Keith Holdbrooks, Kevin Clayton, Mike Rutherford, and Tom Walsh (L to R) are guiding Clayton Homes to new heights.
Colin Lenton Photography Keith Holdbrooks, Kevin Clayton, Mike Rutherford, and Tom Walsh (L to R) are guiding Clayton Homes to new heights.

Two essential properties, fit and fitness, form a double-helix genetic code that powers the half-trillion-dollar Berkshire Hathaway empire. Cultural fit—whose basis is human trust and values alignment—and business and economic fitness can scale, self-sustain durably over time, and produce value regeneratively. Hard assets, like land, on the other hand, produce value that may be cyclically fickle, fragile, and finite.

Now, Warren Buffett’s credo for iconic business success weaves together a genetic sequence straight out of a Horatio Alger rags-to-riches story. He’s constitutionally allergic to whitewashing business risk or threats. No one’s likely ever to accuse Buffett of looking at any detail, factor, or force—pro or con—through rose-colored lenses.

Yet according to Kevin Clayton, whom Berkshire’s chief sage and strategist has grown to trust implicitly over the years since Berkshire Hathaway acquired Clayton in 2003, even Buffett is capable of letting his imagination take a flight of fancy with the best of us.

“It would be Mr. Buffett’s dream scenario for a family to pull up to a driveway in a car insured by Geico, to a home sold by a HomeServices of America real estate agent, financed through our mortgage units, built by Clayton with materials from Johns Manville and MiTek and Lubrizol and others, a Benjamin Moore and Acme Brick exterior, and Shaw carpeting indoors,” says Clayton, president and CEO of Clayton Homes. “That’s not a strategic master plan or any kind of imperative for us as Berkshire subsidiaries. Still, Mr. Buffett’s real passion is for America-produced products and services that families want and need over long periods of time.”

"Mr. Buffett is thinking 100 years out. He could not care less if a downturn happens in the next quarter or in the next five years.”—Kevin Clayton, Clayton Homes president and CEO

Clayton Homes has made a name for itself in a business at best, discounted, and more often dismissed, dissed, and derided for much of its six-decade history, as a builder and purveyor of double-wides and HUD code mobile homes on wheels and platforms. For much of Clayton’s six-decade history, its executive management has been intent on elevating both the manufactured housing business and its customers, raising safety, quality, durability, and energy performance of the homes, and the financial stature of people who buy them.

Now Clayton’s story has a new chapter. The narrative over the past few years could easily serve as a classic case study from the Buffett playbook on principles of company acquisition. In such a playbook, people, a future-proof operations model and trust figure more importantly in deals than physical plants, product outputs, or other hard assets, including home sites. Clayton’s everyday business philosophy, to “open doors to a better life,” presupposes a mind-meld of both vision and mission, where profit and opportunity cross paths with risk and challenge for other competitors in the field.

This explains Clayton’s full-on assault to crack the code of more widely available new sub-$150,000 homes. Most market-rate single-family builders—save D.R. Horton, LGI, and perhaps, NVR—simply find it too profitable to serve a shrinking universe of more well-heeled customers, and cannot make new houses pencil profitably for so little as $125,000 or $130,000.

For Kevin Clayton, getting to see up close what’s worked so well for Buffett has served as both a gently applied kick in the butt to go do more, and a constant well of trusting support in what he’s already doing.

“Mr. Buffett is thinking 100 years out,” Clayton says of his mentor. “He could not care less if a downturn happens in the next quarter or the next five years. He’s challenging us to come up with a plan for the longer haul.”

Dream big. Mind the everyday minutia. Expect tough challenges around the next corner. Serve families and their pursuit of America’s promises of upward mobility to those who work for it. These flashing arrows of each Berkshire operating unit point to principles at the foundation of the Clayton Homes leadership’s drive from the outer fringe segment of manufactured home building into the heart and soul icon of the American dream itself, the single-family starter home.

Clayton’s Prefabulous marketing campaign launched in early 2019 to show off the latest innovations in off-site construction.
Courtesy Clayton Homes Clayton’s Prefabulous marketing campaign launched in early 2019 to show off the latest innovations in off-site construction.

A big-picture roadmap, careful attention to people and details, business model resilience, and a relentless laser focus on the starter home buyer’s journey and experience each serve as ladder rungs of a strategic transformation whose ramifications and impacts could alter home building development, investment, and construction itself.

A national infrastructure of 40-or-so manufacturing plants—whose output sells through 350 retail outlets—a distribution network of 1,200 independent retailers, and an owned mortgage finance company, as well as home insurance, includes a vertically integrated building supply chain that produces and distributes 42% of the rough and finished components and products that go into the company’s homes. Clayton is in about every segment of housing that one can imagine: modular homes, tiny homes, manufactured housing, college dormitories, military barracks, and apartments. And now, it also features a robust, top 20–ranked single-family, site-built portfolio with operations flanking its heartland-focused manufactured home businesses in what land sellers might classify as B, C, and D lot markets and submarkets.

Clayton’s got goals going right now to overcome two big challenges, and its meteoric and potentially game-changing success at both is why the company is what may be a counterintuitive choice for our 2019 Builder of the Year.

One is to evolve from the No. 1 builder of manufactured homes to a new class of single-family home builder, purpose-focused to crash affordability’s steepening barriers among working American households. The second is to do it by marrying the best and most innovative practices of both the on-site stick-built world of detached single-family builders with the off-site, vertically integrated, and increasingly automated factory-assembly world of manufactured housing. Clayton may very well have created a new species of hybrid home building that can actually drive cost savings into asking price relief for buyers.

How? We’ll explore that, but first a bit of the Clayton backstory, and how it morphed from nearly six decades of HUD code housing into the Builder 100’s fastest-growing private builder over the past three years.

Colin Lenton Photography

Clayton, The Man and The Brand
Kevin Clayton started working as a young kid for his father, who grew up picking cotton bolls on patches of ground his father before him worked in East and West Tennessee. Humility runs in the one-time sharecropper Clayton family veins, and so, too, does a work ethic with an American dream plotline. “Our whole family worked in the business, and I gravitated to it,” says Clayton, 55.

As a young man he did take some time away from the business, working in the restaurant industry and eventually getting his MBA from the University of Tennessee. There, he studied management techniques that would allow him to evolve from the entrepreneurial signature management style of his father.

Clayton put some of that schooling into practice immediately after graduate studies, when his father asked him to take charge of Clayton’s southeastern region, and then allowed him—in a sequence of four- to five-year stints in the late 1980s and early ’90s—to run Clayton’s finance company, home building operations, and retail company. By the time his father was ready to retire in July 1999 from his day-to-day role as chief executive officer of the publicly traded enterprise, young Kevin was fully groomed to step up to the position.

“My dad—educated as a lawyer—built the business with instincts and a style as a micro-manager, and I learned an awful lot from seeing his grasp of details and his involvement in decisions at every level,” Kevin says of a company that ranked as a Forbes “Best Small Company in America” from 1989 to 1992. “Fortunate for me, during my MBA program I was exposed to participative management styles and Kaizen principles that encouraged constant process improvement with a great deal more latitude shared among leaders.”

Kevin Clayton’s two key mentors—his father and Warren Buffett—each encouraged and allowed for growth, focus, and an aptitude at placing confidence in his brain trust.

“He’s the reason I’m here,” says Keith Holdbrooks, president of Clayton Home Building Group and, in Kevin Clayton’s mind, one of home building’s smartest, most visionary strategic thinkers. “Kevin—who I’d competed with and grew up with in manufactured home building as CEO of Southern Energy Homes—called me up in 2006, and said he’d talked to Mr. Buffett about exploring my company, which essentially would give Clayton a vertical-integration, distribution, and network of materials sources. It was a total 100% handshake deal. That’s the foundation of how we’ve dealt with all of our home builders, establishing the trust factor. Once you do that, as with all relationships, trust puts you at a different level.”

Talk to any of the principals among the eight home building companies who have become part of the Clayton strategic plan, portfolio, and family over the past four years, and that “different level” comes through loud and clear.

Beyond the Lots: Acquisition Strategy
Clayton’s foray out of manufactured housing’s comfort zone it had dwelled in since its founding in 1956 by Jim Clayton began in late 2014, with the purchase of 81 building sites in the Mundy Mill community in Gainesville, Ga., northeast of Atlanta.

The lot purchase fit Kevin Clayton’s mantra to “try a lot of things and keep what works,” with a low-risk, distressed land deal that came with a bow tied on top in the form of a former LGI builder who wanted a change. The initiative paid off so well and Clayton’s line of site-built homes moved so fast that Clayton Properties Group home building chief Mike Rutherford reached out to Atlanta-area building supply company maven Howie Turner of Robert Bowden Inc. to help him identify a local home builder whose operations and culture might make for a good fit with Clayton as a buyer.

That outreach, in May 2015, set a daisy-chain of events in motion: the acquisition of the Atlanta-area Chafin Communities in late 2015; the purchase of Gallatin, Tenn.–based Goodall Homes and Summit, Mo.–based Summit Custom Homes in 2016; two more purchases in 2017—Harris Doyle (Alabama) and Oakwood Homes (Colorado); and three more this past year with Brohn Homes in Texas, Indianapolis-based Arbor Homes, and Carolinas powerhouse Mungo Homes.

Across the U.S. there are 40 climate-controlled home building facilities where Clayton Built homes are constructed. Many of Clayton’s home building facilities are strategically located near Clayton-owned home centers so retailers can deliver homes quickly.
Courtesy Clayton Homes Across the U.S. there are 40 climate-controlled home building facilities where Clayton Built homes are constructed. Many of Clayton’s home building facilities are strategically located near Clayton-owned home centers so retailers can deliver homes quickly.

Today, with 2018 single-family, site-built deliveries totaling nearly 4,000 homes, Clayton’s home builder portfolio is a force to reckon with among the nation’s leading enterprises. What’s different about the Clayton site-built roll-up is that while it reflects the need for access to a lot pipeline, the entity purchases themselves were less about current land asset value and more about a capital framework to allow smart local and regional operators to do what they do best: match locations to buyers, and delight them with new homes at a great value.

“Our capital is people,” Holdbrooks says. “The asset is people. Yes, we wanted access to homesites as a way to try to expand our market share and ability to scale. And, yes, the operators want access to capital, which is a big, time-consuming and anxiety-producing part of their experience as home builders. Still, these acquisitions were based more on the cultural fit and the ability to outperform than they were on any current land asset value.”

Five boxes are essential checkpoints as Clayton—which has had talks, casual or more serious, with more than 400 home building operators over the past four years since the Chafin deal—considers priority evaluation criteria for potential acquisition targets.

  • First, and perhaps foremost, is a focus on cultural fit, where people matter and want to stay on.
  • Second is Clayton’s desire to have operator principals stay on and run their companies as if they never got a check.
  • Third, clear signs that customer focus is among the highest priorities, investments, and commitments.
  • Fourth, a focus on the low- to mid-price point in selling prices.
  • Fifth, a proven track record of having survived the calamitous business conditions of the Great Recession.

In other words, fit and fitness. Rarely in home building are acquisition suitors as anxious in the middle and end of the process as the sellers, but Clayton executives on the acquisition front—whose game plan counts on attracting highly motivated operators and turning them loose to do their thing over the long haul—get nervous every time.

“We’re about four-plus years in since they reached out to my brother Daryl and I—when we were not for sale—and asked us to listen to what becoming part of Clayton and the Berkshire Hathaway family would be like for us as operators,” says Eric Chafin, who started the Atlanta-area building company Chafin Communities in 1996 with his brother and has every intention to keep the reins and grow the business. “Every promise the Clayton people made then, they’ve kept. Every word they’ve said since then, they’ve kept true to.”

Clayton’s site-builder acquisition spree culminated this past December with the purchase of 65-year-old, multigenerational family-run Mungo. Clayton’s largest yet, the Mungo operation gives it an 11-state footprint: Alabama, Colorado, Georgia, Indiana, Kansas, Missouri, South Carolina, North Carolina, Tennessee, Texas, and Utah. Total new-home deliveries among Clayton’s eight-company portfolio are on pace to reach 4,200 deliveries on a 12-month leading basis, catapulting Clayton from No. 29 on our Builder 100, into the top 20. Its astounding 367% growth since 2016 makes it the fastest-growing builder on the list. While size and volume count, more disruptive forces are at work:

  • First, five years ago, who would have imagined that a player out of the manufactured home arena would have emerged among the industry’s site-build, high-volume builders?
  • Second, Clayton’s geographical empire consists primarily of heartland second- and third-tier housing markets that have been less prone to accelerated price increases over the past five years. They are also possibly more resistant to the market slowdown taking hold in home building’s expensive, mostly coastal markets.
  • Third, the lion’s share of Clayton’s customer-segmentation exposure is to entry-level buyers, where both the pent-up demand, current supply of inventory, and pace of absorptions continue to run strong, short, and hot.
  • Fourth, the Berkshire unit—one of a half-dozen Berkshire Hathaway companies positioned in the building supply, construction, and real estate technology space—has been working to close the construction technology gap between manufactured home building and higher-spec site-building to even better serve the $150,000-and-below market for homeownership.

Customer Experience Focus
Clayton gets it. A customer who can pay not much north of $600 or $700 a month—versus an average U.S. monthly mortgage payment of $1,030, and an average of $1,500 a month or more on a newly built home—is a tough customer. Still, that customer is practically the center of the universe in the minds of Clayton’s strategic leadership.

Courtesy Clayton Homes

Buffett described Clayton’s customers in this way in a 2017 letter to shareholders: "Clayton’s customers are usually lower-income families with mediocre credit scores; many are supported by jobs that will be at risk in any recession; many, similarly, have financial profiles that will be damaged by divorce or death to an extent that would not be typical for a high-income family. Those risks are partly mitigated because almost all have a strong desire to own a home and because they enjoy reasonable monthly payments that average only $587, including the cost of insurance and property taxes."

“Clayton also has long had programs that help borrowers through difficulties. The two most popular are loan extensions and payment forgiveness. Last year about 11,000 borrowers received extensions, and 3,800 had $3.4 million of scheduled payments permanently canceled by Clayton. The company does not earn interest or fees when these loss-mitigation moves are made. Our experience is that 93% of borrowers helped through these programs in the last two years now remain in their homes.”

To make such customers the center of the Clayton universe and to convince them, as the company urges, to “Have it made,” Clayton had little choice but to attend to another matter first: Its 16,000 full-time associates working in factory facilities, retail outlets, and distribution points around the nation.

“We have the highest demand for our product that we’ve had in 20 years,” notes Holdbrooks. “Yet, despite the labor crunch, we’ve reduced turnover among our plant team members. We find it’s simple: To create a world-class customer experience, you have to have a world-class team member experience. Then you can aspire to be a world-class company.”

To that end, senior strategists at Clayton started a nationwide capital improvement journey by surveying construction facility associates on what environmental conditions matter most to them—pay, dust, heat, noise, and other workplace issues.

Then, top executives toured facilities—ranging from Google headquarters to European off-site construction plants, to Freightliner assembly factories, to a Yale forklift factory—to learn not only how to bring better technology to bear on people’s productivity, but how to bring more enthusiastic and engaged people into an automated but humane environment. “We’ve been able to raise our team members’ pay per hour, reduce our overtime pay, and still produce more homes,” says Holdbrooks.

A recent off-site built home design, The Lulamae, features the popular farmhouse style.
Courtesy Clayton Homes A recent off-site built home design, The Lulamae, features the popular farmhouse style.

Kevin Clayton measures progress on the team member experience by the company’s customer “net promoter score,” which ranged until relatively recently in the 40th percentile, and now typically clocks in at 72%.

“Now we’re looking at increasing our customer referral business, which has inched up from 13% to 17%. We think there’s a lot of opportunity for growth there,” he says.

When Joseph Michelli, a customer experience adviser to brands like Mercedes-Benz and Starbucks, got a call from Kevin Clayton, his first impulse, he admits, was skepticism.

“I’m going to have to be convinced that they’re doing more than going through the motions of some corporate messaging exercise,” Michelli says.

He was convinced not only by Clayton and his team’s rigorous all-point focus, but also by their willingness to look at team members, suppliers, retailers, distributors, and partners from the standpoint of their journey maps in making homes for people who can pay $600 or $700 a month.

“They don’t just talk about people and the customer experience, they make it functionally part of each behavior,” says Michelli.

Which is what Kevin Clayton and his team intend and work to improve day to day. Clayton recalls a conversation with Buffett during which Buffett confided to him, “If I could implant one gene into a company, it would be the customer experience gene.”

Such is the stuff that makes up the Oracle of Omaha’s dreams-come-true philosophy.