Changing Gears?

Roughly five years ago, Bethesda, Md., remodeler Mark Scott did the great majority of his business with his local branch of one of the 10 biggest building-materials dealers in the country. As time went on, he noticed that he seemed to be less and less important to them. Eventually, salespeople there told him that, essentially, the company no longer wanted his account — which Scott estimates at a half-million dollars at the time.

A few months ago, Scott was at a small remodeled-home show, and saw the familiar banner of his old supplier adorning a booth there. The salesman manning the booth told him that orders had come from the corporate office to start cultivating relationships with remodelers again.

In order to understand what's currently happening in the supply chain, it's important to understand how we got to this point. Dealers won't admit it, but anecdotal and statistical evidence strongly suggests a conscious decision by the bigger supply houses to focus on the big-production builders, at the expense of what the industry calls the “high-touch market” — remodelers and custom-home builders. “If a remodeler walks in the front door and wants to buy something, there's not a dealer in the country that'll turn that business down,” says Mike Butts, of LBM Solutions, a DeWitt, Mich.-based business and training consultant to the supply industry. But in terms of actively pursuing that business — or even just encouraging it by returning phone calls and not ignoring those contractors — there's a “totally unfounded feeling that they can find a [new-home] builder and sell a whole house for the same amount of effort,” according to Butts.

Hancock Lumber, in Maine, has recently assigned staff members to specifically serve remodelers.

Photo Credit: Hancock Lumber

“From the perspective of the big dealers, it came down to the question of whether they could be successful being all things to all people, and the answer was no,” says Ruth Kellick-Grubbs, of Kellick & Associates, a firm based in Tryon, N.C., that advises manufacturers, distributors, retailers, and builders serving production builders.

The high-touch market differs from production builders in many ways. Where a dealer will make just one or two deliveries to the site of a tract builder's spec home, a remodeling project or custom home might require a dozen or more deliveries. Remodelers and custom-home builders also need their suppliers to carry a much wider variety of products than production builders do. They have little use for prefab trusses and wall panels, but often lean on dealers for other services, such as showroom use or installation training.

So, while remodeling projects actually offer lumber and building materials dealers a substantially higher gross margin percentage than production homes, when you factor in the “extras,” the net profit will be smaller on the remodeling side, according to Butts.

Consolidation among production builders — and, to a lesser extent, suppliers themselves — may have been the proverbial straw that broke the camel's back. The sheer volume of the tract builders'accounts made them important customers, and, as Kermit Baker, senior research fellow at the Joint Center for Housing Studies at Harvard University, points out, “it's easier to win over just two or three accounts” than it is to manage dozens of relationships just to get the same amount of business. Particularly for the bigger dealers, who had seen consolidation in their industry as well, there wasn't much of a choice to be made.

The result isn't particularly good for anyone. Small, independent suppliers that serve the high-touch market well on a local or regional basis do exist, but only in certain markets (generally ones with a number of well-established remodeling companies or, in the case of New England, where remodeling dominates the construction industry). Remodelers in many areas have had no other option than to use big-box stores as their suppliers. Lumber and building materials dealers, on the other hand, miss out on a whole market segment's worth of customers.

Of course, there are advantages to dealing with the high-touch market. There are many, but the biggest one is stability. Greg Brooks, of the Lumber and Building Materials Institute, in New Albany, Ind., says that there used to be a rule among suppliers: Never have one customer account for more than 10% of your business. As builders got bigger, however, it became harder to abide by this adage.

Those who were unable to do so are now paying the price. With housing starts down nationally — 16% at the end of April — production builders are spending much less with suppliers.

“There are a lot of peaks and valleys with new construction,” Butts says. “With remodeling, you get a little dip here and there, but you don't see the same sine wave of activity.”

For the dealers who served some of the smaller new-home builders in addition to remodelers and custom builders, the solution to the problem is to focus more of their resources on the high-touch market. Ed Quinn, chairman and CEO of T.W. Perry, a Gaithersburg, Md.-based supplier with five distribution yards and a custom molding operation, has been successful in serving remodelers and small custom builders for years. “When you pick a niche market, you don't have as much competition,” Quinn says, but that may be changing, as suppliers look to that niche to fill the holes left by reduced business from their larger builder customers. Already, Quinn says, T.W. Perry has lost one account to a competitor who until recently didn't court smaller contractors.

The solution for the bigger dealers isn't so simple. For them, Butts likens changing gears to turning a battleship in the middle of the ocean. “It's a long time before you change direction,” he says. For that reason, Brooks says, “for those who have been very focused on production builders, when business is off, business is simply off. Once you have your infrastructure aimed toward a certain group of customers, it's very difficult to adapt that to a different customer group.”

Photo Credit: Hancock Lumber

Kellick-Grubbs acknowledges that the big suppliers have a difficult task ahead of them, but disagrees that they can afford to stand pat and wait for the new-home market to recover. “Overhead is not supportable given the current level of sales in many markets,” she says. “Many have been doing cutbacks, but in a lot of markets, it's just not enough.” Stock Building Supply, with 320 locations in 34 states, is a larger chain that is continuing efforts to reach out to remodeling contractors. “We recognize the potential in this market,” says Dave Corna, director of repair, maintenance, and improvement at Stock, which is headquartered in Raleigh, N.C. “We recognize that the remodeling professional wants a salesforce dedicated to their needs.”

To that end, in certain markets, Corna says “we're not having our guys wear four or five different hats.” In Los Angeles, for example, Stock already has stand-alone locations dedicated to remodelers, and Corna suggests that the company will look to duplicate that model in other markets. Strategies like this one have the advantage of not just being a stopgap measure; the business generated from remodelers can be sustained even during boom periods for new homes.

Corna says that Stock's organized commitment to serving remodelers dates back to at least 2001, when the position he currently fills was created. Are the recent developments in that area coincidental — the natural progression of the company's business model — or a response to the slowdown in the new-home market? It doesn't really matter, but with the outlook for new homes still relatively bleak in the near future, expect to see more efforts like it.