Legend has it: don't let myths about large-production builders keep you from a potentially profitable revenue source

Prosales, April, 2004 by Rich Binsacca

When independent lumber dealers seek out Frank Chambers for advice about supplying production/tract builders, their first question usually is how can they avoid getting beat up on price. "The perception is that big builders will hold their feet to the fire and not let them make any money," says Chambers, an industry consultant with CK Solutions in Nashville, Tenn., and former executive at Payless Cashways Pelican Lumber (now Builders FirstSource), and Wickes. "That's absolutely a myth."

While outrageous price discounts and razor-thin margins top the list of urban legends about big builders, other fables, misperceptions, resentment, and outright denials regarding that segment also give many independent dealers pause when they consider a shift in market strategy toward serving high-volume customers.

In addition to being price-driven brutes, legend has it that production builders always resist change, build only cheap, low-priced housing, and prefer national contracts to local relationships. It also holds that, to serve them, dealers should forget about the field, focus oil the purchasing department, and forego small-volume and remodeling customers, and that--despite national trends, land shortages, and changing demographics--big builders will never enter certain markets.

Or not. Industry sages like Chambers, dealers that have found profitable success serving tract builders, and even big builders themselves debunk such myths, clearing a path for suppliers to follow with far less fear.

Myth No. 1 : Big builders only care about price

Put another way, they demand discounts, erode your profits to boost their own, and shop price for sport. "That's the perception, but it's not 100 percent true," says Garrett Gill, sales manager at Chase Lumber, an independent, $25 million, single-location dealer in Aurora, Colo., near Denver. "Price is up there [as a priority], but it's more about being competitive."

Simply, in most cases price works into the mix as a factor in the overall cost of a house. Big builders have no patience for a low-priced product that requires a new or different subcontractor, delays the job, or breaks down after move-in. "We may bid out every new phase [of homes], but we don't always choose the lowest bid," confirms Bill Hughes, purchasing manager for Los Angeles-based Pardee Homes' Nevada division in Las Vegas, part of Weyerhaeuser Real Estate Co., a top-20 builder with more than 4,600 closings in 2003. "We choose the supplier or sub that is most qualified, has a reliable track record, and offers price guarantees past 5 o'clock that day."

And in a show of altruism that truly shatters the price-only myth, Hughes and his purchasing team request that suppliers and subs estimate both price and materials quantities when bidding. That way, if a low-price bid is a reflection of less material than other bids of the same plans and specs, Hughes confirms it with the vendor to avoid a costly mistake. "We don't want them to lose money on jobs," he says.

Just as many big builders appear to consider overall costs as opposed to just price, so should dealers. "A builder that requires you to buy in larger quantities allows a dealer to negotiate [discounted] prices with its vendors," to protect margins and weather commodity price fluctuations, says Steve Monroe Sr., president of SME & Associates, an industry consulting firm in Jamestown, N.C. "Big builders also generally pay on time and are well-financed, which translates to a steadier cash flow for dealers."

He also says dealers can negotiate higher prices and/or better margins with big builders that are picky or demanding about their purchases. "If you charge them for it, they'll pay it," says Monroe.

In addition, big builders can be more efficient to service than smaller-volume customers (assuming the builders have good production scheduling and the dealers have the proper infrastructure in place). In this environment, "deliveries are larger and fewer, and there are fewer jobsite visits," says Bob Erwin, president of Lee Resources, a consulting firm in Greenville, S.C., and a former supply chain executive.

That's a reality echoed by Gill. "We still service the field [of Chase's tract-builder customers], but a lot of the business is done internally," he says. "We're not calling on them every day as we might a custom or semi-custom builder."

Myth No. 2: Big builders only sell affordable housing

As the average price of a new home nationwide approaches $250,000, the concept of "affordable" housing itself is becoming something of a myth. Regardless, while many tract builders started out in the first-time buyer market, they've diversified into move-up and luxury segments, as well--providing dealers with opportunities to up-sell higher-margin products. "We don't build for first-time buyers," says Jennifer Shearon, director of purchasing and pricing for Atlanta-based John Wieland Homes & Neighborhoods, which builds in Atlanta and Charlotte and Raleigh-Durham, N.C. "We look for partners with brand names we can leverage, not to jump to the best deal."