Home builders sold $11 billion worth of technology products in 2004 and expect sales to increase 10-12% in 2005, according to Parks Associates’ 2004 Builder Survey.

Home Builders: Key Channel for CE

Bill Ablondi | Parks Associates

Home Builders: Key Channel for Consumer Electronics
by Bill Ablondi, Parks Associates

Home builders sold $11 billion worth of technology products in 2004 and expect sales to increase 10-12% in 2005, according to Parks Associates' 2004 Builder Survey.


Builders occupy a unique position in the value chain of products and services from manufacturers and service providers to consumers. In many cases they have direct contact with buyers, but more often they build homes speculatively - even "custom" homes, which are customized after the sale has been completed, are built "on spec." Home builders are making a product in a competitive environment and face the same challenges as any other producer. They are concerned about pricing, costs, differentiation, demand, economic environment, etc. Home builders just operate on a longer sales cycle than typical manufacturers and have a much bigger item for sale. Therefore, it is not surprising that builders are conservative in their adoption of new products, technologies, and business processes. At the same time, they need to be on the lookout for ways to capture business from their competition - even in these times when the home building industry continues to be a shining star in the U.S. economy.

Builders have been including appliances such as clothes washers, dryers, dishwashers, garbage disposals, compactors, central air conditioning, and the like in homes for decades. This wasn't always the case as builders used to focus on erecting the structure and buyers would add the amenities. In Europe and other regions, this is often still the case. In the United States, builders are now offering a wide array of amenities that extend well beyond typical appliances, granite countertops, tile floors, and hot tubs. Electronic systems such as structured wiring, security monitoring, home controls, and entertainment systems are now part of the portfolio of products that builders offer their customers.

Home builders sold $11 billion worth of technology products in 2004 and expect sales to increase 10-12% in 2005, according to Parks Associates' 2004 Builder Survey. These findings show builders growing into a formidable channel for the distribution of advanced products such as home networking and multiroom stereo systems, with 62% of all U.S. builders on the lookout for new products and/or capabilities that could differentiate them in the market (Figure 1). This finding challenges the view that builders are not interested in offering new products or services. This is not to say that builders are ready to gamble on products not widely adopted by consumers. When asked why their firms began offering products, most respondents reported that they experienced strong demand from consumers. Looking at the other side of this picture, builders were asked why their firms do not offer selected products. Low buyer demand was the most common reason mentioned.

Figure1: Builders' Attitudes about Offering New Products

Approximately 26% of builders have a dedicated resource for new product assessment. In most cases this resource was the president/owner of the firm, but in 15-20% of such cases it was a director of new technology or a team of people charged with the responsibility. Management makes the final decisions about new products to be offered, but marketing and sales personnel influence these decisions.

PRODUCTS OFFERED

Builders are currently offering a wide array of electronic systems in the homes they build. Security systems are the most widely offered among the products mentioned in this study with nearly 80% of builders offering them. Builders offering security systems reported that two-thirds of the homes they built in 2003 had a security system installed. Nearly one-half of builders offering security systems include them as a standard feature in their homes or pre-wire their homes for these systems. Buyer demand prompted 77% of builders to begin offering security systems; 35% started selling them because they believe houses sell faster with them installed.

Sixty-eight percent of builders offer structured wiring; in 2003 nearly 60% of the homes these builders constructed included structured wiring. More than 80% of builders offering structured wiring see it becoming a standard feature due to widespread broadband Internet adoption. Those not offering structured wiring cite lack of buyer demand as the reason. Although most new home buyers are likely to install a broadband connection, many do not think about the infrastructure required to fully utilize this connection. Builders offering structured wiring have taken on the challenge of educating buyers and offering options and upgrades that take advantage of this infrastructure.

One-third of builders offer control systems, and 15% connect appliances of one type or another to these control systems. HVAC and lighting controls are the most common capabilities associated with these control systems. Builders in the U.S. are not typically experiencing strong demand for central home control systems. One in five builders indicated that their buyers were keenly interested in central control systems, and a comparable portion saw no interest. The majority of builders sensed some demand for central controls, but manufacturers need to develop awareness of the convenience and improved resale home value that come with their systems.

Few builders currently partner with electric utilities or cable MSOs to offer central control systems, but nearly 20% would definitely consider the option and another 65-70% of builders indicated that they would consider such an arrangement.

Figure 2:  Which Technology Amenities are Offered and Installed?

Figure 3:  Which Entertainment Amenities are Offered and Installed?

Sixty percent of builders offer multiroom audio systems, which are a good example of an upgrade based on structured wiring. Builders offering audio systems installed them in 44% of the homes they built in 2003, and 35% indicated that multiroom audio was critical to the sale of the home when the buyer requested the feature. The proliferation of readily accessible audio content from satellite radio to the Internet, plus more affordable, high-quality sound systems, is driving consumer demand for built-in sound systems in homes. These factors, plus the likelihood that new home buyers value multiroom audio systems more than the previous generations of home buyers, lead to the conclusion that the market opportunity for multiroom audio systems is just beginning to take off.

Home theaters can be expensive options for home buyers to add, but they are growing in popularity as prices for good quality systems drop. This study probed builders about the extent to which they offer home theaters. More than 70% of builders offer to include a space or portion of a room designated as an entertainment center, and 42% of the homes these builders constructed in 2003 had such a space. Nearly 60% of builders will pre-wire a home for a home theater system, which allows buyers to add the components they want later. Most builders do not install electronic components in the homes they build, but this may be changing as a significant portion (42%) already do. In most cases builders are installing speaker systems, but 18% offer to have the entire home theater system installed.

Buyer Costs and Builder Margins for Selected Systems

On average, a security system costs buyers of single-family new starts about $2,600, including installation. This cost is higher than the $1,480 average cost of a security system in a new home because our builder numbers are only for single-family housing while the average cost of a security system includes multifamily dwellings. In addition, new-home buyers are a bit less cost sensitive than are existing homeowners because their security system costs will go on a long-term mortgage. Considering the average price of a new home, it is easy to see why more than one-half of new homes built have a security system installed. Builders report a wide range of margins earned on security systems. About 20% say the margin they earn is less than 5%, but 18% report 25% or more.

Structured wiring costs buyers an average of $3,000 installed, again a relatively small amount when considering the benefits to the homeowner over the long run. Computer networking is one of the prime applications supported by structured wiring, and builders report that this capability makes more of a difference in selling a home than a finished basement. Earning a margin of 22% on the wiring is attractive to builders, and most say that they can charge more for a house outfitted with structured wiring.

Multiroom audio systems cost buyers an average of $4,000; this cost includes four to five rooms wired for audio. Builders reported a wide range of margins earned on audio systems, reflecting the multitude of systems and options available. On average their margin is 18%, but that number needs to be viewed in context with the type of system installed and the extent to which the house is wired for audio. A dedicated home theater costs buyers an average of $10,800, a hefty sum for many, which is why only 13% of homes built in 2003 had some level of home theater installed.

Selling and Installing Selected Options

Builders were asked who they consider to be their primary partners for selling and installing the electronic products and control systems covered in this study. More than 80% of builders mentioned electrical contractors (#1) as their primary partners. Security installers (#2) came in a close second with 75% of builders feeling that these types of firms are their primary partners. Fifty-eight percent of builders mentioned audio/video dealers and installers (#3).

Builders were probed further about their relations with contractors by asking them who sells and actually installs the options they offer. The builder's sales staff is clearly the primary force selling options. Local security dealers, audio/video dealers, and electronic systems contractors are actively selling options for a significant number of builders. These last two categories of firms, A/V dealers & electronic systems contractors, are commonly referred to as "installing dealers." Installing dealers often install security systems and therefore may be represented among "local security installers" as well.

Parks Associates has been conducting research of installing dealers for the past four years and has found that they are a key influence on which electronic systems are sold to consumers. This study of builders confirms their role in a broader sense as one of partnering with builders on the sales and installation of high-value electronic systems.

Electrical contractors do not get involved in the selling of options, but they are definitely involved in the installation of selected systems. Builders' reliance on them to perform installation of structured wiring, multiroom audio, and security systems is a natural extension of their current role. The issue that concerns some manufacturers is whether electrical contractors are properly qualified to perform installation of these systems.

Builders were asked how important it was to them to have individuals who were "certified" by an independent industry organization, e.g., NAHB[1]. Overall, builders seem to be undecided about the importance of such certification with more than 40% "neutral" on the issue. However, 30% do not see certification as important, and on the flip side, 25% see it as essential or nearly so.

Electronic systems contractors (a.k.a. installing dealers) are heavily involved in the installation of multiroom audio systems but significantly less involved in the installation of structured wiring. These types of contractors are typically "certified" by CEDIA[2] to install structured wiring, but clearly this certification does not matter to many builders.

It is interesting to note that 14% of builders call upon security system installers to install some of their multiroom audio systems. Some of these may be installing dealers handling a variety of electronic systems as was previously mentioned, but many are security system installers expanding their businesses to capitalize on the growing opportunity in audio systems. It is likely that more security system installers will follow these trendsetters as they too become aware of the opportunity.

In Conclusion

  •  Manufacturers must generate robust demand among home buyers in order to capitalize on builders' willingness to adopt new products/capabilities in the homes they build.

  • Capabilities such as computer networking that build on the adoption of broadband Internet access are viewed by many builders as positively influencing home sales.

  •  Manufacturers of popular options, e.g., structured wiring, security systems, and audio systems, have not created brand awareness among a substantial number of builders offering these systems.

  • There is a significant opportunity for audio system manufacturers to capitalize on growing buyer demand for multiroom distribution systems.

  • Electronic systems contractors (installing dealers) are a key link in the value chain for manufacturers delivering audio/video systems through builders to consumers.

  • Security system installers are likely to play a bigger role in the installation of audio/video systems in new homes based on their well-established relationship with builders.

  • In general, builders are open to doing business with new partners as long as the products/services are priced favorably and vendors have a solid reputation for product quality.

[1] National Association of Home Builders

[2] Custom Electronic Dealers Industry Association


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