Innovation in building products retailing
The US Big Box Stores. Innovation in building products retailing. Insights for treated timber suppliers.
INNOVATIONS COME in all sorts of shapes and sizes. In this case it’s the shape of a box and its size is big. We’ve become familiar in Australia with what the Americans call Big Box stores. On our shores they’re the Bunnings and Masters. On American shores they’re Home Depot, Lowe’s and Menards.
Apart from the names the other thing that separates theirs from ours is size, yep everything is bigger in the US but with a population of around 317 million people they need bigger. In Australia we’re barely pushing 26,500 million people.
About four years ago in the US a number of companies like Home Depot, came up with the idea that if they could find very, very large empty buildings and fill them fully of traditional products, like hardware, paint, nursery and treated wood etc. and also add decorative items, kitchen and bathroom, appliances, shelving and flooring "they would come’. And they did! ""If they could fill up this empty space of this big box as we call it, they could generate a new type of business,” said Gary Converse, senior vice president of Osmose in the US.
“It would not only attract builders and contractors to come to the store but home owners and do-it-yourselfers.
“Big box retailers have certainly changed the landscape of how we sell building material products as well as other products.
“I’m going to talk a bit about doing business with the boxes.”
In the early days of doing business with the boxes it was a reasonably pleasant experience for wood traders.
“You had an old guy like me and you would make the sales call and sit in the office talk about sports ... eventually you'd get around to getting your proposal out, they’d look at it say "Yea this looks pretty good you got a deal",shake hands and you’re done,” said Mr Converse.
“Today’s buyers are completely different [they are] younger people, men and women, highly educated, typically these people have accounting degrees, MBAs, business degrees and surprisingly a lot of these buyers have little knowledge of wood products. They couldn't figure a cubic metre if they had to, but they still have the responsibility of managing the category and in the case of treated wood, to turn a profit back to the corporation”
So these buyers don’t really know much about the category but according to Converse they are very demanding. They really put the pressure on the treater to do a lot of things that in many cases the treater is not being paid to do, it’s just the cost of doing business with them.
“One example is as a treater I get to come in, in the morning and I’ve got orders for 10 truckloads of lumber,” Mr Converse explains. “The buyer is going to expect I’m going to deliver that lumber that afternoon, and certainly no later than the next day.”
That’s a pretty fast turnaround, but not only that, the buyer wants wood that looks good, wood that has a green or environmental endorsement and one that performs better than expected.
On top of that the Big Box stores are now interested in changing the colour of treated wood from a green to a warm natural brown. Big, bigger, biggest So there’s a lot of pressure in the US on wood treaters from the Big Box stores. However, you can’t afford to not do business with them.
In the US the biggest chain is Home Depot. It has 2185 stores and a typical treated wood inventory of 300 cubic metres per store. It is not only one of the largest retailers in the US, but one of the largest retailers in the world.
About 90% of Home Depot’s treated wood is treated with MCA, and the customer mix is around 20% builder and 80% homeowner. There’s a lot of commitment to building products in the stores.
The second biggest player in the US is Lowe’s with 1710 stores, and its typical treated wood inventory is 250 cubic metres per store. Like Home Depot it has mainly MCA treated wood, with some CA-C and ACQ. Lowe’s has recently introduced a family of preservatives that are carbon based - these are above ground wood with stabilisers.
“Lowe’s customers are about 15% builders and 86% homeowners. One of the big differences between Lowe’s and Home Depot is Lowe's is trying to fill their stores with more items that attract female shoppers. The store is laid out better for a female shopper and has more decorative products.
The third player is Menards. They are a smaller Big Box store with only 287 locations, but with a treated inventory that is the largest of the three with 350 cubic metres per store. It is mostly MCA treated with a very small percentage of CCA.
The customer mix is 30% builder and 70% homeowner. They’ve got a bigger commitment to the contractor and tradesman than the other two.
Menards is primarily located in the upper mid west of the US. In the areas where they compete with Home Depot and Lowe’s they are very aggressive. The difference with Menards is they have an outdoor drive-through lumber area. They are catering more to the contractor builder ... so they can load up a truck onsite.
The 8000lb gorilla
“So now that you have better understanding of the scale of these Big Box stores here’re some ideas on how you have to present wood to make it onto the shelves.
“Each bundle of wood has to have a bundle placard. The treaters are required to put these on the wood with a barcode so that when the bundle comes into the store the employees can scan it. It tells the employees what it is, so they can’t get it wrong.
“There are also white plastic end tags on the end of each board in the bundle. The retailers require all the treaters put these on every board with a barcode number. They don’t want to spend money having their employees put price stickers on every piece of treated wood. That’s the responsibility of the wood treatment company.
“To give you an idea of scale of the US market, for 2013 [there was] 7.1 billion board feet or 16.8 cubic metres of treated wood [this amount is] processed and sold in the US every year,” said Mr Converse. “It’s a very big market that the Big Box stores pay a lot of attention to.
“If you look at the breakdown of companies that sell treated wood products in the US - 9500 lumber yards.
“Home Depot has 23% of the stores, Lowe’s has 19% and Menards has 3%; the rest - 55% - would be non-box stores like independent lumber yards.
“However, if you look at the percentage of sales of treated wood products Home Depot, Lowe’s and Menards sell a higher percentage of treated wood products than the independent dealers.”
So, 50% of all the treated wood sold in the US is going out of stores in a lumber cart from the Big Box stores.
“We have a saying, dealing with the Big Box stores in the early days was like trying to do business with an 800lb gorilla - friendly, big, powerful but back then there were about nine companies that were box stores in the United States,” said Mr Converse.
“This included Home Depot, Lowe’s and Menards and it included five or six other companies but they were either purchased by Home Depot or Lowe’s or basically were driven out of business. “Today we’re dealing with the 8000lb gorilla” The treated wood buyer at Home Depot is responsible for purchasing 400 cubic metres of wood with a retail value north of one billion dollars in sales. So there is one purchasing guy buying more treated wood on the planet than anybody else. That makes him or her a very powerful buyer, and they recognize their power.
Trick or treat
Home Depot and Lowe’s deal with maybe around 15 treaters each, but Menards’ buyer does not buy any treated wood from treaters. This is where the business model is a little different. Menards owns its own treating plant.
The company has three treating plants. In fact, the largest single treating plant in the world is in Wisconsin and owned by Menards. The company also employs this business model with other products.
As is the case in many other businesses all three Big Box stores want to own more than just their name, they want to own the labels under which they sell products. This gives flexibility.
Private label branding for treated wood categories allows the retailer to control the branding and marketing programs. Home Depot has Weathershield Premium Wood products, Lowe’s has Severe Weather Max, Menards AC2.
This allows Home Depot and Lowe’s buyers to choose different suppliers without it affecting the branding. They’ve also done this with products other than wood.
“A number of years ago talking to consumers who buy lumber back in those days, we sold a lumber grade we sold as grade number 2 - it has a structural grading,” explained Mr Converse.
“Back in those days some of the material would pass the grading requirements but wouldn’t look very good. We met with the retailers and the first thing we did was stop having the wood mills put ink stamps on the wood.
“In the case of the Lowe’s and Home Depot we went to
suppliers and said we realise we need to have a grade number 2 but we need appearance grade or a pretty piece of wood.
“So the market invented a Prime #2 which is basically a piece of number 2 wood with less knots and wanes ... so the whole market has gone primarily to this prime #2.
“Prime #2 costs the treater about 25% more in the shorter lengths and about 10% more in the longer lengths.
“This change improved the treated wood category for the Big Box stores.
“One mill has taken it up a notch. They developed what they called a treater grade of prime #2. The mill is guaranteeing it will not warp or twist.
“Neither Home Depot nor Lowe’s can manage large deliveries; they’ve got small forklifts that can’t handle the big bundles of wood. And they also want to stack a whole array of wood products.
“So end tagging and bundle placards are musts they want and the treater has to use plastic strapping and corner protectors. It’s the treaters that have had to make the investment.
“The investment is more than just the end tag or placards. You have to hire people to put the tags on either by hand or using automatic air equipment.
“These placards and end tags are also packed with information and that information isn’t always straightforward but it must always be correct to meet consumer legislation.”
According to Mr Converse, tagging is something not done lightly in the US; part of it includes a third party inspection agency that guarantees the quality and standards of the wood.
Then the product size must be placed over the barcode just in case the barcode can’t be read at the cash register. The other thing that is included is the preservative used and the end use for the wood, in most cases the consumer doesn’t know one preservative from the next.
“A treater could have 200 different barcodes at the treating plant,” said Mr Converse. "They are financially responsible for having the right tag on the right piece of wood.”
Treaters get two-year supply deals, which is a good thing, but good for both treater and Big Box stores. The stores are unlikely to do anything good just for the treater -- there has to be something in it for them. Tying up a two-year deal means they have fixed the price, deliveries etc they can move on to something else.
“Big Box stores are open mostly 24/7 so treated wood deliveries typically happen between 10pm and 6am. They don’t want the trucks there during the main sales hours.
Big Box stores are now moving towards water repellents and stabiliser additives, colour additives and mould inhibitors at sawmill level. They are also going after the pro contractor business to increase sales.
One of the things impacting the wood market in the US is the plastic wood market.
“If you look at the plastic wood market - everything is brown,” said Mr Converse.
“So if you can’t beat them join them. We are taking traditional green treated wood and turning it into a natural brown colour.
“The colour is blended into the wood treatment solution for a one step treatment and we’ve done a lot of exposure studies, done a lot of focus groups.
“This is really great for the consumer. As an example, a wooden fence built with cedar wears down to a grey colour, a cheaper pine treated and coloured fence is cheaper, looks better than cedar and lasts longer.
“Home Depot wasn’t convinced about coloured wood but they were tempted into putting some in one of their stores over winter to see the take up. They monitored sales and had a 25% increase by adding colour. Now there’s lots of plants providing coloured wood mostly in two primary colours – cedar brown and redwood.
“So, innovations have come as a result of the Big Box stores in the US, some related to the product. However, by and large they have been about the treaters working harder to keep the Big Box store buyers on side.”