September 21st, 2020
We’re seeing Historic Demand. Will we see a Historic Decline?
What a year it has been. In the most improbable fashion imaginable, 2020 is turning into a record-breaking year for many of you.
After the March/April lockdown, while many cities retained significant restrictions, most began to operate under a “new normal.” This new normal included a great deal of working from home, and families adjusted their plans for things like summer vacations and family holidays. In addition, the economic stimulus bill started to put cash in the hands of people everywhere.
For all of these reasons, people began to consider home improvement projects that they may not have otherwise, for months or even years to come.
The result was: historic demand.
Check out this chart from Google, outlining search interest in the term “window replacement.” This represents the past five years.
Now take a look at the same chart since 2014.
As I said, many of you are breaking records and still going strong.
The question we should all be asking is: When does this end?
The next question we all should be asking is: How far does demand fall?
I can’t predict these answers. I don’t think anyone really can. This situation, this COVID-19 nightmare, is legitimately unlike anything we’ve seen in most of our lifetimes—that is, the sheer unpredictability of it.
But what we can do is learn from our past, make reasonable assumptions and prepare for our future.
Lessons from the Past
I have been “lucky” enough to have witnessed two significant declines in the home improvement marketplace since 2000.
September 11, 2001 is a day I’ll never forget, as I’m sure you haven’t. And while that day has consequences for our personal lives, our families and our culture, I vividly remember the impact it had on business.
At the time, I was part of a young startup manufacturing company. We had just opened the doors in April of that year. Every day, we would watch the fax machine (yep), waiting for orders to come through—waiting for the blood that fueled life into the saws, welders and cleaners.
Well let me tell you, when those planes flew into the World Trade Centers, that fax machine stopped—cold.
Understandable, right? In hindsight, totally reasonable and expected.
What wasn’t expected, was the following:
- Maximum decline in demand was about 40%; and
- The slow down lasted 1-2 months (that’s all).
Lesson #1: 9/11 was a single day event.
It is proof of the recency bias (believing that what’s happening right now is absolutely going to continue, for a long time).
This lesson has a dual meaning:
- The economy and American consumers are incredibly resilient; and
- This boom isn’t going to last (just like the upcoming decline won’t, either).
Next, let’s talk about the Great Recession of 2008.
Fueled by the bursting of what we’ve come to call the “housing bubble,” the American economy went through a nearly two-year general decline from 2007-2009. And, in fact, many economic indicators such as household net worth and unemployment did not fully recover for five to 10 years.
During this time (according to the Harvard JCHS), home improvement spending declined by 25%. What’s worse? Spending on new homes declined by as much as 75%.
What was the result for our business?
- Peak decline in demand was about 40%, but the 40% was short lived; and
- The slow down lasted a good year to 18 months at around 10-15% average decline. Then it roared back.
Lesson #2: Even in a protracted downturn, things don’t completely stop.
For most, a home is their most important asset. Home improvements will continue.
Okay, so maybe these are just reasonable to me, but here goes:
- This uncertainty will end (a safe bet to start us out);
- Demand will slow (because it’s inevitable);
- The slowdown will start very soon (we’re already seeing signs, as kids return to school and economic stimulus ends);
- The slowdown will not be a “full stop” (even with the upcoming elections, whereas people are normally a bit politically paralyzed, there will still be inherent historical demand);
- At some point, any premature demand being taken from the marketplace right now will precipitate and accelerate a steeper decline in demand/activity;
- This is all likely to start happening after the election cycle; and
- The slowdown will be protracted (up to a year … which is a significant point to assume, but stick with me).
So, as long as you believe my assumptions are reasonable, we’re left with one big question:
How much decline will there be?
Preparing for an Uncertain Future
The key to preparation is anticipation. The problem with anticipation, in a COVID-19 environment, is that we’ve never really seen anything like this before.
What if there’s a spike in cases?
What if states begin to lock down once again?
What if the Libertarian candidate wins the November election, causing both sides of Capitol Hill to spontaneously combust? (A pleasant thought, don’t you think?)
What if …
What if …
What if …
I’ll say again: The problem with anticipating how much decline there will be, and therefore preparing for it, is that we’ve never really seen anything like this.
So, we have to combine our lessons from the past, and our reasonable assumptions.
Here’s something to consider when preparing for an uncertain remodeling future:
Run the following exercise, as you prepare to enter 2021:
- Assume the coming decline is significant and assume it will be 40%;
- Assume the coming decline will be lengthy and assume it will last for a year;
- Forecast your financials for 2021 in two ways:
- Scenario 1: flat (year-over-year)
- Scenario 2: 40% reduction of revenue;
- Focus on your overhead and fixed costs, and answer these questions:
- What is the overhead structure you would carry to survive (and be profitable) during a 40%, one-year decline;
- How much different are your fixed/overhead costs between Scenario 1 and 2;
- How (exactly) do you scale down from Scenario 1 overhead, to Scenario 2 (write up a plan of action); and
- When would you need to reduce your overhead to Scenario 2 levels, based on cash available? Write up your trigger events.
This thought and documentation exercise will deliver two plans for your business: Scenario 1 and Scenario 2.
The decision of which scenario, and when, will be dependent on several variables:
- Your current cash position;
- Your backlog and current lead flow; and
- Your nature (i.e. are you generally more aggressive or more risk averse).
There is no right or wrong answer in the face of an unknown. But there is great utility in creating two forecasts and writing out the triggers and subsequent actions.
Along the way, you’ll learn much more about your business, and about yourself.