The edge that large remodelers leverage in a fragmented industry

Like its residential construction counterpart – homebuilding – the more than $500 billion residential remodeling industry remains highly geographically fragmented and varies widely in firm size, despite a slight increase in M&A activity since the COVID pandemic.

In an industry dominated by small operators, larger players compete at an advantage in several areas, such as capital, technology and operational efficiency.  

The Harvard University Joint Center for Housing Studies estimates that over half of residential remodeling businesses with payrolls generate less than $250,000 in annual revenue.

Phil Brenckle, CFO of Pennsylvania-based remodeling company West Shore Home, told The Builder’s Daily that M&A activity increased during the pandemic but has since ebbed and flowed.

As a result, the remodeling industry has experienced less M&A activity in recent years than other related sectors, such as building products or homebuilding.

West Shore Home operates in over 40 markets across 22 states. The company focuses on quick-turn remodeling and home improvement projects, such as bathroom renovations, flooring installation, and door and window replacements, while avoiding large design-build projects, such as basement remodels and home additions. 

To expand their reach, West Shore Home recently hired a Manager of Mergers and Acquisitions to oversee upcoming M&A activities. The company, which has previously completed 10 acquisitions, is mainly exploring targets in new markets within West Shore Home’s existing service areas. 

The capital conundrum

Remodeling is known as an industry with a low barrier to entry but a high barrier to scale, which is why there are so many small operators in the field. One major reason for this is that small operators face more challenges in accessing capital, Brenckle said. He noted that traditional banks are usually the easiest source of financing for remodelers.

For smaller remodeling firms, like those with 10 or 15 employees, access to capital is a significant challenge, partly because the remodeling industry operates on an asset-light business model, leaving little collateral for banks to lend against. This makes growth difficult in some cases.

“One of the things that occurs with scale is, once you get to be quite large, lenders are obviously way less focused on your collateral package and much more focused on your cash flows and your ability to repay the loans,” Brenckle said.

The technology upper hand

For large-scale remodelers, the ability to create and incorporate proprietary technology offers a significant edge over smaller competitors.

“They’re really just reliant on whatever SaaS solutions come to market, where they can purchase them on a subscription model. That obviously limits the customization. It limits what the product can do. Most importantly, all your competitors will have access to it too,” Brenkle said.

In 2022, West Shore Home acquired Design Center, Inc., a technology company specializing in 3D modeling, software development, and virtual reality.

The West Shore Home team then developed its proprietary Scan-to-Plan technology, which offers 3D digital visualizations of projects for customers—a technology increasingly common in homebuilding. According to Brenckle, his team introduced the application less than a year ago, and he is unaware of any major competitors using similar technology on a large scale. 

SAPOS, a proprietary technology of West Shore Home, utilizes AI agents to automatically schedule projects at the point of sale by analyzing inventory, installer availability, and permitting requirements. Although some highly customized projects still need human verification, most jobs are scheduled automatically, providing customers with greater certainty and freeing up employees’ time.

Technology is guiding the remodeling industry toward an omnichannel strategy, Brenckle said. Most sales still occur in person, but new technology gradually enables customers to access pricing estimates, scheduling, and visualizations online if they prefer.

Other advantages that come with scale

Large remodeling companies have certain advantages over smaller competitors. 

Scaling enhances marketing efficiency, and remodeling is a business that relies heavily on lead generation rather than repeat customers. 

Homeowners usually stagger their remodeling projects over many years, so having the ability to generate and manage leads at scale through national campaigns, affiliate partners, and in-house marketing is a major competitive advantage over smaller competitors.

West Shore Home, for example, leverages its size and national presence to invest in internal capabilities, including training centers, recruiting systems, and a 40-person marketing team. Because of their scale, West Shore Home uses W-2 employees for installation rather than subcontractors, which is uncommon but made possible by their geographical market penetration and investment in training.

Scale also provides stronger negotiating power with suppliers and the potential for better material pricing. Similarly, large homebuilders tend to have more bargaining clout with vendors than smaller competitors, mainly due to their economies of scale and consistent volume.