Businomics Blog

Wood Products Forecast: Business Strategy in the Soft Rebound

A construction rebound is coming, but it will be a soft rebound, leading to a mild recovery in wood products demand. Although somewhat better times are coming, businesses need to be prepared for the challenges that improved sales bring—it’s not all beer and skittles.

The rebound has to come because our recent level of construction has been unsustainably low. Our population is growing, albeit not as fast as when we attracted lots of foreign immigrants. The increased population triggers a demand for homes, stores, offices and other places to work.


Don’t get too excited about the rebound, because we are not returning to the go-go days of 2005 when we built two million new housing units. However, we need a lot more than the 612,000 we built last year. Further softening the rebound is the steady decline in average square footage of new housing since 2007, down about five percent for single family houses and ten percent for multi-family.

Attitudes have also changed. People now think of a house as . . . a place to live! Young couples are not speeding to home ownership as fast as they can, preferring to rent for a while.

All things considered, construction and wood products demand will improve over the next two years, but not at a break-neck pace. Even the soft rebound, though, will present challenges to the wood products industry.

Sales: are your sales people ready to book more business? You may think so, but don’t be so sure. In slow times, sales representatives get discouraged and too often become order takers. When the rebound starts, the new business goes to young people too inexperienced to know that times are bad.

Staffing: if you’ll need more people when business improves, do you know where you’ll find them? Too many managers are embarrassed to stay in touch with people they laid off, yet those may be the best potential hires in the recovery. Suppose that a manager calls a previous employee and says, “We are not re-hiring quite yet, but we’d like to know if you’re available when we do.” That former worker is going to feel great, appreciated, respected. Even if he or she has found a new job and won’t return, the phone call is a very positive event. More importantly, you can determine ahead of time how much of a challenge you’ll have if you need to staff up.

Vendor Performance: You rely on other companies for materials, which could range from logs to maintenance, repair and operations supplies. Are your vendors ready to deliver? A little work assessing their ability to supply you can help avoid major headaches down the road.

Cash Flow: Orders come in, which is good news. Suppliers may need to be paid in 30 days, and employees definitely must be paid promptly. Are your customers going to wait 60 or 90 days to pay? If so, you’ll be making money on an accrual basis but hemorrhaging cash. Do some cash flow projections now under a moderate growth scenario to see if you’ll need more financing.

This is a great time to do economic contingency planning for stronger sales. Make sure you’re ready, even if the rebound will be soft.

Facebook IPO Not a Flop

Is the Facebook IPO a flop? Not on your life. It’s a sign that Silicon Valley has gotten as smart about finance as it has been about technology. I like it.

The smackdown of Facebook comes from the lack of a price pop on the first day of trading, compounded by declines in the company’s stock price in succeeding days. This is not a flop from Facebook’s perspective, it’s a success.

(A separate issue is NASDAQ order execution, which I’m not discussing here.)

What’s bad is not Facebook’s initial public offering, but the old Initial Public Offering model: the stock is sold at some price, let’s say $20. On the first day it jumps to, say, $35. Further upward movement follows on succeeding days, leaving the stock price at $40 a week after the IPO. What’s bad is that the company sold stock for $20 that it could have sold for $40, or at least $35. It’s a violation of fiduciary duty for the officers and directors to knowingly participate in such a scheme, though usually everyone is so happy to have the IPO completed, and to be so rich, that they don’t really care too much.

A company is not helped by the “pop” on the first day of trading, but others are greatly benefited. Those investors who got in at $20 and could get out the next day at $35 were obviously better off. How do you get to be such an investor? You do business with the investment house that underwrote the deal. The sad part of the story is that the corporation going public pays the underwriter a fee that’s usually seven percent of the proceeds for small issues and averages 3 ½ percent for large issues. Imagine paying a fee for the underwriter to favor its investment clients over the company going public. (The Facebook underwriting fee was reported to be 1.1 percent of the money raised.)

Here’s what good about the Facebook deal: the company worked for its own best interest and was not intimidated into favoring the investment banks. It negotiated a low fee and pushed for as high a price as the market would bear. Was it a flop? Not for Facebook. This is one deal to like.

International Economic Forecast 2012-2013

I've described my international economic forecast over on my Forbes site, comparing my views to the recent International Monetary Fund World Economic Outlook, April 2012.  For a quick preview, consider the risks to the global economic outlook:

The height of the line shows the probability. "Muddle through" is the most likely scenario. Moving left, there's the risk of a war with Iran, and then an even greater risk that Europe flames out in a financial crisis. More details at Forbes.com.

 

The Future of Telecom: An Economic Perspective

If Adam Smith had observed the modern telecom industry, he might have added some interesting insights. The father of modern economics noted that division of labor had led to great improvements in mankind’s material wealth, but the system was never designed by anyone. It developed spontaneously as various people started specializing and trading. No one in prehistoric times had a guiding vision of what the process would look like by 1776, when Smith’s The Wealth of Nations was published.

What would Adam Smith have added had he been able to watch the telecom industry? That the process of order arising from small actions by various individuals can be very messy indeed, even if the final result is a great improvement for consumers.

The forces impacting “telephone” communications today include a new round of network effects, drawbacks of all-cellular service, as well as the fragility and limitations of VOIP. More turmoil is on the way as individual consumers, service providers and manufacturers all take steps to improve their own situation. Out of the turmoil, though will come big gains for some and losses for others. The providers with a clearer vision of the future—as best we can see it from the viewpoint of today—will do better as the dust settles on this industry.

Network effects are now driving smart phone usage beyond what the obvious features of the devices would suggest. A network effect occurs when my usage of a device is influenced by the number of my contacts who also use it. In the classic example, the very first fax machine was useless until the second fax machine was installed. As fax machines became more common in the office environment, their value to each individual user increased.

Today a great deal of smart phone usage comes from social applications beyond voice communication. Text messaging has puzzled baby boomers in every industry, including the current generation of leadership in the telecom industry. Our children will not answer their telephones, but they will reply to text messages. (Similarly, many parents report that their young adult children will not reply to emails, but will happily instant message with their parents.) The current options for texting to landlines are laughably bad.

Beyond texting, the photo sharing service Instagram, recently purchased by Facebook for one billion dollars, is a smartphone-to-smartphone application with rapidly growing popularity. Words with Friends is a game played primarily on smart phones, with millions of users engaged in competition with their friends (or with random opponents). There are now thousands of reasons for people to use smart phones to interact with other smart phone users. Land lines don’t work for these applications.

There are powerful reasons to use smart phones, but there are also limitations. The baby boomer generation tends to live in larger houses, compared to the dorm rooms or one-bedroom apartments of their children. They are used to the convenience of phones in each room, but not used to carrying a phone with them as they move from an upstairs bedroom to a downstairs kitchen. They also enjoy grabbing an extension when a family member is on the phone.

On the business side, companies are increasingly moving to VOIP, frequently looking for low cost equipment and services and often finding their telephone system more fragile than they are used to. Twenty years ago, it was extremely rare for a company’s phones to go down. Today, it’s not so unusual. The business disruption of having no telephone service is seldom included in a cost analysis of new systems.

Where are we heading? Plenty of very smart people are working on these problems. There’s not much doubt that the problems will be solved. I am not quite smart enough to know how to solve the problems, but I can see some of the future.

In the home, devices will be around the house with the functions of a smart phone and the convenience of telephone extensions. Transmission will be both wireless and wired, and any outage will be invisible to the consumer. Bandwidth will be used where it is cheapest. Backups for power failure will be common and invisible. Music, video and Internet will be available anywhere within a home, multiple channels in use simultaneously.

People will grab a convenient device to take with them outside the house—or leave an extra in the car or on the bicycle, without having to differentiate between the in-house phone and the mobile device. Music and video will be just as handy on the go as at home.

Companies will have robust telephone and internet systems that will seamlessly switch between wired and wireless as the need arises. Power backups will maintain all systems.

This is where we are going. How will we get there? Adam Smith said that humans had a “propensity to truck, barter and exchange one thing for another.” Businesses, both in services and equipment, will look to provide high value to customers in ways that cost them little. Every advantage enjoyed by a current business will be attacked by others seeking to take sales away from incumbents. With data flowing so freely through different electronic media, no company will be safe. It is chaotic now, and will be chaotic in the future, but it will lead to telecom services both better and cheaper. Service providers must understand this movement or face severe consequences of trying to hold on to the past.

Strategic Planning Is a Waste of Time--At Most Companies

Strategic planning should not be a waste of time, but it often is.

Confirmation of this common notion comes from a recent McKinsey Study, "How to put your money where your strategy is." They found that most corporations do not reallocate capital among their business units, or at least not in a significant amount. The study further found that those corporations that do reallocate capital significantly outperform the others. The value of those corporations is 40 percent higher after 15 years, on average.

There are a number of important reasons why this occurs, including maintaining a collegial working environment. It's hard for the boss to play golf on Saturday with the vice president whose division had to give up capital on Friday. However, the CEO is being paid to deliver results, not to make friends of the executive team members.

How to get started with a more valuable process? I recently was gathering my thoughts before meeting with a CEO to discuss his strategic planning process, and I pulled off my bookshelf the old Strategic Planning Management by my corporate planning professor, Tom Naylor of Duke University. The short book is full of wisdom, such as that stategic planning cannot be performed by staff; decisions must be made by the CEO and division heads who will be responsible for implementing the plans.

An audit of your company's strategic planning process is the place to start, according to Naylor. I've seen plenty of planning processes fail because their objectives were not clearly identified, or the corporate decision-making culture was ignored.

The annual planning season will start in just a few months. I recommend preceding that with an audit of your process. Call me; I'd be happy to help.

 

The Economic Recovery—For Real Estate Too?

 

The economy is looking better, with growth in employment, retail spending, and manufacturing production.  Will the economic recovery spread to real estate?  Some good news has already arrived, but not enough to make most real estate professionals happy. Things are getting better, but it will be a while before everyone is feeling good again.

Investors in real estate are feeling better already. The NCREIF index, based on investment properties owned by major institutions, provided a 14 percent return last year, beating stock and bond indexes. The NAREIT index, covering real estate investment trusts, returned eight percent, a healthy gain in this investment environment.

These returns are driven by improving fundamentals. In offices nationally, net absorption of space far exceeded new space brought to market, resulting in falling vacancies. Industrial new completions are also below absorption. Retail space is the exception to this pattern, with absorption running roughly in line with new completions, resulting in the vacancy rate remaining elevated.

The government statistics on non-residential construction showed a little improvement over the course of 2011, mostly from power plants and manufacturing facilities. These are nice for contractors but do little for real estate brokers or investors or financiers.

The outlook for operating earnings is positive. As the economy improves, occupancy will increase. Rent concessions will be cut first, then asking rental rates will rise, putting landlords in the catbird seat. This process will happen gradually over the course of 2012 and 2013. Two years from now, property owners will feel comfortable.

Owners usually should get nervous about new supply coming in to take away their tenants. Right now, however, there is very little construction activity, and that which is occurring is mostly build-to-suit.  The real good times for property owners are over a year away, but they’ll be especially good in the sectors with long construction lead times, such as downtown offices. Suburban warehouse space and other property types that can be built rapidly will benefit the least, though even these sectors will see some good times.

Limiting current construction are tight lending standards. Even though projects are beginning to pencil out, lenders now realize that property values can go down as well as up. They are requiring more equity than in years past, which limits plenty of developers who struggled in the hard times.

Non-residential contractors can expect better times, but not for a while. Look for a real rebound in activity late in 2013 and into 2014.

On the residential side of real estate, apartments are already looking good. Vacancy rates are down, rents are rising and new projects are breaking ground. Given that it’s about the best play in real estate today, there’s a risk of going overboard, which is a long tradition in real estate development.

Single family home prices are have probably hit bottom, though a brisk upturn is unlikely any time soon. The percentage of detached housing units that are vacant is still high, so new construction is not warranted except in specialized niches. With improving job markets, demand for houses will improve over the course of 2012. Some families are already seeing favorable buy-versus-rent comparisons, and more young adults will be moving out of their parents’ homes, pushing rents up even more. That will absorb the current excess supply, and we’ll start building more houses in 2013—not anything like in the boom, but moving toward a reasonable annual rate of production.

The recovery has come late to real estate, but it will come.

Businomics(R) Newsletter Shows Economy Making Progress

You can now read online the latest issue of the Businomics(R) Newsletter. Data show improving employment, car sales, hotel occupancy. Home prices have turned the corner (probably), small businesses still struggle, interest rates are low and the stock market is resilient.

I ask, do you know which of your market segments will perform the best in 2012?

Thomas Jefferson on Investment Bubbles

My friend Patrick Lee at Thomas Jefferson Leadership quotes Mr. Jefferson:

 

The American mind is now in that state of fever which the world has so often seen in the history of other nations. We are under the bank bubble [of financial speculation], as England was under the South Sea bubble, France under the Mississippi bubble, and as every nation is liable to be, under whatever bubble, design, or delusion may puff up in moments when off their guard.

Patrick has a brief commentary about Jefferson on bubbles.

On this topic, I use the works of Kindleberger, MacKay and Bagehot on financial crises.

 

 

New Economic Forecast 2012-2013: More Moderate Growth

I posted my updated economic forecast on Forbes: http://www.forbes.com/sites/billconerly/2012/02/21/economic-forecast-2012-2013/

Growth is moderate for the next two years.

Businomics(R) Newsletter now available

The February 2012 Businomics newsletter is now available.

If you have a free email subscription to the economic newsletter, you already know that.

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