When selling lower priced products is an imperative
When I help companies develop corporate strategies, I generally discourage them from pursuing low-margin businesses. These opportunities can be very competitive, it is hard to realize value for innovation, and you join a race that you will lose over time. However, what should a company do if we are undergoing a structural change in the economy? That is exactly what is happening in the American economy. We aren't in a short-term slump; we are gradually transitioning to a new form of economy in which incomes of Americans will be a lot lower than they have been in the past.
Smart companies are responding to this by making changes to their product portfolios (e.g. lower priced stores by Whole Foods Market) and new companies are emerging that either capitalize on this trend (e.g. Uber is using mostly college educated folks to drive cabs) or are there to serve them (Forever 21 and H&M). That is why the introduction of Express Homes by D.R. Horton was worth analyzing because the company saw the need to serve the first-time home-buyers by building lower priced homes during a time of rising property values. Now that we have some more data, let us review the impact on their financials:
Lessons from the D R Horton Strategy
- When you are selling a lower priced product with lower margins, while it is possible to improve the top line, it is nearly impossible to maintain the bottom-line.
- Responding to changing market structure is smart. Imagine what would have happened if D R Horton would have stayed away from pursuing the Millennial first time home buyers.
- It is important to be disciplined about the pricing of lower-priced products because customers tend to be very price-sensitive. It is encouraging to see that number of Express Homes has continued to grow even as the average selling price has been rising, but there is a limit.