Traditional Distribution Still Strong Despite Consolidation Efforts
That was the verdict of a special all-industry forum, “Our Competitive Marketplace: Contractor Consolidation,” held during NEX ’98 in October. A panel of executives from all parts of the traditional pipeline comprised the panel.
“Product still needs to go through some form of a supply chain — not just to the contractor, but to the end-user,” said Howard Campbell, president of EMCO, a Canadian distributor. “The trick is to be an efficient link in this chain.”
The death knell has sounded before for this prosaic industry. “Roll ups,” whereby a well-financed predator quickly gobbles up successful, but relatively small contractors in a highly fragmented industry, is just the latest threat. Closely linked with consolidation, utility competition is another danger to the small, independent contractors who have dominated the plumbing and heating industry ever since there was a plumbing and heating industry.
On the one hand, said moderator and PM editorial director Jim Olsztynski, the deregulated utilities are household names with marketing savvy to spare. And on the other, consolidators believe they have, or certainly can reach, the requisite size and expertise to either compete against utility service companies, or band together in strategic alliances.
“In the future, I think you will see more and more companies expanding into a total home services concept, offering everything from plumbing to lawn care to appliance service to roofing repairs,” Olsztynski said. “The one-stop shopping proposition is an attractive one to homeowners and commercial property managers. Watch for this to become more pronounced in the future, once the mechanical trade consolidators get sufficiently anchored in those specialties.”
Although consolidators have bought up almost $2 billion worth of contractors in short order, they are not without their soft spots. Despite the changes — or maybe because of them — relationships still matter in this business.
“People still buy from people,” summed up Paul Lundsford, who runs Manufacturers Marketing Inc., a rep firm that covers Indiana and Kentucky. Likewise, when a relationship breaks, it has an effect throughout the channel.
Bob Kruetzer, president of Tatro Plumbing, related that his two main suppliers had both been bought out recently by a larger distributor. “We’re not getting the fill we use to get anymore,” Kruetzer said, “so we have to put more in our warehouse. We’ve lost that relationship with our supply house and that’s added to our cost of doing business.”
In addition, at least one panel member cast doubt on the longevity of consolidation, while others pointed out the nimbleness of small niche operators may be just the saving grace contractors and wholesalers, alike, need.
“Because Wall Street pays its financial engineers so well, they continue to find new and exciting ways to make transactions,” said Kevin Condron, president and CEO of Granite Group Wholesalers LLC, based in Worchester, Mass. “Junk bonds, derivatives, hedge funds and now roll ups — but none have stood the test of time.”
Condron went on to predict the country would enter a recession that “will be a depression on Wall Street” just as recent past recessions have amounted to depressions in specific parts of the country. “If I’m right, the consolidation game will dry up.”
In the meantime, Condron suggested contractors could fend off their new competitors by becoming the proverbial 800-pound gorilla who gets whatever he wants. He advised contractors to consider three options that “would give them strength in numbers they don’t currently have independently.”
Form a buying group to achieve economies of scale in purchasing. While Condron said he was unaware of any contractors who are doing this in his market, groups such as Contractors 2000 are headed in that direction. Establish co-op ventures to buy computers, billing service or insurance. Consider joining a franchise in which centralized management, and sales and marketing services help contractors succeed at being contractors.
Meanwhile, other panelists said the giant size consolidators are, or dream of becoming, isn’t an unbeatable trait.
“The rationale for consolidation from the buyer’s perspective is in the purchasing and marketing clout that are the rewards of size,” said Terry Bihun, vice president of sales for State Industries Inc. “Bigness attracts bigness.”
But while sales volume is certainly a pivotal aspect of who to conduct business with, Bihun added it wasn’t the “one, deciding factor.” From a manufacturer’s perspective, Bihun listed many other functions he can count on traditional wholesale distributors to perform, such as extending credit, providing local deliveries and counter pickups and hiring an inside and outside sales force to promote their wares. “We’re much better off with our eggs in many peoples’ basket rather than a few.”
From a wholesaler’s perspective, national companies can’t respond quickly enough to the individual quirks of a particular marketplace with a one-size-fits-all approach crafted at corporate HQ.
“Regional companies who are able to maintain their entrepreneurial nature and stay in touch with their local markets work much better,” Condron said. “I think we’ll see more regional consolidation than national consolidation.” (These sentiments don’t get past Canadian customs, however: EMCO and two other distributors control 80 percent of the Canadian distribution market for construction materials.)
From a contractor’s perspective, the nimbleness inherent in a niche player in a fragmented market provides some protection. “Our industry’s contractors have always been niche operators,” Olsztynski said. “The total market for plumbing, heating and air-conditioning services runs upward of $40 billion. That leaves plenty left over for the mom and pop shops to make a living.”
That belief has played out even after a generation of consolidation in the waste management business — an industry many contractor consolidator executives started their careers in. Twenty-five years ago, 11,000 firms plied their trade. Today, there are still around 9,000 companies throughout the country.
“The real question, whether you are a contractor, wholesaler, rep or manufacturer, is what can you do better than the giant firms that you’ll be competing against?” Olsztynski asked. “If you can answer that question, you’ll do fine. If not, you’re in trouble.”