Missed Opportunity for Fundamental Change

I began my employment at Clio Holdings, LLC on September 30th, 2019. I was excited to be back in the CPG industry and also to be the first and only FP&A team member for an organization with over 700 employees and $100M+ in annual sales. Clio Holdings was formed in 2016 as a holding company for several regional countertop fabricators. The holding company had brought together a total of six business units, the largest of the six residing in the Kansas City market with over 20 years of existence. It looked like a great opportunity for me to introduce the value of the FP&A position to a collection of like business units that collectively was not that small. Unfortunately, this opportunity quickly unraveled and funding ran out by the end of the year. All six business units had been in business for at least 20 years, some as many as 40-50 years, and had all made it through the great recession which was driven by a housing crisis. In addition, the company's performance suffered at a time when the economy was experiencing full employment, higher home values, and just a month after the organization was shuttered, a 13 year high in new home builds. This was clearly a result of several leadership changes from the onset of the initial combination of the six business units during 2016 - 2017. Much of the leadership in place when I arrived was new and had inherited a turn around project. I knew this going in, but anticipated given the macroeconomics just mentioned that the past was the past and the leadership change could get the job done. I'm confident we would have. But 90 days was not enough. In about 30 days, I saw immense opportunity to add significant value through financial analysis and partnering with the business. There were cost savings that were not realized and pricing performance was in decline. In hindsight, pricing was a giant opportunity for 2020 that I began to realize as the doors were shuttered on Clio Holdings.

I want to focus on the pricing aspect, although the material costs may had generated an equal financial opportunity. I walked into a situation that was experiencing year over year declines in price per unit. And it seemed to befuddle many people. It is understandable, as I have described elsewhere within this site. Customer and product mix can have a profound impact on pricing, so much so that it is possible to increase every product on every customer and still lose margin. I've shown this simple example before:

In the example above, although the quantity in total is the same, revenue has declined. But every product has increased in price. I initially anticipated that this phenomena may be occurring at Clio Holdings, and indeed there was some "trade down" impacts occurring. But with our low and sometimes negative margins, it was hard to determine how Clio Holdings got themselves in this position. Then I looked at some FRED data. FRED, which I believe simply stands for Federal Reserve Economic Data, is a valuable site with great access to industry specific economic trends. This is what I found for housing in the Kansas City area.

This FRED data shows quarterly home value changes on an annualized basis. I only show 2008 - 2010 and then 2015 - 2019. I purposely show these time periods to emphasize the stark differences. 2008 - 2010 was the peak of the housing bust as part of the great recession. It took a while to pull out of that valley. But 2015 - 2019, and specifically 2018 saw a big jump in pricing of house sales with as much as a +8% annual price increase. So why is this important? Because PRICING STRATEGY MUST, WHENEVER POSSIBLE, WORK BACKWARDS. PRICING SHOULD NOT BE AN INTERNAL MARKUP OF COSTS. If a home builder is selling a home and land/lot during a time of strong pricing such as 2018, smart manufacturers need to partner with their customers to get their piece of the pie. It does not need to, nor should it be, a tug of war on taking margin. It can be a win / win scenario.

In what might be an oversimplified example, I take a scenario in which the value of a home increases 10%, from $200K to $220K. I then present two possible scenarios.

The base case is the lower home price and scenario 1 is the home builder taking margin and profits by keeping the total cost of the home the same. If Clio Holdings only changed pricing as a response to their own costs during 2017 - 2018, they missed a huge opportunity which may have led to their inability to increase profits during a time when the industry was extremely healthy. Scenario 2 is an example where the manufactures of all home construction increase their cost to the home builder by a corresponding 10% to match the end value. If Clio Holdings was in alignment with this increase, their revenue would jump from 3,000 to 3,300, but CONTINUE to be 2% of the total cost of the home. Clio Holdings, and all other manufacturers for that matter, would not be taking margin from the home builder. The home builder profit margin dollars still increase and they maintain their margin percent of 25%. Meanwhile, since Clio Holdings is pricing based on the value of the home, not focused on their costs, they would have potentially increased their profit margins by 80%! Of course, this depends on the full supply chain potentially following suit. However, the material suppliers of stone such as quartz and granite, still the overwhelming favorites for countertop surfaces, are often imported from other countries. The stone suppliers would each need to understand many different local markets. In addition, the buying power of a now combined $100M+ business should have been utilized in 2016 - 2017, as soon as the business units were combined as Clio Holdings. The year of 2017 - 2018 for Clio Holdings, with the combination of buying power and increases in home values should have been a golden era. Instead, it likely set up the holding company into a precarious cash crunch in 2019. I only wish I would have been hired 18 months sooner. Clio Holdings, LLC could have used a true FP&A team, even if it was a team of one, to drive much better results.