COVID-19: How R&R and Retail Can Outshine Other Sectors of Building and Construction
- Volume XXII, Issue 33
- Executive Insights
We expect that repair-and-remodel (R&R) and the retail channel will outperform other sectors of residential construction — early indications are that they are already doing so.
Building products manufacturers need to adapt their go-to-market approaches to serve more-resilient and relatively higher-growth segments.
Manufacturers exposed to retail can enhance their marketing programs (e.g., in the digital category, professional solutions such as product selectors) and level of retail partnership.
R&R-exposed manufacturers with less retail exposure can enable pro contractor customer sales activities to deliver product and program enhancements that enable their contractors to close and drive more sales.
The building and construction industry is experiencing a downturn overall, but some sectors will prove to be more resilient, as outlined in the April 7 article, COVID-19: Which Building and Construction Segments Can Weather the Storm? Two of those more resilient segments — R&R and retail — are worth exploring in more detail, with implications for building products manufacturers.
Historically, R&R has outperformed new construction in a recession (see Figure 1).
R&R is more resilient than new construction because homeowners consider many small repairs as essential and immediate.
Similarly, retail has also shown historical resilience. In the last recession, big-box retail experienced a gain in share within the contractor segment (see Figure 2).
How is R&R likely to perform in 2020? R&R has tracked home values historically (see Figure 3). While there are other factors that also influence R&R (e.g., existing home sales, HELOC rates), home prices are a critical factor. As the COVID-19 crisis unfolded, many builders have not appeared to reduce their prices. According to Myers Research, 72% of builders did not initially reduce prices, perhaps because March listings fell by 34% compared with the prior month. The experience from 2008 shows that house prices can fall when there is income contraction and that the potential impact will likely vary considerably by geography. Understanding the likely performance of R&R requires keeping a close watch on home prices at the local and national level.
Most commentators expect a decline in R&R demand. Nevertheless, as homeowners have been spending more time at home, they are giving more thought to their homes. Media and web searches signal homeowner interest in R&R planning, once markets have stabilized. Equally, consumers are interested in do-it-yourself (DIY) activities for high-utility improvements around the house, especially with stay-at-home orders in place for 317 million Americans.1 Home and renovation magazine subscriptions on Readly are up 24% since last month and 6% since this time last year. Terms such as “home improvement” and “DIY” are at a “peak” level of Google searches (defined as the most a term has been searched over the prior year). While other searches reflecting household interest have also increased, home improvement has been particularly high (see Figure 4).
Beyond web searches, early indications are that R&R is performing relatively well. As an illustration, one lumber company reports experiencing a stream of business in DIY product categories and attributes it to people seeking to take advantage of the time they’re spending at home by investing in home construction projects.
Although home improvement and hardware stores have been deemed “essential” businesses by state governments across the country, big-box retailers such as Lowe’s and The Home Depot have reduced store hours and set limits on the number of customers allowed inside a store at any given time.
Despite the challenging stay-at-home and social distancing guidelines, the retail channel appears relatively well positioned to succeed in this environment, factors borne out through L.E.K.’s proprietary contractor survey, which has been conducted since 2010. During the Great Recession, many contractors put less premium on value-added services, given that their workloads had decreased. Rather than relying on value-added distribution, some contractors preferred to group, buy and transport materials to construction job sites themselves. Contractors were also more willing to bid for jobs across categories and to “trade down” from larger new construction projects to smaller R&R projects. The broad category offerings and competitive pricing of big-box retail made this channel ideal for supporting contractors’ needs. In addition, during a recession, contractors face more competition and find themselves competing on price, driving them to elevate material costs in their purchase criteria and seek better prices across channels, as L.E.K.’s contractor survey showed (see Figure 5).
As a result, as stated in Lowe’s 2009 annual report, “Customers continued to focus on routine maintenance and repairs instead of larger discretionary projects during fiscal 2009. We experienced solid sales performance in paint and nursery as a result of the continued willingness of homeowners to take on smaller do-it-yourself projects to maintain their homes and improve their outdoor space.” John Burns Real Estate Consulting showed a decline in average spending per homeowner R&R project from 2006 to 2012, while smaller projects, after declining slightly between 2007 and 2009, showed much more resiliency.
This dynamic of retail share gain through R&R played out after 2008, and there is every reason to believe that the dynamic could replay in 2020, magnified by the impact of online investments by big-box retail that foster an even greater connection between big-box stores and end customers. For instance, The Home Depot has committed to a $1.2B investment through 2023 to enable faster online order pickup and 90% U.S. coverage for same- or next-day shipping.
The early indications are that retail is performing relatively well. Lowe’s CEO Marvin Ellison recently said, “As customers are sheltering in place, they’re looking at that deferred list of home projects. As they spend time around the home, they now have more time on their hands to tackle some of those things.” Ellison noted that Lowe’s has seen an increase in sales across nearly every category as customers stock up on supplies for DIY home projects. Some small hardware stores have also seen an increase in sales. As an illustration, Alain Mongeon, store manager of Aubuchon’s, commented, “Generally, this time of year we have an increase in business anyway because of the spring, but this is just on top of that. You can order online and have curbside pickup — that business has jumped 98%.”3 Mongeon cited paint, plumbing and electrical supplies as being particularly popular.
Media and web searches also show relatively strong retail performance. “Consumer purchase intent mentions” are up 75% year-over-year for The Home Depot and 55% year-over-year for Lowe’s.4 Home improvement retailers are now outperforming other retailers at peak popularity levels (see Figure 6).
Some favorable tailwinds for the big-box channel were not as present in 2008. Since the onset of COVID-19, consumers have been spending more time in their gardens and working at home. The outdoor living and home office categories may grow, given that, according to the Home Improvement Research Institute (HIRI), 64% of landscapers use the retail channel as their primary supplier. Other categories (e.g., lighting) could also potentially perform well if more homeowners accommodate space for home offices, a category where big-box retail has a significant presence.
We may also see an increased shift from do-it-for-me to DIY. Homeowners with less income, and in some cases more time, will be more ready to perform home improvement work themselves and to source the materials from a retail store. HIRI found that 66% of those earning between $50,000 and $99,000 per year are DIYers, compared with only 56% of those earning more than $100,000 per year.
Generational changes could also be a factor. Millennials are now the generation driving household formation. While millennials have shown a willingness to outsource services, such as home improvement, they are now more aligned to the profile of DIY engagement. Millennials are financially insecure, exacerbated by the recession, prone to using self-instruction media (34% of those born between 1980 and 1989 say they perform more DIY after watching YouTube videos), and desire an authentic experience and lifestyle. Hence, as more millennials become homeowners, the current situation could drive them to increase their use of DIY. (see Figure 7).
With a network of partnerships to deliver powerful upstream content, home improvement retailers have the scale to take advantage of millennial needs and play a central role at the intersection of ideation and execution for these DIYers.
The potential shift in business to R&R and the retail channel, as well as a potential increase in DIY, has implications for building products manufacturers, as well as for distributors that sell into and distribute for big-box stores such as Lowe’s and The Home Depot (e.g., special-order items). As such, manufacturers and distributors should consider the following strategies (see Figure 8).
Manufacturers and distributors that are more exposed to retail and R&R need to build new programs and tools to serve the retail buyer. The goal for manufacturers in this space is to determine how best to serve these smaller contactor customers in a recession through marketing, programs and/or partnership.
Manufacturers more exposed to R&R but less exposed to retail need to sustain high value-added services to help customers close more sales. Manufacturers in this space may still experience a decline in R&R sales and their contractor customers might be finding it harder to close sales. Manufacturers’ goal should be to help their customers maximize closed sales.
R&R and the retail channel are likely to outperform the rest of the building products and construction sector. As the new recession takes hold, manufacturers and distributors can adapt their go-to-market approaches to the new reality.
1Myers Research, April 15 webinars
2The New York Times, as of April 7
5John Burns Real Estate Consulting
7Women Who Code