A Look at Building Product Distribution Trends

As the supply chain consolidates and customer loyalty wavers, manufacturers and dealers must adjust their business models
Based on a presentation by Bradley T. Farnsworth, The Farnsworth Group
January 15, 2013
FEATURE ARTICLE | Channels, Markets & Trends

Four key trends are affecting building material distribution: consolidation, market saturation, shifting customer priorities and communication. Together, these drivers create competitive pressures that continue to intensify for manufacturers and dealers alike.

 

The Farnsworth Group, a market research firm specializing in the home improvement, construction and building supply industries, has assembled various statistics dating back to 1985 that identify market changes among building material suppliers, as well as purchasing trends among builder and remodeler customers. This article focuses on findings related to supplier consolidation and remodelers’ purchasing behavior.

According to Farnsworth Group research, remodelers primarily buy windows and doors from lumber/building material dealers (Fig. 1). While LBM dealers remain the primary overall product source for this group, statistics show that remodelers are increasingly cross-shopping: buying from warehouse home centers, specialty wholesalers/distributors and hardware home centers, as well as directly from manufacturers.

 
  
 

The decrease in LBM dealers’ distribution power is evident when viewed across the last two decades (Fig. 2). In 1985, LBM dealers represented 27.6 percent of the market, compared to 24.8 percent in 2011. And while the number of stores in the traditional hardware store channel declined from 24,000 in 1985 to 20,000 in 2011, contrary to popular belief, the “mom and pops” did not disappear. It was the mid-sized home centers such as Hechinger and Handy Andy that were hurt most.

In contrast, the top 10 chains―which held 16.75 percent of the market in 1985―grew to represent almost 50 percent of the industry by 2011 (Fig. 3).

Growth among big-box chain stores is starting to plateau, however. Fig. 4 shows a dramatic decline in store saturation for the top 10 chains in the 1985-2011 period, raising the question of how these companies will make money with fewer households to sell to. The average number of households for the top three big-box retailers―Home Depot, Lowes and Menards―was 239,100 per store in 1985. By 2011, that number had dropped to 27,900.

About 75 percent of all U.S. households are within three miles of a big box store; the fight for the remaining 25 percent is underway. Hardware stores and LBM dealers might be in a better position to win over these households than the top three big-box retailers, whose store concept is under pressure. While average sales per store for Home Depot, Lowes and Menards peaked at $38.4 million in 2005, sales barely surpassed the $30 million-mark in 2011 (see Fig. 5). As big boxes focus on performance metrics such as sales and gross margin per square foot, they are also experimenting with smaller store formats. The economies of smaller stores can backfire, however, if customers still expect to see many product lines in one location.

Shifting Customer Priorities
To determine what factors drive remodelers’ choice of supplier, Farnsworth asked them to rate the importance of the following attributes: assortment, service, price, quality and convenience. The surveys revealed that suppliers do not need to have the lowest prices, but remodelers do expect them to be competitive and offer a wide variety of products. According to Farnsworth research, there is also a significant need for promotional pricing― specials and couponing vs. everyday low pricing―in addition to an assortment of price ranges. Suppliers must communicate their feature benefits through packaging, merchandising and advertising—and a highly functioning web site.

 

As technology savvy remodelers gain ever more access to product information and pricing, the battle for customer loyalty has left suppliers to answer the question: What is the new “wow” factor that will win them over?
 

Bradley T. Farnsworth is president of The Farnsworth Group, Indianapolis, IN, a market research company with expertise in the building material, hardware and home improvement industries, www.thefarnsworthgroup.com; 317/241-5600.