Inside the mind of contractors
The fact that contractors and remodelers have been losing bids over pricing should come as no surprise. They’re under tremendous pressure for price concessions from homeowners, and if they want to stay in the game, contractors have to lower their prices somehow. But how they choose to cut costs through purchasing, and what goes into their decision-making process, is the subject of a newly released study by L.E.K. Consulting, a global management consulting firm.
The survey of more than 500 residential contractors, all of them business owners with at least three employees and five years of experience, revealed some interesting observations about the way pros use social media, how they judge “sustainable” versus “energy-efficient” products, and their unwillingness to “trade down” to cheaper brands when purchasing building materials. And lumberyards will be pleased to learn that their customers are, for the most part, loyal. Although many shopped at big boxes for more competitive prices during the recession, that trend is starting to reverse itself, according to the survey. Contractor loyalty to the two-step channel, as measured by those willing to pay a price premium to shop there, increased from 3.4% in 2010 to 3.8% in 2011.
“The two-steppers right now have the most loyal customers,” said Rob Rourke, VP growth strategy and M&A for the company’s Chicago office. “The big boxes would have to discount their merchandise more deeply to lure away [these] customers.” In the survey, contractors rated big boxes the lowest on the loyalty scale for the second consecutive year. They cited delivery speed, stock on hand for immediate purchase and contractor services as underperforming areas.
Yet the survey participants said they comparison shop across channels to get the best price for the products they trust, instead of buying less expensive brands or lower-grade products in response to competitive pressures. More than 50% of contractors indicated that they have used the Internet for price comparisons, and another 40% expect to conduct more purchasing online during the next three years.
The survey also asked contractors — a sample that took in framers, window and door installers, kitchen and bath remodelers, roofers, and general contractors who do room additions — how they use social media in their jobs. The answer was a little surprising: YouTube.
Pros are increasingly turning to the Internet to find instructions or videos on how to install new products or handle difficulties that arise. If a manufacturer’s website offers little help, there’s usually a video posted on YouTube of somebody who performed the same job or encountered the same problem.
Take the example of installing a vent fan in the bathroom. “Contactors are turning to YouTube to learn how to install the fan from the [ceiling] underside without going into the attic and rolling around in the insulation,” Rourke said.
But many of these “how-to” videos are posted by altruistic remodelers who are just sharing their expertise.
“The branded building product companies have been late to the dance in using social media to interact with their customers,” Rourke said. But then he noted a number of exceptions: CertainTeed, US Gypsum, Tapco, Emerson Electric and Owens Corning roofing.
Bruce Graf, president of Graf Development in Dallas, doesn’t see himself as a Facebook kind of guy. But he’ll watch installation videos on YouTube if he purchases a unique tool or product. A recent example is a trough or “infinity” drain in a shower.
And then there’s Pinterest.com, the popular new website for posting creative ideas, designs, recipes, fashion and everything in between. A designer he worked with on a project established an account so they could trade ideas back and forth with the homeowner. After that, Graf opened his own account and began posting some photos of his competed jobs. They proved to be popular; at press time Graf Development had 55 followers, and a number of Pinterest members have reposted his photos on their accounts. “I’m really stuck on it now,” Graf admitted.
Although Graf didn’t participate in the L.E.K. survey, his view on channel shopping are in line with the results. He buys his plumbing supplies at Ferguson and his lumber at an 80-year-old independent lumberyard in the Dallas area. “I want to see them survive,” he explained. Home Depot is for “basic stuff.” Graf eschews Internet purchasing and cringes when his clients order supplies online because they’re cheaper.
“The product shows up and it’s not the right product and it slows everything down,” Graf observed. He also noted that when the homeowner’s budget gets tight, “they’ll eliminate the green features.”
The L.E.K. survey found a big divide between “sustainable” (eco-friendly) and “energy saving” in the green products sector. More than half the contractors surveyed said they were willing to pay more than a 10% premium for these product attributes. But when the researchers dug a little deeper, they found that residential contractors were much more interested in the energy-saving products, while commercial contractors’ purchasing decisions were equally influenced by both.
L.E.K. consultant Rourke surmised that residential contractors are influenced by their clients’ appetite for anything that reduced their energy bill. But unlike commercial customers, homeowners are generally impatient to realize their energy savings. “They don’t get into the market unless the payback is three years,” Rourke said.
Commercial projects, on the other hand, are focused on the bottom line: cash flow. And if they’re aiming for LEED certification, the sustainable products will gain them more points.
Todd Jackson, CEO of Jackson Design & Remodeling in San Diego, guides his residential customers toward energy-saving improvements that may not seem dramatic at first. Reflective-coated plywood in the attic, motion-activated light switches in powder rooms and pantries, and insulation in interior common walls all come standard in the firm’s custom homes and remodeling projects. In most cases, so do tankless water heaters.
But when a client asks one of Jackson’s six project designers about solar panels, the firm sits down and does the ROI for the homeowner.
“We get asked many, many times about putting solar in, but in many cases, it doesn’t calculate out,” Jackson said.
When it comes to sustainability issues, consciousness usually prevails. Two of the firm’s clients have requested elaborate rainwater collection systems, and the estimates fell in the $14,000 to $20,000 price range. One homeowner went ahead with his plans; the other didn’t.
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National Hardware Show preview
As home building begins to rebound after a five-year slide, the National Hardware Show is celebrating with an expanded Building Products category that calls out exhibitors with special signage to make them easy to pick out on the show floor. Among those scheduled to represent this enhanced category are GRK Fasteners, Louisville Ladder, CoverGrip Corporation and Dumond Chemicals, and pro dealers planning to attend include Gahahl Lumber and BMC.
"Timing is everything, and we are confident that this is the right time to welcome traditional hardline building products back to the Show," said Sonya Ruff Jarvis, VP attendee programs for Reed Exhibitions. "We will offer building products that complement the core hardware category, such as tarp, twine, rope, blades, tools, fasteners, power tools, metal framing and more." Dumond Chemicals, in its 22nd year at the National Hardware Show, will unveil new environmentally friendly paint removal products, Catch-N-Cover microfiltration membranes and graffiti removal products. "Being under the Building Products umbrella, it's going to be good to have a dedicated space to introduce new products to the dealers and heighten their awareness of these new products, which can ultimately lead them into new customer segments," said Dumond president and CEO John Petroci.
Also for the first time this year, the Farm & Ranch category will have a dedicated area of 20,000 sq. ft. on the show floor and will feature such exhibitors as Hengjin Electron Co., MaxPower Precision Parts, Solo Inc. and The Cordage Source. Megan Menzer, owner of Newton's True Value in Cherryvale, Kan., is happy to see the expansion of Farm & Ranch at the Hardware Show, which reflects what's been happening in her own two stores.
"Farm and ranch is big in our area, and we recently started a dedicated section in our stores," said Menzer, who opened her second location in October 2012 and carries such products as cow tags, electric fences, minor medical supplies, herbicides and pesticides. "Instead of having special Farm & Ranch stores, you're now finding the category is present in more diversified locations, including many hardware stores. Fifty years ago, that's what the hardware store was — a farm and ranch supply store — and I think that's coming back."
In other developments, Made-in-the-USA products will have their own area on the show floor and include displays from more than 50 companies; the Pet Pavilion has been expanded and features special signage; and the Energy Efficient Products section, being sponsored by Polaroid and Intelligent Green Products, has been beefed up and will include exhibitors Heat Controller, Niagara Conservation Corp. and Polaroid Lighting.
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Family businesses managed by the grandchildren and great grandchildren of the company’s founder are frequently celebrated in the home improvement industry. But for that kind of company to run an empire of more than 100 stores — there aren’t many of those.
There aren’t many companies like Westminster, Mass.-based Aubuchon Hardware Co. The independent chain of hardware stores operates its own 400,000-sq.-ft. distribution center in Westminster and runs an every-store-is-different chain of 121 stores throughout the Northeast. Another distinguishing feature: 2011 was its best year since it began in 1908. Sales rose 5.2% to $140.5 million.
For its growth, its steady success, its commitment to improvement and its family values mixed with a demonstrated confidence in the hardware business, Aubuchon Hardware was named the 2012 Retailer of the Year by Home Channel News. The company will accept the award during the National Hardware Show in Las Vegas at the Golden Hammer Awards breakfast event May 2.
What makes the company special? A tour of one of the chain’s new prototype stores in Cohasset, Mass., offers a few answers. Distinguishing features include a wide entrance aisle, clear sight lines and a paint contractors’ area. The store is only a year old, but it’s already been fine-tuned with the addition of a colorful DIY “decision area” for homeowners to explore the paint palette from Benjamin Moore in a comfortable space away from the mixers and shakers.
“This is the direction we’d like to take in more stores,” said Bernard Aubuchon Jr., senior VP purchasing. “We’re experimenting here, and we want to bring these ideas to other new stores.”
Other experiments include a South Burlington, Vt., store, where the emphasis is on household decorating ideas, including window treatment and fabric, he said.
According to Kenneth Moore, who is responsible for retail design for the company where no two footprints are alike, the experimentation is systematic. “We start in Westminster at a desk and pencil out a floor plan,” Moore said. “And then we get input from different people and come up with different ideas. If the store develops within that first year, we’ll go back and revisit it, as we did here.”
Aubuchon’s store-footprint comfort is in the neighborhood of 12,000 sq. ft. But across the chain, sizes range from about 8,000 sq. ft. to 20,000 sq. ft. Inside these diverse buildings, Aubuchon brings a consistent merchandise mix born in its planogram department. Each product category has its core mix that can expand or contract depending on space considerations. “And that’s how we can really manage 121 locations and also have consistency through all of them,” Moore said.
CEO M. Marcus Moran Jr., a grandson of the company founder, believes the unique stores are a strength, as are the people who run them. “We just fit into the town,” he said. “The manager is a longtime employee. Most likely he shopped with his father in a hardware store in our small towns. He’s well known, and in some towns he’s known as Mr. Aubuchon.”
The steady drive to improve stores is part of the Aubuchon way, and so is the constant search for the right location — or the wrong one. The company has been transformed, Moran said, by a continuing seven-year effort to be in the right place with the right store, whether that means opening or closing. With this corporate mind-set, one of Moran’s never-ending missions is to evaluate existing locations and scout for new ones.
The reasons to close a store are varied. Moran pointed to the possibility of encroaching competition. It might be a bad lease or an old store that simply can’t perform like it used to and doesn’t look like it ever will. When it makes sense to start fresh, the company acts aggressively, he said. And the 55% to 60% equity transfer to a new town is usually well received by the bank, he added.
Recruitment is ongoing also. Moran explains his process and his pitch: “I go into the store and I look at the age of the owner,” he said. “I look at whether the store is up to date or on a slippery slope to decline. And If I see potential in those two characteristics, I ask to speak to the owner in the backroom. And I say, ‘I don’t know when, but some day you may want to sell. We’re looking for stores to buy. And we have an authorization from the bank to write a check. You’ll have the cash right away.’ ”
The buyer tells the prospective seller: “Basically, I’m your 401K.”
Moran even has the formula for the price worked out in advance: 20 cents on the dollar for good will. Dollar-for-dollar for inventory. Negotiations vary for the fixtures.
Moran has pitched the deal a little more than 400 times, he said, with about 35 or so successful results. And the calls keep coming.
Case in point: The company’s Keene, N.H., location has been operating since 1941 in the same spot. But times have changed. “Wal-Mart, Home Depot, Lowe’s all opened on the other side of town,” Aubuchon said. “We’re going to move that store to that side of town in a bigger location where the people are shopping.”
And behind the innovation, the experimentation and the ability to expand and adjust is the company’s 400,000-sq.-ft. distribution center. It’s a resource that not many independents can match.
“It definitely gives us an advantage,” Bernard said. “We can buy truckloads. We can negotiate and make deals with vendors on our own and offer unique things to our customers. Plus we can change a little faster.”
The distribution center supplies most of the orders through Aubuchon’s Hardwarestore.com website. (The company jumped on the highly desirable URL address when it became available shortly after the dot.com bust in 2002.) For those products it doesn’t carry, Aubuchon’s distribution partner Orgill fills the gaps. Orgill trucks deliver to the Westminster facility about four times a week.
Running it all is the family, literally and figuratively. Moran said there’s about 30 or 40 store managers who started with the company as high school kids. “We have many outside of the family bloodlines that have been with us as Aubuchon family for many years,” Moran said.
About 1,200 people work at the retail company. Roughly 60% are full time and 40% part time. Then there’s the 20 or so relatives descended from the founder.
“We have fourth-generation executives working for the company now,” Aubuchon said. “That is something we’re pretty proud of.”