Some may call it strategy, but I prefer to call it desperation when a company tries to gain market share by going into shell contracting or whole-house construction. It’s like watching a bad movie on a continuous loop—it’s been seen before. Lack of expertise and poor understanding of the work involved often is a formula for failure. This failure becomes even more likely when an executive team goes this route as part of a frantic search for solutions to earlier bad decisions.
Here in Florida, I’ve been told that two major dealers plus a big truss manufacturer have gotten into shell contracting for area firms, building the house’s structure from foundation to rooftop. This is a much different activity from installed sales, in which dealers both sell and put in doors, windows, garage doors, and cabinets.
Installed sales make sense in a lot of markets because of complex building codes, the essential expertise needed, and a lack of qualified installers. Suppliers have processes in place that provide better service, and installing these product lines are quick-hitters with limited liability.
On the other hand, suppliers that attempt shell contracting and full home remodels live in a realm with few if any advantages. This is particularly true when a supplier bids building materials to a contractor at a single-digit profit margin, believing it can increase its profit margin by giving labor along with it. But local and regional framing and foundation contractors have built-in labor and overhead advantages that suppliers don’t have. Plus, odious indemnification clauses in most builder contracts swing the door of high exposure wide open.
Then there are the cardinal sins. The first cardinal sin is: When a supplier provides shell contracting; it is now competing with its customer base. In this time of hypersensitivity due to a bad economy, this type of supplier risks losing a huge number of accounts that will never forgive or forget that supplier. It is amazing how long builders hold grudges.
Shell contracting by a supplier is a high-risk, low-reward business because most builders are too smart to allow for large margins on labor. This doesn’t even take into account foul-up situations, as well as that bad customer who is going to fleece you. I suspect that many supplier executives who get into this business have been given sanitized, perfumed financial projections blended with a lot of hopes and dreams by staff members eager to claim success.
The second cardinal sin occurs when a wholesaler, manufacturer, or mill starts selling directly to a shell contractor because it can’t compete in the regular supply channel. It is happening quietly, and more frequently than most realize. The accounts receivable exposure is enormous and expensive, not to mention the indemnification and logistics issues. This type of company risks being forever branded an untrustworthy business partner.
The wages for committing these two cardinal sins will be harsh. The vast majority of suppliers that try shell contracting will lose a lot of money because they don’t know what they are doing. The companies that subvert the supply chain to sell directly to shell contractors will one day have a reckoning with the suppliers that they seek to sell their product lines to.
If both the big box companies and the independent dealers decide to stop buying from companies that are side-stepping their interests, this practice would end. I see that day coming much sooner than later, because suppliers don’t forget either.