Cast your eye over ProSales’ maps of deals and new store openings last year and this, and one trend is obvious: Specialty dealers account for lots of the action.
In 2014, 10 deals (involving 26 facilities) and 26 greenfield openings involved companies that specialized in particular building products, like roofing or drywall. And through 2015’s first quarter there have already been nine deals (involving 14 facilities) and another eight greenfield openings. Also notably, none of the closures were specialty yards, though a few specialty stores did change names as part of merger and acquisition deals.
What’s behind this trend? Several private equity-backed roofing distributors, all capitalized with tens of millions of dollars. They were set up to undertake acquisitions, and many did. But these companies also have opened lots of greenfield operations, often near existing competitors.
So, what does all this consolidation and expansion of specialty dealers mean for full-service lumberyards as well as for other specialty dealers? The answer: Quite a bit.
Let’s start with three advantages propelling the specialty firms. First, a specialized operation that is established in a market already served by numerous full-service LBM distributors can take advantage of its product specialization. Full-service or broad line dealers typically do not claim to offer every possible product in all of their categories, because the proliferation of SKUs would be too much to manage. In contrast, by stocking the 10% to 15% of additional items in, for example, the drywall industry that are difficult for a broad lines distributor to stock, specialized businesses can win significant new customers.
Second, there are pricing advantages to being a one-stop supplier in a narrow category. Such a dealer can charge somewhat more for certain commonly used products, confident that customers will not leave them over a few dollars and struggle to work again with a less specialized broad line supplier. Customers will pay a little more for confidence that they can access everything they need with one delivery. Skimming away the top few drywall contractors from all of their local competitors is an excellent way to build a business.
And here’s the third advantage of a specialized dealer: Fewer commodity price swings. A full-service dealer may face risk from changes in the prices of commodity and specialty lumber, glass, vinyl profiles, door skins, steel, various petroleum based adhesives and sealants, aluminum and a variety of other commodities. In a specialized dealer, it is likely that most of the danger in the cost of goods sold category involves pricing changes in only one or two primary commodities.
On the other hand, the proliferation of greenfield specialized operations may be causing problems in the market. In a recent study of 12 different building products segments, it was determined that pricing increased in all of them–except roofing. It appears that the flurry of deals and new-store openings has set of an inevitable race to the bottom, with everyone cutting prices to maintain market share.
It is better for the overall health and growth of the market for companies to grow through acquisition of complementary LBM businesses, whether specialized or not, than to open numerous greenfield operations. For that reason, the strong pace of acquisitions of specialized dealers is likely to continue. Whether the pace of new-store openings will slow down remains unknown.