Roughly five years ago, Bethesda, Md., remodeler Mark Scott did the great majority of his business with his local branch of one of the 10 biggest building-materials dealers in the country. As time went on, he noticed that he seemed to be less and less important to them. Eventually, salespeople there told him that, essentially, the company no longer wanted his account — which Scott estimates at a half-million dollars at the time.
A few months ago, Scott was at a small remodeled-home show, and saw the familiar banner of his old supplier adorning a booth there. The salesman manning the booth told him that orders had come from the corporate office to start cultivating relationships with remodelers again.
AN UNTAPPED MARKET In order to understand what's currently happening in the supply chain, it's important to understand how we got to this point. Dealers won't admit it, but anecdotal and statistical evidence strongly suggests a conscious decision by the bigger supply houses to focus on the big-production builders, at the expense of what the industry calls the “high-touch market” — remodelers and custom-home builders. “If a remodeler walks in the front door and wants to buy something, there's not a dealer in the country that'll turn that business down,” says Mike Butts, of LBM Solutions, a DeWitt, Mich.-based business and training consultant to the supply industry. But in terms of actively pursuing that business — or even just encouraging it by returning phone calls and not ignoring those contractors — there's a “totally unfounded feeling that they can find a [new-home] builder and sell a whole house for the same amount of effort,” according to Butts.
“From the perspective of the big dealers, it came down to the question of whether they could be successful being all things to all people, and the answer was no,” says Ruth Kellick-Grubbs, of Kellick & Associates, a firm based in Tryon, N.C., that advises manufacturers, distributors, retailers, and builders serving production builders.
The high-touch market differs from production builders in many ways. Where a dealer will make just one or two deliveries to the site of a tract builder's spec home, a remodeling project or custom home might require a dozen or more deliveries. Remodelers and custom-home builders also need their suppliers to carry a much wider variety of products than production builders do. They have little use for prefab trusses and wall panels, but often lean on dealers for other services, such as showroom use or installation training.
So, while remodeling projects actually offer lumber and building materials dealers a substantially higher gross margin percentage than production homes, when you factor in the “extras,” the net profit will be smaller on the remodeling side, according to Butts.
Consolidation among production builders — and, to a lesser extent, suppliers themselves — may have been the proverbial straw that broke the camel's back. The sheer volume of the tract builders'accounts made them important customers, and, as Kermit Baker, senior research fellow at the Joint Center for Housing Studies at Harvard University, points out, “it's easier to win over just two or three accounts” than it is to manage dozens of relationships just to get the same amount of business. Particularly for the bigger dealers, who had seen consolidation in their industry as well, there wasn't much of a choice to be made.
The result isn't particularly good for anyone. Small, independent suppliers that serve the high-touch market well on a local or regional basis do exist, but only in certain markets (generally ones with a number of well-established remodeling companies or, in the case of New England, where remodeling dominates the construction industry). Remodelers in many areas have had no other option than to use big-box stores as their suppliers. Lumber and building materials dealers, on the other hand, miss out on a whole market segment's worth of customers.
