Lessons Learned Pt. 1: The New Pricing Reality
The COVID-19 pandemic has disrupted many industries, turning business models on their ear and driving prices for commodities like steel through the roof. While COVID is still a part of our lives, we can look back at the last two years and see how the construction industry has changed while evaluating lessons learned about key business elements.
Over the next few episodes, we will dive into key business categories to discuss what we’ve learned and how the way we operate will be changed moving forward.
In part one, we will talk about the new pricing reality and how COVID impacted different pricing strategies, both at the peak of the pandemic and in the years to come.
Transcript
Lexi:
Welcome to the season two premiere of Metal Minutes. I’m your host, Lexi, and in our last episode, we discussed the all-time high steel prices and the factors that led to the extreme price volatility. Since then quite a lot has happened in our industry, so we’re kicking off season two with a series we’re calling Lessons Learned from COVID-19, where we will discuss how COVID affected some of the key elements of our business and how it changed how we operate moving forward.
Lexi:
Today, we are talking about pricing strategies with Jon Lucas, the Strategic Pricing Manager here at Cornerstone Building Brands. Hi Jon.
Jon:
Hi. How are you?
Lexi:
Doing well. Jon, before we get started with our topic today, can you give a quick recap of the factors that led to the all-time high steel prices back in 2021 and how it affected our industry?
Jon:
Sure. Yeah. The biggest effect that COVID-19 had was it basically put us into a period of hyper-cost inflation. It created kind of a perfect storm between supply and demand. The four largest consumers of steel are the construction industry, automotive, appliances, and oil and gas, and all four of them increased pretty drastically during COVID.
Jon:
Construction increased as people started remodeling their homes, and offices started getting reconfigured. Automotive was interesting because right when COVID broke out, automotive production stopped, and then we all forecasted that it wouldn’t pick up again for another six to eight months. But it actually rebounded very quickly in about a month or two, and then all that demand that was not forecasted ended up being very strong in the automotive industry. Appliances kind of goes along with new construction. As people started working from home, they started upgrading their appliances, refrigerators, dishwashers, that kind of thing. And then oil and gas just steadily increased pretty much throughout the whole COVID period.
Jon:
So over that period, you had very strong demand. And then on the supply side, supply was very constricted because the mills and the producers and fabricators of steel had the same issues that everybody else had. They had labor shortages, people not able to work, people taking early retirement, difficulty transferring materials between plants. So demand shot up and supply went down and we had a perfect storm, so we had a period of hyper-inflation.
Lexi:
That makes sense. A lot of times when something like that happens, I think the main question is with these increased costs, who should be taking these hits? Who should be absorbing these price increases? In our recent whitepaper, we talk about downstream pricing strategies. Can you explain what that is?
Jon:
Sure. Yeah. Every company in the supply chain needs to maintain financial health when costs increase as drastically as they increased. It doesn’t do us any good if our customers or our vendors are dealing with squeezed margins and cash flow issues, because that’s when you get into having to allocate inventory and having shortages and extended lead times and all kinds of other problems.
Jon:
What has to happen is when the costs increase, we’ve got to be able to pass along enough of that cost increase to maintain our financial health. Sometimes that means by the time it gets to the end user that that cost will be just too high for that company to buy that building at that time. It might break the budget. And that’s unfortunate. We all want the sale, but the alternative is to end up with a bad situation where we have ourselves and our business partners in financial turmoil and that’s bad for our customers in the long term. We just need to be able to pass along enough costs so that we can maintain strong financial health throughout the whole supply chain.
Lexi:
Okay, so we want everyone to win along the supply chain?
Jon:
Correct.
Lexi:
We have been talking a lot about the steel prices, but I think a lot of other things go into the inflation and the costs that are going into the production of our material and the production of our buildings. Can you talk a little bit more about the bigger picture? What else impacts the costs that consumers are seeing?
Jon:
Sure. Some of the other elements of the cost are things like aluminum and zinc, which both skyrocketed to record highs and they still remain very high. The aluminum and zinc is used as the galvanizing and the galvalume that is the coating that protects the steel. Paint costs; those skyrocketed. They’re still very high. The labor shortage kind of affects everybody. So all of our raw materials and our own labor supply, particularly on the higher end skilled labor. When you think about welders were in short supply before COVID even came around, so the effects of COVID-19 just exacerbated that shortage.
Jon:
The other challenging cost is freight and logistics. That’s been a volatile industry forever, and it’s going to remain volatile. For a period of time, it shot up. It’s come down a little bit now. But we all know where fuel costs are; it’s on its way back up again significantly.
Jon:
So in addition to the steel, you’ve got materials and labor and logistics and several things that are just adding to the cost basis.
Lexi:
Okay. So, I mean, I guess looking back we know a lot more now than we did two years ago, but I think if we could tell ourselves anything back then it would be to expect the unexpected.
Jon:
That’s right. Yeah. Looking ahead in our industry has always been part of our world. One thing that we really learned is that are factors on the supply side and demand side that are very sensitive and that can move very fast. And it only takes a few of those to kind of move in the same direction at one time for it to really move the needle on the cost. We’ve seen things like mill shutdowns that coincidentally might happen at the same time as a weather event. Those kinds of things. If two factors on either the supplier or the demand side happen to hit at once, then costs, there can be a serious impact up or down. It takes a lot less than a global pandemic or the war in Ukraine or something like that to get 20 and 30% cost volatility in our materials. That’s just the world we live in.
Jon:
What we all need to do is just kind of, like you said, expect the unexpected and use database forecasting as best we can, and try to forecast where costs are going to go as best we can and manage that volatility.
Lexi:
Right. No one could have predicted what was coming for us back in 2020. But now that we’re standing here two years later, what would be a piece of advice for our own business or maybe for our customers and how to manage that cost volatility in a post-COVID world?
Jon:
Yeah. I think it does good for all of us to really understand supply and demand dynamics that affect our costs. That’s one thing we work pretty hard at Cornerstone is to be able to understand, even in periods of cost increase, decrease or stability, understand the factors that are driving the cost to where it is. The goal is that we can then educate our sales people about what’s really happening in the markets that affect our costs. And then they can have productive conversations with customers to explain where costs are likely to go and help them forecast and help them manage that volatility.
Jon:
We also want to be able to answer questions and have discussions about it. I think, prior to COVID, maybe we could have gotten away with more of just a high end view of where costs are. But what we like to do is understand it on a constant basis and have our sales team ready and equipped to have productive conversations with our customers so that they can manage the kind of volatility that we are going to face in the future.
Lexi:
So a lot of communication?
Jon:
Right.
Lexi:
That makes sense. I think communication is the key to a lot of things, especially whenever you’re talking about something so sensitive, like cost and price.
Jon:
Well, it’s communication, but it’s also kind of a depth of analysis. We really want to be able to understand what’s going on in the international markets, what’s going on with the raw materials that affect steel production, what the mill situation is in terms of their capacity and the challenges that they might be facing, and their production levels and lead times. And looking at all these kinds of things maybe in a little bit more detail than we had in the past. That just helps us all kind of understand the big picture and make more informed decisions about what our inventory levels are going to be, our purchasing behavior and help manage that volatility.
Lexi:
Yeah, that makes sense. So looking back in the rear-view mirror, how have the past two years impacted the construction industry as a whole, and the changes that we all may need to make moving forward?
Jon:
One thing when I talk to friends and colleagues who are in the industry, you hear a lot about some difficult and challenging conversations that companies have had to have with their customers or their vendors around the terms of sale and around their contracts and agreements, because the hyper-inflation put us in a situation that we had to use some of the stipulations in the contracts that we wouldn’t normally use. And because we don’t pay attention to those types of stipulations very often, there was a lot of misunderstanding. I mean, some companies had salespeople where they didn’t understand their own policies too well, and then that makes it obviously difficult to explain it to a customer. Sometimes the wording wasn’t always clear.
Jon:
I think one thing that we learned in our industry is the time to update your terms and conditions of sale and make sure that all the wording is right and everybody understands it, the time to do that is not after costs start spiking; it’s during the time of cost stability. I think it’s one thing we learned. We all have to have a real clear understanding of all of our supply agreements, and we need to be able to articulate it to our customers and our vendors and speak intelligently about it. We want to clear that up before we start hitting the unusual times, which end up in large cost increases, which is likely to happen again at some point.
Lexi:
Okay. I think that’s a great piece of advice. Well, this has been really good, Jon. I know that we just kind of scratched the surface when it comes to the past two years and what our plan is moving forward, but this has been really good from a high-level perspective. Is there anything else that you want our listeners to know in regard to our new pricing reality?
Jon:
Well, I’d just say that I was very impressed by the resilience that the industry has shown during this period of hyper-inflation. Hyper-inflation has taken companies under, it’s taken industries under, or actually entire economies have collapsed because of inflation. But in our case, this industry performed relatively well. I mean, a lot of companies maintained their financial health, did things that they never had to do before. People had to find creative solutions. I think, in general, we all made some very data-based logical decisions and really managed through a very, very challenging time.
Jon:
I feel like it’s a resilient industry and if we could handle this, we could handle a lot. It’s an impressive reflection of the people that we have in our industry and the work, so I’m just happy to be a part of it.
Lexi:
Yeah, 100%. Well, Jon, thank you so much for joining me today and for sharing your wealth of knowledge on pricing strategies and what we’ve learned from the impacts of COVID-19.
Jon:
Excellent. Thank you.
Lexi:
Stay tuned for part two in our Lessons Learned From COVID-19 series, where we will discuss HR and safety regulations.
Metal Minutes podcast shares insights from metal construction subject matter experts deep dive into trending industry topics. Learn from industry leaders with knowledge relevant to many different project types. This podcast episode was created by Cornerstone Building Brands, Metallic’s parent company.