Saturday, September 17, 2005
The Builder of Boomtown (great stas on baby boomers)
Locals call it Viagra Falls -- a fountain in the middle of a roadside lake, spraying jets of water three stories high. On a summer morning under blue skies, it's a serene backdrop for a pair of elderly women strolling the sidewalk in shorts and Nikes. Up the road, a distinguisnhed foursome makes its way across the greens at the Whisper Creek Golf Club. Players pack the nearby tennis courts. And in every other direction are dozens of pristine ranch-style homes, built exclusively for buyers ages 55 and older.
This is Sun City Huntley, a booming residential community 50 miles northwest of downtown Chicago, where more than 4,200 houses have been built and sold since 1998. Another 1,600 homes under construction dot the development's 2,200 acres of rolling wetlands.
The mastermind behind this and dozens of other freshly gated communities around the country is 40-year-old Richard Dugas, CEO of Pulte Homes, now the top homebuilder in the United States, with $11.7 billion in annual revenue. As the company's first "active adult" development outside the Sun Belt, Huntley is more than just a pretty portrait of suburban leisure. Homes aimed at older buyers generate a third of Pulte's sales and a slightly higher percentage of net income. Pulte's profit jumped 63 percent in the first half of 2005, its stock has more than tripled since 2003, and Dugas is promising 15 to 20 percent annual sales growth through 2007.
Aggressively targeting the fast-growing boomer market -- a consumer demographic that will swell to 80 million by 2020 -- Pulte is building 22 retirement communities, half of them in cold-weather states like Illinois, Michigan, New Jersey, and Ohio. The company is also buying land at a record pace to meet demand in every other demographic niche. "There's not an attractive part of the market that Pulte isn't hitting," says Standard & Poor's real estate analyst Bill Mack.
Behind much of this success is an old business practice -- sophisticated market research -- that has eluded the notoriously fragmented industry for decades. Even today, the 10 largest U.S. homebuilders control just 20 percent of the $375 billion market. Dugas and Pulte, however, are laying a new foundation, paying as much attention to consumer surveys and demographic data as they do to the detail work on custom homes. "Toyota (TM) sells Corollas to entry-level buyers, Camrys to the middle market, and Lexuses to the top," Dugas says. "Why can't we do the same in homebuilding?"
Not only has Dugas begun relying on internal research to find buyers for places like Sun City Huntley, he's counting on it to transform Pulte into the first U.S. homebuilder with national scale. The numbers are helping him to find prized land that other builders pass up and to better match home designs with his customers' tastes. Ultimately, Dugas says, research will protect the company from the precarious whims of the market. "If they can keep it up," predicts Greg Gieber, a housing industry analyst with A.G. Edwards (AGE), "Pulte is going to turn into the megafirm of the industry."
The Quest for Green Acres
Few people have had a better ringside seat to the American housing boom than Bill Pulte, the company's jovial, white-haired patriarch. As an 18-year-old in 1950, Pulte and a few buddies built a five-bedroom bungalow on Detroit's east side. The success of that project drew more work, and by the time Pulte incorporated his company in 1956, large, suburban custom homes had become his trademark.
TOP HOMEBUILDERS
REVENUE (IN BILLIONS) UNITS SOLD
PULTE HOMES $11.7 38,612
D.R. HORTON $10.8 43,567
LENNAR $10.5 36,204
CENTEX $9.0 33,306
KB HOME $7.0 31,646
Sources: Builder magazine; S&P Industry Survey
As Americans fled to the burbs in the decades that followed, so did Pulte, pushing beyond Detroit to start building residential developments around cities like Atlanta, Chicago, and Washington, and posting profits year after year (54 in a row).
The basics of Pulte's business model haven't changed. Like most builders, the company makes money by buying plots of land and then selling the homes it builds on those lots. Pulte owns more land than anyone else: 366,000 lots, a seven-year supply at the current pace of construction. Today, Pulte builds 100 homes a day, in 54 metro markets spanning 28 states.
The rapid expansion, though, created a pressing need for the one tool that most homebuilders can't wield: market research. The homebuilding industry is still dominated by 70,000 small local builders, each cobbling together an average of five homes a year, so to most it makes little sense to invest in research. But when you have thousands of customers scattered around the country, you have the chance to dramatically improve your results by figuring out exactly what they want.
That's the opportunity that helped persuade Dugas, then 29, to leave his six-figure job as an efficiency manager at PepsiCo (PEP) in 1994 to join the construction business. Dugas hardly fit the profile. Raised on the bayous of southern Louisiana, he helped manage his father's sporting goods store near Baton Rouge before earning a marketing degree at Louisiana State University. From there he went to Exxon, helping to market gas stations, and then spent four years squeezing costs out of Pepsi plants.
"Richard didn't know anything about homebuilding when he got here," says Bill Pulte, who at 73 remains the company's chairman. "But I was struck by how his mind worked and how he was never afraid to ask questions." As a VP for process improvement, Dugas helped reduce construction time in Pulte's hottest markets, Arizona and California. That led to a promotion as one of Pulte's top field generals, buying land and negotiating with fickle contractors and suppliers. By 2001 he was running the company's coastal division, generating $650 million in revenue, and in 2002 Pulte named Dugas COO. From that perch, Dugas still saw the unsolved problem -- building thousands of homes without serious research driving the process.
A Segment for Every Buyer
Bill Pulte had experimented with market research, but when Dugas was named to the top job in 2003, he quickly made it the centerpiece of the homebuilder's strategy. He quadrupled the annual marketing and segmentation budget to $40 million and began bringing in senior managers from Clorox, Disney (DIS), Wal-Mart (WMT), and elsewhere. Then Dugas assigned a new segmentation team, led by a former DaimlerChrysler (DCX) exec, to start dividing up potential homebuyers as they might Pepsi and Mountain Dew drinkers. Digging into a national database of more than 500,000 consumers, the team split the market into 11 target groups, from "starters" (first-time buyers) and "restarters" (single parents reentering the market) to "upwardly mobile families" and "retired/independents."
Such detailed segmentation data -- a kind of real estate talisman -- began to drive decisions in every part of the company. Take land buying, for example, a $5 billion annual expenditure. "Not a dollar of revenue comes in without us first controlling a lot," says Dugas, who runs a land-acquisition team of about 200. They scout states, cities, even small neighborhood pockets that pair up ideally with target customers. "We can say, 'In the southeast part of this city, or the northwest part of that one, this consumer is underserved,'" Dugas says. "We buy land where customer demand most exceeds supply."
The process can be like a search for hidden gems. "We do a comprehensive area study by demographic -- where they want to live, what they want," says Jim Rorison, who heads Pulte's land-buying operation in the eastern United States. "You find niches to serve undertargeted groups." Case in point are the retirees in Sun City Huntley. "Other people thought Huntley was Iowa," Rorison says. "But we matched what the demographic was looking for." That is, a house within a couple hours' drive of their previous homes outside Chicago. More than 6,700 boomers now live there, and Pulte expects to sell out the development by 2007.
All this mining of data helps Pulte on a smaller scale too. The company recently acquired a former hospital complex in Point Pleasant, a densely populated area on the New Jersey shore between Manhattan and Philadelphia. The site drew little interest from developers, but when Pulte's surveys showed that it was a good match for 44- to 55-year-old baby boomers, Pulte paid $11.5 million for it and agreed to demolish the hospital, remove the medical waste, reengineer the soil, and build condos. "It's close to amenities that active adults like -- cultural activities, transportation, nice canal views," Rorison explains. He expects a return on invested capital of at least 21 percent.
How Pulte Covers the Market
First-Timers
San Antonio, TX $145,990
2,519 sq. ft., 4 bedrooms, 2 baths
TARGET: First-time homebuyers, ages 20 to early 30s
HOTTEST MARKETS: Texas, Midwest
KEY CHARACTERISTICS: Young couples looking to break out of the rental cycle. Townhomes are popular for first-timers buying in big cities.
PORTION OF PULTE REVENUE: 27%
Second Move-Ups
South Orange, NJ $999,000
4,827 sq. ft., 3 bedrooms, 3 baths
TARGET: Homeowners looking to upgrade a second time, ages 40 to early 50s
HOTTEST MARKETS: Florida, West (Arizona, California, Nevada), Northeast
KEY CHARACTERISTICS: Well-off families with older kids, looking for lots of space and high-end features.
PORTION OF PULTE REVENUE: 19%
"Active Adult" Retirees
Huntley, IL $372,990
2,833 sq. ft., 2 bedrooms, 2 baths
TARGET: Baby boomers easing into retirement, ages 55 and up
HOTTEST MARKETS: West, Midwest
KEY CHARACTERISTICS: One-third of these buyers pay cash. They'll sacrifice square footage for luxury touches and access to golf and health clubs.
PORTION OF PULTE REVENUE: 33%
One Countertop Fits All
Market research generates another critical benefit too: hammering needless costs and complexity out of Pulte's supply chain. By parsing its database, the company discovered that 80 percent of its homebuyers end up picking the same countertops, floors, carpets, toilets, and other options. Yet the company buys 35 toilet models from six manufacturers, purchases windows from 17 suppliers, and offers customers more than 2,000 floor plans. "We saw that all 11 consumer groups considered a lot of the same things the most important," says Pulte COO Steve Petruska, who has already reduced the number of floor plans to 1,250 and has begun to standardize the options nationwide. And last year Dugas hired Reginald McCoy, a former supply-chain expert at Wal-Mart, to whittle down the list of suppliers and push for cost concessions. Says Dugas, "We didn't have that experience in-house."
Besides cutting costs, Dugas says, such efforts also create brand loyalty -- something no large homebuilder has ever enjoyed. Six years ago just 20 percent of Pulte's home sales came from repeat customers and referrals. Today that figure is 45 percent.
Making so many big bets on the basis of market research does, of course, come with significant risk. Pulte's massive land position could become a liability if the real estate market goes south. While Pulte keeps about half of its 366,000 lots under option -- putting down a fraction of the total price for the right to buy the land outright later -- the company is often forced into the same precarious position as homebuyers. Last year Dugas paid $100.5 million, or three times the appraised value, for a 276-acre plot in Arizona, outbidding rival builders Toll Bros. and D.R. Horton. "It's a big balance-sheet risk," warns Friedman Billings Ramsey analyst Craig Kucera. "They can't just walk away if things go bad."
Dugas says Pulte's diversification -- geographic and demographic -- will provide the necessary hedge. "Two, three, or five markets may have a falloff in pricing, but that's not going to kill a diversified builder," he says. "I can weather these things." If only the market research could guarantee that.
This is Sun City Huntley, a booming residential community 50 miles northwest of downtown Chicago, where more than 4,200 houses have been built and sold since 1998. Another 1,600 homes under construction dot the development's 2,200 acres of rolling wetlands.
The mastermind behind this and dozens of other freshly gated communities around the country is 40-year-old Richard Dugas, CEO of Pulte Homes, now the top homebuilder in the United States, with $11.7 billion in annual revenue. As the company's first "active adult" development outside the Sun Belt, Huntley is more than just a pretty portrait of suburban leisure. Homes aimed at older buyers generate a third of Pulte's sales and a slightly higher percentage of net income. Pulte's profit jumped 63 percent in the first half of 2005, its stock has more than tripled since 2003, and Dugas is promising 15 to 20 percent annual sales growth through 2007.
Aggressively targeting the fast-growing boomer market -- a consumer demographic that will swell to 80 million by 2020 -- Pulte is building 22 retirement communities, half of them in cold-weather states like Illinois, Michigan, New Jersey, and Ohio. The company is also buying land at a record pace to meet demand in every other demographic niche. "There's not an attractive part of the market that Pulte isn't hitting," says Standard & Poor's real estate analyst Bill Mack.
Behind much of this success is an old business practice -- sophisticated market research -- that has eluded the notoriously fragmented industry for decades. Even today, the 10 largest U.S. homebuilders control just 20 percent of the $375 billion market. Dugas and Pulte, however, are laying a new foundation, paying as much attention to consumer surveys and demographic data as they do to the detail work on custom homes. "Toyota (TM) sells Corollas to entry-level buyers, Camrys to the middle market, and Lexuses to the top," Dugas says. "Why can't we do the same in homebuilding?"
Not only has Dugas begun relying on internal research to find buyers for places like Sun City Huntley, he's counting on it to transform Pulte into the first U.S. homebuilder with national scale. The numbers are helping him to find prized land that other builders pass up and to better match home designs with his customers' tastes. Ultimately, Dugas says, research will protect the company from the precarious whims of the market. "If they can keep it up," predicts Greg Gieber, a housing industry analyst with A.G. Edwards (AGE), "Pulte is going to turn into the megafirm of the industry."
The Quest for Green Acres
Few people have had a better ringside seat to the American housing boom than Bill Pulte, the company's jovial, white-haired patriarch. As an 18-year-old in 1950, Pulte and a few buddies built a five-bedroom bungalow on Detroit's east side. The success of that project drew more work, and by the time Pulte incorporated his company in 1956, large, suburban custom homes had become his trademark.
TOP HOMEBUILDERS
REVENUE (IN BILLIONS) UNITS SOLD
PULTE HOMES $11.7 38,612
D.R. HORTON $10.8 43,567
LENNAR $10.5 36,204
CENTEX $9.0 33,306
KB HOME $7.0 31,646
Sources: Builder magazine; S&P Industry Survey
As Americans fled to the burbs in the decades that followed, so did Pulte, pushing beyond Detroit to start building residential developments around cities like Atlanta, Chicago, and Washington, and posting profits year after year (54 in a row).
The basics of Pulte's business model haven't changed. Like most builders, the company makes money by buying plots of land and then selling the homes it builds on those lots. Pulte owns more land than anyone else: 366,000 lots, a seven-year supply at the current pace of construction. Today, Pulte builds 100 homes a day, in 54 metro markets spanning 28 states.
The rapid expansion, though, created a pressing need for the one tool that most homebuilders can't wield: market research. The homebuilding industry is still dominated by 70,000 small local builders, each cobbling together an average of five homes a year, so to most it makes little sense to invest in research. But when you have thousands of customers scattered around the country, you have the chance to dramatically improve your results by figuring out exactly what they want.
That's the opportunity that helped persuade Dugas, then 29, to leave his six-figure job as an efficiency manager at PepsiCo (PEP) in 1994 to join the construction business. Dugas hardly fit the profile. Raised on the bayous of southern Louisiana, he helped manage his father's sporting goods store near Baton Rouge before earning a marketing degree at Louisiana State University. From there he went to Exxon, helping to market gas stations, and then spent four years squeezing costs out of Pepsi plants.
"Richard didn't know anything about homebuilding when he got here," says Bill Pulte, who at 73 remains the company's chairman. "But I was struck by how his mind worked and how he was never afraid to ask questions." As a VP for process improvement, Dugas helped reduce construction time in Pulte's hottest markets, Arizona and California. That led to a promotion as one of Pulte's top field generals, buying land and negotiating with fickle contractors and suppliers. By 2001 he was running the company's coastal division, generating $650 million in revenue, and in 2002 Pulte named Dugas COO. From that perch, Dugas still saw the unsolved problem -- building thousands of homes without serious research driving the process.
A Segment for Every Buyer
Bill Pulte had experimented with market research, but when Dugas was named to the top job in 2003, he quickly made it the centerpiece of the homebuilder's strategy. He quadrupled the annual marketing and segmentation budget to $40 million and began bringing in senior managers from Clorox, Disney (DIS), Wal-Mart (WMT), and elsewhere. Then Dugas assigned a new segmentation team, led by a former DaimlerChrysler (DCX) exec, to start dividing up potential homebuyers as they might Pepsi and Mountain Dew drinkers. Digging into a national database of more than 500,000 consumers, the team split the market into 11 target groups, from "starters" (first-time buyers) and "restarters" (single parents reentering the market) to "upwardly mobile families" and "retired/independents."
Such detailed segmentation data -- a kind of real estate talisman -- began to drive decisions in every part of the company. Take land buying, for example, a $5 billion annual expenditure. "Not a dollar of revenue comes in without us first controlling a lot," says Dugas, who runs a land-acquisition team of about 200. They scout states, cities, even small neighborhood pockets that pair up ideally with target customers. "We can say, 'In the southeast part of this city, or the northwest part of that one, this consumer is underserved,'" Dugas says. "We buy land where customer demand most exceeds supply."
The process can be like a search for hidden gems. "We do a comprehensive area study by demographic -- where they want to live, what they want," says Jim Rorison, who heads Pulte's land-buying operation in the eastern United States. "You find niches to serve undertargeted groups." Case in point are the retirees in Sun City Huntley. "Other people thought Huntley was Iowa," Rorison says. "But we matched what the demographic was looking for." That is, a house within a couple hours' drive of their previous homes outside Chicago. More than 6,700 boomers now live there, and Pulte expects to sell out the development by 2007.
All this mining of data helps Pulte on a smaller scale too. The company recently acquired a former hospital complex in Point Pleasant, a densely populated area on the New Jersey shore between Manhattan and Philadelphia. The site drew little interest from developers, but when Pulte's surveys showed that it was a good match for 44- to 55-year-old baby boomers, Pulte paid $11.5 million for it and agreed to demolish the hospital, remove the medical waste, reengineer the soil, and build condos. "It's close to amenities that active adults like -- cultural activities, transportation, nice canal views," Rorison explains. He expects a return on invested capital of at least 21 percent.
How Pulte Covers the Market
First-Timers
San Antonio, TX $145,990
2,519 sq. ft., 4 bedrooms, 2 baths
TARGET: First-time homebuyers, ages 20 to early 30s
HOTTEST MARKETS: Texas, Midwest
KEY CHARACTERISTICS: Young couples looking to break out of the rental cycle. Townhomes are popular for first-timers buying in big cities.
PORTION OF PULTE REVENUE: 27%
Second Move-Ups
South Orange, NJ $999,000
4,827 sq. ft., 3 bedrooms, 3 baths
TARGET: Homeowners looking to upgrade a second time, ages 40 to early 50s
HOTTEST MARKETS: Florida, West (Arizona, California, Nevada), Northeast
KEY CHARACTERISTICS: Well-off families with older kids, looking for lots of space and high-end features.
PORTION OF PULTE REVENUE: 19%
"Active Adult" Retirees
Huntley, IL $372,990
2,833 sq. ft., 2 bedrooms, 2 baths
TARGET: Baby boomers easing into retirement, ages 55 and up
HOTTEST MARKETS: West, Midwest
KEY CHARACTERISTICS: One-third of these buyers pay cash. They'll sacrifice square footage for luxury touches and access to golf and health clubs.
PORTION OF PULTE REVENUE: 33%
One Countertop Fits All
Market research generates another critical benefit too: hammering needless costs and complexity out of Pulte's supply chain. By parsing its database, the company discovered that 80 percent of its homebuyers end up picking the same countertops, floors, carpets, toilets, and other options. Yet the company buys 35 toilet models from six manufacturers, purchases windows from 17 suppliers, and offers customers more than 2,000 floor plans. "We saw that all 11 consumer groups considered a lot of the same things the most important," says Pulte COO Steve Petruska, who has already reduced the number of floor plans to 1,250 and has begun to standardize the options nationwide. And last year Dugas hired Reginald McCoy, a former supply-chain expert at Wal-Mart, to whittle down the list of suppliers and push for cost concessions. Says Dugas, "We didn't have that experience in-house."
Besides cutting costs, Dugas says, such efforts also create brand loyalty -- something no large homebuilder has ever enjoyed. Six years ago just 20 percent of Pulte's home sales came from repeat customers and referrals. Today that figure is 45 percent.
Making so many big bets on the basis of market research does, of course, come with significant risk. Pulte's massive land position could become a liability if the real estate market goes south. While Pulte keeps about half of its 366,000 lots under option -- putting down a fraction of the total price for the right to buy the land outright later -- the company is often forced into the same precarious position as homebuyers. Last year Dugas paid $100.5 million, or three times the appraised value, for a 276-acre plot in Arizona, outbidding rival builders Toll Bros. and D.R. Horton. "It's a big balance-sheet risk," warns Friedman Billings Ramsey analyst Craig Kucera. "They can't just walk away if things go bad."
Dugas says Pulte's diversification -- geographic and demographic -- will provide the necessary hedge. "Two, three, or five markets may have a falloff in pricing, but that's not going to kill a diversified builder," he says. "I can weather these things." If only the market research could guarantee that.
