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This is a part of the 2015 Distribution Trends Special Issue. The annual feature was researched and written by MDM editors based on interviews with dozens of distributors, as well as industry experts and manufacturers. MDM also conducted a survey of its readers to uncover the trends outlined in this issue.
2015 Distribution Trends Special Issue
The construction climate is improving but still hasn't met expectations. Housing starts have climbed back to 1 million or more per month nationwide, and commercial construction continues to be steady, which bodes well for distributors. However, supply chain disruptions, the slumping oil and gas market, and inclement weather have stunted sector growth in the first half of 2015, providing significant headwinds for distributors and creating a lingering rebound instead of a snapback. "There are more experts that think we're in for a longer, slower recovery, which in many ways is more conducive to a longer-term growth potential for the sector," says Jason Kliewer, co-head of Baird’s distribution group.
Consolidation at the top could drastically change industry dynamics. Acquisitions of smaller companies continue at a normal pace, but M&A among the larger players signals a seismic shift for the industry, which is finally on relatively solid footing six years after the great recession ended. In April, Builders FirstSource Inc. announced it would acquire ProBuild Holdings LLC for $1.6 billion. The purchase unites two of the largest building materials companies in the U.S.; ProBuild is No. 2 and Builders FirstSource is No. 7 on the sector's 2015 MDM Market Leaders list. And in early June, Stock Building Supply Holdings Inc., Raleigh, NC, and Building Materials Holding Corp., Boise, ID, agreed to merge.
"Coming out of the recession, a lot of companies chose not to sell at that time," says Randy Aardema, executive vice president, supply chain, US LBM Holdings LLC, Green Bay, WI. "Market uncertainty didn't make valuations very good for companies, but a lot of companies are saying it's a good time to sell and a good time to join forces with a larger company."
Technology is growing in importance because of rampant M&A activity. As acquirers seek assets, they will target companies that have aggressively improved their technology capabilities, meaning now – a sound economy with purchase-happy buyers cruising the market – is the time for building materials distributors to invest in their companies. "I think the realization is coming around, independent of business cycles and everything, that they need to invest in these kind of tools, and I think that's a good thing," says Michael Sprague, director of e-business development, ThomasNet. "It's a good thing for everybody – consumers, manufacturers, distributors. I think we're getting to a better place, but, boy, it takes a long time in this industry."
Looming supply chain issues could disrupt building materials distributors. The West Coast port slowdown wreaked havoc across all sectors, but now that it has been resolved, a larger issue lurks on the horizon – the national truck driver shortage. As drivers retire, companies are having difficulty replacing them, which is problematic for all sectors but especially building materials and construction. "We ask the driver to do a lot more than just drive the truck," says Dan Tinker, president and COO, SRS Distribution, McKinney, TX. "They're part of the delivery team, and in a lot of cases, they put product up on the roof, and they have to load their trucks, unload trucks, load cranes, operate heavy equipment. So it's a different job than just getting in it and hauling something for a box truck." Also, because of an aging workforce and strict rules regarding hours of service, companies will soon have to pay truck drivers more to entice them into an industry that has struggled to attract millennials, Tinker says.
Merger & Acquisition highlights in 2014:
As noted above, 2015 has already seen some big deals. Look for more building materials and constructions to merge in the second half of the year.