Area Developers Catch Vertical Integration Wave

Ben Israel could hear time ticking away as his company began to pay interest on land while waiting for bids, survey crews and everything else it takes to get a project built.

That ticking turned into ear-splitting thuds when it became more and more difficult to keep subcontractors on one site.

There’s so much construction going on in the area that some excavators and other subcontractors hop from site to site trying to land as much business as possible, said Israel, president and CEO of Dixie Development Inc. of Fayetteville.

Though it was annoying and costly, Israel couldn’t find too much fault with his subs. Instead, he fought frustration with excavation, and in 2002 the company launched Dixie Construction LLC, a division of the parent company.

What Israel and Dixie’s investors did was a common business practice that dates back at least to the Industrial Revolution. Dixie integrated more than one stage of its production, which ensures supply lines, timelines and, theoretically, increases in profit.

David Swain, president of Dixie Construction, said the practice is akin to the company taking control of its own destiny.

“When you’ve got millions of dollars tied up in dirt, then time is a lot of money,” he said.

Vertical integration has caught on in a plethora of business models and there’s some evidence it may be doing so in the development industry. At least three of Northwest Arkansas’ largest developers have construction divisions: Dixie Development, Lindsey Management Co. and The Barber Group.

The general trend in business right now is to outsource, which is really the opposite of vertical integration, said Alan Ellstrand, an associate professor in the management department of the University of Arkansas’ Walton College of Business. Some companies outsource so much they are becoming little more than marketing operations that produce virtually nothing, he said.

But Ellstrand could see definite benefits of a development company in Northwest Arkansas integrating into construction because the real estate market is so intense.

“[Vertical integration is] not a magic bullet by any means,” Ellstrand said. “If it’s managed properly you can kind of get the best of both worlds.”

Timeline compression is the most obvious benefit to integrating and the one that Israel pointed to most. If a company owns a dedicated supplier, then it has supplies on time, all the time.

And the practice tends to build synergies, Ellstrand said. Integrated divisions of a company might communicate well about a project being too expensive, while an outsourced company might not communicate that information, and bidders may secretly think they hit the jackpot.

The Barber Group of Springdale has a construction division, though it doesn’t actually employ any construction crews. Seth Kaffka, president of the group, said TBG employs three people to oversee an army of about 130 different subcontractors. The company is essentially its own general contractor on most projects, he said.

For large projects, like the Legacy Building in downtown Fayetteville, the group will hire a general contractor to manage the heavy lifting, then the oversight goes back in-house for all the finish work.

Lindsey Management of Fayetteville oversees Lindsey Construction. Company officials declined requests for an interview.

Dixie Doin’s

With the move into a construction company, Dixie Development has cut its start-to-completion time down, though Israel and Swain couldn’t estimate a percentage on time.

Dixie Development’s revenue was about $40 million in 2005, Israel said. That’s up 31 percent from about $30.5 million in 2004, and up about 148 percent from $16.1 million in 2003. Dixie Construction had revenue of $19.3 million in 2005, up 18 percent from $16.4 million the previous year.

Israel said he and his investors are shooting for $50 million in revenue for Dixie Development in 2006. Dixie Development’s annual payroll is about 10 percent of its revenue he said.

The company built about $20 million worth of commercial projects in 2005, Swain said.

The development company has plans to build about 300,000 SF of projects in 2006 alone. One of those, the 77,000-SF Nelson’s Crossing on Joyce Boulevard in Fayetteville, will cost about $9.5 million, Swain said.

The construction arm is made up of five main divisions: Dixie Excavation, Summit Steel Erectors LLC, Dixie Landscaping (which includes an insulation installer), Southern Classic Homes (residential construction) and a new concrete division, which includes both ornamental iron and a painting capabilities.

The concrete division was added to Dixie’s portfolio in early February.

Dixie Construction now has about 65 employees.

The idea is to build up the construction company slowly, adding companies a little at a time, Swain said.

Israel said the company is not actively looking to acquire tradesmen that require certifications, like plumbing or electrical workers, but that a cabinetry crew is an attractive option.

“I don’t like waiting six weeks for cabinets,” he said.

Excavation & Steel

Dixie Construction started with an excavation division.

Roy Wright, general superintendent for Dixie Excavation, said his division has about $7.5 million in projects on its scheduling board. There are about 24 employees working at eight different sites from Fayetteville to Bentonville, he said.

Wright praised Israel and Dixie’s investors, just based on the equipment he gets to work with, which includes a fleet of track hoes, backhoes, water and dump trucks, graders and loaders.

The company recently spent about $170,000 on a global positioning system that helps survey land quickly and accurately. The excavation crew saved five full workdays on the Commerce Park II project on Joyce Boulevard, site of a four-story 66,000-SF building that will be the future home of Dixie Construction.

Those five days added up to about $8,000 in total savings, Wright figures.

Ellstrand, the UA professor, said one potential problem with vertical integration could be a company having too much capacity and wasting its resources. But Dixie makes up for extra capacity by outsourcing its services to other contractors.

Jason Dye, the head of Summit Steel and a third generation steel worker, said in 2005 his division’s billings were split about 50-50 between Dixie and other companies. He notes that the split will be more like 90 percent to 10 percent in 2006, with the lion’s share on the Dixie side of the board.

Swain said the eventual goal of Dixie Construction is to get to the point where it’s a subcontractor for large or out-of-area contractors. But the focus for the foreseeable future is on Dixie’s projects. He cautions that Dixie takes small steps.

“You only get one chance, if you don’t do it right the first time, you may not get another,” Swain said.