America's history is full of tales of intrepid folks who left their familiar, often comfortable known worlds to seek new territories. It's also a tale of the obstacles faced during those journeys–obstacles that not every pioneer was able to overcome.
The story for independent construction supply companies is following much the same pattern. Responses to this month's ProSales 100 report indicates many of America's premier dealers are exploring new markets. Multifamily projects are a good example; one-quarter of the respondents said they expected their organization's sales to that market to rise at least 10% annually through 2015. The retail market–an area that some dealers had let slide in pursuit of new-home builders–is equally attractive, with 24% of the dealers expecting robust growth this decade.
But dealers planning to invade these markets better not think of it as some sort of modern-day Oklahoma Land Rush. There are several mountains in the way in the form of retail firms like the big boxes as well as commercial specialists like HD Supply. Before taking them on, it might help to know how they're appealing to some LBM dealers' potential customers.
First, the commercial market is doing only slightly better than the woebegone residential market. The seasonally adjusted annual rate for nonresidential construction stood 6.3% lower in February than it did one year earlier, the Census Bureau says. It's even worse in several areas where dealers previously had spotted opportunities: construction of hotels is down 42%, the office segment has shrunk 19.9%, and work on commercial properties has fallen 11.9%.
Even religious projects aren't seeing much light; they're down 18.3% over the past year. Given those kinds of numbers, it's not surprising that HD Supply posted a loss of $619 million in its fiscal year ended Jan. 31.
The big boxes may be more visible competition, but their role in the pro market isn't as clear. The Home Depot estimates that roughly 3% of its customers account for 30% of its $68 billion in sales, or roughly $20 billion for just that group. It refers to this audience as "pros," but by using that term it's not referring solely to builders and remodelers. Rather, The Home Depot's pro count also includes landlords, maintenance workers, and government officials who keep up buildings–basically, anybody who gets paid to build, repair, or maintain a structure. How many of those customers can pro dealers get back? That depends in part on whether dealers are willing to make some expensive commitments.
Take operating hours and branch counts. A survey by L.E.K. Consulting of contractor operations with at least three employees at high season–in other words, not just the dog-and-pickup truck crowd–found that 43% of the reasons given by those who preferred big boxes over specialty dealers were related to convenience. Another 45% of the answers concerned price, though L.E.K. believes that once the housing recession ends this will matter less as a reason. (See related story, page 29.)
Dealers seeking to lure away big-box customers also would probably need to ease their credit policies. That's because big boxes are making money financing sales as well as profiting from the actual goods sold. The Home Depot has roughly 10 million holders of the company's private label credit cards. During the 2010 fiscal year, it estimates those cards figured in roughly 22% of all store sales.
Lowe's runs its commercial account and proprietary credit card-programs through a branch of General Electric. In the year ended Jan. 28 2011, receivables on those accounts totaled $5.8 billion. Lowe's announced April 22 customers paying with their Lowe's Consumer Credit Card will get an immediate 5% discount on in-stock and special order purchases.