Study: Despite stimulus package, construction supply industry expects sharpest drop in sales in second half of 2009

• Survey of 53 executives in the building materials and supply industry: 64% of companies are already suffering from the crisis. Close to half expect the crisis to last two years. Longer-lasting impact on new-construction suppliers
• 70% see benefit in federal government stimulus package, though 45% of them only to a small degree
• 94% consider bankruptcy greatest risk
• 70% see certain opportunity in countercyclical marketing; 51% hope for attractive investment options
• All companies are lowering costs. Personnel reductions mainly in production and overhead; sales and marketing only slightly affected

The financial crisis has reached the German construction materials and supply industry. A survey of 53 industry executives by Roland Berger Strategy Consultants reveals that almost two thirds (64%) of respondents are already grappling with the consequences of the crisis. Additionally, they still anticipate the sharpest drop in sales in the second half of 2009. As sales volumes decline, operating costs continue to rise for many. Slumps in profit are thus inevitable. Almost half expect the crisis to last about two years. Almost three quarters of those surveyed expect to benefit from the German federal government's stimulus package, though nearly half see its effects as minor and 30% see no effect at all. The primary points of contention are the short-term effects and lopsided approach. Suppliers to new residential construction in particular feel left out. Almost all fear the risk of bankruptcy, followed closely by problems at their major customers. Consequently, all companies are lowering their costs, primarily general and administrative, production and overhead costs. For 83%, obtaining financing remains especially challenging.

"The heads of the German construction materials and supply industry are worried about the second half of 2009," says Dr. Kai-Stefan Schober, a Partner in the Civil Economics Competence Center at Roland Berger Strategy Consultants. "Nearly two thirds are already suffering from the crisis, and expect their sales to continue to drop by year-end." To many, the federal government's stimulus package is of vital importance in weathering the downturn: "If the stimulus package achieves traction in the second quarter and orders visibly increase as a result, these companies believe the bottom can be reached by mid-2009. However, if the government's allocation process is delayed, or if no direct orders follow, then a crisis lasting well beyond 2011 is conceivable, according to these managers." Suppliers for new construction are generally affected for a longer period than those in remodeling: 45% believe that the crisis may last at least three years. Remodeling benefits from energy-savings programs and regulations.

Sales decline as costs rise

To date, the crisis manifests itself primarily in declining sales: 57% of those surveyed are struggling with lower revenue due to decreased sales volumes. This will become painfully evident in 2009: 70% of those surveyed project a substantial drop in revenue for 2009 (2010: 52%). At the same time, about 40% of respondents believe their costs will increase. "This creates a massive amount of pressure on profits, and 58% of the companies are already struggling with a decrease in earnings," says Schober.

Stimulus program inspires only limited hope

Seven out of ten respondents anticipate that the stimulus package will have a positive effect on their business. "Nevertheless, only about one fifth of these companies anticipate a "strong" or "very strong" effect – by contrast, almost half are merely counting on "somewhat" positive effects," says Schober. In the opinion of half of the survey participants the initial impact will be felt as early as the end of 2009, whereas about one third (35%) do not expect this until 2010. However, these companies expect the effects of this program to be short-lived, and are asking themselves what's next. And it would neglect new residential construction.

Savings mostly in production and general and administrative costs

"All companies surveyed are starting to reduce general and administrative costs," says Schober. Personnel reductions primarily affect production (77%) and overhead (64%); however, only one fourth (28%) are planning personnel cuts in sales and marketing. "One doesn't want to gamble with one's clout in the market. In production, three quarters of those surveyed are additionally instituting furlough programs. Reduced working hours are already in force at just under half of these operations," says Schober. A strategic withdrawal, either from specific regions or by selling off business units, is only planned by just over one fifth (23%) of those surveyed. "More than half of the companies are trying to turn the economic situation into a net benefit: 51% are looking for attractive acquisition targets." Many companies (70%) are considering countercyclical marketing as an opportunity. But in these economic times, securing financing remains a special challenge for almost all of them (83%).