Dealers and Manufacturers Weigh in on Consolidation

Originally published by: LBM JournalMarch 10, 2021

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With steady headlines of acquisitions of LBM dealers and distributors, industry consolidation is a hot topic among our readers. This month’s Real Issues survey question comes from a Wisconsin dealer who asks what will happen when (and if) a few large corporations control LBM distribution. We posed that question to our readers, from full-line lumberyard operators to distributors and manufacturers. Of the 150 respondents to our survey, 66% indicated that the recent rise in consolidations is concerning. What follows is a sampling of how these readers feel industry consolidation may shape their company’s marketplace.

How would you respond to the dealer who shared this question? “There has been so much consolidation, with so many longtime independent LBM dealers and distributors being acquired by much larger companies. If this trend continues, I’m concerned about what will happen to our industry when just a few corporations control all the distribution. Do others share my concern, and if yes, what’s the answer (if any)?”

Responses from full-line lumberyard/building material dealers and specialty dealers

  1. “This is a concern of mine and it applies to the major lumber and manufacturing companies as well. The last several years have seen considerable change and consolidation. My fear is that suppliers will begin to only focus on big boxes and very large dealers in the $100 million category and not support the smaller folks like me that helped to build these companies with service and loyalty to them and our customers. We already run into ‘exclusives’ with the likes of Home Depot and Menards.”
  2. “We, as small, single-store lumberyards, are a dying breed. We support our communities and have a good customer base now, but we have a Builders FirstSource and Alpine just 45 miles away. Now that BMC and Builders FirstSource have merged, there will be no way we can compete on pricing. Both have rail spurs in their yards, and the buying power will be huge. I hope we can last a few more years.”
  3. “The manufacturers have sold out to the box store industry and one-steppers. Until the independents pull their heads out of the sand, we’re on the fast track to an endangered species. Leadership from an existing organization needs to step up and lead.”
  4. “I don’t know if there is an answer. Even if a company isn’t actively for sale, if a high enough offer comes the majority of older owners would sell. The less competition there is, the more the prices will rise.”
  5. “We keep seeing the larger companies in our area being bought by the giants. It makes me wonder why the buying groups keep inviting the foxes into the hen house. Some already are loaning money to keep members.”
  6. “We worry about what we can do to have a point of differentiation from the big national chains. We have two in our market area and we are bigger than both of them (probably combined). We have better supply, service, and OTIF than they do. We feel you just need to be really good at what you do and give customers no reason to change. We are also very diversified and have the production capabilities to match their sourcing of components and millwork.”
  7. “I acknowledge that it can be a concern, but the ‘accumulators’ also have problems themselves because they are generally owned by private equity groups that are typically highly leveraged and unable or unwilling to invest much into each acquisition. Furthermore, they generally have a short-time ownership horizon. I believe the operative expression for this situation is ‘pump up and dump.’ Stick to being a good operator with solid customer service and building solid relationships and, over time, independent operators should do fine.”
  8. “We need to continue to differentiate our offering in ways that remain extremely relevant to our target audience.”
  9. “Yes, I think competition is a good thing. It keeps everyone honest.”
  10. “I’m concerned that the manufacturers will favor the larger dealers and distributors, thus driving the little guys out of business. We already are seeing favoritism toward them now. They’re already receiving priority status on hard-to-get materials, etc. The only things we have over the big box is our ability to adapt quicker and to offer better service.”
  11. “You simply have to look at what has happened to other industries that have already been through an industry-wide consolidation to see where the LBM business is heading. Look at the grocery industry. We’ve given up a lot of local creativity and wisdom to have fewer choices, lower quality, and less connection to our communities simply to achieve minimally lower prices for the consumer and higher margins for the consolidating companies.”
  12. “I am concerned it may limit distribution in the LBM industry. We independents may have fewer sources to purchase from. It also puts pressure on our support organizations. Our lumber associations provide education and political representation services. With fewer members because of consolidation, associations are also getting squeezed by this continuing trend of consolidation.”
  13. “The demand is outpacing the current ability to produce. This is just driving the cost of all material up beyond anyone’s expectations. Yet it still does not seem to be slowing the sales of homes down. Now with many things being delayed due to COVID-19 it will be an interesting 2021.”
  14. “My main concern is with all the small independents being bought up, that special connection with their individual communities will be lost. That connection is what makes each individual business special and unique.”
  15. “My hope is that there will be competition between these much larger entities. Since there is nothing we can do about this consolidation, I think we just have to navigate between them as best we can. Yes, it does concern me.”
  16. “My concern isn’t so much about controlling the price of materials, as the large LBM companies will always be competitive with each other. My concern is that the level of service and product availability in rural and smaller markets will be less because they are not markets that appeal to the larger yards. Smaller independent yards will only have a tougher road in remaining profitable as this trend continues.”
  17. “When we see the majority (if not all) of a mill, or an entire industry production capacity contracted to a few entities, the squeeze on the independent dealer is obvious and makes the independent model unsustainable. Strong co-ops/ buying groups hold the answer but will need to modify their models to combat consolidation pressure and continue to provide value to the membership.”
  18. “Big dealers can make better deals than smaller dealers. I fear that one day manufacturers won’t take independent dealers as seriously as they should.”
  19. “We operate a chain of lumberyards that gets 95% of our sales from pros and we are completely surrounded by the newly-conjoined, publicly-traded roll-up that now has sales in excess of $11 billion. You probably know who this is. Fortunately for us and the other independents in our market, this company has continued to focus its resources and energy on growing their sales revenue and geographic coverage rather than investing in the assets that might improve the effectiveness of their local operations. This has allowed us privately-owned independents the ability to focus our resources on the local market and generate an acceptable return for our shareholders. I suspect our situation is replicated across the U.S.”
  20. “I believe we are heading for more and more consolidation as retiring independent operations are being gobbled up by large corporations. It’s an opportunity for those wishing to be something other than a cookie-cutter operation.”
  21. “I think there will always be a place in the market for independent distributors and dealers that are well-run and attuned to their customer and vendor bases. The consolidations can make the experience for customers and vendors less personal, and in many cases the consolidated entities are less nimble and have a harder time making point of sale, point of purchase, and point of service decisions that an independent company can make on the spot. The larger concern is the availability of distributed product (engineered wood, sidings, etc.) whose production is contracted for by the larger consolidated entities. Don’t look for an external resolution to the challenge. The answer for independent dealers and distributors is to run more efficiently with a focus on the following (in this order):
    1. Maintain and develop great vendor relationships (don’t be a pain to work with) and always remember that you can’t sell from an empty
    2. Focus on your good customers and make sure they see the value of doing business with an independent company—there is a value there—find it, exploit it, promote Take the emphasis off of price and put it on value.
    3. Look for substitute products for items that have been tied up by large companies—if you maintain a great relationship with these vendors it may help when the time comes to protect you against losing your source to a large company’s purchasing
    4. Be willing to review and diversify your product line and services—look for niche areas that can help you maintain and grow your customer and vendor
    5. Take care of your good employees and get rid of the bad Promote from within. Good employees can make up for sporadic deficiencies in other areas. For example, a delivery driver that your customers recognize as courteous and helpful, but maybe is little slow is just as valuable as one who is very efficient and fast. I only get compliments on the quality of my courteous, helpful driver, which helps with customer relations.”
  22. “Grow or die. It sounds harsh, but very few businesses of any type last beyond the original owner. A handful may make it to the second or third generation. The generation that came home from W.W. II, got a truck and a few employees to serve the building trade has passed on. Mergers and acquisitions have replaced new stores as a way to grow the business in the 21st century. I don’t like it, but unless and until people grow tired of big LBM like some of the backlash against big box stores, smaller retailers will continue to fade away. Small LBM dealers may find a niche market for a subset of the builder market (such as custom homes), but the big fish are getting hungrier and the minnows are their lunch.”
  23. “It would be nice if there were an answer. Greed rears its ugly head, and the mighty get mightier. Just look at Walmart and Amazon. They’re running mom and pop stores out of business by the thousands.”
  24. “Nothing. The current state of the FTC, SEC nor any other federal agency is to let the competition roll. In the future, you can take your clue by what happens to social media companies. If they are forced to break up, then you might look for this to happen in the lumber industry, but that is way, way, way down the list.”
  25. “I do share the same concern to a certain extent. We cannot slow or stop the consolidations without first looking at a few reasons why smaller independent LBM dealers are selling out. The first and most-important factor is the resistance to change by those independents. All of our customers and products are vastly different today than they were 5-10 years ago. If we don’t adapt to those changes the merger options look more and more appealing. Our industry had to re-think every approach to customer service when the big boxes exploded in growth and this threat is no different.”
  26. “Yes, we are concerned, but we think the consolidation may bring opportunities to service smaller customers that are not the target customer of the bigger national accounts.”
  27. “It’s a natural progression as business sectors age. In the past, lumberyards were passed down to the next generation. Now the next generation has other interest and don’t want to do what their parents did. For many businesses, the choices are few: merge, sell, pay someone to run it, or close. Selling or merging gives the owner a chance to “pull the money off the table.” Having someone run it has its own risks. Closing the business nets the least amount of return for many years of hard work. As for the future, there will always be smaller yards in remote and harder-to-service areas; or specialty yards that can survive and thrive in more urban areas. But overall, we are definitely seeing a reduction in our numbers.”
  28. “In almost every market a large independent holds the number one spot. Many will sell, but others will sprout up to take their place. Large corporations are slow and cumbersome, and by the time they react the trend is already changing. Know what your competition is doing but focus more on what your customers need. Keep your IT up to date; if you act like a dinosaur you will go the way of the dinosaurs. Manage your business with a long-term perspective. Big companies are managed quarter-to-quarter for their share price. Finally, lead your associates for efficiency and longevity. High profit dealers pay their associates more but in return those associates produce much more than industry averages. Be lean and mean; big companies have layers and layers of management.”
  29. “Buying power is my main concern. Will our buying groups and associations be able to keep up?”
  30. “Not a concern.”
  31. “A good independent can always beat a chain. Chains aren’t locally based, don’t develop the strong relationships this industry is known for, and aren’t part of the fabric of the local market like someone who lives there for a long time. Chains usually sell on price and I don’t want pure price buyers anyway. They can have them.”
  32. “It seems it will always be the David and Goliath story. We are a one location small independent store that has been in business for 49 years. All around us are the ProBuild, 84 Lumber, and Carter just to name a few. Builders expect kickbacks and will gladly even spend more to get back pocket money. We are not able to play in that game and it makes it a disadvantage. We survive by sheer tenacity. So, are we concerned? No. We continue to strive and do what we know best. It has served us well for 49 years.”
  33. “Yes, we saw this happen with the small mom and pop hardware stores. Loss of the personal connection was huge.”
  34. “No! Building is local.”
  35. “No, we are still relatively fragmented, and independents still have power to outperform consolidators.”
  36. “Businesses all go through life cycles. Business owners grow old and deserve the ability to transition to retirement and take chips off the table. The good news for independents is that the big acquirers never make the acquisition better. They almost always shrink the business and lose key people and customers. Big manufacturers will partner with big distributors. That always leaves other manufacturers that are hungry to help you gain market share. Don’t partner with vendors that are entrenched with the national distributors. Find the #2 or #3 and work hard with them to compete. Bigger is not better—better is better.”
  37. “Consolidation is not new, but we are in an active period of the M&A cycle. Acquirers are seeking out the best performing companies. To compete in the future, all businesses must utilize the best practices to ensure that they will survive and thrive. If you do so, you will continue to be successful against any competition.”
  38. “I am not concerned as much as I am curious. Will they have to change their practices to fall in line with the company that bought them? Will that open new avenues for me?”
  39. “I don’t believe they will corner the distribution market any more than the big boxes have. Impact the market and distribution yes, the dynamic will continue to change to a certain degree, but frankly I would be a lot more concerned if we were not affiliated with LMC and did not have their clout available to us when purchasing commodities.”
  40. “In my city there used to be 12 independent lumberyards. Now there is just us and two Menards, two Home Depots, and two Lowe’s stores. We have heard many times that customers are so grateful that we are here because they don’t like the quality and service from the box stores. Unfortunately, we do not have unlimited advertising budgets or the buying power of the large stores. We are also concerned with the consolidation of the mills and wholesalers. There used to be hundreds of independent mills producing high-quality products but that has dwindled too. No answers other than try to hold on as long as possible.”
  41. “I am concerned about fewer companies controlling the production and providing the services necessary to provide quality, thoughtful distribution practices. As a full-service dealer, we aim to provide a personal touch in the way we communicate and fulfill our customers’ needs. If a small service provider like myself cannot count on responsiveness in our vendors, we fail as a service provider in the eyes of our customers.”
  42. “Yes, I share your concerns. The nimble independent who is well connected with its manufacturers and suppliers can outperform the behemoth competitors every day. The problem is there is no pipeline of next generations who can compete with the acquirers’ cash to buy Ma and Pa’s businesses.”
  43. “Consolidation is standard in any business. Larger companies enjoy some advantages, but also struggle with competing against smaller, more nimble competitors. Identify and use that advantage in your local business.”
  44. “It is becoming clear that small stores may not be able to compete with large corporations. That said, many small, struggling businesses are consolidating with bigger small businesses in a way that is diversifying the market share. These companies are becoming nimble and providing the information and market share that the large corporations cannot or will not provide. Our industry is saving the smaller businesses by consolidation among the medium fish. Heck, the LMC is a prime example of co-operatives and small business working together to keep afloat.”
  45. “Not a problem.”
  46. “I feel it is a concern in the short term. In the long term they will lose touch with their customer base in many markets and there will be a new surge of single-location independents that will fill the demand that this creates. The unfortunate thing is that a lot of multi-generation legacy businesses will be lost as this happens.”
  47. “The fleecing of America! We have been talking about it since the 1990s, and it is only going to get worse. Collectively, we can put a stop to it, but we cannot do it without 100% commitment, discipline, and loyalty. Stop buying from the big box stores and start supporting your local small business owners. If you enter a place of business, and you are not able to speak with the owner because they do not actually work there, leave! Yes, we will pay a little more today, but I promise it will make for a much brighter tomorrow.”
  48. “Yes, there is some concern whether we will be able to acquire inventory at competitive prices or be disadvantaged by the consolidators. I am also concerned with current market multiples for acquisitions and what impact this will have on our acquisition strategy.”
  49. “Fight ‘the man!’”
  50. “Concentrate on what you can control and don’t worry about what you can’t control. There will always be a place for the independents on both sides.”
  51. “I think there will always be a role for strong, well-run independent lumberyards that are more agile than the larger companies. I feel like we are seeing a lot of consolidation right now because of the demographics of those in the industry and the generational gap between owners and the much younger next generation of leaders, but that 10-15 years from now there will be more options for yards wishing to remain independent to sell to those up and comers. It’s hard to buy a yard as a 30-year-old (trust me) but will be much more accessible in terms of available capital/financing, experience, and life stage in another decade or so for many in the next generation.”
  52. “I believe there will always be some room in the market for smaller independent yards. Fair prices and a high level of service will keep independents going. They will have to focus their business model to take advantage of what they can and don’t try to be everything to all customers.”
  53. “I am concerned about the consolidation, but more on the supply chain side than the competition side. I feel that well-run and well-financed independents will always have a space as long as they can purchase at competitive prices. With the shortages in the supply chain, the large corporations begin to contract for major chunks of the available supply. The open market for the rest will become more expensive. This will be a problem. Even worse would be if these large corporations are bought or if they buy the major suppliers. We’ve seen this in the sheetrock world.”
  54. “I guess the answer for an independent is to take a hard look at your business to make sure you are viable in your market and providing the services and products to retain customers and retain market share. If you run a first-class operation and customers choose you first, then business should be sustainable. If nothing else, this consolidation forces all of us to run our businesses better on a daily basis if we wish to remain independent.”
  55. “Everyone I know is concerned about this.”
  56. “Service will drop, and prices will rise. The answer is to continue to support a broad mix of distributors, so you are not limited. Also buy as much directly from manufacturers as you can.”
  57. “We can’t control the competition, so we strive to do the best we can and continue to grow. Being a member of a large buying group helps level the field for now and hopefully our group can stay strong and increase upon our advantages in the future.”
  58. “The market will bear what the market will bear.”
  59. “With fewer distributors comes less competition for purchasing through secondaries. This will drive up price. At the same time, it can result in reduced payables to secondaries. This will hurt the smaller, less financially agile dealer. With fewer dealers comes less competition among dealers, thus allowing for better profitability against those who remain. Combined dealers will likely not be given larger credit by the mills and manufacturers, so the much hoped-for benefit of getting larger may not be realized on the buy-side. The answer? Get financially fit quickly.”

Responses from distributors and manufacturers

  1. “It is certainly a concern but looking from a positive perspective, the situation may create opportunities for those who want to control their own destiny and have autonomy by starting their own a lumberyard or home center. Consolidation will present opportunities and force people in our industry to be creative in a business environment that thrives upon competition.”
  2. “I am afraid that the knowledge that is learned from small to medium size yards will be lost and the large distributors will end up being more like bean counters than customer-focused.”
  3. “We should all be concerned. Adam Smith’s ‘invisible hand’ of perfect competition doesn’t work if the industry is an oligopoly. Without perfect competition, we have higher prices, lower wages, and both quality and service suffer. I know we don’t want to go the way of the airlines, and we don’t want the government stepping in to block every transaction, but we are going to reach a tipping point. I don’t know if there is an answer, but we all should be concerned.”
  4. “We’ve seen this before during markets like this. And we will see divestitures when the market slows. If companies become heavily laden with debt and redundancy, they will be less competitive and nimble. All things local.”
  5. “Focus on being everything the big guys can’t be. It’s different in every market, so find out what it is in your market. The big companies have layers of management that can be so full of themselves. They can hold in their feelings for a period, but when the right person gets pressure to perform, they’ll be dictating what they believe will make a difference, which is to shoot first then ask questions.”
  6. “The dealer is right. Consolidation limits the choices and the personal touch that smaller operations can provide.”
  7. “I would be concerned if the companies buying are domestic or offshore-influenced. As a supplier, it is concerning as eventually a supplier may be bumped out, given a relationship with the major shareholder would be considered first. Offshore products are a bigger concern.”
  8. “Many areas of distribution are already being controlled by the big box stores, and their control will only grow stronger as they continue to go after the pro contractor. There must be a strong counterbalance in the industry to offset the box stores and that counterbalance will be achieved through roll-up groups, mergers and acquisitions. The answer is to have a strong niche in your market and be the best at it or find like-minded LBM dealers to partner with.”
  9. “I feel their pain from an associate or wholesale position. We deal with this almost on a daily basis. We try to align with who we think are the best partners for us. This is always a struggle.”
  10. “We’ve already seen the demise of many independent, family-owned yards, especially in the major markets. Similarly, there has been consolidation on the wholesale side, but much less than the retail. This is mostly because the third and fourth generations don’t want to work as hard as their parents and grandparents did to build a successful business. They just see dollar signs.”
  11. “Consolidation has been going on since I was a kid (I’m 65 presently). I remember my grandfather telling me that Wickes was going to put every independent lumberyard out of business, then I thought it was going to be Builders Square after he had passed. I wish he was still here so we could laugh that we were both wrong! If your company has value, someone will buy it. If not, you will be put to a slow and miserable death. Most if the independents in our footprint that closed starting in 2008 were under-capitalized and struggling long before the recession. We lost over 200 independent lumberyards in our service area and wondered how we were going to survive. The hell with surviving. We have grown every year since. Just continue to get better at everything that you can control and not be focused on what you can’t.”
  12. “Diversify, differentiate, and stay true to who you are.”
  13. “I own a 116-year-old company that’s been in my family for 74 years. I am the third (and last) generation here, and I’ve worked and/or owned it for 57 years. The only thing that is stopping me from expanding to a second or third location is my age and being able to find the quality level of employees that I require. My business has a great business model that continues to grow with an 80% sales growth in 2020 over 2019. However, my wife, kids, and grandkids say I’ve worked long and hard enough, so it’s time to retire.”
  14. “Customer service will suffer.”
  15. “I used to work at NAWLA, and they had around 360 of the largest wholesalers in the U.S. and Canada, and that still wasn’t the whole universe. There have been consolidations, but even the largest manufacturers (i.e. Weyerhaeuser) only control around 4 to 5% of total manufacturing of lumber in North America. However, that does not account for regions of the country that may be dominated by groups acting as an oligarchy, or a group that specializes in certain sizes, species or product lines. But the Bottom Line is that there will always be competition and alternative products and species, and different logistical situations of which to take advantage! So, don’t fret; get out there and learn the alternatives, or make a few in conjunction with a few friendly competitors as a cooperative. Contact suppliers in other countries. The potential is endless!”
  16. “Capitalism.”
  17. “Consolidation cannot be a good thing, whether we’re talking about dealers, distributors, or manufacturers. I’m not sure how we fight this monster.”
  18. “I fully agree, and many other small businesses do as well. Small businesses are the best way to maintain local employment and a healthy economy, but small businesses are feeling pinched. Additionally, the volume buying power of large corporations and willingness by some to under-cut prices to buy market share make competition unfair for small businesses. The best strategy is to foster healthy customer and vendor relationships and add value by providing a level of service that larger corporations cannot.”