Two-step distribution is the worst-kept secret in the building materials supply industry. Pro-focused lumber dealers do it all the time, from fulfilling ad-hoc requests by neighboring dealers to establishing formal and separate profit centers that reload materials or manufacture components that are then shipped to a variety of customers—including their own yards and pros.
Despite the proliferation of two-stepping among dealers large and small, few companies with a pro focus care to admit, much less publicize, the fact that they're deriving revenue from distribution. “We've run into a fair amount of trouble when there's an article or we've run an ad for our wholesale or [truss] manufacturing operations [that are sold to pros and other dealers],” says John Waldron, senior vice president of operations for Lyman Lumber, a 13-location, $361 million operation based in Excelsior, Minn. “It causes hard feelings with some good customers.”
Selling to your competition, as well as your own locations—even in small or ad-hoc lots—usually smells like a conflict of interest. “We'd try that niche if we thought there was an opportunity,” says Jim McAndrew, a senior manager with Tague Lumber, a three-location operation based in Philadelphia, which he admits occasionally sells materials upon request to other dealers. “But we'd break it out as a completely separate business to avoid the perception of a conflict.”
McAndrew recounts that Tague Lumber was more active, if informally so, in the two-step game 15 years ago when the dealer handled more exclusive product lines and materials in greater inventory than the rest of the market. “[Dealers would] come to us on short notice needing product,” he says. Most of those dealers are now gone or, he says, “niched to the point that they're no longer interested in what we have.”
Despite being tight-lipped about their two-step operations, LBM dealers recognize and seize opportunities to generate revenue and profits from the wholesale side by focusing on exclusive or niche product categories, manufacturing operations, excess inventory management, non-competitive dealers, a market void, or geographic circumstances, among other strategies.
Meanwhile, they face challenges such as muddied messages that erode a market advantage and higher profit margin, pressure from their own locations to discount prices and restock large-volume returns, and uncooperative manufacturers looking to sell into any open shelf space. “Most manufacturers would like to sell to a lot of dealers in every market,” says Terris “Terry” Inglett, president and COO of Honsador Lumber Corp., a six-location, $103 million dealer based in Kapolei, Hawaii. “They don't want exclusive dealers, but sometimes circumstances give you the leverage,” which, in turn, enables resales to other dealers in the area.
Filling a Void Regardless of its formality for a dealer, two-step distribution is about filling holes in the market.“It's not necessarily an effort to sell more product, but to reach a different consumer,” says Inglett, who is willing to shift some decking or fencing inventory to small retail outlets sharing an island with one of his locations. “It's an opportunity to resell a brand to other small dealers and to customers we otherwise might not reach.” As a statewide operation with outlets on all five major Hawaiian islands, Honsador Lumber deals in such volume that it can also afford to sell or resell products to smaller, non-competitive dealers (such as hardware stores) without losing margin. “Small dealers who need less than a full load come to us,” says Inglett. “They have no means for purchasing in large volumes or getting the economic benefit of freight costs on their own.”
A more formal and extensive undertaking on the same concept is Resource Logistics International (RLI), a “reload” center in Conroe, Texas, started twelve years ago by Houston-based Bison Building Materials to serve distributors, dealers, and large-volume pro customers in the Houston metro market. “The owner had the resources and saw the need for it,” says Kyle Williams, general manager of Bison's Conroe lumberyard, located on the same 19-acre spread as the RLI operation, albeit in separate buildings. “There were no good reloads for this market.”
Fair Treatment As much as a dealer's lumberyard locations may wish it differently, and squawk at the sales meeting about it, simultaneously managing two-step and pro sales operations depends on a level playing field of prices and service. “We're considered an ‘internal' customer [to RLI], but there's no other difference,” says Williams. “They have their customers and need to take care of them just like we [take care of our customers] to eliminate conflicts.”
Similarly, Lyman's Mid-America Cedar (MAC) operation, which reloads and distributes cedar products, engineered wood, and alternative decking materials to dealers from locations near Minneapolis and in Charlotte, N.C., treats its retail customers—including Lyman Lumber locations in Wisconsin and Minnesota—the same. “Lyman owns us, but we sell them like any other customer,” says Mark Capp, sales manager at MAC's Osseo, Minn., location.