Home builders want to make indentured servants out of wholesalers.

Ferguson Enterprises CEO Chip Hornsby warned about it in an address to last year's ASA Convention. Another Ferguson executive, Larry Stoddard, repeated it to an audience of manufacturer reps at the AIM/R Conference in San Diego this past April 29. (Story on page 6.) The home building industry is consolidating. The top 10 builders now are responsible for an estimated 15% of new homes built in this country, but Ferguson's top brass expects that to grow to between 50-75% of all new homes in the next 10 years.

This will invest tremendous purchasing clout in the big builders, who are already throwing around their weight. Hornsby, who also attended AIM/R, told members of one unnamed home builder that wanted a rebate of 15-20% in return for its business.

The knee-jerk fear among wholesalers is that humongous home builders will attempt to do an end run around distributors and buy direct. I think that's a false concern. No matter how big the purchaser, someone has to perform the function of moving large amounts of merchandise from factory floors to jobsites scattered throughout the land. Over the years, various manufacturers and end users have tried to cut out the middleman from this process. Almost all have found out the hard way that it's more efficient and cost-effective to leave it to those who specialize in that part of the supply chain.

Dan Bridleman, vice president of national contracts for one of the nation's largest home building firms, KB Home, acknowledged as much in his presentation at the AIM/R Conference. He stated flat out that KB had no intention of entering the distribution business. You can take heart in that statement as far as it goes, but you won't like the vision he has in store for the builder-distributor relationship.

One-sided partnership

Bridleman voiced politically correct buzzwords in talking about “partnership” and “customer-driven” strategy. Unfortunately, the details amount to squeezing every last cent out of suppliers through volume pricing, rebates, reverse auctions, simplification, standardization and what he called a “collaborative supply chain with unlimited sharing of data.”

Interesting phrase that “unlimited sharing of data.” A certain amount of data sharing is in everyone's interest in order to maximize supply chain efficiency. But this context portends potential loss of control by suppliers over their own pricing and marketing information. The KB executive admitted to only a hazy vision about the supply chain of the future. However, when one connects all the dots, the picture that appears is a builder-distributor relationship analogous to indentured servitude.

As a practical matter, this will be irrelevant to the vast majority of you reading this. The KB vision, and presumably that of other big home builders, pretty much excludes all but the largest wholesalers from competing for their business. Bridleman said it's a goal of his company to drastically reduce vendors by “partnering” with distributors who have a vast reach. Realistically, only a handful of PHCP wholesalers operating more or less nationwide could service such accounts to their liking. The home builders will play these firms off against one another in a bidding war for a gazillion dollars in sales volume.

The rest of you won't be missing much. KB projects 2004 sales at $6.8 billion, but it took many in the audience by surprise when Bridleman revealed an average selling price of $135,000 for the homes they build. That doesn't buy much in major U.S. metropolitan markets, and even this figure is skewed upward by KB's large presence in the ultra-expensive California market. KB basically produces starter homes fitted with builder-grade plumbing and HVAC. Margins aren't much to get excited about even before the “partnership” of the future comes into play. Nonetheless, large manufacturers and distributors have a business model that addicts them to volume. They cannot afford to shrug off these accounts as unworthy of attention.

The rest of you have no choice but to look at alternatives. No matter how much consolidation takes place, it will still leave a sizable market of custom home builders whose products sell for multiples of $135,000. There also is an ever growing repair and replacement market that is challenging due to its fragmentation, but relies more on traditional plumbing trade sales. Volume may be smaller but profits in this sector promise to be much more lucrative to distributors than serfdom under the big builders.

For most PHCP wholesalers, this high road is the only route to future prosperity. The low road will be hopelessly clogged by massive companies slogging it out over nickels and dimes of profit on million-dollar orders.