July 14, 2008

Builder Requiem: Mediocrity Kills

A mental gasp escapes every time I hear or read about another Builder closing its doors. Neither the longevity of the housing downturn nor the plethora of closures and bankruptcies can deaden the sound of the horns blowing Taps over a landscape of unsold houses.

Some closures seem obvious; some seem completely unfair - bad luck and worse timing.

A couple of weeks ago an Atlanta-based, mid-sized Builder closed its doors. The name is not important but for today we'll call them MB Homes (I hope there is not a real MB Homes - if so I apologize in advance. This MB Homes is a fictional name.)

I was not privy to the inner workings of the company, their financials, nor the direct cause of their demise. My observations of their operations are from an industry standpoint from a time when the market was at its height in 2003 - 2005.

Observing MB Homes from the marketplace one overwhelming attribute defines their operation - mediocrity. They had a complete and thorough grasp of mediocrity. That seemed to be their brand although I must say they were a solid mediocrity. In other words their quality was O.K. and they had a pretty good reputation about standing behind their warranty work. Their home designs were "off-the-rack" and could be found in any subdivision within 100 miles, but they were OK. Everything they did was just O.K., but never outstanding.

Up until 2006 mediocrity was OK and sellable at least at a mediocre rate.

Their price range was from about $400 to near $1 million. Not cheap. Their dedicated communities were usually small with one or two phases and a furnished (wife-decorated) model which were nice enough. Amenities were rare. The smaller community business model required continually launching new neighborhoods without the benefits of spreading up-front start-up costs over a larger number of units. Their communities were O.K. but I never saw their reason for being. I wonder if customers were ever bold enough to ask the sales reps, "Why would I want to live here?" I don't have a clue how they would answer that very important question.

Several years ago MB Homes' sales manager (who happens to be a friend) asked me and another marketing director to have a look at one of their projects that was not selling (in a hot market). The problems were too numerous to enumerate here but let it suffice to say NOBODY was paying attention at the conceptual or build-out stage of this particular project. It didn't even fall into the realm of "O.K." Their only option in our opinion was to cut prices dramatically and get out. Three years later there are still houses for sale and now the Builder has gone up in smoke. I can't imagine how many lives have been negatively effected from this one project - all because nobody was paying attention.

There are many home builder corporations that are run by financial suits and that role is incredibly important. I have always felt however, that in order to be really successful in the housing industry somebody at the helm has to have a eye for housing - an intense interest in the aesthetics of housing and a talent to balance cost with the production of an outstanding product. It's not all numbers and buyers have an uncanny ability to discern the differences between those who excel within their market segment and those who embrace mediocrity. If the difference is not so obvious in an outstanding market it certainly becomes apparent in the market we're currently dealing with.

After many years working with custom builders, the ones that were the most and consistently successful were the ones who had an adept eye at design, proportion, and knew how to create something that stood out within the market place. The former bankers, CPA's, or engineers - no matter how good a business they ran - are very seldom the most successful in the home building arena. Obviously the ability to run a good business is an absolute. An aesthete without business acumen could probably beat a CPA with no design ability to the poorhouse. That's not the race we want to be in. Principles here apply to any size company. An analogy is Bob Nardelli running Chrysler. I just don't get it.

A mediocre product will return a mediocre profit when the market is good. When the market turns south and it's time to go into survival mode...mediocrity will lose every time, as has been evidenced time and time again.

Let's talk about the importance of a brand for a minute. Unfortunately MB Homes missed Branding 101, unless of course you think mediocrity is an acceptable brand.

This is an excerpt from an earlier post called The Real Estate Brand, or Lack Thereof:

If branding is a means to create value and make sales, the brand actually becomes part of the exit strategy. It is one of many insurance policies for success. In creating a brand you have to ask the hard questions. You can’t cheat on this and you can’t just make something up. There must be clearly defined, honest, relevant answers to these questions. This is risk management.

What makes you unique?
Different from your competitors?
Name one thing you do better than everyone else?
Can you prove it?
What is your promise?

If your answers are not clear, positive, and passionate, proceed at your own peril.

Everything matters whether it is at the pinnacle of a hot market or the depths of a downturn. I guess every organization needs a mediocre meter. Some companies may need an entire security force to weed out the insidious nature of ordinary.

Like I said, some closures seem obvious. The survivors seem obvious as well.

2 comments:

Vance Shutes said...

Gerry,

You make an excellent point with this thoughtful article. I recall reading about the Atlanta builder you mention - right next to an article about a local builder closing its doors here in Michigan. It wasn't until I read this article that it came together for me. Those local builders who have now disappeared were the ones who excelled at mediocrity! Their developments were just whelming - not overwhelming.

I regularly advise my buyer clients that the re-sale homes they buy in the "mediocre" neighborhoods will likely require substantial investment in maintenance when the home is 7-10 years old. That's just the nature of a mediocre house. I can't fault the builder for making the home that way - certainly the buyers at that time didn't give much thought to their purchase of a "mediocre" home.

Those builders who survive this market will (hopefully) emerge with a renewed sense of building toward excellence, rather than mediocrity. Otherwise, all that we're going through now will have been for naught.

Gerry Davidson said...

Vance,

Many thanks for your thoughts. I agree that the current housing downturn is so dramatic (as in nuclear) it will certainly be a shame if those who emerge aren't renewed with a sense of excellence. Trial by fire.

Vance, you're so right - excellence trumps!