Even though “big box” stores Home Depot and Lowe’s primarily are the domain of the non-professional do-it-yourself construction consumers, the retailers’ influence on the construction materials market may be more industry-wide than their target audience would imply. The huge amounts of materials that rapidly move through the thousands of stores, and the just-in-time supply chains that feed them, are a recipe for price volatility and materials shortages, some industry sources say.
“The whole industry has shifted to just-in-time production and delivery,” says Carl Cullotta, head of the construction practice group at Chicago-based Frank Lynn Marketing and Consulting. “Home Depot and Lowe’s have been partly responsible for that by making mills and suppliers streamline their production and shipping to keep up with demand.” Mills and suppliers have had to invest in global positioning system (GPS) tracking of shipments, bar coding of materials and leaner production to keep pace in the just-in-time environment the big boxes groom, Cullotta says.
Lowe’s and Home Depot “have over 50% of the do-it-yourself market and traditional building materials distributors have been losing market share,” says Al Schuler, an economist with the U.S. Bureau of Forestry. Last year, Home Depot was the world’s largest home improvement specialty retailer, with $81.5 billion in sales, 345,000 employees and 2,042 stores in the U.S.
“It’s resulting in a tighter supply chain that’s more susceptible to sudden quirks and surges in demand or supply. In the old days, most building supplies went through distributors, and that provided a buffer in the system.” Schuler points to a sharp jump in plywood prices in 2003, when prices nearly doubled from May to September, as an example of how the market’s tight supply chain can unleash unexpected volatility (ENR 9/29/03).
Lumber supply chains are particularly vulnerable to price volatility in the new market, Schuler notes. “In the past, there was more lumber that would go through warehouses and wholesalers, but now mills have lumber already earmarked for retailers like Home Depot or Lowe’s.” With the big retailers fueling demand in an already overheated market, “inventories in the pipeline have been cut in half in recent years,” says Cullotta.
Some contractors witnessed the vulnerabilities of the just-in-time supply chains in the wake of Hurricane Katrina, where rebuilding efforts all along the Gulf Coast quickly ate up building materials. “The big-box stores can have a big impact on availability of certain materials,” says Mel Spangler, president of Kansas City-based general contractor Garney Holdings Co. “We saw that during the hurricanes. We had to really scramble to find PVC pipe, plywood, 2 x 4s, and dimensional lumber because the big box stores were selling so much of it to the non-professionals—guys that normally don’t buy those things. We looked far and wide, but our normal suppliers weren't giving quotes.”
While the big boxes’ influence on the demand side of the market has had some ugly consequences, their impact on the supply side may be even more dramatic. Schuler says that Home Depot and Lowe’s account for as much as 20% of some mills’ and suppliers’ business. “The leverage they have can take mills captive,” Cullotta claims.
Pressure Is On
When the retailers began demanding bar codes on lumber several years ago, “they told the mills they had to invest in bar coding, or they wouldn’t get their business,” Schuler says. “They can also get some concessions on price, they want a certain amount of volume each week and they set the price they are willing to pay. Lumber mills generally charge $5 or $6 per 1,000 board ft for shipping costs, but these retailers have started saying they won’t pay those costs, so the mills have had to adapt.”
For wholesalers, the adaptation has come in the form of a changing customer base as Home Depot and Lowe’s expand their non-professional base. “As the big- box stores have come into focus in the last 10 years, their phenomenal growth has really had an impact on our customer base,” says Shawn Conrad, president of Washington, D.C.-based National Lumber and Building Materials Dealers Association. “It used to be that suppliers were focused on selling to anyone who came in the door, whether it was a professional contractor or a do-it-yourself customer. But the big box stores have forced suppliers to focus much more on the professional trade and to determine how to best serve the professional.”
The retailers are eyeing the professional market fiercely, and both Home Depot and Lowe’s have services catered to subcontractors and contractors at their stores and in special business units. “For the most part, most of our business is still do-it-yourself customers, but about 30% of our business is with professionals,” says Don Harrison, spokesman for Atlanta-based Home Depot. “It’s evolving and we are getting deeper and deeper into that market.”
Harrison declines further comment, but Home Depot next month is expected to close the acquisition of Orlando-based Hughes Supply, a wholesale distributor with operations in 38 states that is expected to double the business-to-business sales of Home Depot Supply to $12 billion in 2006. Officials at Mooresville, N.C.-based Lowe’s were not available for comment.
Just how deep the big boxes can dig into wholesalers’ domain remains to be seen. “When a big-box store opens in an area, it grows the market there by 20%,” says Cullotta. “But they still have a limited crossover in their customer base.”
For now, large purchases by big contractors is still a market firmly in the hands of wholesalers and distributors. “It’s pretty clear that more contractors use commercial and industry suppliers than Home Depot or Lowe’s,” says a spokesman for the American Subcontractors Association.
For large lumber orders, some contractors say they can count on better quality material when purchasing through wholesalers that are committed to the professional customer. “We don’t generally purchase any materials at [big-box stores],” says James J. Barr, president of East Peoria, Ill.-based general contractor River City Construction LLC. “We would not be satisfied with the quality of lumber—there are many more culls in their lumber.” Still, some contractors say they often turn to the big boxes when small volumes of materials are needed once a project is under way. “We might purchase some materials there if we are on a job and we needed something in a hurry,” Barr adds.
Spangler says larger contractors rely on discounts available for large purchases that the retailers cannot accommodate. “Most of our volume orders are through suppliers and wholesale companies,” Spangler says. “We seem to get the best pricing with wholesalers. But if we need plywood or 2 x 4 forming lumber we may go to a big box store.”
Cullotta says the low prices the retailers can offer small-volume consumers does not translate across the board to the professional. “They are able to offer some low prices on a very limited amount of products,” Cullotta says. “But they still don’t have the breadth of product needed for the professional.”
Still, there is a draw for smaller contractors. One builder in Upper Saddle River, N.J., also uses Home Depot stores for general items such as plywood and framing lumber. The stores “tend to keep the price down” on materials, he says. On one recent job, the builder bought plywood at a nearby store but had to go to a traditional lumber yard for longer lengths of framing lumber that the stores do not carry. “With the money I saved by buying the plywood at Home Depot, the lumber was for free,” he says.
(Photo by Michael Goodman for ENR)