he had married Broad's wife's cousin the same week in December 1954 that Broad himself had been married. Moreover, Kaufman had been a carpenter and a small home builder, so he brought field expertise to match Broad's business acumen.
The two studied what home builders were doing in other markets. In Indiana and Ohio, they found that builders were building homes without basements and with carports–unheard of in the Detroit market. But for Broad and Kaufman, no basements and a carport equated to less expensive homes and a distinct competitive advantage.
Backed with this business plan and $25,000 of seed money borrowed from Broad's in-laws, Kaufman and Broad Building Co. opened for business.
Skeptics were plentiful. Michigan was married to its basements, and a price cut wasn't enough to get them to divorce the tradition, or so the arguments claimed. "The conventional thinking turned out to be wrong," Broad says 50 years after the fact. His idea not only would sell, but would also make Broad a millionaire before he turned 30.
The duo's first weekend in business, they sold 17 houses at an average price of $13,740.
The business continued, pedal to the metal, for the next three years. It grew from a single-office operation into a multi-subdivision builder as sales soared to $5.1 million by 1959. However, Detroit remained a volatile market, with starts plunging from 40,000 per year to 14,000, and only the addition of stable markets would even out the business. Broad soon expanded into Arizona, continuing K & B's focus on the first-time buyer. The builder's first tagline in the market was, "Live like a movie star. House and pool: $9,900." In 1961, Kaufman and Broad became the first home builder to go public, one of Broad's proudest moments in company history.
Broad pins the company's success in the early years on two strategic anchors. One was the ability to deliver a lower cost product that would entice renters into homeownership. Equally critical, Broad says, was his ability to come up with creative financing. At a time when most home builders tapped into merchant banks' traditional construction loan services–which required them to pay two points up front and a high interest rate–Broad was working with commercial banks to obtain unsecured loans. Standard & Poor's soon began rating Kaufman and Broad's creditworthiness, allowing the company to access commercial paper, which Broad says "saved us lots of money."
The company's super star success invigorated Broad but disinterested Kaufman, leading the senior partner to retire from the business in the early 1960s.
Broad assumed the helm as solo captain, steering the company into the Chicago and Southern California markets by 1963. Around the same time, Kaufman and Broad came up with a groundbreaking offering for the entry-level segment: the townhome. The attached product was a big success in markets from Detroit to Southern California. The company sold roughly 600 townhomes, ranging in price from $9,900 to $15,000, within two weeks in a single Huntington Beach, Calif., community. "It was some all-time record," Broad recalls.
As Broad sought new opportunities in the mid-1960s, he kept his eye on the French housing market. He was fascinated by the growth potential in and around Paris, which at the time was the economic hub of all of continental Europe. U.S. home builder Levitt & Sons had already expanded into the Parisian suburbs, and Broad saw good reason to follow suit in 1967.
Broad remembers the early years, growing French operations from Paris into various provinces, as "very exciting days." He flew 11 times in a single year to Paris, leaving at 11:00 p.m. from California one day and arriving at 5:00 p.m. the following day in France. "I was probably Air France's biggest customer," Broad jokes. But all the time spent traversing nine time zones was well worth it, as he takes credit for industrializing home building in France. "[In a country where] it would take two years to build a house, and then you'd get the house without cabinets or closets or light fixtures, we offered a total package," he says.
The success in France led to new divisions in West Germany and Belgium, but an early 1970s energy crisis forced management to retrench and limit European operations to Paris and its suburbs.
With a market cap of $1 billion in the early 1970s, Broad says he could've grown operations in a variety of ways. He toyed with the idea of acquiring several builders, including Levitt & Sons and The Lusk Co., but in the end, he felt the company could do better by expanding organically.
However, Broad did see a lot of value in diversifying the business. Wall Street was still wary of the publicly held home builder; the home building industry was still too cyclical for comfort, investors argued. To allay Wall Street fears, Broad began broadening the company's horizons. By the 1970s, he'd gotten into cable television franchising, manufactured housing, and insurance.
Learn more about markets featured in this article: Los Angeles, CA.