Competitive pressures have forced many builders into survival mode, where they often settle for significantly lower profit margins.
“Anyone who tells you their profit margins haven’t been slashed at least in half probably needs to re-run their numbers,” said Mike Giovanone, owner of Concord Pools & Spas, a Pool & Spa News Top 50 Builder based in Latham, N.Y.
Net profits per pool have dropped between 20- and 60 percent, depending on the region. Not surprisingly, the decimated markets of Florida, Arizona and California are taking the biggest hit.
“We have hundreds and hundreds of pool builders fighting for 10 percent of the pools that were built three years ago,” said Dave Allen, owner of Erikson Pools’ Central Florida office, located in Clermont, Fla.
Some builders work for margins they’d never have considered before. They settle for profits in the area of 5 percent, some even lower. The objective is to bring in enough revenue to close out the year.
“Once we get the revenue to cover overhead and give us a baseline profit, then we can become a little more picky with the jobs that we take because we’ve covered our nut,” said one installer who asked to remain anonymous. “From there on, we can actually start to be profitable.”
But it isn’t only competitive pressures that are cutting into profits. Rising equipment prices also play a part, Allen said. And with companies building fewer pools, they can’t take advantage of the volume discounts they enjoyed before. Overhead costs such as insurance and fuel also have increased.
This trend is even beginning to affect high-end and commercial installations, specialties previously considered immune to such fierce competition.
“People expect a deal right now,” said Jeff Fausett, president/CEO of Aquatech Corp. in Costa Mesa, Calif. “So part of the game becomes, ‘I need to do this to survive, so if I can keep people employed and break even, then I’ll do that.’”
However, lowering margins will not help for long, said Manuel J. Perez de la Mesa, president/CEO of PoolCorp in Covington, La. “If you don’t make a gross profit, you don’t have enough money to pay your overhead,” he explained. “If you can’t pay your overhead, then pretty soon you’re out of business.”
While some see lowering margins as a necessary evil to raise volume, Perez believes that is a bad idea. “A lower margin per pool always hurts you more than lower volume, period,” he said. “The first thing you have to do as a businessperson is make sure you maintain your margins. If you don’t, you’re going to get hurt really bad.”
But, for better or worse, the phenomenon of drastically lower margins probably will end later this year because more companies are likely to go under. Currently, each job that arises may help a firm hang on a little longer, but it’s not a sustainable strategy.
As firms fail to earn enough revenue to remain viable, they will falter, thus giving the surviving firms more breathing room.
“Ultimately, there will be more pool builders failing, and it’s going to thin out the herd,” Fausett said. “As more people go out of business, then prices will rise naturally.”