What's behind the entry into installation services by a prominent distributor?

Last month, this column focused on a consultant's presentation at a PMI meeting detailing the troubling demographics of the plumbing trade and how it's leading to a potential shortage of plumbing contractors. Another recent development bears on these same issues.

Last May, a division of Stock Building Supply acquired a family of electrical and plumbing contractors in the Las Vegas market. Stock is the largest supplier of building materials to professional home builders and contractors in the United States, with 2005 sales of $4.1 billion. Its British parent company, Wolseley, is also the parent of Ferguson Enterprises, the largest U.S. PHC distributor.

Stock is a separate company from Ferguson, but they have the same parent and enjoy some operational synergies. Knowing this, some contractors have raised eyebrows about distributors they buy from invading their contracting turf. To this observer, there's both less and more than meets the eye.

Ferguson took the unusual step of speaking for a sister company in addressing this issue in a “Frequently Asked Questions” section of its Web site, acknowledging that “our customers may be concerned about the installation services” provided by the acquired companies. Ferguson explains: “The strategy behind Stock's acquisition is aimed directly at responding to the needs of the high-volume production builder - one of Stock's core customers - not to compete for local plumbing jobs.”

I believe them. Distributors have enough headaches running their own business. They don't want the aggravation of managing field labor in a business with tiny profit margins. In that sense, there's less than meets the eye.

So why are they doing it? According to Ferguson: “Increasingly, high-volume production builders are demanding turnkey, multitrade services, and the installation of products sold … Our overriding objective is to give these builders what they're asking for.”

This begs the question, why can't those installation services be provided as they always have been, by local independent contractors? Here's where there's more than meets the eye.

It's not yet because there aren't enough contractors around to do the work. At least in most markets it's not hard to find tract housing plumbers. Some markets are served by top-notch companies specializing in that business who know how to make money at it by doing lots of shop fabrication and running a tight ship in the field. The rest tends to be done by “pickup truck” shops that specialize in low bidding. What can Stock do that these contractors can't?

This brings up another part of the presentation at the Spring PMI meeting that I omitted in last month's article because it didn't fit the topic at hand, but one that's central to this continuation. Consolidation among home builders has been dramatic. The presenter, Carl Cullotta of Chicago's Frank Lynn & Associates, predicted that the nation's top 10 home builders will increase market share from 20 percent in 2004 to 35 percent by 2010, largely at the expense of the next 200 largest builders. (Small niche market and custom home builders will continue to do well, he said.)

These humongous builders are obsessed with cutting costs of materials, installation and every other aspect of their business. Many are trying to squeeze distributors out of the picture and buy direct from manufacturers, with some success in certain product lines. Stock sees an opportunity to increase its value-added to major customers by providing as many needed services as possible, while also protecting the flanks of its core distribution business from builder-direct purchasing.

Don't get too concerned about a competitive threat from distributors. Most of you will lose only unprofitable business you never even go after.

More disturbing is that this represents a continuing devaluation of your skilled trade. These labor forces are likely to consist of modestly paid, semi-skilled task workers who know how to install certain components but with little understanding of an entire plumbing system.

It's time for everyone in this industry to be asking, what am I doing to sustain the value of this proud trade?

Links

• Radiant & Hydronics e-News
• ISH North America