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529 SW Third Avenue, Suite 600 Portland, Oregon 97204 telephone: 503.827.8416 • 800.411.0834fax: 503.827.8437

M a r k e t P r o g r e s s E v a l u a t i o n R e p o r t

Super Good Cents Manufactured Housing

prepared by

Pacific Energy Associates, Inc.Dave HewittJeff PrattGary Smith

report #E99-022

February 1999

R

THE SUPER GOOD CENTS

MANUFACTURED HOUSING VENTURE

AN INITIAL PROGRAM AND MARKET PROGRESS EVALUATION REPORT

Final Report

Prepared For:

The Northwest Energy Efficiency Alliance

Prepared By:

Dave Hewitt Jeff Pratt

Gary Smith

Pacific Energy Associates, Inc.

1920 Mulberry Avenue Portland, Oregon 97214

(503) 233-6543

ACKNOWLEDGMENTS

This report was prepared by Pacific Energy Associates, Inc. under contract to the Northwest Energy Efficiency Alliance (the "Alliance"). The development of the contents of this report would not have been possible without the information and assistance provided by Ken Eklund of the Idaho Department of Water Resources. Additionally, we wish to thank the following persons who provided invaluable insight and context to the market and the program:

Dave Baylon - Ecotope, Inc.

Joan Brown - Washington Manufactured Housing Association

Don Davey - Bonneville Power Administration

Tom Eckman - NW Alliance

Tim Eckstrom - Northwest Research Group

Tom Hewes and Nancy Bond- Oregon Office of Energy

Mike Lubliner and Andrew Gordon - WSU Energy Programs

Don Miner - Oregon Manufactured Housing Association

Gub Mix - Idaho Manufactured Housing Association

Don Stevens - Stevens and Associates

We would also like to thank Ben Bronfman, John Jennings, and Phil Degens of the Alliance for providing project guidance.

The views and opinions of the authors expressed herein do not necessarily reflect those of the Northwest Energy Efficiency Alliance, its board, its members, or its staff.

Table of Contents

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Page i

Executive Summary.................................................................I Summary of Key Findings ................................................................... I

Conclusions and Recommendations...................................................III

1. Introduction .......................................................................1 Background and Purpose ....................................................................1

Summary of Research Activities..........................................................1

Structure of This Report .....................................................................2

2. Program Status..................................................................3 Background ........................................................................................3

Venture Program Activities and Market Transformation Efforts ..........4

Continuation of SGC Quality Control .................................................6

Increased Installation Efficiency ..........................................................6

3. Market Status.....................................................................9 Highlights Previously Reported...........................................................9

Manufacture and Sales of SGC Manufactured Homes in 1998...........10 Production ........................................................................................ 10 Sales.................................................................................................. 12

Natural Choice Manufactured Home Production ...........................13

Summary ..........................................................................................14

4. Retailers ........................................................................15 Research Approach...........................................................................15

The Retailers and Their Sales Staff....................................................15

Retailer Opinions Regarding Trends in the Market ............................16

Opinions Regarding Energy Efficiency and Super GOOD CENTS ...17

Stocking Practices At Retailers .........................................................21

Summary ..........................................................................................21

Table of Contents

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Page ii

5. Manufacturers..................................................................23 Highlights Previously Reported.........................................................23

Research Approach...........................................................................24

Primary Industry Trends....................................................................24 Factory-Owned Retail ........................................................................ 24 Product Features and Pricing.............................................................. 26 Turnkey Sales .................................................................................... 26

Status of Super GOOD CENTS.......................................................27

Manufacturer Opinion of State Energy Office Marketing Efforts .......28

Summary ..........................................................................................28

6. Analysis of Venture Goals and Objectives....................31

7. Other Programs and Market Issues ...............................35 ENERGY STAR

(Manufactured) Homes ..............................................35

ENERGY STAR Windows ...................................................................35

Appendices

Appendix A: Quarterly Sales of SGC by State and Manufacturer

Appendix B: Gilmore Research Group Manufactured Home Retailer Interview Survey Questionnaire

Executive Summary

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Page I

This report discusses program and market progress toward increasing the penetration of Super GOOD CENTS (SGC) manufactured housing and accomplishing the general goals of the SGC Manufactured Housing Venture (Venture), an initiative funded by the Northwest Energy Efficiency Alliance (Alliance). The primary focus of the report is on market indicators and program accomplishments that will help assess and measure program success, which includes the development of a market-based, self-supporting program to support energy efficient construction and installation of manufactured housing in the Alliance region.

To determine the current status of the market, Pacific Energy Associates, Inc. (PEA) interviewed a variety of key market and program actors, including most of the housing manufacturers located in the Northwest and their respective industry associations. A survey of 86 manufactured housing retailers was conducted as well. PEA also reviewed and analyzed current market data prepared from multiple sources by the Northwest Research Group.

Highlights of program activities and accomplishments are also presented in this Report. To develop the program progress highlights, PEA reviewed the Venture’s Annual Report and interviewed key program staff.

Summary of Key Findings

1. Shifts in market structure and corporate influence are creating a difficult operating environment for the Venture. The manufactured housing industry is in a significant state of flux. New manufacturers have entered the region and acquired existing companies, and more manufacturers are engaging in retail distribution through purchasing independent retailers and opening new factory retail outlets. Personnel movement is high.

2. Price competition continues to be a dominant trend in the industry. Approximately 80% of the retailers surveyed projected market growth in the low- and low-to-middle- price manufactured housing. SGC can still play an important role in a more price -competitive market, but price pressures may drive the industry to more standardization and products with fewer features.

Executive Summary

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Page II

3. The Venture’s marketing effort is beginning to make an impact at the retail level. Nearly half of the retailers surveyed reported their sales staff had attended SGC training within the past 12 months, and two-thirds of those said it encouraged or helped them to sell more SGC homes. Manufacturers also noted the increased activity by state energy offices and indicated this could have a positive impact on SGC sales if the effort is sustained.

4. The erosion of the market for SGC manufactured housing appears to have slowed. Despite some indications that the Venture is making progress in marketing the SGC program to manufacturers and retailers, production and sales data are giving mixed signals. The percentage of SGC production increased slightly during the second quarter of 1998, but then decreased for the third quarter. The absolute number of SGC homes manufactured during the second quarter of 1998 increased, but the percentage of SGC homes sold decreased during the same timeframe due to overall production increases.

5. Fundamental changes to the Venture’s structure and/or its program offering will likely be needed to allow for a market-based, self-supporting program. Although increasing SGC production is the number one goal for the Venture, increasing production and program revenues per home will not result in a self-supporting venture; program costs must be cut substantially. On the positive side, based on survey responses, it appears that retailers may be willing to pay fees for value. Manufacturers do not appear to support additional fees.

6. The Alliance and the U.S. Environmental Protection Agency are reviewing technical issues and opportunities pertaining to aligning the SGC program with the ENERGY STAR

HOMES

program. As of early November 1998, the technical analysis being conducted by EPA’s contractor was not complete and the implications for the technical standards for the two programs had not been fully resolved. EPA said that the resolution of this issue was a priority for them and that their preference is that it would resolve in favor of being able to co-brand manufactured homes in the Northwest, if that strategy is pursued by the Venture.

Executive Summary

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Page III

Conclusions and Recommendations

1. During this period of turmoil in the Northwest manufactured housing market, the Alliance and the SGC Venture should continue to support and promote the program, monitor industry changes, and work to understand the opportunities created by the new market structure. Manufactured housing accounts for about 30% of all housing starts in the Northwest, and is even more significant in rural areas. While key industry and market actors acknowledge that the changing market structure presents a significant challenge for the SGC program, a solid base of industry support for the program exists. PEA recommends that the Venture continue to work to re-establish the value of SGC to the market and the industry, and consider narrowing the scope of program support to focus on building strategic industry relationships (i.e., work more with identified allies). The planned increase in Venture advertisement and promotion should be noticed throughout the sales channel, and may provide leverage to engage in future planning with the industry.

2. Developing a Business Plan should be a high priority for the Venture. The Venture Business Plan is the vehicle for transition to the envisioned market-based, self-supporting program for the industry. The Venture Business Plan will need to specifically discuss the following in detail:

u Program strategies to address the key market barriers, trends, and opportunities;

u Program design and administrative structure (including program cost); and

u Production and sales projections and corresponding revenue to cover program costs.

PEA continues to recommend that the Venture consider and examine two business models: a minimal scenario that simply maintains a significant presence of SGC in the marketplace, and an enhanced scenario that attempts to significantly increase market share (as originally planned).

Executive Summary

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Page IV

3. Alliance staff should continue to work with EPA to resolve the technical issues pertaining to a possible alignment of SGC and ENERGY STAR

. The Venture should allow for consideration of a co-branding strategy with a refined ENERGY STAR

HOME program

as part of the business plan.

I. Introduction

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Page 1

Background and Purpose

This report is the first in a series of market progress evaluation reports on the Northwest Energy Efficiency Alliance’s SGC Manufactured Housing Venture (Venture). These reports are intended to document the program and market progress in terms of key market indicators and program accomplishments. Additionally, the market progress evaluation reports are designed to provide data and information that will help inform program refinements and direction.

This report covers the period from program initiation, November 1997, to September 31, 1998, with some additional information from late 1998. A Baseline Market Assessment and Market Characterization was issued in August 1998, and is available through the Alliance’s web site (www.nwalliance.org). Additional market progress evaluation reports will be issued in April 1999, October 1999, and October 2000.

Summary of Research Activities

To develop this report, Pacific Energy Associates, Inc. (PEA) reviewed and analyzed market research from several sources. Production numbers and information about program activities were provided by the Venture program staff and through the Venture’s Annual Report. Siting information was gathered from quarterly reports developed by Northwest Research Group (NRG). PEA also conducted a literature search of manufactured housing trade journals that provided detail regarding the recent trends impacting the industry.

The market investigation specifically conducted for this report included the following:

u In-person and telephone interviews with the general managers or sales managers from 14 of the 19 factories representing the region’s housing manufacturers;

u A telephone survey of 86 manufactured home retailers covering medium-to-large volume firms in Oregon, Washington, Idaho and Montana;

1. Introduction


u Telephone interviews with the executive directors of the Idaho, Washington, and Oregon Manufactured Housing Associations; and

u Telephone interviews with program representatives from the state energy offices and the Alliance.

Structure of This Report

The main body of this report is divided into seven sections. An introduction is presented here in Section 1. Section 2 reports on the program status, including the Venture’s program activities and market transformation efforts. Section 3 discusses the status of the market, including estimates of production and sales. Section 4 reports on information gathered in the telephone survey of retailers, while Section 5 discusses the feedback from interviews with the manufacturers. Section 6 presents PEA's analysis of the Venture’s goals and objectives, and Section 7 discusses other program and market issues.

The Appendix, which presents the retailer survey instrument, follows the main report body.

2. Program Status


This section of the report focuses on the program activities of the Venture. The information presented here borrows heavily from the Venture’s draft Annual Report, dated October 1, 1998. Information and data regarding measured accomplishments and program performance is presented in Section 3: Market Status.

Background

After the Manufactured Housing Acquisition Program (MAP) ended in August of 1995, the penetration of Super GOOD CENTS (SGC) homes began dropping across the Pacific Northwest. An increasing number of retailers began selling lower-priced, non-SGC homes, discounting the long-term benefits of energy-efficient SGC construction. The manufactured housing industry and the State Energy Offices of Idaho, Oregon, and Washington collaborated to continue the production of energy-efficient manufactured homes and the Northwest Energy Efficient Manufactured Home (NEEM) program was created. Electrically heated homes produced under this program are marketed using the Super GOOD CENTS trademark. Natural gas and propane heated homes use the Natural Choice (NC) trademark. Consumers pay the full cost of a SGC or NC package.

In response to a proposal based on NEEM, the Alliance agreed to fund a three-year marketing program in June 1997. In August, the Venture Partners (Idaho Department of Water Resources [IDWR] Energy Division, Montana Department of Environmental Quality, Washington State University Cooperative Extension Energy Program and BPA) met with their ally, the Oregon Office of Energy, to plan a new region-wide marketing program. By mid-November 1997, the main Alliance contract was in place with the IDWR Energy Division, who drafted subcontracts with the other Venture Partners, a market-data analyst, and a marketing consultant.

Oregon has been operating a self-supporting SGC venture, and is not included in the funding provided by the Alliance. Because of the predominance of manufacturing activity in Oregon, the Oregon Office of Energy was able to design a program that could be sustained using a $30 per house fee assessed at the manufacturer level. The Oregon Office of

2. Program Status


Energy is cooperating with the Venture, but Venture funding only directly supports activities in Washington, Idaho, and Montana.

Venture Program Activities and Market Transformation Efforts

The following are some of the highlights from the Venture’s first year:

1. Comfort You Can Count On Ad Campaign. All four Pacific Northwest State Energy Offices (SEOs) worked together for the first year of the Venture to develop and implement the Comfort You Can Count On market campaign for Super GOOD CENTS. The Comfort You Can Count On design was developed by the Oregon Office of Energy with assistance from Inter Active Marketing and Interpretive Exhibits. The design and text for the retailer display, brochure holder, and the theme brochure were finalized during the Fall of 1997, and January 1998. Coordinated pens, mugs, hats, and jackets were also designed and ordered. The campaign was implemented in three of the market areas (Idaho, Western Montana, and Washington) during the summer of 1998, and in the fall of 1998 in Oregon.

2. Retailer Training and Certification. Inter Active Marketing also developed the retailer training and certification program for the Venture. This program is used throughout the region to implement the Comfort You Can Count On campaign. Scripts were customized by the individual SEOs, and a presentation created by Washington State University (WSU) Energy Programs was used in retailer training in Idaho and Washington. Staff from 26 retailers were trained and 38 retailers were visited to discuss training.

3. Super GOOD CENTS Hall of Fame. The Venture partners, in collaboration with Inter Active Marketing, developed a companion concept to the retailer training and certification to recognize and provide incentives to the individuals who sell SGC homes, called the Super GOOD CENTS Hall of Fame. The top sales people in specified areas are recognized as being in the Hall of Fame and receive awards.

2. Program Status


4. Manufacturer Involvement. All Idaho and Washington manufacturers were contacted and briefed on the new marketing campaign. In addition, WSU Energy was invited by Moduline to train all of the Pacific Northwest Lamplighter retailers. Nine retailers were trained and certified in one session.

5. Marketing at Public Events. The Venture marketed the SGC program to the public at manufactured home shows and home and garden shows.

6. Television Advertising. Bonneville Power Administration (BPA) coordinates the Venture’s SGC television advertising. The Venture strategy for television advertising is to pay production costs for one of three ads aired by Northwest Pride. The ad focuses on energy efficiency, and specifically promotes SGC. Northwest Pride’s airtime advertising budget is one million dollars; and one-third of this airtime is for the SGC ad. The ad run during 1997 featured both the SGC and NC logos because the Northwest Gas Association contributed one-half the $54,000 production cost. In early 1998, a preexisting energy ad was enhanced with a voiceover encouraging viewers to: “Own an energy efficient home. Look for the Super GOOD CENTS or Natural Choice labels.” The Venture and Northwest Gas Association each contributed 50% of the $4,585 for the ad modification. The ad flights target morning talk shows and the evening news hour on regular networks, and Mariners’ games and PAC-10 athletic events on Fox Sports Northwest. The target markets are Idaho, Oregon, Washington, and Western Montana.

7. Low Interest Loans and Sales Incentive. In the Spring of 1997, the Idaho Energy Division developed and began offering a low-interest, incremental-cost loan for SGC and NC homes using oil overcharge funds. The loan is for the cost of upgrading from HUD Code to SGC or NC, calculated to be $1,500 for multi-section and $1,000 for single-section homes, and is available only through retailers who are trained and certified. The home buyer signs an unsecured note to repay the Energy Division in five years at 4% interest, and the sales person receives a $100 incentive.

8. Website Development. The WSU Energy Program created a website for SGC and NC homes. The address is

2. Program Status


http://www.energy.wsu.edu/org/sgc/. The website links to Venture staff in the other states, Northwest Pride’s website, BPA’s website, and the Alliance’s website. The graphics match the Comfort You Can Count On brochure and retailer displays.

Continuation of SGC Quality Control

License agreements with the manufacturers that require each SGC home to be inspected while in production by a designated third party were in place throughout the year. Quality assurance of the inspection and production process is also required by the SGC license. Oregon and Washington provide quarterly quality assurance, and Idaho inspects plants bimonthly. These same requirements are imposed on NC homes.

Inspection logs show that constant oversight is needed to assure that air-leakage control is done properly, that duct work is sealed with the right materials, that correct windows are installed, and that the proper amount of insulation is installed without compression and to correct fit or depth. The main cause for this needed oversight is high turnover in production-line personnel. In addition, the manufactured housing industry is constantly creating new construction details that require technical assistance to ensure proper insulation and air sealing.

Increased Installation Efficiency

Idaho, Oregon, and Washington have statewide installation requirements and mandatory installer training. Permits and inspections are required in all three states. Montana has no requirements and installations are not inspected in most areas.

Both Idaho Energy Division and WSU Energy Programs participated in training installers in their respective states. Most problem home referrals involve improper installation, and the installation standards and training appear to reduce complaints about program homes. The number of problem home referrals is down this year in Idaho, and is below 1% of SGC and NC homes sited this year in Oregon and Washington.

Program staff or subcontractors in all states provide technical assistance to homeowners who have energy-related problems on SGC and NC homes. Of all the states, Montana appears to have the highest number of requests

2. Program Status


relative to the number of homes sited. Several factors contribute, including lack of installation standards and inspections and the cold climate. In response, Montana DEQ has suggested to the Montana Manufactured Housing Association that the Association should develop a program to train installers and that it consider proposing legislation for standards and installer licensing.

2. Program Status


3. Market Status


Highlights Previously Reported

THE NORTHWEST IS A LARGELY SELF-CONTAINED MARKET FOR MANUFACTURED HOMES; THAT IS, THE

VAST MAJORITY OF THE MANUFACTURED HOMES MADE IN THE NORTHWEST ARE SITED HERE, AND

SIMILARLY, MOST OF THE HOMES SITED IN THE NORTHWEST HAVE BEEN MANUFACTURED REGIONALLY. THERE ARE CURRENTLY 19 MANUFACTURERS LOCATED IN THE NORTHWEST.

MANUFACTURED HOUSING IS TYPICALLY A THREE-LEVEL INDUSTRY: MANUFACTURERS, RETAILERS, AND

CONSUMERS. EACH OF THESE LEVELS HAS POWER OVER SOME ASPECTS OF THE SALES TRANSACTION. THE MANUFACTURERS CONTROL THE PRODUCT AND ITS POSITIONING IN THE MARKET. IN PARTICULAR FOR

SGC, MANUFACTURERS CONTROL THE PACKAGING AND PRICING OF VARIOUS OPTIONS. THE RETAILERS

HAVE CONSIDERABLE POWER DURING THE SALES PROCESS. THEY CAN PROMOTE, DOWNPLAY, IGNORE, OR

SELL AGAINST VARIOUS PRODUCT ATTRIBUTES. CONSUMERS HAVE THE POWER OF CHOICE. WHILE THIS IS

THE ULTIMATE POWER OF THE MARKET, THEY ARE ALSO SUBJECTED TO A VARIETY OF INFLUENCES, INCLUDING MARKETING, SALES, AND PRODUCT POSITIONING. IT IS LIKELY THAT ALL THREE LEVELS OF THE

MARKET WILL NEED ATTENTION FOR THE VENTURE TO MEET ITS GOALS.

SEVERAL MARKET TRENDS WERE IDENTIFIED BY PEA. THE FIRST, AND PERHAPS MOST SIGNIFICANT TREND

DISCUSSED IN THE REPORT WAS INDUSTRY CONSOLIDATION. NATIONAL CORPORATIONS FROM OUTSIDE THE

REGION HAVE BOUGHT EXISTING REGIONAL MANUFACTURERS. AS PART OF, AND IN RESPONSE TO THESE

CHANGES, THE INDUSTRY IS ALSO UNDERGOING SOME LEVEL OF VERTICAL INTEGRATION: THAT IS, THE

PURCHASE OF INDEPENDENT RETAILERS AND RETAIL CHAINS BY MANUFACTURERS. ADDITIONALLY, FACTORY RETAIL OUTLETS ARE OPENING ACROSS THE REGION.

THE SECOND MARKET TREND DISCUSSED BY PEA WAS A REFOCUSING ON PRICE COMPETITION BY THE

INDUSTRY. ALTHOUGH MANUFACTURED HOUSING IS TRADITIONALLY A PRICE-SENSITIVE INDUSTRY, SEVERAL REASONS WERE GIVEN FOR THE INCREASED EMPHASIS ON PRICE:

u THERE WAS A REDUCTION IN HOME SALES AFTER THE END OF MAP AND MANUFACTURERS FELT

THE NEED TO REDUCE PRICES TO SPUR SALES OF THEIR PRODUCTS IN GENERAL AND VERSUS

OTHER MANUFACTURERS. WITH FIRMS FROM OUTSIDE THE REGION EXPANDING IN THE REGION AND

SPECIALIZING IN LOW-TO-MIDDLE-COST HOUSING, PRICE COMPETITION INCREASED DRAMATICALLY, PARTICULARLY AT THE LOW- AND MIDDLE-END OF THE MARKET; AND,

u GREATER NUMBERS AND VISIBILITY OF RETAILERS INCREASED THE ATTENTION PAID TO PRICE AS

CUSTOMERS COULD MORE EASILY SHOP THE COMPETITION.

PEA FOUND THAT RECONCILING PRODUCTION AND SALES DATA IS DIFFICULT. HOWEVER, WHILE

PRODUCTION NUMBERS MAY DIFFER FROM SALES DATA IN SIGNIFICANT WAYS, THE BASIC STORY OF THE

INFORMATION IS THE SAME. THE MANUFACTURE AND SALES OF SGC MANUFACTURED HOMES HAS

DROPPED EACH YEAR SINCE THE END OF THE MAP PROGRAM. EVEN WITHIN YEARS THE TRENDS ARE

EVIDENT, CORRECTED PRODUCTION DATA FOR THE FIRST HALF OF 1997 INDICATED A SGC MARKET SHARE

OF 58%, WHILE IN THE LAST HALF OF 1997, THE MANUFACTURE OF SGC HOMES DROPPED TO 49% OF THE

TOTAL ELECTRICALLY-HEATED MARKET.

WITH RESPECT TO THE VENTURE AND ENERGY EFFICIENCY, PEA BELIEVES THAT WHILE THE REGIONAL

SALES OF SGC MANUFACTURED HOMES HAVE STEADILY ERODED SINCE THE END OF MAP, THE PRESENCE

OF SGC CONTINUES TO HAVE A POSITIVE EFFECT ON THE ENERGY EFFICIENCY OF THE MANUFACTURED

HOME INDUSTRY AND HELPS POSITION THE INDUSTRY TO BETTER COMPETE WITH SITE-BUILT HOMES, A

PRIMARY OPPORTUNITY FOR MARKET GROWTH.

3. Market Status


Manufacture and Sales of SGC Manufactured Homes in 1998

Data for the Second Quarter of 1998 provide mixed signals regarding the status of SGC in the market. Production figures, which are adjusted based on assumptions for out-of-region shipments and fuel type,1 suggest that the market for SGC has stabilized, or actually turned up a bit. However, sales (or siting) figures, which lag the production data in terms of timing, suggest program participation continued to slip from the previous quarter. Successive semi-annual production data also suggest continued SGC market erosion.

Figure 1

Production

The adjusted over-all regional produc-tion of SGC homes rose to 49% during the Second Quarter of 1998, up from 45% in the First Quarter of 1998. This represents the first break in a steady downward trend dating back to the First Quarter of 1997 (the beginning of IDWR quarterly data). As Figure 1 shows, SGC made

1 The SGC production percentage is an adjusted number using the Venture’s best estimates for out-of-region shipments and the percent of homes with electric heat. Additional research and documentation of these two issues is needed. IDWR has already recognized this and has implemented a new in-plant inspection form to gather data during the bimonthly quality-assurance visits to support future adjustment estimates.

State and Regional Production of SGC Homes

22

89

68

60

19

84

65

58

22

74

58

53

18

73

5047

16

71

4945

23

62

5349

20

60

5046

0

10

20

30

40

50

60

70

80

90

100

ID WA OR Regional Total

Per

cen

t o

f T

ota

l Pro

du

ctio

n ,

1st Qtr 97 2nd Qtr 97 3rd Qtr 97 4th Qtr 97 1st Qtr 98 2nd Qtr 98 3rd Qtr 98

3. Market Status


production gains in Idaho and Oregon, while losing in Washington. Somewhat tempering the news of SGC production gains in the Second Quarter of 1998, PEA’s preliminary review of Third Quarter production data reveals another marketshare decline.

Tables 1 and 2, below, show the regional production of manufactured housing for the most recent two successive six-month periods.

Table 1 (Revised 10/22/98)

State and Regional Production of SGC Homes – Jul 1 through Dec 31, 1997

State Total Units Produced

Percent of Total Sent

Out of Region

Number of Electrically

Heated Units

Number of SGC Units

Percent of Total Units

That Are SGC

IDAHO 2,571 25% 1,330 229 17%

OREGON 6,279 1.5% 5,568 2,938 53%

WASHINGTON 1,161 1% 1,043 725 70%

TOTAL 10,011 7,941 3,892 49%

Source: IDWR

Table 2

State and Regional Production of SGC Homes – Jan 1 through Jun 30, 1998

State Total Units Produced

Percent of Total Sent

Out of Region

Number of Electrically

Heated Units

Number of SGC Units

Percent of Total Units

That Are SGC

IDAHO 2,618 45% 1,246 205 16%

OREGON 5,786 2% 4,907 2,527 51%

WASHINGTON 982 1% 840 572 68%

TOTAL 9,386 6,993 3,304 47%

Source: IDWR

Extending the timeframe of the data suggests a somewhat different trend than the quarterly data discussed above. For the most recent sixth-month

3. Market Status


period (ending 6/30/98), the adjusted regional SGC production declined slightly to 47% of the market, down from 49% for the previous six months. Worth noting is that regional production of manufactured housing dropped about 6% to 9,386 units during the most recent six months, while Super GOOD CENTS production dropped about 15% to 3,304 units. Idaho showed a modest increase in total production, while Oregon and Washington had substantial declines in total and SGC production during the most recent six-month period.

Also worth noting when comparing these two tables, is that the Venture’s assumption concerning the percent sent out of region has changed. Based upon investigations by the Venture’s plant inspector, the IDWR raised the estimate of the percentage of Idaho production shipped out-of-region to 45%, up from a previous estimate of 25%. A similar, but less significant adjustment was made to Oregon’s assumption, based on communications with the Oregon Office of Energy.

Importantly, these adjustments are not based on hard data, but are estimates derived from discussions with manufacturers’ personnel. These revisions to the adjustments to state and regional production marketshare have the effect of increasing the percentage of SGC production relative to total production. (Note: this adjustment does not impact the sales figures reported below.)

Sales

PEA’s examination of quarterly sales (siting) data suggests continued SGC market erosion. Figure 2, below, shows that the percentage of sited SGC homes continued to decline across the region in the Second Quarter of 1998 to 48%, compared to 51% for the previous quarter. While each state in the Venture area noted declines, Oregon and Montana appeared to suffer much larger percentage drops (6% and 5%) than either Washington or Idaho (1% each).2

2 In the August 1998 Baseline Report, PEA reported substantial drops in First Quarter 1998 sales for Idaho (11% drop) and Washington (25% drop), and in total sales (13% drop). The Second Quarter and Year-to-Date 1998 NRG report revealed that while there were decreases in the First Quarter 1998, they were less drastic than earlier reported by NRG. This suggests some caution is

Continued . . .

3. Market Status


Figure 2

Natural Choice Manufactured Home Production

PEA also looked at the production and marketshare trends of Natural Choice homes in the region. Although the Idaho manufacturers consistently report their market for gas heat is growing, Figure 3, below, shows the regional production of Natural Choice homes has remained fairly constant over the last six quarters. During those same six quarters, SGC has tended to gain and lose marketshare with the fluctuations in overall manufactured housing production.

prudent when interpreting early release NRG data, which can be subject to time-lags and other data collection and cleaning issues.

State and Regional Percent Sales of SGC Homes

48

64

71

64

43

6668

63

41

66 66

61

38

63 6259

32

5759

20

51

31

5653

15

48

0

10

20

30

40

50

60

70

80

90

100

ID WA OR MT Regional Total

Per

cen

t o

f T

ota

l Sal

es

1st Qtr 97 2nd Qtr 97 3rd Qtr 97 4th Qtr 97 1st Qtr 98 2nd Qtr 98

3. Market Status


Figure 3

Summary

PEA previously reported that the marketshare of SGC manufactured housing had steadily eroded since the end of MAP. Based on recent data and analysis, PEA believes that the erosion of the market for SGC manufactured housing may have slowed, but may not have ended. Despite some indications that the Venture is making progress in marketing the SGC program to manufacturers and retailers, the production and sales figures are giving mixed signals. With adjustments to regional production data to reflect up-dated in-formation on shipments out-of-region and the marketshare of electric heat, the percentage of SGC production increased slightly during the Second Quarter of 1998. The absolute number of SGC homes also increased during the Second Quarter of 1998, as did the total number of manufactured homes produced. However, the percentage of SGC homes sold (sited) in the region decreased during the same time period, and PEA’s preliminary review of Third Quarter production data indicates that the marketshare of SGC is lower than in the previous quarter.

Unadjusted Regional MH Production

3,985

4,823

5,157

4,854

4,447

4,938

1,9792,233 2,136

1,7461,494

1,810

213 324 298 255 242 272

0

1000

2000

3000

4000

5000

6000

1st Qtr 97 2nd Qtr 97 3rd Qtr 97 4th Qtr 97 1st Qtr 98 2nd Qtr 98

MH

Un

its

Pro

du

ced

Total SGC Nat.Choice

4. Retailers


Research Approach

PEA worked with Gilmore Research Group to develop a survey that Gilmore then conducted with 86 manufactured housing retailers in Oregon, Washington, Idaho, and Montana. To develop the survey sample, PEA requested NRG to prepare a data set of sales information on the region’s manufactured housing retailers. Gilmore used this information to draw a sample of large (40+ units sold annually) and medium-sized (5-40 units sold annually) retail firms. PEA required a minimum sample of 24 retailers per state, with the exception of a smaller sample (8) from Montana. The purpose of the survey was to determine retailers’ current level of knowledge and attitudes about Super GOOD CENTS The SGC Baseline Report did not contain a retailer survey.

The Retailers and Their Sales Staff

The retailers were asked a number of questions about their individual dealership operations. Independent retailers comprised 86% of the survey respondents, with the remainder being factory stores, which represented some of the highest-volume operations. Every manufacturer brand produced in the region was represented in the sample. Most of the retailers (60%) offered a single manufacturer’s brand, while the others sell anywhere from two to five different brands.

Sales staff’s knowledge and experience with Super GOOD CENTS and staff turnover were mentioned in the Baseline Market Assessment Report as important barriers to increasing sales of Super GOOD CENTS homes. This survey revealed that 26% of the retailers had sales staff with less than three years’ (average) experience in the industry. Thus, a meaningful portion of the region’s sales force has been hired post-MAP. In Idaho, the state with the lowest penetration of Super GOOD CENTS; nearly half the sales force is new.

Concerning staff turnover, 42% of the retailers indicated that their sales personnel have worked at their dealerships for less than three years. At the factory stores, turnover is even more of an issue as 73% of these retailers reported their sales personnel have worked there for less than three years on average. Despite the fact that these firms experience substantial sales

4. Retailers


force turnover, retailers as a group strongly contend their sales staff is “very familiar” with the Super GOOD CENTS energy-efficiency package (87%). See Figure 4.

Figure 4

Concerning the sales aids used to market manufactured homes to consumers, 83% of the retailers indicated that they rely most heavily on the traditional point-of-sale materials, such as brochures, flyers, posters, and display signs. One-third of the retailers use mass media advertising, split fairly evenly between print and electronic mediums. The use of lot models

was noted by 17% of respondents. The retailers also reported that the sales aids used to promote Super GOOD CENTS were largely the same in type and frequency of use as those generally used by the industry for marketing purposes.

Retailer Opinions Regarding Trends in the Market

PEA asked retailers some questions concerning recent trends in the manufactured housing market. When asked about the marketshare of various price ranges, the retailers estimated that the middle-cost market (defined as homes costing $40,000 to $70,000) comprises over 79% of all homes sold. They reported that the low-end market (consisting of homes selling for less than $40,000) represents only 2% of sales, while sales at the high-end (more than $70,000) represent about 13% of the total.

Familiarity Of Sales Staff With SGC

87

12

10

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50

60

70

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100

Very Familiar Somewhat Familiar Not Familiar

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4. Retailers


When asked about where the market growth would be in the future, about 75% of retailers said that the market growth would occur in the middle-cost market (homes costing between $40,000 and $70,000). Five percent (5%) noted growth would be in the low-end under $40,000, while 15% projected most of the market growth for the high end over $70,000. Refer to Figure 5 below.

Figure 5

Concerning the current industry trends which impact their business, the strongest response (42% of retailers) pertained to the lack of available land and zoning limitations. Twenty-three percent (23%) noted the movement of interest rates as having a major impact on their business. Thirteen percent (13%) of retailers mentioned increasing land prices, and 14% noted the trend toward sales of the site and home together. Twelve

percent (12%) identified the growth in the number of retail dealerships, including the increasing number of factory outlets, as a trend. Only 8% mentioned a trend toward less-expensive homes and only 3% of retailers mentioned improved energy efficiency as a trend.

Opinions Regarding Energy Efficiency and Super GOOD CENTS

Retailers reported that energy efficiency was very important to customers at the time of purchase (70%). This response was consistent from state-to-

Market Growth by Price RangeProjected By Retailers

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75

15

0

10

20

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50

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70

80

90

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Less than $40K $40K to $70K More than $70K

Price Range of Market Growth

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4. Retailers


state, by dealership type, and size of dealership. The independent retailers also strongly indicated that energy efficiency needs to be part of the manufactured home package in order to compete with site-built housing (80%). The factory-owned stores, while in agreement, did not report as strong an endorsement of energy efficiency (64%).

Concerning the kind of support that manufacturers provide to retailers to help sell energy efficiency, the most common response (33% of retailers), was “none.” However, 31% did indicate they receive some type of literature, while 9% receive factory training.

Awareness of Super GOOD CENTS continues to be high, as 55% of retailers reported that “most” customers had heard about Super GOOD CENTS before they entered the store. Another one-third of retailers noted about “half” of the customers knew of the program, while less than 10% of the retailers indicated only “a few” or “almost none” knew of the program before entering the store.

The retailers indicated that they actively promote Super GOOD CENTS through sales conversations with customers (86%). While 60% of retailers said customers are “shown” a Super GOOD CENTS home 100% of the time, 8% indicated that Super GOOD CENTS housing is not shown at all, and another 12% revealed that it is shown less than 20% of the time. The independent retailers’ responses concerning the showing of Super GOOD CENTS homes indicate a slightly stronger SGC sales effort than at the factory stores.

Most dealerships seem to be interested in selling Super GOOD CENTS homes, and this interest seems to have stabilized. Sixty-two percent (62%) of the retailers surveyed indicated that their dealerships were “very

Super GOOD CENTS homes, while only 8% indicated they were “not interested.” Eighteen percent (18%) of the factory stores indicated “not interested,” compared to only 4% of the independents.

The portion of retailers indicating that their interest in selling Super GOOD CENTS had “decreased” in the last year (22%) was nearly the same as the portion indicating their interest had “increased” (20%). The major reasons cited for a “decrease” in the selling interest of Super GOOD CENTS were “no rebate offered” (58%), “SGC homes are more expensive” (37%), and “other homes offer energy efficiency for less cost” (16%). The major

4. Retailers


reasons cited for the “increase” in selling interest of SGC were “it offered good value for customers and it saved on utility bills” (35%), and that

re more aware of it, and they like it” (29%).

Retailers were split on the idea that Super GOOD CENTS made them more competitive. Forty-five percent (45%) believed that SGC makes them “more competitive” against other retailers, while 43% thought it “did not matter, because everyone has it available,” and 12% thought it “did not” make them more competitive. The retailers were also evenly split on whether Super GOOD CENTS was profitable for their businesses. .

Figure 6

Retailers were asked about the importance to customers of different “features” and “benefits” of the Super GOOD CENTS package. See Figure 6 and Figure 7. Increased insulation, better air sealing, and venti-lation all rated much higher than third-party inspections and free technical assistance. As to the most important “benefits,” retailers stressed that

Importance Of SGC Features To Customers

16

16

57

65

82

0 10 20 30 40 50 60 70 80 90

Technical Assistance

3rd Party Certification

Better Ventilation

Better Air Sealing

Increased Insulation

Percent of Retailers Mentioning Feature As "Very Important" To Customers

4. Retailers


Figure 7

SGC buyers would be saving money on their utility bills and saving energy. These benefits were mentioned three times as often as other benefits, such as comfort, and higher resale value.

In all, retailers continue to rate Super GOOD CENTS as “very good or good value” for

their customers (83%). However, eight per-cent of retailers disagree, and contend that Super GOOD CENTS is “not a good value,” with Montana retailers rating it the lowest.

PEA asked retailers their opinions about the support from the program, including the Super GOOD CENTS Certification and Training offered by the State Energy Offices. Nearly 60% of retailers report that they have at least spoken with Super GOOD CENTS staff within the past six months. Nearly half reported that their staff had attended training within the last 12 months. Of those who attended training, two-thirds believed that it encouraged or helped them to sell more Super GOOD CENTS homes.

When asked if they would be willing to pay $30 for every Super GOOD CENTS Home they sell to help ensure the program continues, 38% of retailers indicated they would. The response was somewhat higher in Idaho, and somewhat lower in the other three states. The response was also higher in the dealerships selling fewer homes.

Importance of SGC Benefits to Customers

5

5

7

12

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18

46

67

0 10 20 30 40 50 60 70 80

Less Drafty

High Quality Construction

Vinyl Windows

Increased Comfort

Higher Resale Value

Extra Insulation

Energy Eff./Saves Energy

Save $ on Utility Bill

Percent of Retailers Mentioning Benefit as "Very Important" to Customers

4. Retailers


“Bringing back the rebate,” “other financial incentives,” and “more advertising and point-of-sale material” were the top responses when asked what the program could do to help retailers sell more Super GOOD CENTS homes.

Stocking Practices At Retailers

The recent actions of the retailers concerning the ordering of lot models for display that are Super GOOD CENTS indicates continued support for the program. Over the past year, retailers ordered lot models that were Super GOOD CENTS about 56% of the time. The Washington retailers indicated the highest support for SGC with 69% of lot models ordered SGC, while Montana was the lowest at 23%. About 20% of retailers said they do not order SGC lot models for display, while more than 25% reported every home ordered as a display model was SGC.

Looking ahead, 22% of retailers reported they plan to order “more” SGC lot models in the future, while 12% indicated they would order “fewer” SGC lot models. Retailers in all the states, with the exception of Oregon, indicated that they planned to order more Super GOOD CENTS lot models rather than less. Twenty-one percent (21%) of the surveyed Oregon retailers indicated they would order fewer SGC lot models, versus only 8% that would order more. The Idaho retailers reported the strongest endorsement of Super GOOD CENTS with 35% indicating they would order more.

Summary

According to the retailers surveyed for this report, SGC continues to maintain a significant presence in the manufactured housing market. Retailer opinions regarding the importance of energy efficiency are very high and the awareness of Super GOOD CENTS is strong. Most retailers actively promote Super GOOD CENTS in their sales conversations with customers, and stocking SGC lot models is common practice by many.

The Venture and the Oregon Office of Energy appear to be reaching the retailer level of the manufactured housing market. The training being offered appears effective and has encouraged sales personnel to sell more Super GOOD CENTS homes. The program seems to have received a

4. Retailers


significant endorsement (and potentially a green light to pursue a revised funding structure) as over one-third of the retailers surveyed said they would pay $30 per home to ensure the program continues.

5. Manufacturers


Highlights Previously Reported

THE FOLLOWING INFORMATION, GATHERED FROM PREVIOUS INTERVIEWS WITH 20 MANUFACTURERS IN THE

REGION THIS SUMMER, WAS PRESENTED IN THE BASELINE REPORT.

u ALTHOUGH ALL OF THE MANUFACTURERS RECOGNIZED THE BENEFITS OF MAP/SGC TO THEIR

MARKET IN THE PAST, THEIR ASSESSMENT OF THE IMPORTANCE OF SGC CURRENTLY AND IN THE

FUTURE IS NOT SO ROSY. NEARLY ALL OF THE MANUFACTURERS FELT THAT SGC HAS A REDUCED

IMPACT IN THE MARKETPLACE AT THE CURRENT TIME. THE MANUFACTURERS ARE NOW SPLIT IN

THEIR OPINIONS, WITH 6 OF 20 BELIEVING THAT SGC IS “VERY IMPORTANT” TO THEIR MARKET

CURRENTLY, WHILE 8 FEEL SGC IS “SOMEWHAT IMPORTANT,” AND 6 BELIEVE THAT IT IS “NOT

IMPORTANT.”

u A TOTAL OF 12 MANUFACTURERS FELT THAT SGC WAS A “GOOD VALUE” FOR CUSTOMERS, WHILE 7 DID NOT AGREE. ONLY 8 OF THE MANUFACTURERS PROMOTED SGC TO THEIR

RETAILERS, WHILE 10 DID NOT. ONE MANUFACTURER NOTED THAT HE ACTIVELY PROMOTED

AGAINST SGC.

u ONLY 3 MANUFACTURERS CONSIDERED ENERGY EFFICIENCY TO BE “VERY IMPORTANT” TO

CUSTOMERS IN THE CURRENT MARKET, WHILE 6 MANUFACTURERS FELT THAT ENERGY EFFICIENCY

WAS “IMPORTANT” OR “SOMEWHAT IMPORTANT.” TEN MANUFACTURERS CHARACTERIZED

ENERGY EFFICIENCY AS “NOT VERY IMPORTANT” TO CUSTOMERS.

u ON A MORE POSITIVE NOTE, 16 OF THE MANUFACTURERS BELIEVED THAT SGC WAS PROFITABLE

FOR THEIR BUSINESS. TEN MANUFACTURERS FELT THAT SGC IMPROVED THEIR

COMPETITIVENESS, WHILE 9 DID NOT CONSIDER SGC TO HELP THEIR COMPETITIVENESS.

MANY OF THE REGION’S MANUFACTURERS (13 OF 18) OFFER AN ENERGY-EFFICIENCY PACKAGE, WHETHER

NAMED OR UNNAMED, THAT IS FAIRLY CLOSE TO THE SGC LEVELS OF INSULATION, OR AT LEAST A

SIGNIFICANT INCREASE OVER HUD REQUIRED LEVELS. BASED ON INTERVIEWS WITH MANUFACTURERS, AND WEIGHTED BY SALES DATA FROM 1997, PEA ESTIMATED THAT THE NON-SGC ENERGY PACKAGES

REPRESENT 29% OF THE MARKET.

EVEN THE BASE-LEVEL HOMES OF MANY MANUFACTURERS CONTAIN SIGNIFICANT EFFICIENCY FEATURES. PEA’S CONCLUSION IS THAT THE PRESENCE OF SGC IN THE MARKETPLACE HAS FOSTERED THE

DEVELOPMENT OF COMPETITIVE PACKAGES, AND THEREBY RAISED THE OVERALL ENERGY EFFICIENCY OF

THE INDUSTRY.

THE AVERAGE PRICE INCREASE OF SGC COMPARED TO THE NON-SGC ENERGY-EFFICIENCY PACKAGE WAS

$843. THE AVERAGE PRICE INCREASE OF SGC VERSUS THE “BASE” HOUSE WAS $1,724.

THERE IS SIGNIFICANT ANECDOTAL AND OTHER EVIDENCE IN THE MARKET THAT SOME MANUFACTURERS

AND RETAILERS ARE ACTIVELY SELLING AGAINST SGC. AS THE MANUFACTURER SURVEY INDICATED, MOST MANUFACTURERS HAVE ANOTHER COMMON PACKAGE OF ENERGY-EFFICIENCY FEATURES WHICH IS

PRICED LOWER THAN SGC. EVIDENCE FROM “MYSTERY SHOPPERS” AND PRELIMINARY INTERVIEWS WITH

RETAILERS INDICATES THAT SELLING AGAINST SGC IS FAIRLY COMMON.

5. Manufacturers


Research Approach

Following up on the manufacturer interviews from the Baseline Report, PEA conducted a second round of interviews with Northwest manufacturers for this Market Progress Report. A total of 14 interviews were conducted with general managers and sales managers. Nine of these were in-person interviews conducted at the Portland Manufactured Home Sale & Expo in September 1998. The remaining interviews were conducted over the telephone. In all, PEA completed interviews with 7 of 11 Oregon manufacturers, all 3 Washington manufacturers, and 4 of 5 Idaho manufacturers. The purpose of the interviews was to gather opinions from the manufacturers about the latest trends impacting the industry and to update their opinions regarding energy efficiency and the Super GOOD CENTS Program.

Primary Industry Trends

As in the Baseline Report, manufacturers were asked about the primary trends impacting their industry. This time, the manufacturers focused most of their comments on themes related to the actions of the dominant volume manufacturers, especially the volume manufacturer’s expansion into retail distribution, the movement to lower price points, and the development of land and home packages. While these developments were all noted in the Baseline Report, there now appears to be wider recognition of these trends and their impact on the industry. Underlying these trends is the desire for significant increases in profitability and growth by the larger, vertically integrated companies.

Factory-Owned Retail

Larger volume manufacturers have been buying the most successful independent retail chains, and they have been rapidly opening factory stores in new locations. One result of this retail expansion has been the recognition by other manufacturers that they need to act to maintain their market position. With the exception of a few smaller, local firms, most of the manufacturers in the region now own retail outlets. As one smaller manufacturer explained, their sales took a huge hit when a competing manufacturer acquired one of their best independent dealerships, and then converted it exclusively to the competitor’s line of products. This resulting

5. Manufacturers


loss of sales capability forced the manufacturer into the retail acquisition game to recoup its sales base.

Another effect of this trend is the replacement of many multi-line independent dealers with single-line manufacturer outlets. This has caused considerable upheaval for the remaining independent retailers. As one manager explained, when a factory store with the same products opens up nearby, some independents have had to completely change over their lines to a different manufacturer in order to compete.

When asked about the consumer benefits of the expansion into retail by the manufacturers, the manufacturers with retail outlets mentioned better rates, terms, sales presentations, and/or service, as well as increased product selection. They also noted that consumers would be able to demand performance, because the manufacturers could not hide behind the retailer anymore. The manufacturers without retail outlets could not list any consumer benefits.

When asked about any negative impacts, most of the comments came from the manufacturers without retail outlets, and they paint a bleak picture. They indicated that three-to-five major firms could end up totally in control of the market and pricing; and that the industry would no longer be market-driven, but manufacturer-driven. They felt that these firms would become less innovative, choosing instead to standardize products for the factory. They also believed that quality would suffer because the manufacturers would no longer receive independent feedback, that service and satisfaction would diminish due to pressure to reduce overhead, and that there would be a real increase in consumer prices to cover the higher overhead expected from the new, bigger, factory stores.

Some of the industry leaders are also on record with their views on this trend. For example: Gub Mix, Executive Director of the Idaho Manufactured Housing Association, wrote the following in an April 1998 editorial in Manufactured Housing Today:

“And even though the recent rise in vertical integration by a number of our manufacturers is adding new retail sales centers at an unheard of pace across the country, that alone will not increase sales, but rather divide the pie into smaller pieces to be shared by more players. It will also probably lead to serious price-cutting and an increasing lack of interest in customer satisfaction because of the costs associated with it.

5. Manufacturers


In the end result, about the only benefit gained by the changes created by vertical integration will be to keep the manufacturing facilities running.”

At this point, it is not clear whether there will be price reductions or other consumer benefits from vertical integration. However, increased manufacturer control could have significant impact on the support for SGC in the marketplace.

Product Features and Pricing

Beyond the expansion into retail, the largest manufacturers also appear to be aggressively targeting the lower-end of the market by reducing product content to achieve lower price-points. One manufacturer, commenting about the recent Portland Home Show, noted that there was a definite overall cheapening of product, and fewer deluxe features. Affirming this trend, 10 of the 14 manufacturers interviewed indicated that most of the market growth in the future would be at the low- or low-middle end of the market. Several manufacturers indicated that the trend to lower-priced homes was forced by higher land costs due to the lack of available supply. In their minds, something has to give in this squeeze, and it is the product and pricing.

To underscore how competitive the market and pricing has become, a few manufacturers noted their concern over another new industry development, that is, aggressive competition from site-built builders, who are reducing their price-points to a level that competes with the manufactured housing market. Additionally, the financing end of the manufactured housing business has responded to the competitive trend by offering “nothing

At the high-end of the market, manufacturers noted more positive industry trends, such as an increase in the number of higher-quality buyers that they contend are from the site-built market. Additionally, this end of the market also appears to be experiencing growth in larger, custom homes (triple-wides).

Turnkey Sales

Almost all manufacturers (13 of 14) now agree that there is an increasing industry trend toward a “turnkey” sales offering, where a single sales

5. Manufacturers


contract produced a home, land, site improvements, utilities, and landscaping.

When asked if they expected to be directly involved in developing and selling land as part of a turnkey consumer offering, only Oakwood, Valley, and Fleetwood indicated they would. Oakwood and Valley noted they were doing this now, while Fleetwood indicated it was planning to do this soon through its retail arm and that it would be significant. The intentions of another large manufacturer, Champion, were not clear. The remaining manufacturers saw this as the responsibility of the independent retailers and developers, with whom they have been working closely and encouraging to become more involved. (Note: It is not clear that the remaining independent retailers would have the skills and the financial capability to undertake land acquisition and development.)

Eleven of the 14 manufacturers thought that turnkey land/home offering was important to compete with site-built housing. Another manufacturer noted that the main purpose of vertical integration was to do a better job at competing with site-built homes. However this approach may not be working as more low-end, site-built builders seem to have been drawn into the market to compete with manufactured housing.

Status of Super GOOD CENTS

The manufacturers were asked their opinions on how the interest at the dealerships in selling Super GOOD CENTS has changed, compared with three months ago. Eight of the manufacturers indicated that interest had stayed about the same, while three manufacturers at the high-end of the market indicated interest increased, and three manufacturers at the low-end indicated it decreased. One Oregon manufacturer, who indicated interest was increasing, gave credit to the retailer training he requested as a result of reading about the “mystery shopper” survey results. Others also commented favorably about the efforts of the State Energy Offices and Northwest Pride.

Ten of the 14 manufacturers noted that production levels of Super GOOD CENTS had remained about the same compared to three months ago, while two noted an increase, and two a decrease. The manufacturers focusing on the high-end of the market indicated an increase in production

5. Manufacturers


of Super GOOD CENTS, while manufacturers focused on the low-end indicated a decrease in production.

Manufacturer Opinion of State Energy Office Marketing Efforts

Ten of the 14 manufacturers interviewed were aware of the efforts by the State Energy Offices to train and certify SGC retailers and provide promotional materials. The four exceptions were all from Oregon. All but two of the manufacturers expected this effort to encourage and help retailers sell more SGC homes.

When asked if they would be willing to pay an additional $30 for every Super GOOD CENTS house produced to ensure the Super GOOD CENTS program continued, the responses were largely negative as seven firms said no, one said yes, two maybe, and three didn’t know (stating it could not be decided at the plant level, only at the corporate level). On the positive side, one manufacturer indicated they would be willing to pay if they could see benefits at the plants through increased orders; another said they would only if everyone did it; and another said that he believed the that the vast majority of retailers would pay the extra charge.

Most of the manufacturers (10 of 14) had been contacted by the SGC program within the last six months. The four exceptions were Oregon manufacturers. The contact was generally meant to update the manufacturer about the program and its progress. Several manufacturers from Idaho and Washington noted that they are in frequent communication with the SEOs.

Summary

Overall, the current manufactured housing industry in the Northwest has experienced considerable change, which is resulting in some fundamental revisions in how business is conducted. The primary changes are the vertical integration of the industry, as manufacturers move into direct control of the sales channel, and a second form of vertical integration, as the largest firms are beginning to move into land development as a way to compensate for the decreased availability of affordable land. The control of the sales channels by manufacturers is currently reshaping how business

5. Manufacturers


is conducted, and will likely lead to further changes and consolidation within the industry.

The impact of these changes for the SGC program is not fully clear. The move to factory-owned retailers could ultimately change the product mix, pricing, and other competitive features. SGC could still play an important role in this market, but pricing pressures could force a move to increased standardization, which might not include SGC. The move to home/land packages should work well with SGC, as the manufactured home industry will more clearly be competing with site-built housing in this market, and SGC should be an asset. In either case, increased consolidation of the market further concentrates market power in the hands of fewer entities. The Venture must work to prove the value of SGC and to obtain SGC commitments from the larger manufacturers.

Most manufacturers perceive the interest at the dealerships in selling SGC has stayed about the same over the past three months, and that SGC production levels and SGC pricing are stable. There are a number of manufacturers who disagree, but they are about evenly split on whether SGC is declining or growing.

The increased activity by the SEOs has been noted by the manufacturers, who believe that this activity could have a positive impact on SGC sales if it continues. However, most manufacturers indicated they do not support paying an additional $30 fee for these services to ensure the SGC program continues.

5. Manufacturers


6. Analysis of Venture Goals and Objectives


The Idaho Department of Water Resources (IDWR), in conjunction with the WSU Energy Program and the Montana Department of Environmental Quality, received funding from the Alliance to help create a self-sustaining market for SGC. The goal of the Venture is to increase energy efficiency in the construction and installation of manufactured homes in the Pacific Northwest. The four objectives of the program are:

1. Increased production of SGC Homes. The Venture objective is a 25 percentage-point increase above benchmark penetration (58%) in the percentage of electrically-heated manufactured homes built and sited, or stocked, in the Pacific Northwest which are certified and constructed to the SGC standard.

Analysis: Currently (for the Second Quarter of 1998), IDWR and PEA estimate the SGC marketshare to be 49%, including factor adjustments for out-of-region-production and for space-heat fuel-share. A preliminary review of production data for the Third Quarter of 1998, indicates a SGC marketshare decline to 46%. In terms of absolute production numbers, a slight increase in SGC units occurred in the Second Quarter of 1998, after a recorded decline in the three previous quarters.

PEA believes that the impacts of the Venture marketing and retailer outreach are beginning to show up in the production numbers, but the total effect of program efforts are still to be determined. Supplemental advertising efforts (recently funded by the Alliance Board) may also impact the demand and production of SGC homes. PEA will attempt to draw some conclusions regarding this goal in the next Program and Market Progress Evaluation Report (MPER#2) due in April of 1999.

2. Continue to provide SGC quality control. The Venture objective is to continue to provide SGC quality assurance that SGC



manufactured homes continue to be designed and constructed to the SGC specifications.

Analysis: A brief discussion of program-sponsored quality control is located in Section 3. PEA did not specifically review this program element and received very little feedback from manufacturers regarding the quality-control process. For MPER#2, PEA plans to conduct and report findings from on-site interviews with program staff, quality control contractors, and production personnel from selected manufacturers.

3. Transition to a market-supported program. The Venture objective is to transition from partial utility funding to a fully market-supported SGC certification and quality assurance program by the end of the third Venture year (June 30, 2000).

Analysis: The workplan for the Venture required a business plan be developed by December 1, 1998, as a guide toward accomplishing this goal. The Venture’s Regional Manager and the Alliance’s SGC Venture Contract Manager met three times to work on Venture business during Venture Year One, and a major topic each time was Business Plan development. The first draft of the Venture’s proposed Business Plan is due in December 1998, although PEA’s understanding is that this date is likely to slip. Currently, alternative mechanisms are being discussed to facilitate the timely development of a high-quality business plan.

A critical and detailed review of the Venture’s proposed Business Plan is necessary to make a comprehensive assessment of the likelihood of achieving this key program goal. Nevertheless, PEA believes that sufficient information is now available to provide insight into some of the important considerations for the business plan. Table 3, below, presents production and corresponding program revenue for the first two quarters of 1998.



Program expenditures for this time period are also presented. Oregon data is included to show the importance of its impact on the regional efforts.

Table 3

1998 SGC/NC PRODUCTION REVENUE AND PROGRAM EXPENDITURES

Qualifying Production

Program Revenue @ $30 per Home

Program Expenditures

Program Expense per Home

1ST QTR 2ND

QTR 1ST QTR 2ND

QTR 1ST QTR 2ND

QTR 1ST QTR 2ND QTR

VENTURE 417 508 $12,510 $15,240 $102,154 $183,162 $245 $360

OREGON 1319 1574 $39,570 $47,220 $58,461 $61,886 $44 $39

TOTAL 1736 2082 $52,080 $62,460 $160,615 $245,048 $92 $118

These data should be viewed with caution. Venture expenditures reflect program start-up and other one-time expenses. Furthermore, direct comparisons between the Venture data and the Oregon data are inappropriate because of issues pertaining to program design, volume, administrative structure, and maturity. However, PEA believes that the data do suggest important implications for the Venture’s Business Plan.

Based on these data, PEA believes the Venture Business Plan must address both the program cost (program design and structure) and revenue issues. Although increasing SGC production is the number one goal for the Venture, the Oregon data seems to suggest that increasing production and increasing program revenues per home will not result in a self-supporting program; program costs must be cut substantially.

On the positive side, based on survey responses, it appears that retailers may be willing to pay fees for



value. Manufacturers do not appear to support additional fees.

PEA continues to believe that the Venture should consider two program models in developing their Business Plan, the first that simply maintains a significant presence of SGC in the marketplace, and the second that attempts to significantly increase marketshare (as originally planned).

4. Increased installation efficiency. The Venture objective is to improve the quality of energy efficiency of manufactured home installations and to measure the effect of action by targeted samples. Improvements in marriage-line seal, structural support for marriage lines and perimeters, and crossover duct installation will be investigated and changes in practice tracked.

Analysis: The Venture has begun to provide installer training in Idaho and Washington, and believes the training is having the desired impacts. As with quality control, PEA plans to examine and report on this program element in MPER#2.

7. Other Programs and Market Issues


ENERGY STAR (Manufactured) Homes

In the Baseline Report, PEA suggested that the ENERGY STAR

Manufactured Homes marketing identity might represent an opportunity to strengthen the marketing appeal of SGC. The logic being that ENERGY

STAR crosses many residential product lines, and therefore its presence in

the broad consumer market is likely to be substantial over time. This could mean that ENERGY STAR

branding would need less market support to achieve or maintain marketshare in the manufactured home market than SGC. Based on this logic and other information, PEA recommended that the Alliance and the Venture should work with EPA to refine the ENERGY

STAR specifications for manufactured housing in the Northwest and to

consider a co-marketing campaign.

Beginning in August of 1998, Alliance staff and contractors have worked with representatives of EPA to explore technical resolutions and marketing opportunities regarding co-branding of SGC and ENERGY STAR

manufactured housing. The difficult issues were largely technical in nature. Homes with electric-resistance heat are technically “penalized” in the performance-based home energy rating analysis used by ENERGY STAR

Homes, and therefore are extremely difficult to qualify, even when the proposed thermal-shell energy efficiency exceeds the requirements of SGC. Alliance staff and contractors offered EPA some possible technical solutions for consideration.

EPA agreed to consider modifications to some of its technical assumptions based on Northwest data. As of early November 1998, the technical analysis being conducted by EPA’s contractor was not complete and the implications for the technical standards for the two programs had not been fully resolved. EPA said that the resolution of this issue was a priority for them and that their preference is that it would be resolved in favor of being able to co-brand the homes in the Northwest, if that strategy is pursued.

ENERGY STAR Windows

During the third quarter of 1998, the Oregon Office of Energy (OOE) raised concerns over the Alliance’s regional promotion of ENERGY STAR

7. Other Program and Market Issues


Windows in the manufactured home market. The OOE had concerns that ENERGY STAR

Windows, a less expensive (albeit less comprehensive) consumer upgrade than Super GOOD CENTS would be used by the manufactured home retailers to sell against Super GOOD CENTS.

PEA was asked to conduct “mystery shopper” research to determine the extent of the problem. In all, nine retailers were “mystery shopped” and little-or-no evidence of selling ENERGY STAR

Windows against Super GOOD CENTS was found. None of the retailers displayed any brochures or posters about ENERGY STAR

Windows, whereas nearly all displayed the Super GOOD CENTS brochures.

Only four of the retailers that were “mystery shopped” were “aware” of ENERGY STAR

Windows. The other five retailers had either never heard of them, or didn’t respond when prompted about them. At a second level of prompting, none of the aware retailers appeared to have any specific knowledge of the ENERGY STAR

Window products, nor did they attempt to sell them. One “aware” dealer mentioned ENERGY STAR

Windows were only available with gas-heated homes.

Two manufactured home retailers that were visited by D&R (the Alliance contractor for the ENERGY STAR

Windows initiative), were among the four firms “aware” of ENERGY STAR

Windows. When prompted about energy efficiency, the sales person at both retailers immediately mentioned Super GOOD CENTS then proceeded to demonstrate their knowledge of Super GOOD CENTS. One of these two retailers/salespersons said that ENERGY

STAR Windows were not available.

When asked about ENERGY STAR Manufactured Homes, all the contacts at

the retailers said they were not available. Super GOOD CENTS was discussed in every store visit, but in most cases, only after a prompting of the salesperson about energy efficiency by the Mystery Shopper. All said they sell vinyl, double glass, low-e windows either standard, or with the Super GOOD CENTS option.

At this time, based on this limited research, PEA believes that Super GOOD CENTS is solidly positioned in this market and not particularly vulnerable to individual energy efficiency products like ENERGY STAR

Windows. In fact, additional contact with retailers and a coordinated



clarifying message may be beneficial to both the SGC program and the ENERGY STAR

Windows initiative.

Appendices

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Appendices

Appendix A: Quarterly Sales of SGC by State and Manufacturer

Appendix B: Gilmore Research Group Manufactured Home Retailer Interview Survey Questionnaire

Appendices

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Appendices

Appendix A

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Appendix A

Quarterly Sales of SGC by State and Manufacturer

Appendix A

THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Appendix A


THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Page A - 1

Table 4

1997-1998 QUARTERLY SALES OF SGC BY STATE

1997 1998 State

1ST QTR 2ND

QTR 3RD QTR 4TH

QTR 1ST QTR 2ND

QTR

OREGON 789 1058 741 820 624 650

WASHINGTON 781 750 892 954 767 740

IDAHO 208 162 225 153 133 139

MONTANA NA NA NA NA 25 9

Source: June 1998 NRG Reports


THE SGC MANUFACTURED HOUSING VENTURE Market Progress Report Pacific Energy Associates, Inc. Page A - 2

Table 5

1997-1998 SGC PRODUCTION BY QUARTER BY MANUFACTURER

1997 1998 State Manufacturer

1ST QTR 2ND

QTR 3RD QTR 4TH

QTR 1ST QTR 2ND

QTR

WA VALLEY 80% 98% 64% 88% 84% 95%

OR HOMEBUILDERS 45% 45% NA 45% 45% 72%

WA FLEETWOOD 84% 61% 78% 79% 97% 70%

OR FUQUA 78% 69% 70% 76% 61% 68%

OR GUERDON 71% 63% 74% 61% 57% 59%

OR SILVERCREST 61% 71% 67% 26% 54% 59%

OR MARLETTE 66% 55% 58% 44% 42% 49%

OR FLEETWOOD 56% 59% 55% 48% 40% 48%

OR REDMAN 49% 60% 53% 41% 34% 32%

OR GOLDEN WEST 55% 31% 9% 23% 32% 26%

OR PALM HARBOR 43% 34% 31% 18% 17% 25%

OR SKYLINE 25% 26% 26% 13% 10% 16%

WA MODULINE 58% 59% 35% 27% 19% 16%

OR LIBERTY 22% 22% 22% 19% 8% 13%

ID KIT 24% 9% 11% 10% 9% 7%

ID FLEETWOOD 13% 7% 6% 3% 2% 5%

ID NASHUA 12% 8% 10% 5% 5% 5%

ID GUERDON 4% 2% 5% 3% 2% 4%

ID CHAMPION 5% 2% 3% 2% 1% 2%

Note: These percentages are adjusted for outshipment and electric heat.

Appendix B

THE SGC MANUFACTURED HOUSING VENTURE Progress Evaluation Report Pacific Energy Associates, Inc. Appendix B

Gilmore Research Group

Manufactured Home Retailer Interview Survey Questionnaire

Appendix B

THE SGC MANUFACTURED HOUSING VENTURE Progress Evaluation Report Pacific Energy Associates, Inc. Appendix B

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