Sometimes a set of numbers can whack you as hard as a 2x4. That happened to me recently when one of several dealers in Grand Junction, Colo., whom I met last year passed along the building permit numbers for his county:
2005: 1,525
2006: 1,426
2007: 1,320
2008: 706
The 2009 forecast? 400, and it easily could be 100 permits lower.
So, what we have is a 20% drop in permits between 2005 and 2007, followed by a 70% plunge in construction activity. This in a county where at least five significant lumberyards, plus The Home Depot and Lowe's, compete.
LBM capacity has begun to exceed the need for construction supplies. The result is that dealers nationwide are beginning to write a third chapter in the downturn's story.
The first, pre-2008 chapter consisted mainly of small, precise cuts to staff and operations. Chapter 2 mostly took place last year and was marked by a sharp increase in closures and cutbacks. But last year's cuts generally were made in an attempt to hold off both the competition and the debt collectors until housing turned around. Now we have turned a page and face a much nastier prospect: dog-eat-dog competition. Many areas have reached the point where, no matter how you try to divide the market, there's not enough business to support all the LBM companies in it. In those places, being No. 3 or even No. 2 might not yield enough share for you to survive. We're in a brutal zero-sum game where, as one Salt Lake City dealer put it, for you to survive, a competitor must fail. Or, if you take your management cues from the "Highlander" television series, you know the rule: In the end, there can be only one.
There are two upsides to this scenario. The first is that dealers in communities where competitors have died or left say that conditions are less perilous now that they control more of the market. The second is that this has happened before. Dealers around the country have told me how there used to be a lot of locally owned LBM operations in town, sometimes several on the same street. Over the years, a sort of lumberyard Darwinism took place: Those that were weak or unable to adapt died, and those that survived typically emerged stronger and more diversified. This next wave of competition will result in more evolution.
One more key: Most of the closures ProSales has reported in the past two years involved out-of-town owners, not dealers rooted in their communities. The surviving independents are much smaller but still here, and much tougher than they were a few years back. If your competition operates from a different ZIP code, this may give you a head start to victory, but it's no guarantee. Locals will make an outsider your community's "hometown" institution if they believe it offers better value and service than you.
We all talk about striving to be the market leader, but rarely in recent years have the prospects been so stark. We have entered a phase of mortal combat, and unless conditions change dramatically and soon, there's going to be a lot of blood on the floor. Make sure that blood isn't yours.
Craig Webb, editor
202.736.3307
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