If there ever was a poster child for the notion that simple questions can be the hardest to answer, building material distribution is it. Queries like “How big is the market?” and “How many dealers are there?” can yield murky replies given the lack of data and clearly defined markets.
Now Principia Consulting is shining a flashlight into this dark hole. Its Building Products Distribution 2012 study concludes that the U.S. and Canadian distributors and dealers who comprise the supply chain from the factory gate to the customer’s jobsite bought their goods for $78.1 billion and racked up $21.4 billion in gross profit selling those products. Canada’s share was 11% for both revenue and profit.
Principia, a Malvern, Pa.-based research and consulting group, looks for North America’s specialty dealers and big box retailers to expand their revenues by 6% per year to reach $122 billion in sales volume in 2014. But that growth won’t be spread equally: Principia predicts specialty dealers will see an 8% compound annual growth rate in their gross margin dollars through 2014, big boxes will record a 7% gain, and lumberyards and distributors will increase only 6% annually.
The 343-page report differs from more general studies of the building material market in that it focuses on 14 product groups that matter most to lumberyards and specialty dealers: dimensional lumber, engineered lumber, insulation, siding, trim, roofing, doors, windows, railing, decking, masonry products (cinder block and brick), barriers and wraps, sheathing, and drywall and ceilings. “Instead of throwing in everything and the kitchen sink, we’re doing a deeper dive and a tighter drill-down,” says Ken Jacobson, a partner at Principia and a leader in the research project. As a result, the study is likely to come much closer than other research to depicting actual conditions in the pro dealer market.
Principia counts roughly 26,000 sales outlets in the links that join manufacturers to the pro customer. It believes specialty distributors—mainly firms that focus on selling roofing, siding, and insulation—took in 36% of the $99.5 billion in revenue last year and also collected 36% of the gross margins. Meanwhile, lumberyards took in 32% of the revenues but got only 26% of the entire distribution market’s gross margins. That’s mainly because lumberyards receive much of their material through wholesale distributors, which collect 14% of the $21.4 billion in total profits reaped by all parties along the way, Principia said. Since specialty dealers don’t use distributors as much and rather get goods straight from the factory—thus their “one-stepper” nickname—they retain a higher share of the profits that can be gleaned from the goods they sell.
Big-box stores account for 19% of the sales of the 14 product groups as well as 19% of the gross profit, while masonry yards represent both 5% of the revenue and the profit.
Principia also tracked the $8.2 billion in sales last year that it described as coming “Direct from Manufacturer.” Insulation accounts for half the total in this group, Principia found. The category also counts activity by manufacturers that own their own distribution arms. Examples include USG, which owns L&W Supply, No. 6 on the latest ProSales 100 with $1.06 billion in sales and 155 outlets. In addition, this sector tallies direct purchases by big builders from manufacturers, but Jacobson said the amount involved was fairly small. Because outside distributors don’t figure into these sales, Principia includes “Direct from Manufacturer” in its measure of total sales made at the factory gate (it works out to 8% of the $78.1 billion) but doesn’t count them when figuring share of total gross margin.
As for the 8% annual growth forecast for specialty dealers vs. the 6% increase for lumberyards, “You could say that a difference of two percentage points per year over three years is kind of eating someone’s lunch … but it’s not a seismic shift,” Jacobson said. “We’ve done a lot of studies over the years, and contractors buy where they buy for a reason.”
Indeed, Principia’s report includes results from a survey of 150 contractors in which the respondents ranked each sales channel highest for the services each is best known for delivering: deep selection of specific product lines at the one-steppers, convenience at the big-box stores, and on-site delivery at lumberyards.
The study takes note of the frenzied mergers and acquisition market for one-steppers. Examples are companies like SRS Acquisition, which has gone from 42 locations in 2010 to 64 in 2011 and plans to have 100 facilities under its control by the end of 2012. There’s widespread belief that this is because specialty dealers are more efficient and profitable than lumberyards. The ProSales 100 survey found specialty dealers generated 17% more sales per employee than lumberyards with manufacturing divisions in 2011 and 52% more than lumberyards that don’t make components. Specialty dealers also racked up more than double the sales volume per facility than lumberyards without manufacturing operations, but were smaller than ProSales 100 dealers that ran lumberyards with component divisions.
On the other hand, Principia’s research found that roofing and dimensional lumber both generated the same gross margin—17%—above the price paid for those goods at the factory gate. But remember that much of the 17% for dimensional lumber is shared between lumberyards and the distributors who supply them. Drywall and ceiling products had the highest margin, 23%, while insulation was lowest at 13%.
The report summarizes eight months of research and features in-depth looks at sales and prospects for 14 products and 37 subproducts. It also includes a spreadsheet-style database that can be used to drill down into the numbers, make “what-if” assumptions based on metrics like housing starts and remodeling investment, and update the numbers when fresh information arrives. In addition, the report includes an online database of more than 25,000 locations, products offered, and suppliers represented. The package retails for $25,000.