Storm Warning: The 2015 ProSales 100 In Depth

You need bifocals to properly read this year’s ProSales 100 report. Look at it close up and the numbers sound the same drumbeat we’ve been hearing for quite a while. Sales in 2014 rose for the fifth straight year, increasing 10.3% to $38.7 billion, and the six companies atop the rankings last year held the same six places, in the same order, this time.

But viewed from the perspective one gets from being five months deep into 2015, there’s an end-of-an-era feeling to this latest report. The planned takeover of No. 2 ProBuild by No. 6 Builders FirstSource (BFS) will create a $6 billion behemoth that almost certainly next year will end ABC Supply’s five-year reign at the top. And US LBM (which is up for sale) charged into the top 10, aided in part by its acquisition last year of Brooklyn’s Samuel Feldman Lumber, a former top 30 company. That pulled Feldman off the list this year. Next year, the same fate will befall No. 33 Lampert Yards (also acquired by US LBM) and No. 39 VNS Corp. (which has become part of BMC).

For all that the billion-dollar companies achieved, smaller dealers did proportionately better. While the 10 biggest dealers’ sales rose 9.1%, at the next 90 dealers they climbed 12.1%. And while the big dogs increased staff counts by 7.1%, the other 90 dealers’ payrolls increased 8.2%. Only in facility growth (5.3% vs. 4.5%) did the top 10 lead.

All told, 89 firms recorded sales gains, three saw no change, and eight posted sales declines.

One result of the slightly larger growth spurt among the bottom 90 is that the top 10 claimed a marginally lower share of total sales (61.3%) than they did in 2013. That contrasts with the homebuilding community, where the top 10 builders last year accounted for 29% of all closings, up from 27% the year before.

Special Strength

Specialty distributors continued to punch above their weight, accounting for 13% of the list’s membership but 38.5% of total revenues. Their numbers include six dealers with more than $1 billion in revenues apiece. Dealers with manufacturing capabilities matched the specialty gang by also placing six billion-dollar members on this year’s list.

In contrast, there was only one dealer without manufacturing capabilities—McCoy’s Building Supply—that could claim even $500 million in revenues, and nobody else in that category hit $205 million.

 The 10.3% growth recorded in 2014 from 2013 by this latest group of ProSales 100 dealers feels about right for the industry, particularly given that housing starts increased a disappointingly low 8.5% in 2014. For 11 of the past 12 years, when housing starts went up, each ProSales 100 (its membership changes annually) recorded bigger percentage sales gains than the rise in starts, or when housing starts fell from the previous year, ProSales 100 sales didn’t fall as much. Taken together, history indicates that while new-home construction figures significantly in how dealers do, home building has never been the entire story.

Growth Stock

To see many of the key factors that went into the ProSales 100’s performance last year, visit Denise and Tony Brookhouse, who with Dirk Koopman own Koopman Lumber in Whitinsville, Mass., No. 79 on the PS100 list. Koopman’s sales rose last year by $10.6 million, or 19%, to reach $67 million. Four-tenths of that growth is credited to a new branch that Koopman opened in Sharon, Mass., in July 2013. Expect another acquisition-related jump this coming year, as Koopman on March 2 bought R.S. Lamson & Sons, a 127-year-old company based in Hudson, Mass.

Koopman has more consumer business than a lot of ProSales 100 companies: It gets 24% of its total revenues from DIYers, whereas this year’s average for the PS100 is 12%, “We love hardware because that’s cash flow,” Tony says, “whereas the builder end is all credit.” Retail is in the company’s DNA, and its lineup still counts three full-line hardware stores and two paint stores.

But Tony also notes that “you just can’t sell enough fertilizer” to grow based on DIY alone, so over the past two decades Koopman also has been pursuing the pro. Denise believes Koopman was one of the first dealers around to centralize its distribution operations—it ships out of three locations—and it has 21 outside sales reps.

Koopman Lumber also believes in technology. It installed a system from Triad (an ancestor of today’s Epicor) back in the early 1980s, and all of its trucks are equipped with GPS devices. Those devices plus routing software help Koopman craft its growth plans. “When I was trying to decide whether to go to Sharon, we knew we had delivered $3 million from our distro center 37 miles away the previous year,” Tony says. “We knew we were going to have that business on Day 1. The art is figuring out how much more you can get from there.”

Rocket Men

Koopman’s 19% rise in sales beat the average, but it was nowhere near the top. That honor goes to Kodiak Building Partners, where sales rose 152% to $395.8 million. Lots of acquisitions fueled that rocket: its facility count more than tripled to 20 from six, and its payroll jumped nearly 2-1⁄2 times to 795 from 340. Organic growth helped, too; chief executive officer Steve Swinney says same-store sales percentage gains were in the high teens. Kodiak is assured to leap again this year given its acquisition in April of No. 67 Zarsky Lumber, a 12-facility dealership in South Texas where 2014 sales swelled 22% to $72 million.

Five biggest sales increases by percent

Six biggest sales declines by percent

Acquisitions also helped the other company that doubled its sales: The Detering Co. of Houston, which jumped 104% to $33.2 million. And it was a similar story at the PS100’s newest billion-dollar full-service dealer, US LBM, in which acquisitions and organic growth combined to produce a 79% sales gain to $1.42 billion and move the 2015 Dealer of the Year to No. 7 on the list.

Kodiak, US LBM, and the No. 84 firm, Central Network Retail Group, all are poster children for a revived concept of success that emphasizes a decentralized management structure, owners who actually work in the company, and an atmosphere that promotes sharing. At Kodiak, “Our whole focus is to get everyone together and, in conjunction with our quarterly board meeting, have platform presidents do presentations,” Swinney says. “Where it’s really successful is when the operators share ideas and best practices. Inevitably, you’ve got a guy in Denver doing really well in some aspect and another guy has nailed installed services. That sharing of services and going home and saying ‘I’m going to be doing these three things [that I heard at the meeting], that’s the real power.”

Vive La Difference

While we divide the ProSales 100 membership into four basic groups, there actually are more differences than that between dealers, and knowing those differences affects how one reads the results.

Take Stine Lumber. Its $166 million in total sales puts it in the top third of all dealers when measured by that category. But because it gets only 40% of its sales from pros (our bottom theshold for being on the list), Stine drops to No. 65.

Likewise, companies that do drop-ship or rely heavily on lumber and/or commercial sales have their own story to tell. Shelter Products, Reliable Wholesale Lumber, and Idaho Pacific together account for hree of the only six companies in which sales per employee topped $1 million. This came even though sales at Reliable Lumber fell 8%, more than any other PS100 firm, while the take at Shelter Products slipped 3%. Both Shelter and Reliable are more lumber-dependent than just about any other company on the PS100, and with lumber prices dropping 13% from peak to trough in the past year, they bore the brunt of the decline. Idaho Pacific also makes most of its money from lumber, but its drop-ship business model helped it push sales up 21% to $203.5 million. (It also added a facility.)

Matheus Lumber gets the bulk of its business from multifamily and commercial business, two areas that a lot of other dealers would like to get into but fear getting burned in the process. Matheus’ sales rose 30%, the ninth-best showing of any company. It only looks weak compared with the previous year’s 71% leap.

Looking Ahead

Talk to Reliable’s executives and they’ll tell you that, despite lumber prices being in the doldrums, they feel good about how they did last year and their prospects for 2015. Such optimism pervades the entire list. No more than three members out of the 90 who gave growth expectations expected any of their major constituencies to spend less this year than last.

Of all respondents, 86% predict higher sales to new-home builders, and between 61% and 64% predicted more sales from remodelers, multifamily builders, and commercial contractors.

That optimism also may be a reason why some PS100 members have increased their spending on information technology (IT) products and services. Last year, three out of 10 ProSales 100 companies said their IT spending would amount to less than 0.25% of sales revenue. But in this year’s group, about half said the same. Why the decrease? In part, it’s because 37.4% of the dealers this year vs. 28% last year said they planned to devote a quarter to a half percent of their sales to IT. There also were increases of 0.7 to 1.3 percentage points in the other, bigger-sending categories.

Some of that extra money might be going toward maintaining a customer relationship management (CRM) system, technology that helps a sales operation keep track of current customers and enticing prospects. Last year, only 23% of the 74 respondents said they had a CRM; this year, 33% of the 72 PS100 members answering the question said they use one, and 26% are buying.

IT Expectations

A total of 91 ProSales 100 members detailed their IT plans for this year. Roughly 60% planned to offer online order tracking, joining the 13% that already do so, while 52% expect to make online purchase orders a reality, adding to the 18% that say they currently have that capability. Expect investments in mobile applications, as 41% of respondents planned action in this year, and 36% intend to add a delivery tracking system.

Granted, PS100 members over the years have regularly said that they plan to implement some whiz-bang IT, only to fail to follow through because of implementation costs, economic woes, or having too many other things to do. But this past year, things appear to have changed.

For instance, in last year’s report we found 42% of respondents saying they had the ability for a customer to view online information such as purchase history, invoices, and payments. This year 52% said they had such capabilities. Given that 88 of the companies on this year’s list were on last year’s as well, it’s likely there has been real growth in IT investments.

Here’s one thing dealers appear less likely to do: become financial institutions. Yes, 46% currently offer financing programs and another 5% intend to do so, but that still puts this category 10th out of 12 popular contractor services. In addition, just 19% said they currently have an online store in place where a customer can buy products and pay for them at that time.

Installment Plan

Installed sales remains a controversial topic across the industry, but among the ProSales 100, more often than not it’s a fact of live. Sixty-two percent of this year’s group install at least one product. Cabinetry topped the list; it’s done by 96% of the firms that do any installations. Windows and entry doors came next at 74% and at 72%, respectively.

Builders’ well-publicized problems finding framers appear to be spurring dealers to act.

Nineteen percent of the respondents plan to start installing wall panels, and 13% plan to offer whole-house construction. Both are starting from relatively low bases (35% do wall panels now, 22% do whole-house work), so even if they grow as planned the two offerings won’t crack the top seven. But it is a sign of change in the air. So, too, are that plans by at least a dozen ProSales 100 members to start offering whole-house engineering and design services.

Making Stuff

When you ask the 60% of ProSales 100 members that say they’re in manufacturing and millwork to identify what they do, door-hanging shows up most often at 80%. Next come roof and floor trusses, at 63% and 61%, respectively.

What’s the growth market? It may be wall panels. Forty-four percent of the PS100 members who make things already make wall panels, and another 14% said they plan to get into that area. That’s a bigger percentage than any other category. Pre-build stairs came next, with 10% of respondents saying they’ll soon offer that service.

Technology, manufacturing, and installations aren’t the only services getting upgraded these days. At No. 19 Parr Lumber, where sales rose 5% last year to $324.8 million, marketing manager Nancy Cranston says a steady effort is under way to improve Parr’s personal touch.

“Really during the downturn we started connecting, making an effort to connect with not only our core customers but our advertising to homeowner and others,” she says. “We put on events, connecting with them on a personal level.”

The effort also included hiring, for the first time, a trainer to work fulltime on boosting Parr’s customer service levels. New employees get schooled, but so do existing workers, some of whom have worked for the Oregon-based company for 46 years. Such training also helps Parr’s succession planning work, Cranston adds.

Workers Wanted

The employee count for ProSales 100 members returned above 80,000 as of the start of this year, but one gets the sense that growth would have been even more than the 7.5% increase recorded if dealers could find decent workers. At No. 9 BMC, sales rose 8% but the number of employees grew by one-quarter that much.

“The biggest labor crunch is our drivers,” says Terry Arnold, vice president of human resources at BMC. “We’re using several media to get out in the market. We’re partnering with driver schools, have job-force solutions, and we’re on the constant prowl.” BMC appeals to veterans with military commercial driver’s licenses, and it continues to employ such old-fashioned methods as referrals, job fairs, and working with educational institutions.

Biggest hiring increases

Biggest hiring decreases

The 100 workers that BMC added last year, pushing its total payroll to 5,200, come on top of finding people to replace the 8% to 10% of the staff who leave every year. For Arnold, that means the recruiting pipeline is “something we can’t afford to turn off.”

“We’re putting a lot of focus on veteran hiring,” he says. “It’s incumbent on us to target the right schools with construction and design and management programs and appeal to students. We’re doing it at Texas A&M with its construction program, in Georgia at Kennesaw State, and we’re kicking off a program at the University of Houston that’ll be an intern/co-op initiative that I hope to button up before fall.

“We’re putting a lot on our sheer branding of BMC as a better place to work and having a better quality of worklife balance,” Arnold says. “We should basically become an employer of choice as opposed to constantly going to the market. We’ll know success when people are knocking the door down and bombarding our website.”

“We’re not there yet,” he says. “We recognize there’s a lot of work to do. But what we’re seeing now in the infancy is good.”

No Esop Fables

It was a good year for companies that have employee stock ownership plans (ESOP). Ganahl Lumber, 21st on the list, grew sales 18%, the same as No. 85 GBS Building Supply. And Mead Lumber, which has moved to an ESOP in the past year, saw its sales climb 12%.

Five companies jumped at least 10 spots on the rankings this year: Zarsky from 82nd to 67th, Moynihan Lumber from 86th to 73rd, Kodiak from 28th to 16th, Tibbetts Lumber from 89th to 77th, Building Solutions from 82nd to 71st, and Forge Lumber/Sims Lohman from 44th to 34th.

Only one company fell as many as 10 places, Higginbotham Brothers, which sank from 76th to 88th. That ranking change came despite a 3% gain in sales and the addition of three facilities. What appeared to hurt this Texas-based specialist in tiny rural lumberyards was its increase in consumer business to provide half of all sales, up from 40% last year.

Whether the ProSales 100 company has been around since 1880 like Higginbotham or just 2011 like Kodiak, the air around this year’s list is electric. Merger and acquisition activity is at its highest level in a decade. Perhaps more notable, the numbers reveal a group of companies that are launching services, beefing up infrastructure, diversifying markets and product lines, and trying new ideas.

“When we started four years ago, we felt that after five years we’d just be getting going. And after four years we do feel like that,” Kodiak’s Swinney says. “We’re trying to build something that’ll be around 25 to 30 years.”