LBMs and the Component Business

The contemporary consolidations within the Lumber and Building Materials (LBM) business were prompted by consolidations within the home improvement retail industry. Home Depot started the movement in 1979, and its dramatic growth forced Lowes to follow it, converting its stores into mostly retail outlets. This led to the formation of Builders FirstSource (BFS), fueled its rapid growth, and then prompted other LBMs to begin consolidations. Later came the consolidation of the consolidators, with BFS buying ProBuild and then BMC. Has a better business resulted? Looking at the experience of Lowes can provide some answers.

Beginning in the 1920s in small Southern towns, Lowes conducted most of its business with contractors. As it expanded to 238 stores by 1984, Lowes developed a large cadre of knowledgeable contractor salesmen with strong ties to their customers. These salesmen typically provided a range of services, including material take-offs and coordination of deliveries, including trusses, which they purchased from others. Lowes had become a one-stop shop for contractors, and it had no intention of losing that business, which accounted for half of their sales at the time. In fact, they seemed to doubt Home Depot’s future when they declared in their 1984 Annual Report, “the big format companies will run out of big cities before we run out of small and medium towns.” At the same time, however, Lowes began setting up separate Lowes Contractor Yards to keep this important clientele. It also built a large truss plant to supply its stores in Florida. However, when ten-year-old Home Depot eclipsed the sales of sixty-year-old Lowes in the late 1980s, the die was cast at Lowes, and the quest to gain consumer sales dominated its business, alienating both pro-builder customers and their Lowes contacts.

BFS went after these underserved pro-builders in the 1990s, with a similar “one-stop-shop” approach that Home Depot’s Founder, Bernie Marcus, had conceived in the 1970s and deployed in the 1980s. Bernie hired experienced tradesmen to staff his stores, just as BFS brought on experienced Lowes-trained contractor salesmen. Bernie created stores that had everything needed for home improvement, just as BFS created supply yards that had everything needed to build a house, but Home Depot added two very important services: project coordination and national builder focus.

To deliver wall panels and trusses on time, it helps to be the supplier of most of the materials and to have a single point of contact, a coordinator, who keeps track of all deliveries. While this function is present at all component plants, it gains much more significance, and can lead to more efficient scheduling, at an integrated LBM. For example, if the first lumber drop is delayed, the entire sequence of component manufacturing can be adjusted accordingly. The coordinator also manages invoicing adjustments, credits, and backorders, relieving the component plant of many administrative functions.

BFS, like Carpenter Contractors of America (CCA) and many other CMs, prefers the more consistent production schedules of national builders, which yield steadier manufacturing workloads. The best of these builders attempt what is known as an “even flow” methodology, which allows trade partners and suppliers to function most efficiently and provide the best prices. Of course, the ups and downs of the economy often upset this process, and have led to the downfall of many CMs, large and small.

Having multiple component plants also provides the opportunity to spread “best practices” across the group. In the short term, individual locations may just enter metrics into a master spreadsheet, as is done at US LBM. In the longer term, this could be automated, however not without monumental leaps in software sophistication. Because there is no such package commercially available from huge ERP vendors like SAP or Oracle (it failed at ProBuild), this capability will require massive investments and years of dedicated custom programming efforts. However, if this custom software is built upon and can leverage data from other apps with open databases, like Epicor (being implemented at CCA) or AppWright (being used at BFS and ICG), it can provide considerable competitive advantages.

Structural building components, though they represent just 20% of LBM sales, are essential to their overall success, because they have better margins than commodity items. In addition, increasing investments in automation may further increase the margin of components. That is why component plants are a key part of what is called, in business schools, a classic roll-up strategy, i.e., “rolling up” similar businesses in a highly fragmented industry and achieving economies of scale.

In assessing the risks faced by these LBMs, it is worth reflecting on the experience of Lowes. In the 1960s, Lowes owned two large saw mills, and as it entered the 1970s a large portion of its earnings came from lumber and commodity items, which were attributed to the booming housing market. However, as housing starts sunk dramatically in the late 1970s, and also in the late 1980s, Lowes sold the saw mills and de-emphasized commodity sales, ramping up retail from 52% to 66% of its total sales. Bernie Marcus intentionally put lumber in the back of his stores, so that customers would walk past all the decent-margin products on the way to that lower-margin commodity. And these actions by Lowes and Home Depot highlight the risk of depending on new construction, even though that is the approach taken by most LBMs today.