A combination of financial, ownership, likely consolidation and competitive factors could combine with a pressure to innovate that could produce a major realignment within the building products distribution industry when the housing industry recovers, the consulting group Principia Consulting predicts.
"In contrast to many other manufacturing sectors-and construction is essentially a manufacturing endeavor-the housing industry and its supply chain have a long history of quasi-adversarial relationships between players at each level," Principia says in its recently published major analysis of the building products supply chain. "Marketplace pressure to build higher-quality homes at lower prices may well force the same kind of cooperation among channel players that has led to significant productivity gains in other industries. Such an environment would represent a threat for some, but an unprecedented opportunity for others."
Principia bases that conclusion on a several findings it made when analyzing the supply chain. Among them:
- Private equity firms are more involved in the supply chain than is commonly realized. At least 15 different firms are involved, said John Pruett, director of Principia's Building Products and Construction Materials practice. "It's not just the pro dealers, it's the two-steppers and specialty one-steppers" that have private backing, he told ProSales in an interview. "No matter where you look ... you've got financial sponsors in the mix."
- Despite attempts to create national dealerships and distributorships, the building supply chain remains largely local-and locally owned. Principia argues that this is due in part to the fact that co-ops have helped reduce any advantage that size might give a bigger player over a smaller one. Also, there's ample evidence that "when the owner is active in day-to-day operations, there's a big difference" in the company's performance, Pruett says.
- While the roles in the supply channel clearly are changing-for instance, with regard to one-step vs. two-step distributors-it is less clear whether we'll ever reach the point where one of the channels will disappear entirely. For instance, while the advantages of using relatively expensive new technology have tended to encourage consolidation, that compelling need fades as the technology becomes more widespread and cheaper.
- Markets are polarizing, with producers tending to go either up or down market. Companies that stick to the middle on price and quality appear to be in greater danger than those that move to the edges.
- "Establishments that are heavy into financial management are not going to do well," the report declares, "while those that have deep and long operational experience will survive."
Future consolidation will turn in part based on how well suppliers help their customers compete, Principia's study concluded. While one might normally think that big customers have an advantage over smaller ones, the "big-small" setup that one sees in co-op distributorships suggest that it's not always the big companies that will emerge victorious once the market recovers and demand rockets upward.
Principia's roughly 260-page report, Building Products Distribution 2008, is based on research on more than 200 dealers, two-step distributors, private equity groups, specialist dealers and distributors, purchasing co-op buying groups, major manufacturers, and major home improvement retailers in the United States and Canada. It sells for $15,000.