Pulling in different directions

Home Channel News, Jan 10, 2000 by Scott Larson

Dealers wrestle with divergent demands of custom, production builders

From where Ken Kuester sits the numbers just don't add up. He'd like for his three-unit Lumber Unlimited to be the lumberyard of choice for all home builders in and around Jacksonville, Fla. But the more Kuester contemplates the differences between production builders, who build hundreds of homes each year, and their custom counterparts, who typically account for between a handful and 20, the more he questions whether any lumber dealer can profitably serve two such disparate masters.

"It could probably be done, and it'd be kind of fun to try," says Kuester, whose company currently gets 95 percent of its $26 million in annual sales from the custom side. "But you'd have to be a heck of a lot smarter than I am. I've crunched the numbers and I just don't see it."

To Kuester and a growing number of his fellow dealers across the country, the production vs. custom dilemma is rapidly becoming a key competitive question. It's difficult to pin down exactly what percentage of the country's new homes are being built by production builders in part because there is little consensus over what exactly "production" means. But few would argue that this group of large, volume-oriented and geographically far-reaching builders is steadily swallowing more and more market share, especially in major and mid-size markets. According to Alan Laing, vp-operations for Pulte Home, one of the biggest and best-known production outfits, the 100 largest builders in the country - a list dominated by companies that fit at least somebody's definition of production - accounted for 20 percent of all new homes built in 1999.

Consolidation, fueled by aggressively acquisitive members of this production group, will push that share to 40 percent to 50 percent in the next 10 years, Laing maintains.

For dealers, the remifications of such a scenario are obvious. With production builders responsible for an ever increasing number of the new homes being built, the competition among dealers to serve those accounts will grow ever more fierce even as the amount of business being generated by traditional custom builders falls off.

Not surprisingly, a number of large, builder-oriented regional dealers such as Wickes, Builders FirstSource and Carolina Holdings are already aggressively pursuing volume accounts by unveiling programs tailored specifically to production builders' needs. These dealers have rapidly established the operational heft, geographic reach and arsenal of services -- including the installation of framing packages and the production and installation of trusses and components -- that have allowed them to make significant inroads in many of the nation's biggest production markets, including Denver, Charlotte, N.C., and Indianapolis.

"There's a real trend toward that type of yard that's really geared toward the tract-type builder," says Dale Boozer, president of Boozer Lumber in Columbia, S.C. "They've cut overhead, they ship to lists. They really operate as quasi-wholesalers."

Complicating the picture are a number of service-oriented distributors that have begun selling materials such as trusses, wall panels, gypsum and roofing directly to production accounts. Included in this group is Universal Forest Products, a truss and component producer that according to Laing, "understands the large production builder's requirements."

UFP's offering of a limited number of skus allows it to focus on follow-up and service, Laing explains, and by selling direct, the company is able to operate on the lower margins production economics demand. While dealers who supply custom builders look to make up for lack of volume by charging margins of 23 percent and above, production builders like Pulte are rarely willing to pay more than 18 percent, Laing points out.

Indeed the economic disparities between serving production and custom builders are at the heart of the production vs. custom issue for most dealers. To Kuester, for instance, the low-margin, high-volume mindset needed to serve the production side simply isn't compatible with a service-oriented predominantly custom yard.

"Philosophically it's completely different," he says, pointing out that custom builders require significantly higher service levels, including daily job-sire visits, materials takeoffs, special orders and frequent deliveries. Those services, he figures, translate into operating expenses in the neighborhood of 2l percent -- or significantly higher than the 14 percent to 15 percent a dealer could expect to get serving a production and still be profitable. To Kuester's way of thinking, most dealers simply lose sight of what costs go where when they serve both types of builders and they end up overserving their production accounts.

"I think we lull ourselves into a false sense of economic profit," Kuester says. "[Serving production builders] gets your volume up, but ultimately one side probably ends up drawing costs from the other."

Not all dealers share Kuester's doubts, however. David Luecke, president of single-unit Riemeier Lumber in Cincinnati, says he sees no reason why a dealer can't serve both production and custom accounts, and he offers his own company -- which gets 50 percent of its $35 million in annual sales from production builders, the other 50 percent from the custom side -- as evidence.