Aslowdown on the Scoreboard

The big picture among hardware and building product distributors is one of traditional companies fine-tuning their operations, watching every penny and working overtime to serve their customer base.

In other words, it’s pretty much business as usual—except for this little housing downturn you might have heard of.

The Home Channel News Top 150 Distributors Scoreboard, which ranks LBM and hardware distributors by two-step wholesale sales, tells the story in black and white. More than two-thirds, or 101, of the companies on the list show flat or negative sales growth. That compares to only 14 that failed to show growth on the 2006 list, a banner year for the Distribution Scoreboard.

Combined sales of the Top 150 amounts to $60.89 billion, down 1.4 percent from the combined total of the prior year.

Despite these numbers, many companies on the scoreboard described real business momentum, but price deflation of commodities and building materials weighed heavily on the chart. For instance, Independent Builders Supply Association (IBSA), the Smithfield, N.C.-based LBM co-op that ranks 21st on the list, picked up more than 20 new members in the last year. “We know we’re selling more sticks and merchandise, but the sales figure doesn’t reflect it,” said Tim Johnson, director of dealer relations.

Stats vary, but IBSA points to deflation of 20 percent in many lumber categories, and even higher declines in OSB. These estimates echo reports from BlueLinx Holdings, which describes deflation at 25 percent to 35 percent in wood-based structural products.

The tone is set at the top, where BlueLinx and iLevel by Weyerhaeuser—ranked one and two on the Home Channel News Top 150 Distributor Scoreboard—both show double-digit declines in two-step wholesale sales. BlueLinx declined 12.9 percent to $4.9 billion, and iLevel was down 16 percent to $4.11 billion.

BlueLinx CEO Steve Macadam, during a recent investors conference, enumerated the factors that make for a difficult business climate for LBM distributors: 1) a “massive drop” in wood-based structural products, 2) housing starts declines and 3) tightening inventory at lumberyards.

And you shall know them by their products

“It was a kind of perfect storm because we were fighting all three of those effects,” he said.

Generally, hardlines-focused distributors fared better than LBM-focused distributors in 2006. Sales among this group increased 3.1 percent to $13.36 billion, compared to last year’s two-step sales. Hardlines companies with positive sales growth outnumbered those with flat or negative sales by a count of 19 to 17.

The lion’s share of the scoreboard consists of LBM-focused companies, which together tallied $47.53 billion in two-step sales, down a collective 2.6 percent. Of these companies, 84 show flat or negative sales performance, while 30 show positive sales growth.

Still, there were pockets of sales surges. For instance, at 18 on the list, Cedar Creek Lumber of Broken Arrow, Okla., increased sales 25.6 percent to $534 million. No other company in the top 30 came close to that kind of increase, which was fueled by recent acquisitions.

“We’re growing out of necessity to accommodate our vendors as well as our retailers,” said president Clark Wiens. But there’s more to the growth than just buying up competitors. Wiens pointed to a focus on specialty products, including its namesake cedar, and engineered wood products.

“We’re not unique, we’re just not quite as geared to the commodity markets, where the pricing is in the tank,” he said. While discussing sales strategy, Wiens also displayed an example of business acumen: “If I had a secret, why would I want to put it in a magazine?” he asked.

Flagging growth

Distribution Scoreboard methodology

HCN’s Distribution Scoreboard is a survey of about 250 firms with significant two-step wholesale sales of hardlines, lumber and building materials.

Companies are ranked by two-step sales, that is, revenue generated by traditional distribution of products from a manufacturer to a reseller. When a company has significant one-step sales to end-users, such as to home builders, those sales are excluded from the two-step sales total and are not used to calculate rankings. Some distributors with significant one-step sales are also listed on HCN’s Top 350 Pro Dealer Scoreboard.

Sales were rounded to the nearest $100,000 and, in some cases, to the nearest $10,000 when detailed figures were available. Companies with identical two-step sales were ranked by sales growth.

The research for Home Channel News’ 2007 Top 150 Distributor Scoreboard was conducted by HCN’s sister company, Chain Store Guide. Individual companies were contacted by phone or fax; every effort was made to gather information directly from top-level executives. Some data were collected from company Web sites and public documents. Data were prepared by CSG senior editor Arthur Rosenberg and HCN managing editor Michael Moran Alterio.

Most of the information in the Distribution Scoreboard is therefore self-reported by privately held companies. The great majority of companies contacted recognize the value of participation, especially that all companies benefit from this unique look at the inner workings of the home channel. Some distributors, however, choose not to provide data about their operations or sales. HCN estimates data for these companies, based on editorial research, historical performance and in comparison with similar companies operating in the same area. All estimated data are noted as such in the footnotes.

A deep historical data set on these companies and others is available on HCN’s Premium Top 500 Retailer Scoreboard on CD. For ordering information, please contact Michael Moran Alterio at (212) 756-5235 or visit homechannelnews.com .

So, what is the secret? Executives in the two-step distribution say there isn’t one, except for hard work. More specifically, they describe establishing the right product mix, the best service and strong customer focus as a good start.

IBSA president Ray Price points to all of those basics, plus an emphasis on recruitment and communication. “We’ve become more aggressive and encouraged our members to support the buying-group concept,” he said. “There’s strength in numbers.”

Product mix decisions factor heavily at BlueLinx, which tops the list. The Atlanta-based distributor that was once a division of Georgia Pacific wants to continue to grow its mix of specialty products (without reducing its presence in the structural product arena). It’s moving from a company relying on structural products for more than 55 percent of its business, to one that’s relying on specialty products for 60 percent of its business.

Booms and busts

It has also adopted a strategy to become a business solutions and logistics services provider, in addition to its traditional role of delivering products from point A to point B. The company describes this emphasis as “unlocking value.” Macadam told HCN the changes in these areas were more of a gradual evolution than a radical shift. “We’re already doing a lot of this stuff but in a limited way, taking solutions that we may have developed in one market, and making it more formal.”

The Top 150 online

Still, in the midst of a downturn, unlocking value takes on greater significance, he said. “A lot of it is the value we add as a two-step distributor,” Macadam added. The customer’s dependence on the distributor to hold inventory grows, and so does its need for exceptional service.

The time is also right for acquisitions, he said. “We’re not going to get crazy,” Macadam told investors. “But we do think there are a lot of attractive companies out there for us strategically, and the valuations are becoming much more reasonable.”

M & A activity is heating up. Beloit, Wis.-based ABC Supply, No. 67 on the list based only on its two-step sales, has finalized its purchase of Ashley Aluminum. Terms were not disclosed.

ABC will take ownership of Ashley Aluminum’s 48 branches in Florida, Texas, Alabama and Georgia, making them a part of ABC Supply’s Town & Country Industries division. ABC Supply’s Town & Country division is a wholesale distributor of aluminum and building products.

Those looking for bright spots on the list might look to the big three hardware co-ops: Ace (fourth on the list), Do it Best (sixth) and True Value (10th)—all three show positive two-step sales gains on the 2007 Scoreboard.

True Value’s CEO Lyle Heidemann, recently described his company’s effort to emphasize the retailer mindset. It begins with understanding its needs, including in-stock position, competitive pricing, dependable delivery and clearly providing great retail support.

“We’re very excited with our changes, we are becoming a retail company,” he said. “We still have a wholesale P & L, but our mindset is to be a retailer, to help retailers be better at what they’re doing.”

That’s a common sentiment among companies on the Top 150.

House-Hasson Hardware, No. 90 on the list, is another hardlines distributor that showed growth on the 2007 list—up 6 percent. President Don Hasson explained that there were no levers to pull. “Our distribution mission is to provide goods and services at very competitive prices and provide high service levels and advertising programs—the same things we always provide,” he said. “There’s really no magic bullet for times like this.”

Follow the money

That’s not to say the company isn’t making moves. Its spring 2007 acquisition of Persinger Supply of Prichard, W.Va., is expected to add $40 million in annual revenue and expand services to West Virginia, Virginia, Ohio and Pennsylvania.

Responding to a question about thinking as a retailer, Hasson rattled off the names of all the hardline co-ops and added, “All of us have to think like a retailer.”

“Customers like to feel noticed, and that’s one thing we put a lot of emphasis on—to know our customers,” Hasson said. “It seems to be appreciated more now, I think.”