retail - building for the future

8/3/2019 Retail - Building for the Future

http://slidepdf.com/reader/full/retail-building-for-the-future 1/5

The transformation of the business

of selling building materials to profes-

sional contractors is happening before

our eyes at an incredible pace—

promising to change forever an indus-

try that has long been noted for low

margins, poor economies of scale and

extremely fragmented service

providers. Building material suppliers

have competed fiercely among them-

selves to drive down prices and meet

consumer needs for lower-cost build-

ing supplies. Now the survivors face

new threats from outside the industry

that might thwart all their well-con-

ceived plans in building strong, lasting

relationships with their customers.

Financial acquirers of building materi-

al suppliers have dissected the cost-value equation and come up with new

retail concepts. Their stories have

attracted interest in the public equity

investment world. The end result has

been to persuade dozens of fiercely

independent suppliers to sell out, forc-

ing a financial-oriented consolidation

upon the industry. This pattern is con-

sistent with revolutions in other con-

sumer durables markets that effectively

transferred market power from manu-

facturers and distributors to a financial

savvy type of retailer. This also insures

that the retailer becomes the caller of

shots over the contractor customer,

instead of the other way around.

FORCESOFCHANGE

From the early decades of the 20th

century, the building materials industry

has been based on a “supply-push” phi-

losophy—a strong bias toward “filling

the stores” to cover the distribution and

warehousing costs of the distributors.

The building material retail network

(that is still in place today) was largely

created as a logical extension of the

“supply-push” model. The retailers were

designed to hold inventory, leverage

their own private capital (without threat-ening the wholesale distributor’s con-

trol) and service and support what still is

a commodity-based, maintenance-

intensive line of products and services.

These retail lumber and hardware stores

were built from the ground up by

entrepreneurs who focused on a defined

geographic area, selling a large array of

both construction and hardware lines,

catering to both contractor and the

walk-in consumer.

This distribution retail model has

been remarkably resistant to change.

Building material retailers have become

ingrained over time by a web of informal

habits and long-established customer

and vendor contacts.

Despite its longevity, the building

material supplier channel leaves some

retailers unhappy. High customer acqui-

sition costs motivate retailers to convert

store traffic to sales by merchandising a

multitude of products that extract differ-

ential margins based on customers’ will-

ingness to pay. Taking numerous bids

and sticker wars have taught contractors

to be excessively cost sensitive and nego-

tiate from cost up, rather than from bid

down. As a result, retailers often find

themselves competing against a similarsupplier across town. This acute compe-

tition has almost wiped away retailer

profit on the sale of lumber and other

commodity-oriented building materials.

So, lumber companies often make their

profits in areas other than lumber.

The decline in profits on building

materials has forced construction, lum-

ber and hardware suppliers to make up

the margin shortfall by looking at what

many only considered “filler” businesses

Who will be the winners and losers in the revolution that is radically reshaping

the marketing, distribution and selling of building materials? Will the expansive

dealer networks, which are broken into literally thousands of independent retail suppliers, be able to overcome years of inertia to pioneer and execute new

concepts that will strengthen and extend the value and scope of their

businesses? Or will nimbler, more imaginative retailers get there first?

B Y C L A R K C OL V I N

How Building

Material Retailers

Can Adapt

to Changing

Industry

38 DO•IT•YOURSELF RETAILING/DECEMBER 2001

BUILDIN GFO R TH E FUTURE



before: cottage manufacturing units,

installed sales programs, etc. The prob-

lem is that a conventional building

material supplier is not necessarily posi-

tioned well to conduct all of these busi-nesses because of their different

economics, knowledge of direct costs,

bases of competition and consumer pur-

chasing patterns. Some suppliers, for

example, have purchased a truss manu-

facturing or a pre-hung door assembly

facility only to shut down those same

factories a year or two later. They go into

these ventures lured by the perception of

high margins only to find out they were

ill-fitted in terms of cost control and

management to handle such labor-

intensive operations.

RETAILERSSTILLPART OFEQUATION

No one is suggesting, though, that

construction-oriented building materi-

al dealers will disappear. Ironically,

changes in building materials them-

selves are making retailers more

important. Customer satisfaction has

become a much more critical competi-

tive differentiator and a greater influ-

ence than the materials themselves.

And it is the retailer that controls these

levers today. This explains the intense

efforts many building material retailers

have made to increase standards for

customer satisfaction.

As a result of the low-margin, high-

satisfaction proposition provided by the

traditional retailer in general, the suc-

cessful strategy will be to capitalize on

horizontal cost-reduction opportunities

afforded by improving the retailer

economies of scale equation by trying to

reduce costs in administration, advertis-

ing and service.

VISION FOR THEFUTURE

Now that we see cracks in the walls

protecting the traditional building mate-

rial construction supply industry, what

will the future bring? Both the underly-

ing drivers of change in building material

retailing and trends already under way

help answer that question. In addition, it

is helpful to compare with other indus-

tries that have experience in economies

of scale evolution and look at the lessons

they learned.

Most consumer-durable industries

have undergone a substantial distribu-

tion and service evolution resulting fromchanges in economics, competition or

technologies. Each one has unique cir-

cumstances, but we can see three rela-

tively common, distinct stages in these

economies of scale restructurings:

Stage One:This first stage is marked by major

improvements in value delivered,

mostly reductions in cost. Usually the

cost reductions stem from strategic-

oriented consolidations and rational-

izations in the value chain as better

concepts or bigger players drive out

marginal or small players. The objec-

tive is the bigger players use their costadvantage to reduce prices and often to

improve service, variety and conve-

nience. In practice, however, these

strategic consolidators focus mainly on

increasing market share rather than the

profitability of each acquired entity.

Stage Two:The second stage is marked by com-

panies becoming more focused on

achieving economies of scale of specif-

ic customer segments through the

rationalization of logistical support

services. Functions are unbundled and

restructured into more efficient or

more appealing profit and cost centersand formats for defined groups of cus-

tomers. Customer value is further

enhanced through lower prices for

select product lines, better service or

greater variety.

Stage Three:The final stage brings dramatic new

paradigms not just for the sale and dis-

tribution of products but for the entire

value chain.

1 . M ultiple profit centers and

forma ts w ill coex ist to satisfy dif-ferent market segments. Profit

centers are distinct paths between a

retailer and a customer through similar

economic entities, such as contractors

vis-à-vis retail customers, vis-à-vis

commercial customers. Formats are

distinct combinations of points of sale,

service offerings and business process-

es within a general profit center defini-

tion. We expect much more variation

in profit, cost centers and formats in

both an accounting and in a physical

sense and more distinct positioning in

terms of the purchase experience they

provide, thus shifting the basis of com-

petition from products to services.

2. The separate businesses

under the roof of the traditional

retailer w ill be unbundled. Differ-

ent operational structures will be

required to serve a variety of customer

needs and economics.

3. The cost of distributing and

ma rketing building materials w ill

be cut significantly. New formats will instill discipline in the current sys-

tem to drive out non-value-adding

cost. Supplier consolidations may

unlock substantial economies of scale

in back-office functions and purchas-

ing leverage. Much larger savings are

possible, however, by driving out obso-

lete and excessive inventories; reduc-

ing investment in brick-and-mortar,

equipment and real estate, and opti-

mizing the delivery of services.

DO•IT•YOURSELF RETAILING/DECEMBER 2001 39

RETAILING

Customer satisfaction has become a much

more critical competitive

differentiator

and a greater influence than the materials

themselves.



40 DO•IT•YOURSELF RETAILING/DECEMBER 2001

RETAILING

4. M ark eting and distribution

w ill concentrate on estab lishing

durable customer relationships.

Since customer acquisition costs are high

and going higher, it is logical for retailersto work harder to hold on to the cus-

tomers they have. We see these relation-

ships developing on two axes: “follow the

product” and “follow the customer.”

The “follow the product” axis will

make manufacturers and distributors

more active in the value chain. We see

this axis as counterproductive, actually

driving down margins as well as

depleting necessary cash flows for the

retail suppliers.

The “follow the customer” axis means

building more direct relationships with atargeted set of customers to define their

needs, develop tailored marketing pro-

grams and stake out unique positions.

Identifying these customers and keeping

them happy will require substantial

investments in market-understanding

capabilities that go far beyond the func-

tional and demographic information

that most retailers rely on today. We see

this axis as the correct point of strategic

realignment of customer service.

Retailers will seek and attain much

closer contacts with consumers. We

have no doubt that someone will figure

out the riddle of consumers’ needs, aspi-

rations and experiences as they relate to

building materials; the tenuous part of

this prediction is that retailers must get

there first. However, retailers today are

surprisingly—if not shockingly—cut off

from their consumers.

Undoubtedly, Internet technology will

enable more effective and efficient direct

contact between retailers and their cus-

tomers, as both become more comfort-able with this new type of POS. If,

however, retailers fail to exploit tech-

nologies to establish meaningful rela-

tionships with consumers, more

powerful intermediaries may gain the

upper hand and end up providing mate-

rial direct to both the contractor and

retail consumer end-user.

These transformations will not be

easy, and many of today’s players will

fight them aggressively. But the revo-

lution in building material retailing has

begun, and now that it is underway, it

will be impossible to stop and nearly as

difficult to contain.

FORMINGA STRATEGICRESPONSE

What, then, should a building materi-

al retailer do? Appropriate responses are

to some extent situation dependent, of

course, but we believe the three stages of

economy of scale evolution observed in

other industries provide valuable insight

into what will be required to prevail in

the retail building material industry.

In fact, first-stage economy-of-scale

evolution activities are already rampant

in building material retailing in the Unit-

ed States, and second-stage changes are

gradually being accepted by a handful of

retailers at this time. We expect that par-

ticipants who fall behind in this evolu-

tionary process will suffer severely,

particularly as more and more of thevalue creation and consolidation in the

industry occurs downstream. The future

winners in the building material industry

likely will be the ones that drive third-

stage evolution. Accordingly, we recom-

mend the following strategic responses

consistent with the three stages of

economies of scale evolution and the

future of the building material supplier

vision described above:

1. Aggressively and systematically pur-

sue functional, as well as, profit center

improvement, such as operational cost

savings and high margins of the existing

product lines.

2. Develop a vision of a desired end-game sales strategy and begin making

progress toward that vision, taking care

to achieve consistency between the long-

term vision and short-term functional

improvement agendas.

3. Build the means to create and

capture much more of the “down-

stream” value associated with building

materials—and, in so doing, strive to

innovate “game-changing” approaches

to the business.

FUNCTIONALIMPROVEMENTS

In the conventional building material

retailer network, tremendous improve-

ment opportunities exist along two basic

functional paths: reducing operational

costs and raising customer satisfaction.Most retailers are jumping at the latter,

forgoing the former. For example, these

players tend to select a limited number

of high acquisition specific programs,

and they typically concentrate on single

functional improvements independently

or on a single functional path. For exam-

ple, thinking that a kitchen and bath

department is the cure-all for company-

wide lagging sales, or that focusing solely

on contractor sales will enable the com-




RETAILING

pany to rid itself of unnecessary people

and product lines.

A better approach is to systematical-

ly address the whole realm of possibili-

ties with an integrated view of benefits within and across specific functions.

This is not easy. Even programs with

moderate scope and ambition typically

require reforming entrenched business

philosophies; coordinating several

organizational groups with individual-

ized incentives; managing complex

and imposing logistics, and facing up

to customers resistant to change. But

retailers must recognize that new play-

ers unencumbered by these con-

straints are raising the bar and

traditional players must reach higheror fall behind.

Based on our experiences and analy-

sis, we estimate that cost reductions,

though easy to execute, will be one of the

hardest things to accomplish. There are

three reasons:

1. The consolidation and rationaliza-

tion of activities to achieve economies of

scale and eliminate inefficient opera-

tions is unpopular. Large numbers of

small competing suppliers operate as

“mom and pop” operations.

2. The unbundling of profit center

businesses, for instance, is largely

unknown to unsophisticated business

people. To date, a retailer’s profit center

is often viewed as a location, not a cus-

tomer type or manufacturing process.

3. Given the wide variation and the

resulting large differences in efficiency

and effectiveness in operations among

retailers, the application of best practices

for the industry is substandard. In other

words, working toward the industry

standard creates a continuing downwardspiral in industry-wide performance.

Here are some examples of potential

functional improvements:

• Reduce inventory costs. Retailers can

cooperate among their different loca-

tions to pool inventory in regional cen-

ters. Also, analytical methodologies,

information-systems tools and best

practices can be used to evaluate the

retailer-level sales history to determine

the best amount and mix of materials

to hold in inventory. Finally, to

improve future demand visibility and

forecasting accuracy, retailers can use

improved information systems and

marketing techniques to track cus-tomer and sales-promotion informa-

tion, marketing campaigns and

historical data on sales-promotion

effectiveness.

• Leverage purchasing power. Retail-

ers can also capitalize on purchasing

economies of scale. The economies

result from lower costs in areas such as

financing, advertising, management

personnel, payroll handling, insurance,

supplies, administrative functions and,

of course, material purchases. The

reported cost savings from theseeconomies alone can be as high as 20

percent of a retailer’s cost.

• Use best management practices to

sell building materials. The traditional

selling approach for building materials

is loaded with cost (and effectiveness)

opportunities that are not taken advan-

tage of. Sales management is often the

missing ingredient. In our opinion, the

understanding of management, as

applied to sales personnel, is one of the

largest problems of most building mate-

rial retailers today.

• Align manpower requirements with

profit and cost center activity. Gener-

ally speaking, even the most efficient

retailers don’t separate manpower

requirements within individual profit

and cost centers, correctly understood.

Often a simple ratio—payroll to com-

pany sales—defines the standard man-

power productivity level. Such

oversimplification of personnel effi-

ciencies disguises the contribution

margin of the separate profit-generat-ing parts of a company.

• Increase customer satisfaction. Cus-

tomer satisfaction and loyalty are rich

veins of potential functional improve-

ment. Good performers end up getting

paid for what they are already doing

well, and the poor performers under-

take short-lived, superficial steps to

“manage the measurement.” Customer

service in building material retailing is

mostly about executing the basics

well—keeping delivery commitments

and offering conveniences. Service

advisors and computer-driven follow-

up calls will not regain ground lost to

sloppy execution.

DISTRIBUTION STRATEGY

Cost and customer-service improve-

ments are necessary but not sufficient

enough to transform the building

material retailing industry. Realizing

the full potential of these programs is

not possible without a reasonable view

of the different customer segments that

should be targeted—the appropriate

mix and level of marketing functions

needed for each segment, and the best

means of distribution.Just as specific groups of customers

have their own product requirements,

different consumer segments have

their own requirements for the pur-

chase experience. These requirements

can be effectively targeted with package

variations such as service contracts,

financing, sales incentives and different

pricing matrixes. Ultimately, the con-

sumer-segment requirements will drive

the service requirements and in turn

help determine the best cost and oper-

ating structure for the specific distribu-

tion format and customer-value

proposition of each customer type.

Creating the purchase experiences to

meet the needs of specific consumers has

two other significant implications. First is

the need for parallel accounting and prof-

it centers in a given region, each with its

own pricing and bundle of product offer-

ings. Parallel sales profit centers range

from the traditional contractor to the

commercial customer to consumer over-

the-counter sales.The second implication of serving mul-

tiple, service-based customer profit cen-

ter segments is the need to avoid

cannibalization—in other words, the rob-

bing of contractor sales to beef up retail

consumer sales, and vice versa. Here the

accurate tracking of sales, margins and

expenses are necessary. Unfortunately,

most accounting software programs in

(Continued on page 51)




RETAILING

(Continued from page 41)

the industry are not set up to track infor-

mation by profit centers.

DOWNSTREAM VALUECREATION

The biggest winners in the building

material economy of scale evolution will

be those that drive substantial value

improvements by creating real innovation

in the retailing of building materials. In

many other industries, retailers have driv-

en and benefited from economy of scale

evolution at the expense of manufacturers

and/or distributors.

The cost-reduction potential in the

building material retailing industry is

huge. Innovative ideas that tap thispotential may well dominate the future

of the building material industry. Such

innovations can be achieved by recog-

nizing the real drivers of value and the

linkages among them. This new life-

cycle value paradigm represents one

way that a building material company

might approach the problem of creating

value through its marketing and distri-

bution activities.

ANTICIPATED CHANGES

Change and innovation are the

lifeblood of all retail businesses, but the

building material supplier industry has

been remarkably resistant to transforma-

tion. As a result, the industry suffers from

an outdated, inefficient and expensive way

of doing business.

This situation will change. Building

material retailing is beginning to evolve. At

one level the future implications are clear.

These include multiple alternative profit

centers or a greater unbundling of the

retailer’s business; increased valuethrough economies of scale; more empha-

sis on life-cycle relationships, and proba-

bly tighter relationships between retailers

and their customers. Specifically who will

win and lose is much less clear. To win,

the established retailer must shake off old

habits and practices and then visualize

and implement revolutionary ways to sell

building materials. However, if the estab-

lished retailers cannot or refuse to change,

the financial acquirers will be the new

CIRCLE125 ON PRODUCTINFORMATION CARD

dominant force in the industry; forever

changing a century of habits and practices.

Clark Colvin, managing general part-

ner at CSC Capital Partners, Ltd. is anexpert in the restructuring of building

material retailers. He has personally

restructured more than 50 building mate-

rial dealers across the United States, con-

ducting the restructuring often as interim

ceo. CSC Capital Partners is a leading

corporate restructuring, turnaround and

private investment firm in the industry. Visit CSC Capital Partners at www.csc-

capital.com for more information or call

(503) 540-0888.

April 10 – April 13, 2002

Anaheim Convention Center Anaheim, California

Hearth, Patio & Barbecue Associat ion • Suite 1001, 1601 Nort h Kent Street • Arlington, VA 22209

Phone: (703) 522-0086 • Fax: (703) 522-0548 • email: [email protected] • web site: www.hpba.org

The Marketplace for Specialists in Hearth, Patio,

and Barbecue Products.For Registration Information and Forms Contact:

Fax on Demand: (877) 730-4802 (toll-free US) • (415) 957-1814 (outside US)

The Marketplace for Specialists in Hearth, Patio,

and Barbecue Products.

retail - building for the future

Documents