With worries about a possible recession and the prices of lumber and building materials dropping after the COVID-19 surge, many LBM dealers are wondering if it’s smart to invest in their businesses right now. Based on my experience, I would say that now would be the best time to do so.
Maximize Market Share with Renovations
When the market slows down, it can be a golden opportunity to gain market share. In the 1990s and early 2000s, I managed a chain of building supply stores in Toronto for a long-established family business. They had a tradition of renovating and opening new stores during major recessions and always kept spending on advertising, no matter how the economy was doing.
During that time, we saw the sudden appearance of 25 big-box stores in our market. We could have played it safe and focused on protecting what we had, but instead, we decided to enhance and expand our existing stores. We upgraded our store fixtures to hold more products, improved store layouts, gave the stores a new look with fresh colors and signs, and added attractive displays for our building products.
Despite the impact of the new box store competition, our changes drove more traffic from both contractors and do-it-yourselfers. As expected, our hardware sales increased, and, to our surprise, the core LBM sales increased proportionately. Our stronger depth and breadth of products and the sales of higher-end building products drove up the average ticket and increased overall sales by high double digits. The improved product mix increased our gross margin by 2-3%.
Meanwhile, our competitors decided to cut spending and not make meaningful improvements to their stores. The result? 37 competing lumber yards in our market went out of business.
A few years later our owner sold the business and by that time, the investments had already more than paid for themselves. The strong market position, financials, and brand image meant the family was able to get a much higher valuation than would have been possible without the improvements.
Utilize the Downturn
It makes sense that during tough times, construction costs can be cheaper. Advertising works better when your competitors are spending less and advertising costs less because media companies are fighting for fewer marketing dollars. You might not see a huge increase in sales right away, but it is likely to boost your market share. Plus, the slower
economy makes it much easier to plan and implement improvements and the benefits really accelerate when the economy turns around. Competitors who survive the downturn end up spending a lot more than they saved to regain the market share they lost.
Optimize Merchandising Opportunities
Improvements such as fixtures that include overhead storage, optimized service areas, and electronic bin labeling will reduce labor costs while maintaining optimal merchandising sets to maximize sales. Effective displays in categories like electrical, plumbing, and building materials can help customers decide what to buy, increase the size and value of their purchases, and educate both customers and staff.
The Results Speak for Themselves
Over the last 20 years, my firm has helped renovate several hundred building supply stores and often, the increased sales and profits have paid back the investment in a year or less. For dealers thinking about retiring and selling their business, higher valuations have made these investments especially attractive.
So, while the temptation is to go on the defensive and pull in your horns when times are slow, the returns tend to be greatest for those who go on the offensive and invest in their store.