10 Ways to Save...Yourself

Scherer Brothers Lumber in Minnesota could be the poster child for pro dealers that find themselves in extreme survival mode. Housing starts in the Minneapolis-St. Paul metroplex have plummeted more than 80% from only a few years ago. That falloff necessitated a "disaster recovery plan," as COO Mark Scherer calls it, that included Scherer Brothers letting go of half of its staff and mothballing its yard in Albertville, Minn.

While profitability may be a question mark during this fiscal year, which ends in March, Scherer Brothers continues to generate positive cash flow and has a solid balance sheet.

The dealer is also taking "a last man standing" approach, says Scherer, by "being conservative, cautious, and focused on our core business without panicking. We pay our bills and haven't missed a payroll. And we're waiting because we think there will be great opportunities for companies that can make it to the end of this downturn."

Every collapse produces winners and losers, and while most of the publicity has gone to dealers that are closing stores and struggling to survive, ProSales research has found some dealers doing considerably better than others. Dealers with diversified customer bases have proven more resilient than those yoked to production builders. Even dealers that used to concentrate on one segment are casting a much wider net to generate leads.

Equally significant is the sense these dealers give that the LBM industry could be undergoing its biggest transformation since The Home Depot and other big boxes killed hundreds of formerly retail-oriented stores and forced others to focus on pro builders. There's a growing mind-set that the dealers emerging from the slump will have used the downturn to change their ways. "A crisis is a terrible thing to waste," Scherer says, and these dealers aren't standing still.

That assessment may seem like science fiction to the dealers nationwide whose companies are suffering the fallout from the economic malaise. Some of the industry's largest players–notably Stock Building Supply, 84 Lumber, and Building Material Holding Corp.–continue to shed manpower and locations to preserve their balance sheets. "Business is awful," says Bill Myrick, COO of ProBuild Holdings, the industry's largest pro dealer chain.

A recent ProSales survey found dealers are getting paid slower, even though half the respondents said their companies have increased the manpower and time they devote to collecting receivables.

But if you look around, you'll find examples of both creativity and stoicism. Dillman and Upton, an independent dealer in Rochester, Mich., has been attracting buyers on eBay, the electronic auction Web site, on which it has its own store site. Recently, the dealer was selling such items as a wireless intercom and digital keypad for $190, a rodent repellent for $10, and a brand-new solar panel for a gate opener for $108. Owner Brad Upton admits that eBay "is not going to save us," which is why his company is placing greater emphasis on promoting its installation services.

Dillman and Upton's sales for 2008 should be up 6% to 8%, but Upton laughs when asked about short-term profits. "Our goal is to survive," he says. "It's our 100th anniversary in 2010, and I think we'll get there."

If it doesn't, there are those lucky few dealers with cash available that are biding their time to see what personnel talent and other assets they can shake out of their sicker competitors' trees. "We're waiting to see what happens to some competitors during the slower winter months," says Dean Kelly, president of Jay-K Independent Lumber in New Hartford, N.Y.

Go to Commercial

As if the housing downturn wasn't problem enough, Jay-K had to deal with a new Lowe's that opened in November 2007, a half-mile from its 17-acre complex. "That's when we started to focus on how we could make our company better," recalls Kelly. Jay-K recently hired consultant Ken Wilbanks, who made recommendations about improving product adjacencies, end cap displays, and the overall appearance of its store. For example, Wilbanks pointed out that customers couldn't see the store's hours from the road.

One of the goals of hiring Wilbanks, says Kelly, was "to get a bigger piece" of whatever pie is left out there. The county that Jay-K serves has shrunk by 10,000 people over the years, "so we're not going to be seeing more retail customers."

Consequently, Jay-K has tried to boost its business with pros–particularly high-end custom builders–by becoming a reliable source for specially ordered products. To upgrade its delivery capabilities, the company last August spent $150,000 to buy its second boom truck. And when ProSales interviewed Kelly in mid-October, he was in the process of hiring three more outside salespeople.

Kelly predicted in October that Jay-K's business in 2008 would be "a little ahead of last year's," and that "we will be profitable." A bigger portion of its sales now comes from supplying commercial projects, such as government-financed rehabs of apartments. Last year, it supplied one project with 240 kitchens at around $2,500 per unit. More recently, it bid on a renovation project in Utica, N.Y., with 300 kitchens.

Even though nonresidential construction has an erratic history, it has become some dealers' life rafts. In 2003, Kuiken Brothers of Fair Lawn, N.J., launched a separate commercial subsidiary called Elmwood Supply that now accounts for between 15% and 18% of its annual revenue, says president Doug Kuiken. TW Perry, a Gaithersburg, Md.-based dealer, recently hired a commercial sales rep and has been offering more of its building products–such as millwork, hardware and even some framing–to commercial customers. "This is not a fad," says Doug Kelly, TW Perry's vice president of sales, adding that the company intends to expand its commercial sales force in 2009.

84 Lumber, which closed 80 of its locations in the first 10 months of 2008, has been vigorously pursuing commercial sales since early 2007, when it got involved with a condo project in Orlando, Fla., called Grande Palisades. 84 Lumber became one of the subcontractors for this 830-unit complex, for which it is providing an array of building materials out of one of its local yards.

"This was our guinea pig, to see if we could do this," says Frank Cicero, executive vice president of store operations. Now, 84 Lumber wants to establish a much bigger footprint in the commercial sector. More than 40 of its 1,680 outside salespeople are dedicated to commercial sales. 84 Lumber has charged Mike McCrobie, vice president of installed sales and manufacturing, with developing a national commercial program, which Cicero says will target accounts in the South initially.

In northern California, Golden State Lumber also has had success bidding to supply commercial projects, especially out of its Sierra Point yard. But president Rick Zaslove cautions other dealers about leaping too eagerly into what is a very different business, and one that has become increasingly competitive. "I think it would be difficult [for dealers] to jump into commercial now if you weren't in it before," he says.

Off Tract

Golden State's business was off by an estimated 15% to 20% in 2008 "from a great year" the previous year, says Zaslove. Like other dealers, it has been forced to cut expenses, close operations, and sell some property. But Golden State also paid down its debt to where "we are nearly self-financed," he says.

And its ability to stay afloat during the downturn, says Zaslove, stems from cultivating a broad customer base that ranges from custom builders, remodelers, multifamily builders, and fence installers to companies that build schools and churches. "We don't try to be all things to all people, but we do carry what these guys want and always have what they need," he says.

Several dealers place greater emphasis these days on generating leads. "A lead is money on the table, and we need to make sure we get it," says Kelly of TW Perry.

And dealers are attracting more business by showcasing their value-added services. Alpine Lumber in Colorado is building timber trusses on that state's Western Slope and floor trusses in New Mexico, says president Bill Miller. Cincinnati-based Nisbet Brower caters to a cross-section of builders–including those that do single family, multifamily, senior housing, and high-rise condos–with turnkey services for countertops, cabinets, trusses, and wall panels. President Mark Rippe says there are advantages to helping builders add value to a house "from the foundation up."

The consensus among dealers contacted for this article is that companies that had put most of their eggs into production builders' baskets are now wishing they hadn't.

"I was never that enthralled with large tract builders," claims Kuiken. Cicero adds that even when 84 Lumber was generating $3.9 billion in annual sales in 2005 and 2006, the industry's largest production builders never accounted for more than $120 million of that total.

Builders account for just two-fifths of annual sales at Kelly Brothers Home & Design in Covington, Ky., outside of Cincinnati, compared to 70% during the housing boom. "We never forgot about the consumer or remodeler," says owner Steve Kelly. While sales were off by an estimated 13% to $17.5 million in 2008, the company made money. Kelly Brothers operates three lumberyards and two kitchen and bath design centers. It has been in the kitchen and bath business since 1995, and has expanded its main design center four times, to where it now takes up 5,000 of its headquarters store's 11,000 square feet. That store also includes a smaller design center for windows and doors.

Kelly is quick to note that the housing slump hasn't translated into a remodeling boom, at least in the Cincinnati market. "This is a different downturn, with credit markets tightening and home values decreasing. People are just holding onto their money," he says.

Other dealers, though, probably would agree with Scherer when he calls remodeling the one business segment "that's been relatively stable." TW Perry, in fact, generates half of its annual sales from remodelers and another 25% from custom builders.

Dillman and Upton has offered installation services for 15 years but has avoided alienating its contractor customers because, explains Upton, it's filling the void left by several window companies that went out of business.

"They weren't very good, and there are homes here that need replacement windows," for which homeowners can still earn an energy tax credit.

Other dealers are emphasizing their specialties, too. A few years ago, TW Perry acquired a manufacturing concern called Classic Moulding & Door, and recently it has been conducting tours of that plant's customers "to get our name out there," says Kelly.

Myrick identifies among ProBuild's strengths its burgeoning gypsum business that is one of the largest distributors of that product in the United States. "It is one of our key strategies to expand our gypsum business nationally," Myrick says, and ProBuild last year hired Ron Rugg away from The Drake Group, a network of gypsum distributors, to develop that business for the company.

Eye on the Future

ProBuild, says Myrick, is insulated somewhat from the ravages of the housing downturn because many of its locations are in rural areas. While declining to comment on ProBuild's profitability this year, Myrick says his company remains intent on establishing a national footprint, primarily through acquisition. In October, ProBuild bought Centex Homes' distribution subsidiary, CTX Builders Supply, its seventh acquisition in 2008. He adds that ProBuild is also moving forward on a multiyear program to reposition many of its yards to better locations, based on where business is likely to emerge.

Indeed, there are dealers that see beyond today's cataclysm and are preparing their companies for better times.

Scherer says Scherer Brothers is looking at "multiple scenarios," one of which anticipates a market that doesn't recover until 2010. Zaslove talks about how Golden State Lumber is already benefiting from an "injection of youth" within its ranks that includes his daughter, Allison, who is the company's marketing director. And owner Lee Nobmann's daughter, Jessica, is a vice president who is assuming some financial and advertising responsibilities so Zaslove can focus on sales.

Even as it trims its store count, 84 Lumber isn't giving up on growth. Cicero says his company hired SelectBuild's team in the Southwest after Building Materials Holding

Corp., SelectBuild's troubled parent, closed its Florida operations. Cicero says SelectBuild had nearly $30 million in purchase orders booked for 2009 in that region.

Miller of Alpine Lumber says his company's acquisition of five yards from Las Vegas-based A.C. Houston has turned out to be "a good fit for us. They are located in excellent markets and give us additional geographic diversity both in Colorado and beyond its borders." So while Alpine's sales were down in 2008, "we've grown market share in most of our markets, and have managed to make a reasonable profit."

That said, Miller is one dealer who anticipates that much of his company's future growth will come from its existing operations. Kelly of Jay-K feels the same way. "We can be a lot more productive using our current facilities," he says. But if market conditions worsen and companies continue to falter, the challenge for some dealers will be to decide when to answer when expansion opportunity knocks.

Nisbet Brower, for one, pounced when competitor Riemeier Lumber went out of business, picking up Riemeier's wall panel operation, which Nisbet intended to fold into Smokey Truss, a 50-year-old business that it acquired last summer. "It's worked out well for us," says Rippe, who estimates the truss plant has the capacity to produce more than $6 million in annual business.

For Kuiken Brothers, its recent expansion was simply a matter of timing. In August 2008, it broke ground on what will be a 12-acre lumberyard in Succasanna, N.J., adjacent to the dealer's 6,000-square-foot KB Concepts showroom for windows, kitchens, and millwork.

"We've owned this land for five years, and–this being New Jersey–it took us a long time to get it approved," says Kuiken. When completed, the facility will have 130,000 square feet under cover.

Kuiken is like many dealers that are convinced the companies that survive this recession will come out stronger and fill in gaps left by foundering competitors. But that doesn't mean business will get any easier, cautions Kelly of Kelly Brothers.

"Yes, there might be fewer competitors," he says. "But there will also be fewer customers and fewer suppliers, which means fewer choices."