Housing Trends & Impacts on Wood Products Manufacturing

With continued low demand in housing and other construction-related sectors, and the importance of these markets to the secondary wood products industry, the third annual housing market survey was conducted in 2012 to discern the status of the secondary wood products industry. This year’s article is a continuation of studies reported in the July 2010 and July 2011 issues of Wood & Wood Products. Three hundred and seven responses were received from woodworking professionals for this year’s survey, representing a variety of secondary wood products companies and products from across the United States. (See the “About the Survey” at the bottom of this article for more details). The studies are a joint effort by Virginia Tech, the USDA Forest Service, and Wood & Wood Products based on online surveys conducted by Wood & Wood Products of their subscribers. As in previous years, the objective was to update trends in the industry and analyze what has changed in terms of market conditions, company performance, and the actions being taken to remain profitable.

Housing Market Overview

With inventories still relatively high by recent historical standards, and demand for new construction low, housing markets remain difficult. This obviously has a negative effect on demand and profitability for the secondary industry. However, according to figures from the U.S. Census Bureau and National Association of realtors, housing inventories have been trending downward since July of 2011, with just over a 5 month supply of new homes and just over a 6 month supply of existing homes reported for March of 2012. Both numbers have peaked near 12 months at different points over the past three years.

Unfortunately, declining inventories did not show up in terms of new construction activity in 2011. Census Bureau figures show single family starts numbered 431 thousand units for 2011 , which was an8.5 percent decrease from 2010 and the lowest total since modern records began in 1959. Through March of 2012, however, starts had improved slightly to a seasonally adjusted annual rate of 462 thousand units.

Housing Trends & Impacts on Wood Products ManufacturingAs shown in Figure 1, the value of private construction in the United States for 2011 was very similar to that of 2010 for the major sectors indicated , with 2011 bringing slight improvement in nonresidential construction after two years of decline. Also of note is that spending on residential improvements (remodeling) was very similar to, or slightly higher than, spending on single family housing construction for the third straight year.

This trend is driven, in part, by the aging of the U.S housing stock, where half of U.S. homes were at least 36 years of age in 2009, according to the Census Bureau.

Another factor driving remodeling spending is that homeowners seem to be planning to stay in their current homes longer. For example, a recent study by the National Association of the Remodeling Industry (NARI) found that nearly 60 percent of respondents planned to stay in their existing homes for at least 6 more years, and that remodeling projects were focused more on filling specific, customized wants and not on increasing potential resale value . The relative strength of the remodeling market also illustrates continued softness in single family construction compared withthe first half of the past decade, and possibly represents a shift in demand for new home construction versus remodeling of existing homes and multi-family housing construction.

Housing Trends & Impacts on Wood Products ManufacturingChanges in Sales Performance and Markets Served

Analysis of year-over-year sales performance for the three years when the study was conducted (2009, 2010, and 2011) reveals something of a mixed story: conditions seemingly improved for many companies, but the overall improvements are tempered with the fact that several respondents indicated that sales volume declined from 2010 to 2011 (with 2010 already generally being a difficult year).

About 38% of respondents reported losing sales volume in 2011 (Figure 2), which was an improvement over last year’s result of 50% having lost sales volume in 2010, and a huge improvement over 2009, when 81% of respondents reported losing sales volume. For the first time since starting the studies, over half (51%) of respondents indicated that year-over-year sales volume had increased in 2011. Also for the first time, a clear plurality of companies was not in the “much worse” category, although the number of companies in this category still was relatively high in 2011.

However, an important consideration is that some firms that experienced drastic sales declines near the outset of the housing crisis (Figure 2) likely have since ceased operations, which has allowed remaining firms to increase sales volume even though overall demand has been essentially flat or slightly declining since 2009 (Figure 1). For example, figures from the Bureau of Labor Statistics show there were nearly 2,000 fewer companies in the wood kitchen cabinet and countertop manufacturing sector (NAICS 33711) in 2011 compared to 2008, which was about a 17% decline.

Housing Trends & Impacts on Wood Products ManufacturingHousing Trends & Impacts on Wood Products ManufacturingThere has been a gradual shift away from new single-family housing markets for secondary manufacturers. As shown in Figure 3A, over half (54%) of respondents reported that markets associated with single-family housing construction represented 20% or less of their production volume in 2011. Similar to last year, only 22% of respondents indicated that the new single-family housing market represented more than 60% of their production volume. Conversely, a solid majority (68%) continued to indicate that more than 20% of their production volume was associated with residential repair and remodeling markets (Figure 3B), a figure identical to last year.

Similar to past years, relatively few companies reported doing no business in residential repair and remodeling, compared to the 27% that indicated they did no business related to new single-family housing construction. In the absence of strong single-family housing markets, nonresidential construction markets also are important, with 81% of respondents indicating that at least some of their production volume was associated with this market in 2011 (Figure 3C), which was an increase from last year (the question wasn’t asked in 2009). The increase in the 1-20% category seemed to be a combination of some firms moving into the category for the first time, as well as some firms reducing their volume in the nonresidential market. Overall, surviving companies have demonstrated an ability to shift production to more profitable markets as single-family housing continues to lag.

Housing Trends & Impacts on Wood Products ManufacturingHousing Trends & Impacts on Wood Products ManufacturingSimilar to previous years, respondents did not indicate strong support for any of the explanations for sales increases offered in the survey (Figure 4). Market share gains for their specific company continued to be rated the highest, suggesting more idiosyncratic or company specific responses to market conditions (more are discussed below). Growth proportional to the overall economy actually declined some from the 2010 average response, suggesting that respondents did not view economic conditions as favorable in 2011. Across the three years, there was a general (but small) trend of increasing importance for developing new products. Coupled with the fact that productivity improvements continued to be rated lower than in 2009, the results suggest that companies have survived the downturn more by finding new customers than by lowering costs, the latter perhaps being especially difficult to pursue further after several consecutive difficult years.

Housing Trends & Impacts on Wood Products ManufacturingFor those respondents that lost sales volume, downturns in the housing market and in remodeling expenditures were rated as the most important causes (Figure 5). In particular, there was an increase in the importance of a downturn in remodeling expenditures noted for 2011. While other factors such as offshore competition, more domestic competitors, and non-wood substitutes continued to be rated low relative to housing construction and remodeling markets, there were small upticks noted for each in 2011, especially for offshore competition.

Actions Taken to Increase Sales Volume

When asked what steps had been taken to increase or maintain sales volume, marketing-based actions were mentioned most frequently, along with a relatively high number for product-based actions, or no actions at all. (Results are shown in Table 1 at the bottom of this article.) Overall, marketing-based actions seemed to have increased in importance, along with customer service activities and improving quality.

The actions for which mentions declined from last year included reconnecting with past customers and bidding on more projects. According to the comments, there seemed to be a general trend away from focusing on past customers and bidding on smaller and/or further away projects, and more emphasis on finding new customers and sales channels with a focus on improved quality and customer service. Several respondents specifically mentioned an increase in the amount of “face-to-face”, “personal”, and “direct” contact with customers and potential customers. One respondent mentioned “shoe to the pavement sales.”However, at the same time several respondents also mentioned increasing use of social media and developing or upgrading their web presence, which were similar to trends noted in last year’s survey.

Green building products are another market possibility for secondary wood products firms to leverage sales volume. For the second straight year, however, respondents indicated they had not seen increased interest from customers seeking to source products compliant with a green building standards program. For 2011, 41% indicated they had seen increased interest, down from 48% in 2010 and 58% in 2009. As noted last year, perhaps this trend is related to slow construction markets overall, or maybe it represents stabilizing interest. Overall, a sizable portion of the market still reported seeing an increased demand for green building products.

Demand for made-to-order and customized production continues to be an important activity for the secondary wood industry, as noted in this year’s and previous years’ surveys. For 2011, 67% of respondents indicated that over 80% of their overall product mix could be classified as made-to-order, and nearly 20% indicated that their made-to-order production had increased compared to three years ago. This made-to-order production also was associated with higher price-points, as 71% of respondents reported they operated at medium-to-high to high price-point, which is similar to previous years but trending upward (63% in 2009 and 66% in 2010).

Lastly, respondents to this year’s survey continued to be domestically focused, with 87% indicating that more than 60% of their sales in 2012 would result from domestically produced and/or sourced products. This figure was identical to last year. Also similar to last year, 18% indicated that they had increased use of wood imports in their respective product lines over the past five years. Of those reporting increased use of wood imports, 68% brought in components or lumber, 11% imported finished products, and 21% imported both finished products and lumber or components.

Housing Trends & Impacts on Wood Products ManufacturingOutlook for Different Building Sectors

As in past surveys, respondents tended to rate construction markets worse for the current year than what was anticipated for the following year, suggesting that the industry generally maintains a level of optimism that conditions will eventually improve. The results from this year’s study are shown in Figure 6.

For 2012 (the current year), new single family housing was rated quite poorly, while residential repair and remodeling was rated as moderately good. In between, and below the mid-point, were multi-family, nonresidential construction, and nonresidential repair and remodeling.

Very modest improvements were expected for 2013 across all categories except residential repair and remodeling, which was expected to remain steady from 2012 to 2013. In terms of percentages, only 6% 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 6) for 2012, increasing to 16% for 2013. Overall, it appears that respondents expect very modest improvements going forward into 2013, with remodeling markets demonstrated the greatest strength; 41% of respondents rated residential repair and remodeling as at least somewhat good for 2013, which was an improvement from 36% for 2012 in last year’s survey.

Summary

Similar to last year, there were some signs of improvement in the business conditions faced by the secondary wood industry, as well as in sales volume. However, these improvements were coming slowly for surviving companies in an industry that is intrinsically associated with construction markets, and these markets were projected by respondents to improve only modestly for 2013. Further shifts away from new single-family housing markets to remodeling markets were evident, as was continued emphasis on developing new markets. For example, more companies seemed to be finding opportunities to move some of their production into nonresidential markets.

Developing new products and offering more customized options also remained important actions for companies to increase sales, with some evidence of companies moving to higher price-points within the industry. Marketing and customer service were increasingly important to secondary manufacturers as companies worked hard to win new customers and offer more value in a challenging business environment.

About the authors:  Urs Buehlmann is with the Department of Sustainable Biomaterials at Virginia Tech, Blacksburg, VA. Both Matt Bumgardner and Al Schuler are with the Northern Research Station, USDA Forest Service, in Princeton, WV. Karen Koenig is editor of Wood & Wood Products magazine.

Housing Trends & Impacts on Wood Products ManufacturingAbout the Survey

This is the third consecutive year for the Housing Market survey. The 2012 study was conducted in February/March via e-mail to subscribers to Wood and Wood Products. A total of 307 usable responses were received, which is a similar but slightly smaller number compared to the previous years’ surveys (359 and 325 for 2010 and 2011, respectively).

Similar to last year, 41% of the respondents were manufacturers of kitchen/ bath cabinets. Nearly 13% were household furniture producers, 11% were millwork manufacturers, 10% were architectural fixtures firms, 7% manufactured office/hospitality/contract furniture, 4% were producers of dimension or components, and 1% manufactured countertops. While an additional 13% indicated their production was in “other” categories, most (78%) could reasonably be classified into one of the aforementioned categories, mostly components, millwork, or contract furniture or fixtures. Similar to last year, most responding firms were small; nearly 56% had sales of less than $1 million, and another 27% had sales of $1 million to $10 million. Furthermore, over 68% of respondents had 1-19 employees, and 11% employed 20-49 employees. Over 82% of respondents represented a single facility operation.

A majority of respondents (56%) represented corporate or operating management, and another 15% indicated they were the owners of their respective firms. Of the remaining respondents, 8% indicated they were in production management and 7% each were in marketing and sales or engineering, respectively. A majority (59%) also reported that their firms used a combination of solid wood and wood composites while 28% indicated that they used mostly solid wood.

Responses were received from 42 states (down from 46 states last year), with CA, PA, NC, FL, IN, MI, WI, and TX each accounting for at least 4% of the total responses. Geographic markets served ranged from 48% doing regular business in the Midwest to 26% doing regular business in California.

Additional custom reports are available through Vance Research Services. For information contact Ellen Roundtree at eroundtree@vancepublishing.com.

TABLE 1

 

Action

2011 Study

(%of companies)

2012 Study

(% of companies)

Marketing-based  (e.g., finding new customers, hiring sales reps or staff, expanding sales base, more trade shows, more promotions, more advertising, etc.)

 

24%

 

29%

Product-based (e.g., developed new products, added product lines, innovation, increased customization options, etc.)

 

13%

 

11%

No new actions

13%

12%

Became leaner (e.g., reduced costs, downsized, changed internal structure, etc.)

7%

8%

Focused on customer service (e.g., getting closer to customers, shorter delivery times, customer care, added warranties, more follow-ups, etc.)

 

6%

 

9%

Developed/improved web presence or social media use

6%

6%

Reconnected with recent/past customers (e.g., continued support for recent customers, contacting past customers, seeking referrals, etc.)

 

6%

 

2%

Bid more projects (e.g., smaller projects than before, projects farther away than before)

5%

3%

Focused on improving quality

3%

5%

Lowered prices and/or margins

3%

4%

Purchased new equipment (e.g., added capabilities, automation, etc.)

2%

2%

Other actions

12%

10%

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