August, 2006
Mob Scene
Consolidation in the production-housing channel leaves underserved markets elsewhere.
By Greg Brooks
It is pretty much taken for granted these days that consolidation is accelerating at all levels of the channel, and recent events such as Andersen Windows’ acquisition of Silverline or Pro-Build Holdings’ acquisition of Hope Lumber don’t do much to dispel the notion. Among pro dealers, Stock Building Supply was No. 1 a year ago, at $3.58 billion in 2004. As of June, Pro-Build’s holdings totalled nearly $6 billion in 2005 sales, and no one doubts that there is more to come. The result is that more than a few independents are wondering whether this isn’t their last chance to cash out before megaplayers take over the marketplace for good. Will Independents Survive?There is no tougher question a dealer can ask, and if I were one, the last thing I’d do would be to take advice from someone who doesn’t have skin in the game. The decision may turn on a personal issue such as succession, but if the question is whether independents will survive, it’s important to know that there is as much evidence thatconsolidation is temporary as there is that it is permanent. In fact, the same evidence can lead to either conclusion. Consolidation occurs whenever the business climate is strong for an extended period of time. If you count LBM sales only (SIC 5211 or NAICS 44411) and include only pro dealers (an LBM focus and at least 50% of sales to residential contractors), Home Channel News’ rankings show the top 50’s market share peakingwhen the market is strongest: 11.6% in 1976 and 12.7% in 2005, but only 5.4% in 1986, following the downturn of 1980-82.But it depends on what you count. In 1976, Lowe’s and Wickes were the top pro dealers. By 1986, Lowe’s was still No. 1 but no longer met the 50% pro sales criterion, while Wickes was emerging from four years in Chapter 11. That left Diamond International at the top with less than $500 million in sales. So did consolidation unravel or did a megaplayer just quit the game? It doesn’t matter; when Lowe’s moved out of contractor sales, it left a void that independents moved quickly to fill. Maybe consolidation isn’t about size, but business models. New Models MatureIn the 1970s, the home center emerged as the hot new model and independents were all over it. Chains were, too, and the strategies were no different than today: price versus service. As the model matured, the result was inevitable: Margins eroded while service requirements escalated. But until Home Depot came in with servicelevels well above other boxes, independents were still viable retailers. In the ‘90s, a new model emerged for the housing boom: contractor-only and vertically integrated into manufacturing and labor. Now that model is maturing; everyone is on the bandwagon and the downward spiral is again in play. In a 2003 study by the Harvard Joint Center for Housing Studies, pro dealers’ gross margins averaged 15.6% on builders who build more than 500 homes per year, while small builders, remodelers and consumers generate 22% to 24%. Moreover, even big builders may be approaching their high-water mark. Five years ago, the top 10 looked unbeatable; now it’s clear that local builders are solidly entrenched and actually dominate more than half of the top 75 housing markets, according to Builder magazine. As independent builders crack the code, the competitive landscape will change dramatically. If you decide to cash out for your own reasons, the top of the market is obviously the time to do it. But if consolidation is in fact a sign that the market is shifting, the next big opportunity is just around the corner.
| Answer | Votes | Percent |
|---|---|---|
| Visibility |   | 50% |
| Watermark |  | 12.5% |
| Ignore It |  | 12.5% |
| Prosecute |  | 25% |
