More good news than bad

By Peter Ganahl President Ganahl Lumber Co.

E IRST let me give you the good f news: inflation will be under 2o/o for the second year in a row. 1986 will finish at 1.6% and 1987 will be about the same. That's good news if you lease your facilities with Consumer Price Index escalation clauses. But it's bad news if you're investing in real estate in the hope that you'll get appreciation. The median price of existing homes is flat and likely to stay the same in 1987. Although house prices have shot up in certain eastern markets, they have been offset in sunbelt markets. In the long run our industry is better off with relatively stable housing prices because it removes speculators from the market and lessens the "boom or bust" cycle.

More good news. If you liked the ihterest rate trends of 1986, get ready for more in 1987. If you have any doubt about our industry being interest rate sensitive. take a minute and review your company's financial statements from l98l and 1982. Low interest rates are good for our industry, and that's what we will have in 1987.

The bad news comes from the fact that we've had four straight expansion years in the construction industry. During this time the companies that supply contractors have enjoyed profitability and growth. Many of these have reinvested some of these profits in expanded operations and new operations thereby resulting in increased capacity in the industry and this in turn has put downward pressure on margins. (Remember supply-side economics!) This is the same thing that happened in the home center industry from 1980 through 1985.

Story at a Glance

Low inflation, low interest rates to continue. added capacity depresses margins. . increasing both sales volume and profit is the challenger of 1987.

By 1986 almost all of them operating in our Southern California market were either losing money or they had dramatically reduced earnings as a result of the overstoring.

What are the implications of these trends of inflation. interest rates and competition for the retailer of lumber and building materials? Getting all the volume we want in 1987 is the easy part. It's no trick to increase sales volume. However, it's no great honor either! Just set your prices low enough and the volume will go up. In our market. Home Club tried this and it worked - they got volume. But they have yet to achieve an operating profit.

The real challenge in 1987 will be to increase sales volume and get a corresponding increase in profit at the same time. I can guarantee you that it is much easier to write these words than it isto actually accomplish what the words say. At Ganahl Lumber, we believe the accomplishment lies in better execution of small things. Our mission is not to do anything extraordinary, but rather, we want to do the ordinary things extraordinarily well.