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October 23, 2005
For Whom the Boom Tolls
Fascinating article last week in the New York Times Magazine about the building industry and boom through the eyes of Horsham, Penn.-based Toll Brothers -- one of the giants in the business. Money quote: "We're really a marketing company that happens to build houses."
They even seem to resemble Dell Computer in many ways. They don't actually build anything. Physical work is subcontracted to electrical, framing, roofing, painting, masonry and plumbing companies. They don't start construction until contracts are signed and deposits are in the bank. The company also follows the "mass customization" (they prefer to call it "semi custom") principles that have made Dell so successful and profitable. Indeed, they ran the numbers back in the mid-1980s and learned that they could be much more profitable and meet 98% of customer demands by radically limiting custom options. Construction errors, delays and costs were often generated by the option process. "The more options we sold," said CFO Joel Rassman, "the less we made."
On the customer intelligence front, it seems that the insight that matters most is related to the preferences of prospective buyers in various regions and socio-economic groups -- whether it's for "stately Colonials" or "Mediterranean-style ranches." (Tolls Brothers -- which competes with other large, national builders such as Pulte, Lennar, Centex Homes, D. R. Horton and KB Home -- skews to the high end of the market). Competitive intelligence is also critical to ensure that the company is incorporating the features that other developers are having success selling. Jed Gibson, a vice president who runs Toll's architecture division, explains, "Our business model is: what's selling out there, and how can we do it better?"
Founder Bob Toll spends much of his time poring over data related to various potential property purchases. At this point, there are roughly 74 million owner-occupied homes in America. But Toll and others believe we actually may be running out of desirable land for development as today's exurbs get built out and push us farther from city centers and workplaces. Extensive building regulations, meanwhile, add costs that smaller developers can't afford to assume. The ability of big builders to understand these regulations, bear these costs and fight the fights associated with new development further strengthen their hand.
Indeed, Toll Brothers is not convinced that the boom will ever end as far as it is concerned. While it expects the market to cool down and crush some overexuberant investors, it sees 15% growth as far as the eye can see. "Why can't real estate just have a boom like every other industry?" Toll asks rhetorically. "Why do we have to have a bubble and then a pop?"
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