Lumber and Other Building Materials Dealers

SIC 5211

Industry report:

This industry consists of establishments primarily engaged in selling lumber or lumber and a general line of building materials to the general public. While these establishments may sell primarily to construction contractors, they are known as retail in the trade. The lumber that they sell may include rough and dressed lumber, flooring, molding, doors, sashes, frames, and other millwork. The building materials may include roofing, siding, shingles, wallboard, paint, brick, tile, cement, sand, gravel, and other building materials and supplies. Hardware is often an important line sold by retail lumber and building materials dealers. Establishments that do not sell to the general public and those that are known in the trade as wholesale are classified in the Lumber and Other Construction Materials industries.

Industry Snapshot

According to the National Retail Hardware Association (NRHA), which takes into account hardware stores, home centers, and retail-oriented lumberyards, industry revenues totaled $272.1 billion in 2005 and $300.6 billion in 2006. That year, hardware stores accounted for $36.8 billion, home centers for $180.3 billion, and lumberyards for $83.5 billion. The NRHA predicted that the industry would reach $374.9 billion by 2011.

The lumber and building materials industry is dominated by do-it-yourself (DIY) giant Home Depot Inc., which markets its goods both to DIYers and contractors. Lowe's Inc. has gained ground on Home Depot by investing heavily in friendly, well-lighted, well-stocked stores and exceptional customer service. The industry has managed to overcome an overall slowdown in construction in the late 2000s, with housing starts at their slowest pace since the early 1990s. Remodeling expenditures have followed that trend as homeowners have become concerned about falling house prices.

According to the U.S. Census Bureau's 2008 County Business Patterns, there were 7,009 home centers operating in the United States. California led with 586 home centers followed by Texas with 498 home centers and Florida with 377 home centers. The other building material dealers sector had 38,586 operations with industry-wide employment of 385,527 workers. California led the nation with 3,802 dealers followed by Florida with 2,551 dealers and New York with 2,324 dealers.

While a highly fragmented industry, lumber and other building materials dealers accounted for 29.7 percent of industry share valued at $129.3 million in 2009 with an estimated 580,053 workers. There were 1,176 millwork and lumber dealers that generated nearly $1.3 billion with 4,382 employees, while 1,974 lumber products dealers sold $1.2 billion in goods. Another 1,606 planning mill products and lumber dealers was valued at $694.4 million.

The other building material dealers sector such as the 4,840 door and window products dealers represented 8.8 percent in market share with industry revenues totaling about $2 billion with a workforce of 21,262 employees. Additionally, garage doors, including sales and installation dealers brought in more than $1.4 billion in revenues. Kitchen cabinet and counter top dealers combined contributed more than $2.6 billion in the total industry sales. Unfortunately, U.S. cabinet sales fell 32 percent during the first quarter of 2009 compared to the same time in 2008, according to the Kitchen Cabinet Manufacturers Association as the economy struggled.

Organization and Structure

There are several types of establishments that fall into the retail lumber and building materials category. The largest categories, by far, are lumberyards, home centers, and warehouse home centers.

Lumberyards, whether as single establishments or parts of a chain, rely heavily on the industry's traditional customer base of contractors, builders, remodelers, and other professionals. Most of their business, anywhere from two-thirds to three-quarters, comes directly from the sale of lumber and building material. Most of these businesses average annual sales of about $3.8 million per unit. Sutherland Lumber, Grossman's, and 84 Lumber fall into this category.

Home centers, which often sell hardware as well as lumber and building materials, generally occupy about 30,000 to 35,000 square feet. Due to their size, they greatly outsell the smaller lumberyards. Many of these sales are to do-it-yourselfers, as well as professionals. Hechinger, Lowe's Companies, and Payless Cashways are home centers.

By contrast, warehouse home centers have an average of more than 100,000 square feet of floor space. They boast a wide selection of merchandise at lower prices, although they offer fewer frills than the smaller stores. Home Depot, Builder's Square, and HQ (Home Quarters) are warehouse home centers. At the end of 1999, annual sales reported by the U.S. Department of Commerce included totals from both home centers and warehouse home centers. The sales per unit averaged almost $13 million annually.

Competition has driven many retailers to find new ways of attracting customers. Many outlets offer custom bath and kitchen design and installation, home decorating merchandise, garden centers, and "how to" classes. Some, such as Lowe's, have moved into even more diverse areas, such as electronics, appliances, home office equipment, accessories, and software.

Establishments in this industry purchase lumber from wholesalers or direct from factories and mills. Most of the lumber and wood products come from the Pacific Northwest and the Southeast. Other building materials, such as paints, cement, hardware, and related supplies, usually were purchased through wholesalers, specialty distributors, or direct from the manufacturer. Some larger chains carried their own labels on products they sold through contractual agreement with manufacturers. Larger stores also worked with manufacturers in training employees about particular product lines.

The industry is represented in federal government policy-making processes by the National Lumber and Building Materials Dealers Association (NLBMDA.) The NLBMDA also provides educational and informational programs to meet industry needs. Some 6,800 retail lumber and building materials dealers, in all 50 states, belong to the association. The NLBMDA also publishes the Building Materials Retailer, a monthly magazine, and maintains a site on the World Wide Web.

Background and Development

Wholesale establishments selling lumber and building materials appeared in America in the early 1900s. By the 1920s small retail operations began to develop. As the population increased, the industry followed suit. When the Great Depression hit the United States, the industry was adversely affected until public works projects gave it the boost it so desperately needed. During World War II, when home sales were down, the industry suffered another blow. However, the post-war period brought tremendous growth for establishments in the industry as suburban America grew during the 1950s and 1960s.

As building increased, so did the number of retail lumber and building materials outlets. At this time many companies expanded into chain stores, and manufacturers began to enter the retail market. A recession in the 1970s caused a temporary decrease in new home construction that put the industry's rapid growth on hold. However, an active real estate market and an increase of home renovations in the 1980s gave the industry's sagging sales a much-needed boost.

Between 1990 and 1993 expenditures in residential repairs and improvement in the United States continued to rise from $39 billion to $41 billion, an increase of 2.5 percent. Overall prices for lumber and building materials increased less than one percent between 1989 and 1991.

Environmentalism had a serious impact on the lumber industry in the early 1990s, which, in turn, affected those in the retail lumber business. In June 1990, the northern spotted owl was listed as an endangered species by the U.S. Fish and Wildlife Service (FWS). As a result, about 9 million acres of timberland in the Pacific Northwest were declared off-limits to the logging industry. In addition, the ruling targeted the areas where much of the country's old-growth trees are located. These trees are a vital part of the industry's livelihood. The lumber industry estimated that the nation's availability of lumber was significantly reduced, forcing more than 200 mill closings and the loss of roughly 30,000 industry-related jobs. This shift also drove up the price of wholesale lumber, which in turn drove up the price of lumber for lumber retailers and consumers.

President Bill Clinton introduced what he called a "forest plan" in July of 1993. The plan was created as a way to accommodate the logging industry and maintain enough old-growth forest to satisfy the demands of environmentalists trying to keep the spotted owl from extinction. A revised plan approved by the federal district court allowed some logging on 693,000 of the roughly 1.5 million acres of land in national forests that contain old-growth trees.

Despite the controversy in the early 1990s over the spotted owl and its habitat, the retail lumber and building materials industry continued to expand, creating fierce competition between smaller, independent stores and chains and the much larger home centers, or "big box" outfits as they are called in the industry. As the big box outlets sprung up all over America, many smaller chains were forced into store closings and even bankruptcy. Some of the smaller outfits merged in order to compete, while others decided to ride out the storm and hoped they could maintain their customer base with more efficient, personalized service.

The industry grew dramatically in the 1990s, due largely to the great popularity and growth of giant home improvement retailers--almost 59,000 establishments in 1997. Retail lumber and building materials outlets accounted for a large chunk of the $215 billion home improvement industry. Since its birth at the beginning of the twentieth century, the industry had grown and changed dramatically. At the start of the twenty-first century, companies across the United States strategized to find ways to keep and increase their share of this very competitive market.

Despite the weak economy of the early 2000s, the home improvement industry bucked the trend toward downscaling, reporting healthy growth through 2002. Lowe's Inc. was the biggest winner as the company strengthened its market position, gaining ground on its top rival, industry-leader Home Depot Inc. For its part, Home Depot took several blows to its stock value during 2002 as Wall Street stepped back from the do-it-yourself (DIY) giant. Along with Lowe's, smaller, independent DIY and home improvement stores also faired well during 2002. The industry benefited from the nesting instincts that characterized the American psyche after the terrorist attacks of September 11, 2001. Fewer people were taking vacations, and more were settling into the comforts of home, which generated more interest in home improvement projects.

Although home improvement stores were holding their own during the economic recession, they were focusing on core products and shying away from major changes. Hardware, tools, lawn and garden, plumbing, electrical, and paint account for 90 percent of all sales. Since 1990 lumber and home improvement stores had increased sales in these core categories, whereas sales of lumber and building materials had declined. For example, in 2002 lumber sales accounted for 32 percent of lumberyard sales, down from 38 percent in 1990. Likewise, over the same time period lumber sales at home centers declined to 20 percent, down from 25 percent.

In the early 2000s, home improvement centers worked toward making their stores and products more appealing to women shoppers. According to a study conducted by Lowe's, women influence 80 percent of all home-improvement buying decisions. By 2003 both Lowe's and Home Depot reported that 50 percent of their customer base was female. Home decorating and painting led the list of projects favored by women, so stores stocked up on designer paints and inviting, in-store home decorating centers. According to Home Depot, 65 percent of the participants in its DIY workshops are women.

A boom year for housing starts occurred in 2004, and the price of materials also was on the rise. The double-digit price increases were blamed on new housing starts (1.95 million), demand from China, and tariffs on certain goods from Canada and Mexico. In order not to lose customers, the builders were absorbing the increased cost.

In 2005 the National Lumber and Building Materials Dealer Association reported that the typical dealer derived 42 percent of its sales from lumber and plywood. Windows and doors made up 15 percent of sales; millwork, cabinets, and finish made up 9 percent; and roofing and siding made up 8 percent. The remaining sales were divided among all of the products the dealers carried.

The housing boom of 2004 took a dramatic turn by 2007, when housing starts dropped to 1.1 million. For the first time since 2003, the Leading Indicator for Remodeling Activity (LIRA) figured homeowner spending for home improvement activity declined, with a drop of roughly 2.3 percent in homeowner remodeling spending from 2006 to 2007. The growing number of households overall has helped offset that drop. Looking ahead, the number of owner households in the United States is expected to grow 16 percent over the next decade. As a result, total sales in the industry are expected to rise 4.5 percent annually through 2011 and likely will be evenly spread among hardware stores, home centers and lumberyards.

In 2007, Home Depot closed its Landscape Supply and Floor Store formats while continuing to introduce new convenience hardware and female-friendly store formats. Meanwhile, Lowe's expanded beyond the United States for the first time with three stores in Canada and also has plans to expand into Mexico.

Current Conditions

According to industry reports, house sales and the home improvement sector experienced a downturn between 2007 through 2009 as the economy struggled. The LIRA suggested home improvement spending will fall 12 percent in 2009 compared to the previous year, which was 9.7 percent below 2007 levels. Consumers were hesitant when it came to making home improvements as the value of their home continued to fall. Home depot shed its EXPO, THD Design Center stores in 2009, as well as 7,000 employees to focus on growing its revenue following faltering sales.

Both Home Depot and Lowe's were cautiously optimistic following a slight increase in sales during the first three months of 2010 following one of the worst economic downturns in recent memory. Home Depot reported a 3.3 percent gain while Lowe's sales climbed by 2.4 percent. The sales gains were in part from federal funding offered to consumers if they purchased energy efficient major appliances. The LIRA projects the remodeling industry will advance 6.5 percent by the third quarter of 2011 as the economy rebounds and house sales rise. While it wasn't expected to be a stable transition, the home improvement industry was headed in the right direction.

Home Depot was the trend setter when it came to new technological advances. With customer service as the main focal point, the company invested $64 million in mobile point-of-sale First Phones, or "transactional/communication devices" in 1,970 stores in October 2010, and by January 31, 2011 the company had processed one million transactions. According to Home Depot chairman and CEO Frank Blake, "We call it the First Phone because its core purpose is to reduce tasking time for our associates so that they can instead focus on customer service," Adam Blair noted in Retail Info Systems News in December 2010, adding that "We see it as a foundational element of improving our service for our DIY [do-it-yourself] and professional customers, putting knowledge and communication closer at hand to our associates on the floor of the store."

Industry Leaders

The Home Depot Inc. is the world's largest home improvement chain and the second-largest retailer (behind Wal-Mart). In 2007 it operated more than 2,150 stores in the United States and Canada and employed approximately 364,000 people. The company successfully combined the economics of a warehouse store with high-level customer service usually reserved for smaller outfits. The average Home Depot store had more than 130,000 square feet of floor space and carried 40,000 to 50,000 products, including home improvement materials, building supplies, and lawn and garden supplies. The company's 50 EXPO Design Center stores showcase bath, kitchen, and lighting fixtures. In 2007 the company reported revenues of $90.8 billion. The Home Depot Inc.'s revenues began to trend down with a reported $71.2 billion in 2009 and $66.1 billion in 2010 with 317,000 employees. The company shed its EXPO, THD Design Center, and Yardbirds stores in 2009 to focus on growing its revenue.

Lowe's Inc., which grew rapidly during the 1990s and early 2000s, operated about 1,380 stores in 49 states and Canada in 2007, with most stores in the Southeast, and employed about 210,000 people. Most of Lowe's stores are found in small towns where they can easily offer better prices and a larger selection than smaller outlets. In 2007 Lowe's reported revenues of $46.9 billion. The company reported revenues of $48.2 billion in 2009 and $47.2 billion in 2010 with 239,000 employees.

Founded in 1972 and headquartered in Eau Claire, Wisconsin, Menard Inc. ranks as the third-largest home improvement retailer. Its 210 outlets, largely located in the northern region of the Midwest, feature a full complement of products similar to that of its competitors, Lowe's and Home Depot. Menard, however, operated a manufacturing facility to maintain competitive retail pricing and increase net profits. The company is owned by John Menard, the firm's founder, president, and CEO. It had 38,000 employees in 2006. Menard Inc. reported revenues of $7.9 billion in 2009 with 40,300 employees. The company closed its store located in the outskirts of Eden Prairie and was building a two-story facility scheduled to open in the spring of 2011.

Other industry leaders include the 84 Lumber Company and Carter Lumber Company.

Workforce

The retail building material and supplies industry employs more than 1 million people in the United States. One-third of the total workforce was employed as retail sales associates. All sales-related positions accounted for more than 54 percent of the workforce. Transportation and freight-related positions totaled 18 percent of the workforce, office and administrative positions 14 percent, and management occupations 4 percent.

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