Onward, Brick by Brick

What the building and civil engineering confidence indices reveal about the state of the construction industry.


Onward, Brick by Brick

When looking at the construction sector, the situation may appear pretty dire, but the bigger picture needs to be kept in mind. While recovery momentum continues at a crawl, the effort has not stalled.

If you closely examine the confidence indices of the civil construction and building industries released every quarter by FNB and the Bureau for Economic Research (BER), you’ll see that the numbers aren’t all that they appear to be and there is, in fact, divergence within the
categories.

While some industries continue to struggle, others have seen improvement. After all, things always need to be built. The trick to surviving while the sector recovers is paying attention to where the money is flowing.

For a start, in order to bolster meagre profits on home turf, cement company PPC is looking to other African countries which, although poor, are still developing and need cement. Staying at home, Eskom is channeling its money to purchasing machinery and equipment rather than construction.

Transnet is ploughing funds into its new multi-product pipeline, and provincial and local governments continue to spend on road and water projects (despite a supply shortage of bitumen that put the brakes on several projects).

State of the Industry

FNB and BER’s confidence indices use a scoring system of zero indicating extreme lack of confidence, to 100 indicating absolute confidence in business in the industry. But the numbers can be misleading if interpreted incorrectly.

At first glance, and based on FNB’s chief economist Cees Bruggemans’ number crunch, the building confidence index hasn’t fared very well, falling from 34 points in the first quarter of 2012 to 27 points. The building confidence index is, however, a composite of several industries.

While the overall number has dropped, not all sub-components have fared poorly. Confidence in the civil construction industry, on the other hand has shown better signs of recovery, recording its biggest improvement in 18 months to 38 points.

This, despite work still being scarce, profitability subdued, and competition for tenders fierce. As a result of this improvement, BER has suggested that recovery is gaining momentum, although Bruggemans cautions that this recovery remains fragile.

Breaking Down the Numbers

While confidence is lower in the building confidence index, it’s a composite of industries including planning, manufacturing of materials, quantity surveyors, material and hardware retailers, and contractors – both sub and main. Architects and sub-contractors were the only sub-components to show improvement, increasing by 13 and three points respectively.

The biggest fall in confidence was registered by building material and hardware retailers, dropping 29 index points, followed by manufacturers down 17 points, main contractors down seven and quantity surveyors down five.

Work Volume Impacting Confidence

The main cause for lack of confidence, according to Bruggemans, lies in pervasive low volumes of new work and rising costs that erode profitability. While volume remains an issue within the sector, civil construction was bolstered by provincial governments’ spending and new civil construction activity by public corporations.

The confidence of residential contractors remained largely plateaued, slipping only two points from 26 in the second quarter of 2012, and non-residential contractors continue to outperform the residential sector, a continuation of the trend from 2011.

While confidence amongst building material and hardware retailers is at its lowest level in a year, 29 index points down from the 40 registered during the first quarter of 2012, whole saleing of building materials (which is not included in the index) did well, highlighting that there is activity in the sector.

In short, with the next batch of confidence indices due, be aware of the divergence between confidence rating and activity within the industry. While overall numbers may not look promising, the road to recovery begins with activity.

From the Man in the Field

Nareen Daya, group CEO of retail hardware franchise Mica, puts some perspective on the state of hardware retailers. While agreeing that times have been tough due to cash crunching occurring at all levels, paying attention to the changing market needs has kept business going.

People don’t have a lot of money to spend, and the money they have is going on essentials like food, petrol and school fees, while DIY and renovations have become much less of a priority, he explains.

Having said that, we’ve encouraged franchisees to adjust their product categories to accommodate customers by stocking non-premium brands. Using paint as an example, a customer can save between 20% to 30% on the cost of painting their house depending on the brand they’re sold. In addition to the primary product, we ensure that well priced accessories are also available, such as paint cleaner, brushes, rollers and the like.

The onus is also on the franchisee and any other business operating in the industry to scrutinise bills and expenses, be critical about product range, and adjust products according to the demographic of the surrounding community, Daya explains.

Customers change overnight, so if you don’t keep up with them, you’re going to lose sales. In addition to that, negotiating an agreement with landlords to either hold off on rent increases or spread the burden over a greater length of time is important.

You have to remember that while the recession has been deeply felt and there’s the feeling that money is stretched, there has been an increase in general retail sales and there are always people in malls and places of entertainment, he adds.

The Ideal Franchisee

In the days before the recession it wasn’t as important as it is now to have retail experience. But now it’s a must to have good financial understanding gained from retail experience, says Daya.

Because banks are less inclined to give loans, a potential franchisee needs to have good financial knowledge and be able to fund at least 70% of the business without assistance from a loan, Daya explains.

Being particular to the times, a franchisee needs to make sure the impact of debt is as low as possible. In a better economy, higher turnover allows you to move debt more quickly. This is why now we emphasise as much financial independence as possible.

To assist our franchisees as much as possible, Mica helps with a demographic study and analysis of an area, and with product ranging based on the local demographic and competition. We also have a good supply chain with 70% to 80% of it being stable and Mica providing up to 70% of the product supply. We are also fortunate to have a presence throughout South Africa so that there’s always another store to gain experience from.

The Future of Retail Hardware

Daya explains that a trend to look out for in the coming years is the consolidation of many smaller brands into one. Smaller brands look to be left by the wayside unless they consolidate, Daya says. Each brand must have a secure, well organised supply chain that reduces third parties as much as possible in order to reduce cost.

Daya says many people are now going to source which means that wholesalers need to up their game with a good marketing plan in order to stay relevant. ìFranchisors now have the responsibility to develop global views and international alliances, he concludes.

 

Tracy Lee Nicol
About the Author
Tracy-Lee Nicol is the managing editor of Franchise Zone Magazine and deputy editor of Entrepreneur Magazine. She studied her Masters degree in Art History and Visual Culture at Rhodes University and spent the next two years working and travelling in Asia. Her love of people, business and teaching is reflected in telling the stories of entrepreneurs, franchisees and franchisors, inspiring others to take the leap to being their own boss and bringing about positive change in South Africa.

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