Thomas C Schleifer, Ph.D.
This post-COVID economic environment is not a normal market. It is a disorderly market that will haunt construction for years. I digressed from my usual reflections last week to encourage industry professionals to change their way of thinking. The normal routine of chasing any work that will keep the company busy in a future of rampant cost inflation, supply shortages, labor shortages, and inflation-fighting interest rate increases by the Fed (that may bring on recession) will only serve to gradually force many small and mid-size firms into financial distress or worse. We are in an unstable economic environment that demands new strategic thinking.
BRAVE NEW WORLD
Recent research into current industry trends revealed the following six trends that are already changing the way contractors do business and shaping the future economic profile of the industry:
- The gradual evolution of commodity pricing across the construction industry.
- Shrinking profit margins.
- A persistent scarcity of skilled labor, increasing unit cost.
Thirty years ago, after a substantial research project I projected the beginning of a consolidation trend in the construction industry which (unfortunately) has come to pass and is finally being recognized. McKinsey reports that the trend toward consolidation in the construction industry has been accelerated by the COVID pandemic. Large national construction firms are finding that it is more efficient to expand into new markets by buying the most efficient regional contractor. Food for thought:
- The industry-wide shortage of skilled labor makes the smaller regional contractor’s trained labor force a valuable asset.
- National and international firms have been and continue to acquire well established local firms.
- An efficient entry into a local market is to purchase the customer “goodwill” that has been earned by the firm being acquired.
- Many smaller contractors who have failed to put a viable succession plan in place are now seeking an exit strategy.
- The trend toward shrinking margins accelerated during this post-COVID market and will only get worse as the impending recession shrinks the amount of work available.
- Many small and midsized firms are realizing that selling the business may be the best strategy if the opportunity presents itself.
Preparation for Consolidation
The large national and mid-sized super regional firms are the consolidators in this new construction world and most of my mid-size regional and local firm readers will be their targets. Even if you are not considering selling your firm anytime in the near future, I recommend that you begin now to prepare your firm for sale just in case. As the consolidation engine revs up, buying out smaller regional firms becomes the growth engine of the super-regionals and nationals. As I said in an earlier blog, stubbornly standing ground against current and persistent industry trends can be a formula for disaster. (Consolidators buy only one firm and a given market)
The Next Normal
McKinsey and Company in its report entitled The Next Normal in Construction, puts it like this:
“The COVID-19 crisis unfolding at the time of publishing this report will accelerate disruption and the shift to a “next normal” in the construction ecosystem. Many executives are wrestling with the pandemic’s economic turmoil, the shifts in demand it entails, and operating restrictions and longer-term safe working procedures. However, it is also critical for executives to lift their view to what the future will hold in terms of changes to business models and industry dynamics. It is in times of crisis that winners segregate from losers, and those who take bold moves fast can reap the rewards.”
Not every small or mid-sized regional firm is an attractive acquisition candidate. Most need to do some “housekeeping” to maximize the value of their company in the eyes of potential buyers. These are the “housekeeping” steps that organizations should take to put their best foot forward.
- Make sure your books are professional and accurate.
- Reinforce relationships with owners you have worked for in the past. Repeat clients are an asset
- Only take jobs similar to those you have completed profitably in the past. Low margin r losing jobs are a warning sign to consolidators.
- Tune-up employee relations with your entire organization from managers to tradespeople. Stable well-trained crews may be your most valuable asset.
- Specialize – if you’re a road builder do not take on any building projects. If you build warehouses do not attempt a hospital. Stick to your specialty, building a reputation of being the best in your market.
- Dominate your market, striving for the largest share of your specialized market segment. Potential buyers assign an added value to market share. If you are the recognized company of choice in your specialty, your firm will be at the top of the consolidator’s list.
Next week we will begin discussing how to implement each of these strategic moves to ensure your company’s maximum value when potential buyers come to town.
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For a deeper look into recession strategies, read more here: STRATEGIES
For a broader view into creative thinking, read more here: CONSOLIDATION
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Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you