Remodeling Business Plan

The highest end of the residential market is represented by the new construction and the renovation of “trophy” homes in the $3-$15 million price range. These homes, within the 781/617 area codes, have an annual need for custom woodwork products of approximately $13 million. An estimated further need of $12 million is generated by the same price range of private homes located outside the immediate area but within 60 miles of New Haven.

4.1 Market Segmentation

A market need for custom woodworking is generated by new construction and residential remodeling. For $1,295, a copy of a 350-page market study undertaken by Business Trend Analysts can be purchased. This study examines demand patterns in both new construction and home improvement markets. Figures on specific millwork products are included. Without this report, some statistics are generally available. The April, 2000 issue of Industrial Trends Report states that residential remodeling has reached $150 billion annually. “A healthy economy, a population increase, an aging housing stock, and more people owning their own homes are resulting in a boom for the remodeling industry,” says the president of the National Association of the Remodeling Industry (NARI). The Joint Center for Housing Studies at Harvard University (The Joint Center) reports approximately 25 million homeowners undertake some remodeling every year. There are about 800,000 remodeling contractors. The generations of people that especially impact the remodeling industry are:

• Baby Boomers: This includes anyone born between 1945 and 1964, comprising almost 45% of the American population. With large incomes and not enough time, Baby Boomers prefer to call contractors rather than to do it themselves. This is the strongest market for home improvements, according to NARI. This represents the greatest potential for high-end custom woodwork, primarily Baby Boomers with homes in the $3-$15 million category (referred to as “trophy homes”).
• Mature Market: These are individuals aged 55 and older who need their residences to be more efficient and comfortable to allow them to move around more easily. According to the American Association of Retired Persons (AARP), 75% of mature people own their own homes, and 83% do not want to move. The Joint Center reports that the typical elderly homeowner is twice as likely to undertake a replacement project than a younger homeowner. This sector does represent a market for Comgate, but only among the very wealthy, and considerably limited in respect to the Baby Boomers.
• Generation X: These are individuals born between 1965 and 1980 that tend to take their remodeling one step at a time due to lack of money, according to NARI. The Generation X-ers are, to a large extent, do-it-yourselfers. This group does not represent any market potential for Comgate.

According to U.S. Census figures, there are 127,080 new single family homes built annually in the Northeast, of which 15,500 were in Connecticut, and of those, 5,670 were in the New Haven area. With average single family home prices at $222,000 in 1999 (all U.S.), and probably closer to $350,000 or more in the Greater New Haven area, this translates into an annual expenditure of over $1.9 billion for new New Haven single family homes.

U.S. Census also reports that almost $14 billion is spent annually on improvements to existing single family homes in the East. Assuming the same percentage share for the New Haven area this means that 4.5%, or $627 million, was spent on major renovation excluding repair and maintenance. The above statistics indicate that for every dollar spent on new homes, $.31 is spent on major renovations to existing homes.

Since the major market for Comgate’s services is custom woodwork to very expensive single family homes in the price range of $3-$15 million, it is useful to know how many new homes are built annually in that price range in the greater New Haven area, and how many existing homes in that price range engage in major renovations. Research indicates over 300 single family homes in the New Haven area (area codes 781 and 617) in this price range actually changed hands in the past two years. Since major renovations generally are undertaken at the time of purchase, this would suggest that at least 150 homes valued at about $4.5 million each elect to have major renovations each year. $200,000 per renovation is not an unreasonable estimate for a renovation of a property in that price range. That amounts to annual renovations of the most expensive homes in the greater New Haven area of approximately $30 million (150 homes x $200,000). If we use the statistic of $.31 spent on existing home renovations for every dollar spent on new homes, that would indicate that $96 million is annually being spent on construction of new trophy homes in this price range in the New Haven area.

Another subsidiary market is the new trophy homes being built outside of New Haven (60 mile radius), as well as the major renovations for homes in the same price range. For example, 44 homes in the same price range ($3-$15 million) changed hands in Stanford alone during the past two years.

The Market Analysis Table shown below has omitted three zeros in all the numbers, for space reasons.

4.2 Target Market Segment Strategy

In line with Comgate’s mission statement, the target market is trophy homes, both new construction as well as renovations. The results of our market study indicate that the total high-end trophy home market need for custom woodworking in the New Haven area outstrips the supply from available local custom woodworking suppliers. To compete in this market sector, Comgate has chosen a special service which is proving successful with design professionals. This CAD service is explained more fully in the chapter on Market Needs. All three high-end market sectors are in need of the custom millwork products supplied by Comgate. All of these construction projects, whether new construction or major renovation, will involve design professionals of the highest standards and clients with deep pockets. With properties of this caliber, the work is relatively recession-proof. These clients will have requests for custom woodworking products that are most challenging and thus most suited to Comgate’s expressed mission statement and abilities.

4.2.1 Market Trends

With greater and greater demand for high-end trophy home construction, coupled with the increasing difficulty of attracting and keeping skilled workers, Comgate’s move toward linking its CAD capability with the practices of design professionals will allow the company to out-source certain simpler parts in a project to other mill shops, while keeping the more demanding work for themselves. Being able to present another mill shop with exact detailed CAD drawings, together with precise dimensions and material lists, will allow Comgate to increase sales and profits, and to concentrate on the more challenging custom woodwork products.

4.2.2 Market Growth

Market growth of 2.4% is based on the actual growth rate in building permits in the East experienced in years 1997-99 as tabulated by the U.S. Census.

4.2.3 Market Needs

The new CAD service offered by Comgate evolved as a result of the inefficiencies which the company has observed in the past. One major problem in the past deals with blue-prints. Whichever construction company won the bid would send the blue-prints, let’s say for the kitchen, to custom wood mill shops to bid over. The mill shop will do its “take-offs” from the blue-prints and bid to do the kitchen. Later, the winner of the bid finds that the designed kitchen cabinets will not fit into the room. This results in expensive problem-solving and meetings with architects. The architects themselves do not understand the way in which woodworkers build cabinets, so often the architects’ design concepts are made more difficult (and thus more expensive) to realize. The new CAD service offered by Comgate circumvents all of this. By working together with the architect at the initial stages, the architect only needs to do the inexpensive design concepts. The actual details of how the cabinet is structurally designed, as well as the exact measurements to fit the room, are left to Comgate’s CAD person. The architect can save money on drafting, save again by eliminating the usual problem-solving and re-drafting. The client of the architect also saves by insuring that the woodwork is done in a way that suits the latest woodworking methods without interfering with the design concept — the look of the final product. A further advantage is that Comgate saves the expense of on-site measuring.

4.3 Service Business Analysis

The industry is mature and well-represented. There are many mill shops in the same market area. Mill shops have traditionally focused on specialty areas. This often happens as a result of the type of woodworking that the shop owner likes to do or as a result of his previous background as an employee in another mill shop. One mill shop may concentrate on custom furniture and form special alliances with upholstery shops. Another mill shop may specialize in what is termed “fast-track,” targeting large scale construction companies who might be building a 100 unit condominium complex and need the woodworking element completed inside of 60 days. Other mill shops may specialize in standard kitchen cabinetry. They will produce without regard to the ultimate user using fast production line techniques. By concentrating on the highest end of the residential market and coupling this with its CAD expertise, Comgate should set itself apart from the competition, and be able to fully utilize its recently expanded production capacity.

4.3.1 Distributing a Service

The traditional pattern in this industry is for: an architect to draft the plans according to the specifications, copies given to contractors to bid on, and elements, such as mill work, subcontracted to mill shops who also make competitive bids.

Through Comgate’s marketing strategy, this traditional distribution pattern will be altered to the benefit of everyone concerned. The architect will save on the design drafting (and redrafting), the contractor does not have to worry about change orders to the same degree, because he can feel confident that the desired woodwork will fit the room as built, and Comgate will not have to be as price-sensitive in getting the work. Comgate’s connection to the design professional will assure that the work goes to him rather than being sent to competitive bidding.

4.3.2 Business Participants

The table below lists major competitors in our immediate area. Appendix B is a map marked with red dots indicating the location of mill shops in the Greater New Haven area. None of these mill shops has the same level of CAD capability and few have singled out the trophy home market as their prime focus.

Competing Mill Shops

Note: appendices A – K have been omitted from this sample plan presentation.