Demand from housing and other construction-related sectors continues to be an important issue for the secondary wood products industry.
Conducted in early 2013, this fourth annual survey provides updated information on the status and actions of U.S. manufacturers affected by these industries. The study is a joint effort by Virginia Tech, the USDA Forest Service, and Wood Products. (See about the survey, below)
Housing Market Synopsis
Though construction-based markets in many areas remain challenging, market data shows some improvement for 2013. According to the U.S. Census Bureau, inventories of new houses continue to trend downward and were just over a four-months’ supply in March of 2013. Similarly, figures from the National Association of Realtors show existing home inventories also fell to just under a five months’ supply in March.
The inventory declines correspond with increased construction activity. The Census Bureau reports single-family housing starts increased to about 535 thousand starts in 2012, up 24% from 2011 figures; though still a fraction of the nearly 1,716 thousand starts in the peak year of 2005. Multi-family housing starts have been trending upward of late and held 31% share of the total starts in 2012.
As shown in Figure 1, the Census Bureau reports the value of private construction in the United States increased for all major categories in 2012, ranging from a 10% increase in residential improvements (or remodeling) to a 45% increase in multi-family housing (though multi-family remained by far the smallest market based on value). For the fourth straight year, spending on residential improvements (remodeling) was very similar to spending on single family housing construction. As noted in past years, this likely reflects an aging U.S. housing stock and plans for many homeowners to remain in their current homes for longer periods of time (or choosing not to move at all).
However, remodeling expenditures have remained relatively stable throughout the past 10 years, including during the highest and lowest points of the housing market. The trend also shows continued softness in the single family market compared to the early 2000’s, when single family value surpassed that of the nonresidential construction market.
Changes in Sales Performance & Markets
Analysis of year-over-year sales performance over the study’s four years reveals gradual improvement in terms of woodworking firms reporting positive changes in sales volume, with 58% reporting an increase in sales volume from 2011 to 2012. Offsetting that, 31% reported a decline in sales volume, with the loss being attributed mostly to the slow construction and remodeling markets. (See Figure 2)
Also, as noted in last year’s article, another dynamic at work is the decline in the number of establishments in the secondary woodworking industry since the housing slowdown began. Having fewer competitors obviously can help surviving firms to increase sales, even in a down market. Overall, this year’s results for sales volume changes shows gradual but continual improvement for surviving firms, which corresponds with the mild improvements witnessed in construction at the national level(Figure 1).
While last year's survey noted the gradual shift away from single-family construction for secondary wood products manufacturers, this year, there was evidence of some movement back into single-family construction (Figure 3). For 2012, 26% of respondents indicated that 61-100% of their production volume was directly associated with the new single-family residential construction market, which was an increase to near-2009 levels.
At the same time, the residential repair and remodeling market also maintained an important share of many respondents’ production volume, staying nearly level with last year at 27%. The repair and remodeling market continues to be important to a wide swath of secondary woodworkers, as only small percentages of respondents indicated that they dedicate no production to repair and remodeling, compared to single family construction where nearly a third of respondents consistently report having no production activity. (Figure 3)
Lastly, nonresidential construction continues to be important for some woodworkers, but a clear plurality of respondents continue to indicate that this market represent only 1-20% of their production volume (Figure 3). Still, for 2012, 77%of respondents reported some activity in nonresidential construction, which represents an alternative to residential construction that showed growth from a relatively large base in 2012 (Figure 1). However, there was little by way of a discernible trend evident for 2012 in this market, with a decline in the 1-20% category being offset by small increases in the other categories.
Similar to previous years, respondents did not indicate strong agreement with any of the explanations for sales increases offered in the survey (for those firms indicating an increase). In fact, respondents agreed most that they simply grew in proportion to the overall economy, relative to past years (Figure 4). Most action items for increasing sale volume at the individual firm level, including offering new services, entering new markets, developing new products, and productivity improvements, were rated similarly to slightly lower than in previous years.
Respondents also had stronger beliefs regarding causes for sales declines (for those firms indicating a decline). Similar to past years, downturns in the housing market and in remodeling expenditures were rated as the most substantial reasons for sales volume declines (Figure 5). However, both of these factors were rated lower than in previous years (especially the housing market), suggesting some perception of improvement. There also was a notable decline in nonresidential construction as a cause for sales decline, suggesting overall that construction markets were viewed more favorably for 2012 than in past years.
Interesting, too, was the minor uptick in answers suggesting that more domestic competition causedrespondents’ sales declines – this factor was still rated relatively low overall but the increase could indicate that more companies are viewing (and entering) woodworking markets as potentially profitable.
Actions to Grow Sales Volume
Not surprisingly, over the last three years large wood products firms engaged in more marketing communications, more frequently, than did small ones. Other activities used to grow sales include productivity enhancements, i.e., lean strategies and investing in equipment, as well as new revenue sources such as new products and markets, as well as increased advertising. (Figure 6)
Among the highest-rated communications, large firms were especially more likely than small firms to make visits with potential or past customers, call past customers, and post new information to their respective websites. In addition, large firms also showed a propensity to use email more frequently than small firms. Conversely, referrals and contacting initial leads (walk-ins, calls received, etc.) to follow-up were especially important to small firms. Small firms and large firms also made similar use of print advertising and social networking, and referrals were the most frequently used marketing communication for both small and large firms. Overall, past customers appear to be especially important to the woodworking industry in the current environment, whether being called or visited directly (especially by larger firms) or indirectly as a source of referrals for new customers.
A related question asked respondents to indicate whether their respective firms were relying more on cost reductions or the seeking out of new revenue sources as the primary strategy to weather the housing downturn. The results suggested that most believed they were pursuing both equally (57%), while 18% were primarily seeking cost reductions and 12% were primarily seeking new revenue sources. The remaining 13% of firms indicated they were doing neither.
Green building products are another marketing option for secondary woodworkers to leverage in order to grow sales volume. Across the four years of this study, however, respondents have said they have not seen increased sales resulting from customers seeking to source products compliant with a green building standards program. For 2012, 37% indicated they had seen increased interest, down from 41% in 2011, 48% in 2010, and 58% in 2009. As noted last year, this trend could be related to the slow construction markets overall, or perhaps represents stabilizing interest.
Another observation from this year’s study was the increase in firms indicating uncertainty about whether they had experienced increased interest in green building products or not, up to 18% in 2012 from 11% in 2011.
Demand for made-to-order, custom, and mass-customized production continues to be important to the secondary wood industry. For 2012, 65% of respondents indicated that over 80% of their overall product mix could be classified as made-to-order, and 11% indicated that their made-to-order production had increased compared to three years ago. This continues to be associated with higher price-points, as 68% of respondents reported they operate at medium to high price-points, which is similar to previous years but perhaps shows a general trend upward (63% in 2009, 66% in 2010, and 71% in 2011).
Lastly, wood manufacturers that responded to this year’s survey also continued to be domestically focused, with 89% indicating that more than 60% of their 2012 sales resulted from domestically produced and/or sourced products. Of those with increased use of wood imports, 47% brought in components or lumber, 23% imported finished products, and 30% imported both finished products and lumber or components. (These results represented an increase in finished products imports and a decrease in lumber/components imports from last year. It is not clear whether these figures reflect a small shift in use of imports by secondary woodworkers, or are specific to this year’s sample of respondents.)
On the other side, 27% indicated that they had increased use of wood imports in their respective product lines over the past five years; up from 18% last year.
Outlook for Different Building Sectors
In past housing surveys, respondents have rated construction markets similar or slightly worse for the current year than what was anticipated for the following year; results were similar for the 2013 study (Figure 7).
For 2013 (the current year), a bit of good news is found in the rating for single family housing, which was quite similar to the other construction markets. In past years, single family housing has been rated lower than the other sectors. Still, only residential repair and remodeling was rated higher than the scale mid-point of 3.0, suggesting that any anticipation of improvements in the construction sectors remains modest.
In terms of percentages, 22% of respondents rated new single family housing as at least somewhat good (rating of 4 or higher on the five-point scale shown in Figure 7) for 2013, increasing to 32% for 2014. These are substantially better numbers than last year, when just 6% and 16% rated single family housing as somewhat good for 2012 and 2013, respectively. Remodeling held steady in the mid-40%’s for both 2013 and 2014, similar to slightly better than last year’s results.
There were some signs of improvement in business conditions for the secondary woodworking industry heading into 2013. In particular, single-family housing markets were perceived to be improving, and many firms realized sales volume growth from 2011 to 2012, attributing the growth mostly to an improvement in the overall economy.
Still, the outlook for the 2013 and 2014 construction and remodeling sectors remained somewhat modest. In addition, nearly a third of respondents reported losing sales volume in 2012, even after what was generally a difficult year in 2011, with these firms attributing those losses mostly to slow construction and remodeling markets.
As new revenue sources continue to be critical for secondary woodworkers, it was found that referrals are the most important type of marketing communication for both small and large firms. Although large firms tended to use different forms of marketing communications more frequently than small firms, small firms made similar use of lead follow-up, social networking, and print advertising as did large firms.
Both cost reductions(e.g., implementing lean strategies, investing in equipment) and searching for new revenue sources (e.g., new products and markets, increased advertising) remain critical for surviving firms in the secondary woodworking industry, with a majority of respondents leveraging such factors to help them realize increased sales volume in 2012 compared to 2011. However, business conditions are likely to remain challenging for the near-term and companies will have to continue to work hard at marketing and lean production to remain profitable.
For a fourth consecutive year the Housing Market survey was conducted in February/March via e-mail to Wood Products subscribers. A total of 244 usable responses were received.
Similar to past years, cabinetmakers made up the largest component of the sample, representing 42% of the respondents. Over 14% were household furniture producers, 11% were millwork manufacturers, 8% were architectural fixtures firms, 7% made office/hospitality/contract furniture, 6% produced dimension or components, and 1% manufactured countertops. While an additional 11% indicated their production was in “other” categories, most (77%) could reasonably be classified into one of the aforementioned categories, mostly millwork, architectural fixtures, or contract casework and closets. Over 81% of respondents represented a single facility operation.
Responses were received from 41 states, with FL, CA, NC, IN, WI, MI, MN, NY, TX, and PA each accounting for at least 4% of the total responses. Geographic markets served ranged from 48% doing regular business in the Midwest to 24% each doing regular business in California and the Northwest.
About the authors: Urs Buehlmann is with the Department of Sustainable Bio-materials at Virginia Tech, Blacksburg, VA. Matt Bumgardner is with the Northern Research Station, USDA Forest Service, in Princeton, WV, as was Al Schuler (retired). Karen Koenig is editor of Wood Products.