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Is your company ready for a recession?

Many economists are saying that a recession is on the way, if it hasn’t already begun. In fact, multiple housing-related sources have declared a housing-market specific recession is already underway. This month’s Real Issue. Real Answers. question comes from a dealer in the Southeastern U.S. who asks what, if anything, other LBM Journal readers are doing to prepare for a slowdown.

Real Issues. Real Answers. Responding to a recession 

As we do each month in our Real Issues. Real Answers. feature, we surveyed our readers via email with a few quick questions. Thank you to the more than 160 readers who responded. First, we asked whether readers even believe that we’re heading into a recession. Overwhelmingly, 67.9% of readers said yes, they believe a recession is down the road. Of the rest of the respondents, 20.8% indicated that they were unsure whether a recession was coming. The remainder of respondents, 11.3%, felt that no, we are not heading into a recession.

Next, we asked readers how they would respond to this dealer:

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“With interest rates and inflation higher, economists are talking recession. We’re not seeing a downturn yet in our market, but from past experience, I know it can happen quickly. Suddenly, sales and margins take a hit, receivables get stretched out, and inventory turns slow. I’d like to know if other dealers are preparing for a slowdown, and if yes, what steps they’re taking to minimize the impact on their business. All insights and advice appreciated.”

RESPONSES FROM LUMBERYARDS, FULL-LINE BUILDING MATERIAL DEALERS, AND SPECIALTY DISTRIBUTORS:

“We are taking a two-prong approach. 1) Being proactive about the areas that tend to be affected by recession— refocusing on keeping inventory as lean as feasible, watching receivables very carefully, and putting more effort into keeping them timely. 2) We’re being extremely proactive regarding sales and recommitting ourselves to the idea that every sale is vital.”

“Any new accounts must have excellent credit. Be very careful extending credit during these times. Reduce inventory as during a slowdown. Prices should come down.”

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“Prudence in watching extended credit and staying on top of collections along with closer management of inventory control. Focus marketing towards the R & R clients, as housing starts shrink away from the 1.78 million mark and drop below 1.4 million. The multifamily starts will survive, and the single-family starts will be under pressure. Those who pull back from the new home purchase will still long for something new, such a remodel or renovation of their existing home, and may fulfill their wants. This can be an opportunity for those with flexibility to divert marketing. With the lumber market settling away from the wild pandemic-driven price swings, it is time to get back to just-in-time inventory management because there is less downside risk at this time. Look into vendor-managed inventory to help maximize inventory turns.”

“We’re being very strict with receivables. We’re saving cash.”

“I feel like it has been building up the last 3-4 years, so we’re watching inventory and accounts receivables.”

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“Make sure you have enough margin so that you can lower prices to keep volume and ride it out until the economy improves.”

“We are taking steps. We are taking inventory levels down and buying on historical averages over the last 3 years rather than on forecasting based on the previous 6 months. We are also taking a very steadfast approach to Accounts Receivable. We will put a customer on hold much faster than we have the last few years now, and ask for the account to be current, or make a sizable payment towards the balance prior to releasing orders. We are also being very cautious about bringing new customers on board. We are requiring more credit balance information from trade partners than we would have a year ago. We will say no to someone new coming in who doesn’t supply meaningful credit references. We weren’t so strict prior to the threat of a downturn. Most importantly, we are continuing to push up margins where we can now. Take advantage of making more while the market is still good. We will be giving some of that back in the very near future, I fear.”

“We’re experiencing a slowdown, although it’s still quite busy.”

“I don’t know if preparing is the right word, but we are continually keeping a pulse on what’s happening. For instance, Goodall Homes just announced they are leaving our market. Fortunately, we don’t sell to them, but we are trying to understand what this means for our market and how to shift. From that example, I would say we are keeping ourselves flexible and nimble to shift or change if, and when, needed.”

“Yes, we believe a downturn is coming to our market, but we always believe a downturn is coming to our market. We just don’t know when because we’re in a highly cyclical business. So, instead of needing to implement operational changes when we believe a downturn is on the way, we put features into our compensation systems that automatically adjust upward and downward depending on changes to sales, gross profit, and pre-tax profit. What this does is it aligns the skin-in-the-game of the shareholders/owners, the management team, and the hourly paid. They all rise and fall together. That’s the upside. The downside is that their household income is less predictable over the long-haul. Therefore, fairness requires that the highest paid (senior management and outside sales) have the highest variability and the hourly people have the lower variability. It’s a bit complicated…but it has worked for us over multiple decades. When the downturns come, we’re all in it together and when the go-go times arrive, everyone is in that game too.”

“We don’t have the oversupply of houses we did in 2008-2009. When, and if, home prices come back in line, demand for building supplies should remain strong.”

“Those who don’t remember the past are doomed to repeat it. Everybody wants to compare the current economic downturn to 2008, but we need to go back further to the 1980-87 downturn ‘recession.’ This is very similar with the high inflation, double-digit interest rates. The housing industry barely existed then, but we had a Democrat-run government led by Jimmy Carter. We need to wake up.”

“Our home office has not done any preparation as of yet, at least nothing that has been visible to other locations.”

“I am not sure if it is a recession/slow down or just a normalization in the marketplace. The pace of home sales the last three years along with the roller coaster of product pricing is not sustainable. The labor force is one area that is not being discussed, which could be the main reason we are having significant slowdown in our marketplace.”

“We have a very conservative accounts receivable policy, especially over the past six months when we became more proactive and started looking at 30-day and 60-day money more closely. We’re getting these accounts focused on paying within terms with the goal that they would not become 90+. While improving our cash, we also focused on improving our turns or returning them to pre-pandemic goals and reducing our overall inventory investment. It’s never too late to start and get ahead of any downturn. If it doesn’t come, we are better off than we would have been.”

“Start tightening up the inventory levels based on current business. Be very strict on your accounts receivables and the terms you have set. Start looking at different ways to maintain a profitable business. Monitor overtime and efficiencies in your delivery system and be prepared to trim the fat.”

“We have met with many of our builders over the past several months. Most have the same sentiment — that sales are slowing, and backlogs are trying to be closed before interest rates get any higher. With that said, many of our builders are shooting for the same number of starts in 2023 as they had in 2022. Lofty goals, but not going backwards. We are forecasting down, more on the pricing side of things, as opposed to market shrink, but still well under-built in our market. Sales have definitely slowed down, but we’re hoping that the sticker shock of interest rates settles, and pricing across all product mixes help in continued home sales.”

“Yes, we are expecting he economy to take a turn for the worse. We are heightening our accounts receivable management and making sure our lien rights processes are being followed. We’re scrutinizing purchasing more closely and balancing inventory between branches before buying from outside.”

“Cover your orders with two to three weeks of extra inventory. Don’t let your accounts age out. Don’t pass on liens.”

“We’re trying to keep our AR as tight as possible since that’s always a leading indicator of a problem coming. We are also holding a weekly call with all our sales teams on current market conditions from their customers and changes in their backlog.”

“We are watching inventory closely and only buying what we need.”

“Though I don’t believe this will be a major recession, we are starting the belt-tightening processes we learned to do in that last one, because we are in a business that varies with the changes in gross profit and operating profit. An example is that we have large cyclical swings in sales, gross profit, and operating profit, and we employ compensation systems. Salespeople are commissioned based on gross profit, so their pay varies with gross profit production. For inside sales, hourly people will receive monthly incentives and annual profit-based bonuses that also fall. Senior managers and middle managers receive annual operating profit-based bonuses that rise and fall, based on profitability. This system eliminates any need for base pay cuts and reduces the need for most layoffs, but not all, however. We still are not perfect in the screening and hiring process and a good house cleaning is needed.”

“We are preparing for a potential slowdown. We meet weekly to look at receivables and the trends. We also tend to ‘circle the wagons’ on the core items and departments in the store. We are less likely to take chances on newer items that are not tested in the market.”

“While we expect a slowdown, we don’t see it happening in the next six to 12 months. Other than being a bit cautious about hiring, we will continue to run the business with the same metrics.”

“Yes, we are looking at slight recession. The largest impact to our business is the price of fuel. It has taken a large toll on our gross profit margin. We do not want to impose a fuel surcharge, so we are looking at different ways, like changing the price structure/multiplier on certain items to help increase margins back to where they were.”

“We have been aggressively reviewing order points and changes in velocity of products and inventory turns. We have also become more stringent in the A/R office and are holding our ground on past due accounts to collect our money now while business is still good.”

“We’re watching the amount of inventory we have on hand.”

“At this point business is strong enough that product is still short on availability. We’re tightening a few key accounts on the receivables side and continuing to monitor open orders.”

“Yes. We’re keeping Inventory at low levels.”

“We are tightening up on our inventory and improving dramatically on our turns to give us more flexibility with the market. We are purchasing via truck vs. rail cars. We’re improving on our receivables now and letting our slower-paying customers know what our expectations are. We’re doing our due diligence and scrutinizing every new account before opening their account, reducing credit amounts with some. We’re holding our commissioned salespeople accountable for special orders, requiring all customers to sign off on special orders to reduce or eliminate unwanted inventory. We’re only hiring additional team members if absolutely needed, and preparing team members now by letting them know we will expect them to wear more hats if needed.”

“Inventory is what gets away from you in this type of market. You need to fight the tendency to continue to bulk up to meet demand by looking farther down the horizon. It is better to be lean and mean than fat and stuck with large, overpriced inventory. If a part of your market starts to concern you, then start planning to move to areas that don’t. It is time to begin to be proactive rather than reactive like this type of market has made us. Look for small changes that give you a hint of the coming storm, especially any changes in receivables from your best payers. A day or two can make you shake your head and begin to study all your accounts.”

“We’re watching inventory levels more closely and increasing margins on both stock and special orders. Develop your staff to be cross-trained as well as be better sales people and to provide better service.”

“We are right-sizing our inventory but staying on the higher side versus competition, so we can take advantage of competitors who have stripped down to bare bones. That way we come out as the current supplier and gain new clients for the next upswing.”

“As usual, we are being very careful with expenses.”

“We’re already beginning to see a downturn. We’ve begun canceling some orders and trying to reduce inventory through promotions and other initiatives.”

“We’ve been through 2007, so we have seen it before. Cut staff and tighten up in every aspect of your business. If you are highly leveraged, you are in trouble.”

“Decrease inventory of your slow-moving specialty items.”

“We’re trying to get rid of expensive inventory and reducing the quantity of inventory. We’re also trying not to be overstaffed.”

“We are starting to limit our aggressive inventory purchases. We are now looking to make smaller buys even though our prices are a little higher.”

“Reduce inventory.”

“Keep inventory as lean as possible and consider which employees should be laid off first, if necessary.”

“This market is still too volatile to take extreme steps. Supply chains are still weak. Europe is in chaos along with Taiwan and China . Interest rates are still on the rise. There is not much a dealer can do while still trying to maintain a stocking inventory while protecting against input swings.”

“We are reviewing our expenses, fixed and variable in nature, to see if we have developed any fat over the past few years. We are watching our inventory levels to make sure we are being efficient with our turns and replacement costs.”

“It is important to diversify. If you experienced a booming new construction phase, then it will be really important to keep at an eye on receivables. Contractors will be the first to default. It is very important that you know the areas your builders are building, the types of homes, the banks they are using, customs or spec houses, how many they have going with how many other lumberyards, how many are on the market vs. sold, completion dates, scarcity of the work force they are employing, if they are paying their contractors or crews on time, etc… The list is extensive if you want to lower your risk exposure. Of course, your purchasing should be altered along with terms and agreements from your vendors.

You need to know the realtors in the market they are building as well. It is an extensive list of responsibilities. There are different product lines to lower the risk exposure as well. Greed will get the best of every lumber dealer, especially those using or relying on artificial intelligence (AI) or business intelligence (BI). You need to hire an economist to do a cost-benefit analysis for your company. There have been way too many builders pumped into these growing markets. The work for many builders has been sub-par due to the work force shortages. The list is comprehensive, and this barely scratches the surface of what to watch for. AI and BI are not a good thing, and we will see many lose and get hurt badly from them.

With the right business plan, you can still be profitable, minimize risk exposure, increase market share, and ensure you will be there in 2-3 years. There are a few more important things to be paying attention to but it’s capitalism, so information isn’t free. You have already missed a couple key stages or are way behind if you aren’t already doing this.”

“We are in uncharted waters. Traditionally, when recessions loomed there were not the supply chain issues that we have today. There is no question that it is a delicate balance, but all things need to be considered: cash on hand, past performance in the volatile market of the last 2 years, is your customer base high-end with the cash to keep moving forward in a recession? I wouldn’t want to be in a position of taking loans at 9% interest to buy inventory.”

“Preparations for a Covid slowdown that did not happen led to shortages, supply chain issues, skyrocketing lumber prices.”

“We have tighter inventory and don’t get beyond 4 weeks. We watch our receivables and call on accounts who normally don’t extend but begin to.”

“Construction is cyclical. What worked and didn’t on the last downturns in your area?”

RESPONSES FROM WHOLESALE DISTRIBUTORS, MANUFACTURERS, AND SERVICE PROVIDERS:

“This is a tricky area to navigate. We are not seeing a slowdown in sales, and we are still struggling with supply chain issues. We just don’t have the product to meet demand. With that said, we watch our inventory carefully and don’t want to overstock, yet we need enough stock to meet demand. You can’t sell from an empty shelf. We keep in constant contact with vendors and look at inventory history which helps with purchasing of goods needed.”

“If you plan for your business to decline, that is exactly what you will get. Be smart about your fundamentals. Protect yourself, yes. However, you cannot sell out of an empty cart. Things are shifting. Pay attention. Custom homes and multifamily starts are still strong. Infrastructure projects are coming.”

“We’re not stretching for any business, and we haven’t been for some time. But we’re a mom ‘n’ pop business in our mid 60s with only mom/pop as employees working from our house, so we don’t have to take excessive risks!”

“Trying to not get caught like we did in 2006-2008. Our sales team is responsible for their accounts, and we are preaching and watching closer than ever before.”

“Stock less of slower moving items, ask for pre-payment of customers who have a history of paying late, and constant update on market and customer needs. If all of us act as if we are in a recession, we will enter a recession.”

“If not already doing so, offer minor discounts for prompt payment.”

“Use the time proven method of selling everything in the yard ASAP with a margin banking or replacing only as needed at cheaper costs.”

“There might be temporary lay-offs.”

“The value of quality supply partners is very important at this stage of a slowdown. Business is still strong today and we need to have product in stock, especially after the challenges we all continue to deal with over the past couple of years. Having the right partners who are able to support your inventory needs with regard for the financial challenges we will be facing in the near future is crucial. Understand that with interest rates rising, it’s making money more valuable, and this relates directly to the inventory dollars in your warehouse.

The value manufacturers can provide with just-in-time delivery cannot be overstated as we enter a slowdown. We must make the ability to provide our products in a timely manner as promised a top priority. Saving a few points with bulk/container purchasing is no longer a priority. If our customers do not have confidence that we can provide them with the products they need, they will look for other sources and from my experience will not hesitate to pay a premium to keep their project moving. Make the right choices for the long-term health of your business, and don’t step over dollars to pick up pennies.”

“Reduce exposure on credit lines if customers are not using them. Hold customers that are past due or be creative with payment arrangements so that you get funds in towards past due but also help the customer get what they need. Maybe for someone that can’t pay all the past due, offer COD plus half and find out what they can pay. If you have communication and some payment coming in, it’s good reason to work with someone. If you have no communication with customers, you have to demand payment on some customers prior to releasing orders so that you don’t get stuck holding the bag. Watch your buying habits during this time and sell what you have in the warehouse. Temporary hold on travel to save cash flow.”

“Really monitor costs and on-hand inventory levels. The supply chain is getting better so no more needing to ‘panic’ buy for stock.”

“Manage inventory very carefully.”

“We are already looking at expenses and trimming where needed and have held back on a few of the hires we were going to make.”

“We’re already in a recession. Upper class materials are still selling, but middle class is slowing down and the lower class stopped buying a few months ago. Keep receivables down and keep close eye on your trouble accounts. Do not overextend credit for anyone at this time. Sell off high-priced inventories asap before prices come down.”

“We first watch our receivables, make sure we have ample inventory, and never let our margins slip! We have been around for 76 years and have weathered the downturns with increased margins and sales each time. Don’t be afraid, but don’t be foolish either.”

“Covid prepared us very well, actually. We are very lean personnel-wise, and the supply chain issues have kept our inventories low. We did quite well over the past two years and I believe we’re in relatively good shape to weather a recession. Additionally, we have ensured that none of our inventory could be subject to adverse Dept. of Commerce rulings.”

“Everything we do is local.”

“We’re balancing inventory and there will be no change to staffing.”

“Pay off all the debt you can to survive any downturn.”

 

THE READER WHO SUGGESTED THE “REAL ISSUES” TOPIC WILL RECEIVE AN LBM JOURNAL PRIZE PACK. Includes: cap, mug, pen, and more.

 

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