Publication Date:
Thu, 2008-10-09 19:00
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For nearly 30 years, housing industry icon Art Rutenberg, now 81, pioneered his unique franchising concept exclusively in Florida, with only a few small steps into contiguous home building markets in bordering states Alabama and Georgia. But now, Art has kicked himself upstairs and turned over day-to-day leadership of his company, Clearwater, Fla.-based franchise network Arthur Rutenberg Homes [1], to David Hanrahan, 40, and Alan Weiner, 48, who have ambitious plans to sign up builder franchisees in Atlanta, Charlotte, and the coastal resort markets of the Carolinas.
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Certainly, the condition of Florida's housing markets had to influence this decision, and the new CEOs have a mandate to grow Rutenberg's franchise network to justify their positions. The firm's housing revenues dropped to $385.6 million in 2007, from a peak of $492 million the previous year, even though the average sale price escalated from $677,685 in 2006 to $864,600 in 2007. (It now stands at just under $1 million in 2008.) Still, homes closed dropped precipitously from 726 in 2006 to 446 last year. Even so, Rutenberg is climbing Professional Builder's Giant 400 rankings — from No. 78 in 2006 to No. 63 this year.
But the decision to grow the company actually pre-dates the Florida housing slump. “In October of 2005, just coincidentally the month the market crashed, Art promoted us to co-CEOs and declared that he's now the non-executive chairman of the company,” Hanrahan recalls. “But he told us he retains 'unlimited meddling rights,' and he's keeping his word.”
Art Rutenberg has not taken any six-week vacations, says Alan Weiner. “He does travel a lot,” Weiner laughs, “but it's mostly road trips to visit the franchises, to see how they're using the services we provide. His most important role right now is quality control. He delves into different areas of our operations and looks at every aspect of that department's operations. In a down market, he wants to use the opportunity we have to get better at everything we do. His knows this company inside out. He wants us to come out of this downturn a better company.”
And a bigger one. Art Rutenberg's theory has always been an appealing one, a housing equivalent of McDonald's Corp.: Let the franchisees carry the debt and assume most of the risk. Grow the corporation on the basis of charging for services that enable small businesses to grow on equal footing with big ones.
“Art has always thought franchising is a great template for partnering with people who have local market knowledge,” says Hanrahan, “and housing is a local business. Financing and land are not something we bring to the table. What we provide are information systems, design, advertising, sales support and brand recognition.”
The move beyond Florida's borders will test Art's concept as never before. “We made the decision to change our growth strategy two months ago,” says Hanrahan. “Before, our goal was always to fill up Florida with franchises, but now we've decided to open franchise sales in other states. We're going to jump over the rural areas of Georgia that border Florida and head right for Atlanta, Charlotte and the resort markets in the Carolinas. They don't have the tremendous surplus of standing inventory we now see in Florida.”
Weiner is responsible for all financial and legal aspects of the company and also oversees franchise sales, while Hanrahan supervises all the franchise support operations — which is the bulk of what ARH's 65 corporate employees do in Clearwater to benefit the franchises scattered all over Florida. “When you follow in the footsteps of a guy like Art, it's a big enough job for two,” Weiner reasons. “The fortunate thing is that we still have Art here to provide guidance.”
While each has areas of specialization, the two CEOs are both involved in everything, Hanrahan says. “We trust and support each other.”
Weiner is leading the franchise sales effort, both inside Florida and in Atlanta and Charlotte, which involves a significant challenge. “We have to find builders in those markets for whom an ARH franchise makes sense, for them and us,” he says. “We have a model home-based marketing approach. Atlanta has models, especially at our luxury price point. And it's a market dominated by small custom builders, so it's a natural for us. We'll bring them design leadership, powerful marketing and a level of systems sophistication no small builder can match on its own. The question is, can the builder leverage our model presentation to generate enough of a return to justify the investment?
“We're confident we can find the right builders, but the assessment process is two-sided,” Weiner says. “We don't 'sell' franchises, we award them. ... We have to find franchisees capable of maximizing the impact of our team in Clearwater as we build our brand in Atlanta and Charlotte. Fortunately, there are a lot of good builders in both markets.”
Meanwhile, Hanrahan is handling the daunting task of adapting ARH's franchise support to the new markets and the new realities faced by existing franchises in Florida. “Business is tough,” he says. “But one of our franchises is absolutely better than going it alone. We have resources no small custom builder could ever afford alone, and our brand is valuable, especially now.”
When times are tough, there's a flight to value in the marketplace, Hanrahan maintains. “No one knows how low the next house price will have to be to get a sale.”
Hanrahan is making significant changes to Rutenberg's software systems and supervising creation of an entire portfolio of new house plans geared to Georgia and Carolinas. “We have to establish ourselves as design leaders there, in the same way we now hold that position in Florida. We can't sell Florida houses in Atlanta, but we've learned that our brand is already strong there. Enough Atlantans visit Florida, especially vacationing in the Panhandle, that a lot of people have seen our models and know our brand.”
Rutenberg's upfront franchise fee is $32,000. Then, over the first 24 months of operation, a new franchisee pays another $2,000 a month, plus the regular royalty of 3.15 percent of the home price, for a home-and-lot sale,
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and 4.15 percent if the sale is home-only.
“It's really $80,000 over two years, if you add it all up,” says Hanrahan. “And our royalties average 3.55 percent of revenues.”
For the investment, franchisees get the house plans and Rutenberg's development and installation of a complete model home presentation and a coordinated marketing effort that includes the firm's Web site, www.arthurrutenberghomes.com [2], as well as the firm's promotional magazine, Legendary Homes, which is now distributed to 150,000 prospects a year. Perhaps the most powerful weapon the firm provides to franchisees is the complete, fully integrated information systems to operate every aspect of a home building business, from sales to accounting.
And the franchises all share this information, except financials. “They get all vendor and cost data,” says Hanrahan, “so every franchise knows what all the others are paying for 2 by 4s. They see each other's budgets. They know the median cost for every line-item in the system.”
Rutenberg also has what it calls a “differential pricing system,” which allows franchisees to price out just three house plans for each new community and have the system then price all of the rest in the entire 90-plan offering, each with multiple elevations and garage configurations. Obviously, to maximize this benefit in Atlanta and Charlotte, ARH will need to develop as many house plans for those two markets as it now offers in Florida.
The firm also monitors materials and product pricing across all its markets and negotiates “national” pricing with many vendors. Once again, to make the move into Atlanta and the Carolinas, Rutenberg will have to expand the reach of this system to new and different vendors.
Rutenberg's model homes are its primary means of controlling quality and building the brand. Every model home is designed, merchandised and marketed out of the Clearwater headquarters building. “We have a series of meetings that leads up to selection of what plan to model in each community,” Hanrahan says, “and we inspect every stage in the development of the model presentation.”
Moreover, there's a clause in sales agreements that homes will be built to “model home quality” and referencing the address of the model home in question. “The model sets the standard for what we deliver,” says Weiner. “No model is allowed to grand open until it passes our inspections. Any changes we require, the franchisee is contractually obligated to make. By the time the model is installed, we — and the franchisee — are very confident that model will facilitate selling houses. It's not an adversarial process; we all want the same thing.”
Hanrahan is now making big changes in the model home process, moving from models that show a lot of options and upgrades to new ones that are finished mostly with materials and products included in base prices. The changes are intended to move Rutenberg toward lower price points. “You'll see us moving more toward the $600,000 to $700,000 range rather than $1 million and up, which is where a lot of our models were a year ago,” Hanrahan says, “We want to avoid sticker shock and get our models closer to the pricing of an average home in the community.”
Design director Tom Kruempelstaedter, who's been churning out Rutenberg's house plans for more than 25 years, is already well into work on the product lines for Atlanta and Charlotte. Meanwhile, Alan Weiner says he's close to signing the first ARH franchisees in both of those markets.
In Atlanta, we could soon see a battle for design leadership between Art Rutenberg and Atlanta's own John Wieland [3], which means neither of those home building legends will ever retire. “We're going to Atlanta,” says Art Rutenberg, “because the builders there need us.”
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