Competition breeds uniformity in pricing across dealer groups

Home Channel News, May 24, 1999

The profit margins that dealers are reaping from the sale of their products appears to be equalizing among all store types, which could be an indication of the overall pricing competitiveness within the market and how that competitiveness is homogenizing what dealers carry and what they can charge for their inventory.

The charts on this and the following several pages break down the sales, margins and turns of 15 product categories for the top 500 companies, as well as by dealers organized by annual sales volume and by customer mix.

The results are extrapolated from a survey of more than 90 dealers within the top 500 which NHCN believes are representative of the larger retailer universe. In a few cases, the sales breakdowns were gleaned from public companies' 1998 annual reports and 10-ks.

Overall, nearly half of the business generated by the top 500 came from lumber and building materials, which, for the purposes of this survey, includes millwork and kitchen cabinets. While there is a wide range in how dependent different dealer groups are on these products, that is likely to change in the coming years, as several of the warehouse home centers go after pro customers more aggressively.

But wresting market share from pro dealers in this category won't be easy, especially now that more of these dealers are either manufacturing or assembling trusses, doors, windows, stairs and wall panels themselves at on-site facilities.

For example, Building Materials Holding Corp. generated 31 percent of its $877 million in sales last year from these "value-added" products.

Everyday decent margins

One figure that leaps out of these charts is how close the margins are, from dealer group to dealer group, on lumber and plywood, especially when dealers are arranged by sales volume. The fact that lumber prices across the country were depressed last year as a result of the economic crisis in Asia, where huge amounts of logs are regularly shipped, makes these margin figures all the more intriguing. Overall, margins for lumber and plywood are nearly three percentage points higher than they were for the top 500 in 1997 (although it should be noted that the companies NHCN used in its survey last year were different from this year's group.)

It is hard to gauge how prices and profits will be affected, if at all, by the controversy Lowe's and Home Depot have stirred up with programs that tout the flawlessness of their dimensional lumber, which Lowe's this month is promoting heavily in its TV ads. That message, though, certainly isn't being directed at the professional and commercial customers who are buying the majority of the sticks.

Consumer-oriented retailers, for example, averaged margins of better than 43 percent on hardware, around 39 percent on electricals (admittedly not the 60 percent that was available in the 1970s, but still flush), and around the same percentage on plumbing.

Perhaps the most remarkable change in recent years, across all dealer groups, has been the profits they've been able to muster from the sale of paint and sundries. The industry has come a long way from the days when, in the mid-1980s, Home Depot gave away a can of paint for every four cans bought and Builders Square sold a gallon of Glidden for $1.99 in the Houston market. Now, dealers throughout the industry are featuring premium products, some with proprietary labels, that have moved paint out of the commodity ghetto into the higher-margin fashion realm.

Paint, though, accounts for a far higher percentage of DIY dealers' sales than for mixed or pro dealers, as is also the case for lawn and garden, a category that, according to most industry statistics, is being dominated by large-format home centers and by discounters that are becoming the destination stores for these products (see story, page 97).

More surprising, though, is how DIY dealers got such a higher percentage of their sales from the plumbing category -- which, for the purposes of this survey includes bath products -- than the other two dealer groups. Indeed, the survey provides a shapshot of how dealers of different sizes and customer mixes are refining their product assortments based on their relative competitive position. For example, dealers that generated $25 million or less in sales last year on average got more than 11 percent of their revenue from roofing, far higher than what roofing contributed to the other two dealer groups. Many mixed dealers fall inside this sales parameter, and they, too, relied more heavily on roofing for sales than either pro or DIY dealers.

The $25 million to $100 million dealers, as a group, were also getting a lot more of their total revenue from housewares, which is a category that always seems on the verge of making a breakthrough into the retail home improvement field. Many dealers, though, still resist this category because of stiff competition, on both the high and low end of the price spectrum, from a vast array of outlets.

The same scenario appears to be true for home decor. While the warehouse home centers have made a big push in this area and have seen their floorcovering sales rise to a steady 5 percent of annual revenue, other decorative products continue to represent only a minuscule portion of any dealer's total volume.