Principia Consulting’s Building Products Distribution 2012 study identifies the best growth opportunities in the sector through 2014 and provides strategies for value creation and competitive advantage.
Ken Jacobson, partner at Principia, spoke with MDM staff writer Angela Poulson about the study’s findings, including increased disintermediation and how distributors can stay competitive despite e-commerce’s role in accelerating this trend.
MDM: In Principia’s 2011 survey, 50 percent of building products distributors expected industry-wide growth of at least 5 percent in 2012. What are distributors’ expectations for 2013?
Ken Jacobson: It depends on the day of the week that you’re asking. It depends on the still-looming status of the fiscal cliff beyond the tax-side issues already addressed with the American Taxpayer Relief Act of 2012. It depends on what new economic or housing industry report has just been released.
In new residential construction, though, generally people are expecting that this year will be up by 20 percent. While new construction can be volatile, the peak-to-trough and trough-to-peak range on the remodeling side is narrower, and it depends on the nature of the remodeling.
There are certain remodeling and repair jobs that are considered essential, like roofing. When you have a roof leak, you generally don’t wait, so those are consistent performers.
Then there’s the impact of natural disasters like Hurricane Sandy that help the building products industry, although we’d all prefer solid growth from pent-up organic demand. Nonetheless, there are a lot of repair and remodeling projects in the area affected by the storm.
In general, with more funding available, and as we put the financial crisis more in the rear-view mirror, there will be greater consumer optimism, a relaxation of the purse strings and increased activity in remodeling. So it’s quite possible that remodeling expenditures will also exceed 10 percent growth this year.
MDM: Principia’s Building Products Distribution 2012 report indicates that high materials and energy costs are hurting distributors. Has this issue improved at all since Principia reported on it in the 2011 survey?
Jacobson: I think it’s still an issue. Anytime costs increase and finances are tight, you’re going to have constrained spending. Raw material prices have not dropped very much if at all, and energy costs have come down a little but are still high.
In response, one thing multi-branch distributors are doing is they won’t carry all the SKUs of a particular line at all locations. They’ll then trans-ship from one location to another to ensure a high fill rate. Some of that depends on how close their operations are together and how far those commodities can generally be shipped, but many distributors are rethinking their stocking positions at different locations and thinking differently about the geographic range of their service and operations.
MDM: The 2012 report also indicates that the building materials supplier base has seen some consolidation. How do you see this affecting distributors, and what strategies can distributors use to counter challenges presented by the trend?
Jacobson: In most of the categories we track, there are typically five or fewer suppliers that comprise the largest part of the supply base, which means distributors have fewer choices from which to attract and retain top suppliers.
So distributors have to think strategically about which suppliers have the products customers want most, which have the products that present the greatest earnings potential and which have demonstrated an understanding of the value that the distributor brings, from services like specification selling, contractor training, and marketing and promotion support.
In turn, distributors can then present a value proposition to suppliers to demonstrate that they’re the right distributor for that supplier’s products because there will be many distributors vying for the same supplier’s attention.
MDM: Tell me about the disintermediation you see happening between suppliers and distributor customers.
Jacobson: What’s happened over time is that because the industry has compressed on both the supply side and on the distributor side, the overall margin pool in the industry has contracted with the downturn. So everyone from the supplier to the dealer is looking to capture more share of the margin pool, and many suppliers have already restructured their own organizations to maximize margins.
Suppliers think they can capture even more margin by disintermediating their distribution networks and going down channel. This can be in the form of selling directly to builders and contractors, going from two-step distribution to one-step distribution or acquiring distributors. There are examples of disintermediation in many categories, including siding, trim, decking and insulation.
What distributors have to do to counter this trend is to provide value-added services beyond just transportation and logistics, and become a sales and marketing extension for the manufacturer. Because if distributors are performing the exact same functions as the supplier, the supplier will recognize that as redundant and say “There’s no sense in paying for it twice. Let’s just do it for ourselves.”
MDM: How has e-commerce played a role in the development of disintermediation?
Jacobson: Online shopping, as we know, plays a role in nearly all consumer purchasing decisions nowadays. The biggest role it has played in building products is that consumers are now very well-educated about products for the home, more so for remodeling, but even for new home construction.
They are informed about the products’ features and benefits, and oftentimes the information they find online will lead them to a specific type of product, which can lead them back to the manufacturer where they have the opportunity to order product directly.
The Internet has also made consumers very aware of building product prices. Whereas consumers would formerly get bids with materials and labor built in together and weren’t really conscious of what they were spending for each, there is now a mentality among a growing portion of consumers that they are buying materials and, separately, hiring a contractor for the labor portion.
It has made the industry much more transparent in terms of what consumers are paying for.
MDM: Is there anything distributors can do to avoid losing business through disintermediation? Can business that’s already been lost be reacquired?
Jacobson: The key to customer retention and reacquisition is to understand consumer demand and contractor behavior. That sounds simple, but it can be very complex.
For a distributor to understand consumer demand, it has to reach one step beyond its typical customer, i.e. the contractor or builder, to understand what the trends are for particular product categories as far as styles, colors, textures and performance, and to be able to stock the right products at the right time and in the right place.
To keep contractor customers, distributors and dealers really have to think like a contractor, who is concerned with growing his or her business, increasing proposal win rates and reducing callbacks. For distributors and dealers, that means having products with strong warranties and a strong track record of minimal product failure.
It also means having the right promotional materials to help contractors win projects, such as product brochures, sample boards and the proper training. We’ve seen in many product categories that contractors are more loyal to the distributor or dealer than they are to the brand. If the distributor or dealer switches brands, often the contractor will stay with its current relationship and migrate to the new brand.
MDM: How have big-box stores played into the creation of channel conflict, and how can distributors avoid or counter that threat?
Jacobson: There’s no doubt that big box has become more of a factor in many categories. Consumers can go in and see and touch a wide array of products and get immediate pricing online or in the store.
Big box stores have also increased their installation services and help desk capabilities, so they’re acting more and more like a pro channel distributor or dealer.
Big-box stores typically carry a broad range of products, but not a very deep selection. So in a category like siding, a big box may carry one or two brands and only a few colors. Distributors and dealers, on the other hand, are much more knowledgeable on the product categories they carry and have a deeper selection.
So there’s a role for both. Contractors shop at big box for the immediate availability and a wide range of locations, but they still look to distributors and dealers for special services, training, support, job site delivery, house packs and more. There are a lot of things that pro dealers can do that the big box still cannot do.
MDM: Can distributors use vendor-managed inventory programs or other services to differentiate?
Jacobson: Vendor-managed inventory is a tactic a lot of companies are advocating, but it’s a double-edged sword. It can give the appearance that the distributor is nothing more than a transportation and logistics warehouse, because the supplier will see every transaction that’s occurring and just refill the pipeline.
The distributor may or may not be using their sales and marketing to manage that inventory.
MDM: What strategies are most effective for distributors looking to increase wallet share?
Jacobson: That relates back to CRM and understanding what that contractor is doing on a daily basis: which products they are buying and which ancillary products can be provided to capture more share of wallet.
The contractor doesn’t want to go to multiple locations to fill his truck to do the job, so the more you can understand what the contractor needs, whether it be tools, fasteners or other components, the better you can satisfy his needs, retain him and increase your share of his wallet.
Contact Ken Jacobson at 610-363-7817 or firstname.lastname@example.org.