State of the Industry - Brief Article

Last year was a good one for Reliable Wholesale Lumber but not necessarily for reasons one might expect. Sure building activity was heavy in and around California's Orange County, where Reliable sells lumber to tract and multiunit home builders and other area dealers from its five locations. But a primary factor behind Reliable's 24.3 percent increase in revenues in 1999 was an especially volatile lumber market, with prices rising 35 percent between January and July of that year before retreating again.

"If we didn't have market fluctuations, we might as well turn the lights out," said Will Higman, purchasing director at the 69-year-old family business, which had revenues of $143 million in 1999. "The money is made or lost playing the market."

Such was the story for many of the country's lumber and building material dealers last year. Business boomed -- as illustrated by the fact that total sales for the 350 largest pro dealers (or those who get at least 67 percent of their total revenues from professional customers) grew almost 14 percent to $39.4 billion and that more than three-fourths of the companies that make up that list reported sales increases in 1999. But ever-increasing margin and competitive pressures left many dealers searching for profits where they could find them.

Indeed, 1999 was a year of contrasts. Even as demand for materials grew, dealers found themselves hemmed in by shortages of such vital materials as gypsum wallboard. Despite signs that housing activity would remain strong, dealers prepared for the inevitable downturn.

One result of this challenging environment was continued consolidation among America's lumberyards. While not a new trend --- mergers and acquisitions have been a prime feature of the industry for most of the past decade -- buying and selling activity in 1999 was especially noteworthy because of the magnitude of the companies involved. While Carolina Holdings and Builders FirstSource, certainly no newcomers to the acquisition market, emerged as the clear power players among buyers, a number of venerable dealers became their often-surprising acquisitions.

Together, Carolina and Builders FirstSource sealed 21 deals between January 1999 and mid-May 2000. But the types of companies involved said as much -- if not more -- about the changing nature of the industry as the number. Acquisitions such as Builders FirstSource's purchases of Suwanee Truss and Madera Components and Carolina's pickup of Summit Structures point to the increasing importance many dealers are placing on value-added products and services. Likewise, Carolina's purchases of regional chains Anderson Lumber, based in Ogden, Utah, and Terry Cos. inTarzana, Calif., and Builders FirstSource's acquisition of Blackstone Lumber in East Brunswick, NJ., highlighted what appears to be a growing willingness among even the most successful operations to consider the benefits of joining a larger organization. Combined,Terry andAnderson add some 58 units and almost $600 million in revenues to Carolina's already imposing arsenal.

The trend is likely to continue. As of early May, several other strong independents reportedly were exploring the possibility of selling, with speculation centering on Builders FirstSource as a likely suitor for Goldston's Building Supply, the two-unit dealer based in Wake Forest, N.C., that had total 1999 sales of $91 million, and Erlanger Lumber of Erlanger, Ky., with 1999 sales of $92 million.

That such prominent and profitable dealers would be fodder for speculation underscores the rapid, and to some surely unsettling, changes that are rattling the industry. Among the other major developments in 1999:

* E-commerce -- Prompted by an industrywide push for greater efficiency throughout the building process, dealers caught the e-business bug. While many continued to express doubts about how Internet ordering and online communications would make them better operators, a number took the first steps toward getting wired. Carolina Holdings, Builders FirstSource and Building Materials Holding Corp. all signed on with BuildNet, which after four years of groundwork made demonstrable progress toward its goal of linking dealers with builders, suppliers and distributors in an electronic community. Other dealers joined ChanneLinx, or, like Wickes Lumber and a handful of innovative smaller companies, developed their own online systems.

Despite such steps, caution reigned, even among the most aggressive dealers. In early 2000, Carolina Holdings created the position of director of e-commerce, noting that it could "learn by the mistakes of others and build our program upon a more solid foundation as we witness the dos and don'ts of this very volatile business environment."

* Channel re-engineering -- Distinctions between distributors and dealers continued to blur. In certain markets, distributors have long defied clear classification by not only serving as a source of supply to smaller local lumberyards but by also selling lumber and building materials direct to builders and contractors. Reliable, for instance, has long gotten some 60 percent of its annual sales from home builders and framing contractors; the other 40 percent is from other local retailers, including Home Depot on a fill-in basis. That trend is now growing, as demands for cost savings and greater efficiencies are forcing more traditional two-step distributors to explore the direct-sales arena.