Home improvement industry hits best growth rate in 15 years

Home Channel News, May 24, 1999 by John Caulfield

The home improvement industry hit new highs in sales last year, as both percentage revenue growth and the rate of consolidation accelerated. The industry's phenomenal success and its prospects for future growth have raised its profile enormously. In the past year, several investment securities analysts initiated coverage of the home improvement industry, while investors such as Stonegate Resources -- which went on a multi-million-dollar buying binge -- have become major players.

Investors intrigued by the industry included President Reagan's former budget director David Stockman, now a managing partner with The Blackstone Group, a high-powered investment firm, who placed an order for a Special Report on Lowe's this newspaper offered last year.

The reason why Stockman, Blackstone and Wall Street in general would be interested in a business they heretofore have gone out of their way to ignore had a lot to do with the success of the industry's two largest retail players, the pace of consolidation within the industry these two companies are forcing and the sustained growth of home building and remodeling off of which the rest of the industry is feeding.

Sales of home improvement products from al] retail outlets expanded by 9 percent in 1998, surpassing the 7.2 percent increase the industry achieved in 1997.

Although a greater proportion of those sales continue to flow to fewer companies, the industry still would have reported a solid sales growth of 5.5 percent last year excluding the phenomenal growth of Home Depot and Lowe's.

More than 60 mergers and acquisitions were transacted among companies selling into the home improvement field, as dealers and suppliers chose to get bigger in order to defend themselves against getting run over by giant companies that are directing -- even dictating -- the course the industry is taking.

In many cases, these alliances have been funded by capital from outside sources that are gravitating toward a business sector which is riding the crest of an economic boom in the United States that defies predictions of a slowdown.

This sector also began exploiting new growth opportunities in online selling, as a raft of companies put up Web sites to hawk their products and services in 1998. What impact the Internet will have -- on assortment, delivery, pricing, customers' expectations and shopping patterns -- should become clearer this year, especially as a number of the industry's big players incorporate e-commerce into their marketing and sales strategies.

A year to remember

1998 was a banner year for the home improvement industry, propelled by its largest companies. Product sales in all retail outlets hit $171.64 billion in 1998, according to Commerce Department data and NHCN estimates. The industry's 500 largest home improvement retailers increased their revenue 11 percent and captured more than half of that total. The 10 largest dealers enjoyed a 14 percent growth rate and grabbed more than one-third of the total. The industry's two leaders generated 23 percent more revenue than in 1997 and claimed $1 of every $4 spent on hardlines and building materials last year.

As has been the case for most of this decade, the inside selling space employed by dealers nationwide exploded even as store count increased only modestly. Retail square footage for the top 500 expanded 9.7 percent to 253.5 million in 1998, while the net stores opened last year grew by only 279 units, 179 of which had "Home Depot" or "Lowe's" gracing their front entrances.

With nearly three-quarters of the Top 500 companies getting most of their sales from professional or commercial accounts last year, the strength of home building and remodeling was critical to the industry's health. On that front, 1998 was a bonanza, as 1.27 million single-family homes were started, an increase of nearly 12 percent over what had been a strong 1997, according to National Association of Home Builders' statistics.

As significant for pro dealers was the 5.9 percent increase, to $125.6 billion, in remodeling expenditures in 1998, a figure that at least one group -- the Joint Center for Housing Studies at Harvard University - believes could be underestimated by as much as $25 billion.

All this activity turned out to be a double-edged sword for dealers, as shortages in key building products -- gypsum wallboard and roofing m particular -- prevailed and prices rose. On the other hand, the economic crisis in Asia depressed lumber prices and led to an oversupply domestically, which put an ironic edge on the ongoing feud between dealers and manufacturers over quotas on Canadian timber shipments.

Customers flock to stores

Home building and remodeling in many ways reflect the increasing wealth of more Americans, which found its most potent symbols in the Dow Jones Industrial Average jumping over the 11,000 hurdle early this month, and the more than $5.7 trillion invested in mutual funds, as of march 1999. Those investments in no small way are sustaining the economic health the United States, where unemployment has fallen to post-World War II lows interest rates are under control and economists regularly fret about "deinflation."