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L.E.K. Contractor Behavior Survey: The Building-Products Industry is Gaining Strength


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In the fourth annual study of 550 U.S. residential and commercial contractors, L.E.K. Consulting found that optimism has returned to the building-products industry and is approaching pre-2008 levels. …

In the fourth annual study of 550 U.S. residential and commercial contractors, L.E.K. Consulting found that optimism has returned to the building-products industry and is approaching pre-2008 levels. This buoyancy is changing contractors’ behavior in several ways:

Contractors are becoming more aggressive during pricing negotiations and are walking away from jobs that don’t provide attractive margins
Contractor purchasing from big-box retailers are showing signs of plateauing and they are favoring one-stepper and broad-line specialty channels
Contractors are integrating mobile devices and tablets into their work and anticipate accelerating their use of mobile software and apps in the future
This Executive Insights examines the results of the survey and their implications for building-products manufacturers. L.E.K. Consulting’s Thilo Henkes, Robert Rourke and Maria Gacek indicate how product manufacturers can use the industry’s renewed momentum to turn a healthy profit and grow market share.

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  • 1. EXECUTIVE INSIGHTS VOLUME XVI, ISSUE 2 L.E.K. Contractor Behavior Survey: The Building-Products Industry is Gaining Strength After a period of considerable decline following the 2008 hous- In this paper, we summarize the main findings from the survey ing crash, the U.S. building and construction market is back in and examine their implications for building-products manufac- good health. Recently approved housing starts have recovered turers. substantially and are on the way to approaching pre-crash levels. In the fourth installment of our annual Contractor Behavior Survey, L.E.K. Consulting found that contractors report strong Contractors Are Growing Their Margins year-over-year improvement in the number and dollar value of Continuing a trend we identified in previous surveys, contrac- jobs, and predict that by 2016 their businesses will be healthier tors in 2013 indicated fewer jobs lost on price and claim they than before the market cycle. are now busy enough to turn down low-margin jobs. In fact, contractors’ bullishness about pricing is the highest it has been Our survey of 550 residential and commercial contractors in the in four years (see Figure 1). For instance, while 44% of respon- U.S. also revealed that renewed optimism is changing contrac- dents reported in 2010 that they were reacting to price pressure tors’ behavior in various ways; first, they are becoming more ag- by accepting lower margins on jobs, only 26% reported drop- gressive during pricing negotiations and are walking away from ping their prices in 2013. Approximately four out of 10 contrac- jobs that don’t provide attractive margins; second, contractors' tors in our survey reported performing extra services on a job to purchasing from big-box retailers are showing signs of plateau- maintain their price – around the same proportion that reported ing and they are favoring one-stepper and broad-line specialty that they are simply selecting fewer jobs that are more attrac- channels; finally, they are increasingly integrating mobile devices tively priced. and tablets into their work and anticipate accelerating their use of mobile software and apps in the future. To better understand contractor preferences, L.E.K. also asked contractors to rate manufacturers across 12 categories in order to identify the manufacturers viewed as highest performing and thus likely to command loyalty from contractors. Contractors Remain Loyal To Brands When choosing products, contractors continue to value their trusted brands in most building-products categories rather than purchase less expensive alternatives by other manufacturers – a loyalty that remained “sticky” even through the worst of the L.E.K. Contractor Behavior Survey: The Building-Products Industry is Gaining Strength was written by Thilo Henkes, a Managing Director in L.E.K.’s Consulting’s Boston office, and Robert Rourke, Managing Director in L.E.K Consulting’s Chicago office. Maria Gacek, a Basic Industries Specialist in L.E.K. Consulting’s Chicago office, contributed to the paper. For more information, contact L.E.K. Consulting / Executive Insights INSIGHTS @ WORK TM LEK.COM
  • 2. EXECUTIVE INSIGHTS Figure 1 Figure 2 Contractor Responses to Price Pressure Contractor Product Purchase Criteria Importance (2013) Durability Purchasing same brands at less expensive retailers and distributors 53% 73% Price 45% 69% In stock for immediate delivery Working on those fewer jobs which are priced more appropriately 64% Manufacturer guarantee/ warranty 40% 43% 64% Available at my preferred retailer/distributor 64% 47% Performing extra services on each job 63% Reputation 39% 57% Aestetics/visual appeal Energy efficiency of products Level of customer support 22% Purchasing less expensive brands 14% 20 41% Sustainability attributes 31% Research on product online 40 31% 31% 0 60 2013 Survey Source: L.E.K.’s Contractor Behavior Survey 20 40 60 80 100 Percent of Respondents Rating Response as Important Percent of Respondents Rating Response as Important 2010 Survey 44% Recommendation of distributor 28% 0 47% Complete system solution 14% No response categorized as important 47% Water efficient/recycled/waste reducing 11% 12% Purchasing same brands but lower grade products 49% Request of owner/specifier 26% 51% Quality of existing relationship w/ manufacturer 44% Taking lower margins on jobs Residential Commercial Source: L.E.K.’s Contractor Behavior Survey downturn. Continuing a trend noticed in past surveys, contrac- four L.E.K. contractor surveys. Notably, a “green” or environ- tors also continue to decrease their searches across multiple mental value proposition did not turn out to be a key purchas- retailers and distributors for the lowest prices for their favored ing criteria for most contractors, ranking eighth on the list of products – another sign of resurgence in the industry as well as product-selection considerations behind attributes such as visual brand loyalty. The importance of using trusted brands reflects appeal (seventh), availability at a preferred retailer (fourth), and contractors’ belief that durability is the most important quality whether the product is in stock and obtainable immediately in a product, with related attributes such as product reputation (third). When contractors do seek green attributes in their prod- and strong warranty also among the top 10 product-selection ucts, they generally favor energy efficiency over sustainability. considerations (see Figure 2). This preference is the result of homeowners, who contractors estimate could pay as much as a 10% price premium on a prod- Price remained a significant consideration for contractors during purchasing, but ran second to durability, as it has in all Page 2 uct if its efficiency benefits drive a payback period of fewer than five years. L.E.K. Consulting / Executive Insights Volume XVI, Issue 2 INSIGHTS @ WORK TM LEK.COM
  • 3. EXECUTIVE INSIGHTS Big-Box Retailing Has Plateaued While Online is Growing ing more success selling such products to homeowners in a As in previous L.E.K. surveys, contractors stated price and con- contractors during the downturn. Given the uptick in projects, venience as the primary reasons for shopping at big-box stores, however, contractors are moving through inventory more quick- but professed no loyalty to these outlets, complaining that the ly and are thus less concerned about tying up working capital. big-box channel was underperforming on other services relative The benefit of the localized inventory of the big-box is now to the pro channels (one-stepper and two-steppers). Specifi- competing with the cost of sending crews (which could other- cally, contractors felt big-box stores lack knowledgeable staff, a wise be productive) out to the stores at a greater frequency. rebounding market. Finally, big-box retailers, with their convenient locations, provided a de facto outsourced inventory for reliable delivery service, depth of product selection and several The online channel remains small, but has been growing other valuable attributes. consistently. Late to the e-commerce revolution, contractors are Indeed, our data suggests the trend toward purchasing at big- shifting some of their purchasing online, and potentially disrup- box retailers seems to have reached its apex in most categories tive Internet competitors including, HomeDepot. (see Figure 3). Contractors are moving back to one-steppers and com and Inc. are positioning themselves to accept two-steppers because those channels offer premium products their business. Although growing from a small base, online with better pro services and also because contractors are find- sales’ market share has more than doubled since 2006, and Figure 3 Contractor Average: Purchase Frequency by Channel – Residential Contractors PPT Change (2006-13) (13-16F) 100 7% 90 80 6% 6% 6% 6% 6% Other (0.1) (0.0) 1% 2% 2% 3% 3% 3% Online 1.3 0.3 26% 28% 29% 29% 29% Big Box retailer 3.2 (0.9) 10% 10% 28% Percent of Spend 70 60 11% 11% 10% 55% 54% 53% 52% 2006 2010 2011 2012 10% Two Stepper/ Specialty Independent (1.0) (0.3) 52% 53% One Stepper/ Broadline (3.4) 0.9 2013 2016F 50 40 30 20 10 0 Source:  L.E.K. analysis L.E.K. Consulting / Executive Insights INSIGHTS @ WORK TM LEK.COM
  • 4. EXECUTIVE INSIGHTS Figure 4 Contractor Average: Purchase Frequency – Online Channel Rating the Product Manufacturers We asked contractors to rate manufacturers across 12 product 3.5 categories, with contractors rating only manufacturers in their 3.0 own sector (e.g., plumbing, electrical, etc). L.E.K. then ranked companies based on aggregate score for the following four Percent of Spend 2.5 attributes: product breadth, quality, price and service level. (See 2.0 Figure 6). Because contractors are loyal to brands, earning high performance scores is critical to product manufacturers’ success. 1.5 1.0 While receiving the highest performing score in each category is notable, these categories remain very competitive. Many of 0.5 the categories have leaders that only hold a slightly higher score 0.0 2006 2010 2010 survey 2011 2012 2011 survey 2013 2014F 2012 survey 2015F 2016F than the category average – including framing and drywall. 2013 survey Source: L.E.K. analysis contractors indicate it now accounts for roughly 3% of sales. Figure 5 Contractor Work-Related Mobile Device Usage Current vs. Next 12 Months (see Figure 4). In general, we believe that the online channel is nascent and will grow substantially in coming years. Adding to the Internet’s disruptive influence, homeowners are increasingly becoming web-savvy and using the Internet to research products and influence contractors’ purchasing decisions (particularly for finished products such as tile and flooring). Many brands are 71% 75% Email (work-related) Browsing/checking specs/ price comparison of material 61% 54% 53% 47% Scheduling/project planning already using social media to build loyalty among homeowners. According to our survey, more than 80% of contractors own smartphones, and around 60% use a smartphone for work – these devices are commonly used to exchange emails with clients and check specs and prices for materials, among other tasks. Contractors report that they are already finding innovative ways to use mobile devices for work; some paint and roofing companies, for example, offer “visualization” software that allows contractors to take a picture of a roof or walls and then demonstrate for homeowners how the roof or walls will appear once certain colors and types of material have been applied. 44% 43% Transacting/purchasing materials 41% 40% Accessing building plans (e.g., blueprints) Training (e.g., from a manufacturer's website) 37% 37% Visualization apps (e.g., apps that render home images with proposed materials) 36% 39% Analytics apps (e.g., tracking productivity of sub-contractors) 33% 36% 0 Contractors are also using apps to estimate how much mate- value from manufacturers, and they expect such tools to prolif- 40 60 80 100 Percent of Contractors rial they might need for a given job. Respondents to our survey reported that these mobile-device apps are sales tools that they 20 Intent for use in next 12 months Current Use Source: L.E.K.’s Contractor Behavior Survey erate in the industry in coming years (see Figure 5). Page 4 L.E.K. Consulting / Executive Insights Volume XVI, Issue 2 INSIGHTS @ WORK TM LEK.COM
  • 5. EXECUTIVE INSIGHTS Figure 6 Top Manufacturer Performance Current Sales Performance Metrics 2012 2013 Highest Performer Score Difference to Avg. Overall Score 5.9 Category 0.2 5.4 0.3 Drywall USG Corporation Electrical/Lighting GE Flooring Anderson Hardwood 5.6 0.4 Framing Georgia-Pacific 5.2 0.2 HVAC Trane 5.6 0.4 Insulation Owens Corning 5.6 0.3 Paint Sherwin-Williams 5.9 0.4 Plumbing Toto Elkay 5.7 0.4 Roofing Owens Corning GAF 5.6 0.4 Siding James Hardie 5.6 0.3 Tile Dal-Tile Mohawk Industries 5.9 0.3 Windows/Doors Andersen Pella 5.7 0.4 Source: L.E.K. Consulting Hubbell Lighting Change from 2012 Implications for Branded Building Products Contractors’ renewed confidence means they are thinking • Connect with customers through the web. Mobile beyond just price and cost containment, and are focusing more devices can be useful sales tools for contractors and can strategically on efficiency and productivity. Their strong brand help them promote your brand and increase sales. Social ties but weak channel loyalty has clear implications for manag- media – both through normal “push” tactics but also ers of branded building-product companies, who should take “pull” tactics such as product reviews and discussion the following steps to maximize profitability: forums for homeowners – can powerfully influence home owners’ brand preferences. Finally, do not underestimate • Resist the urge to discount. Contractors would rather the disruptive potential of upstarts such as and switch channels than trade down brands., Inc. • Build a multichannel strategy. Your brand must be In short, our survey indicates that demand in the building and positioned in all channels to capture maximum value from construction industry is now healthy, and showing real signs the market. Ideally, different products should be sold in of momentum. As a result, product manufacturers that can each channel to avoid channel conflict – a trade-off made develop and position targeted products across key segments of easier by the knowledge that contractors’ loyalty will drive the channel (and provide product information and other tools them to shop across channels for your brand. online) will be well-positioned to turn healthy profits and grow market share. L.E.K. Consulting / Executive Insights INSIGHTS @ WORK TM LEK.COM
  • 6. EXECUTIVE INSIGHTS INSIGHTS @ WORK L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and analytical rigor to help clients solve their most critical business problems. Founded 30 years ago, L.E.K. employs more than 1,000 professionals in 22 offices across Europe, the Americas and Asia-Pacific. L.E.K. advises and supports global companies that are leaders in their industries – including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. L.E.K. helps business leaders consistently make better decisions, deliver improved business performance and create greater shareholder returns. For further information contact: Boston New York 75 State Street 19th Floor Boston, MA 02109 Telephone: 617.951.9500 Facsimile: 617.951.9392 1133 Sixth Avenue 29th Floor New York, NY 10036 Telephone: 646.652.1900 Facsimile: 212.582.8505 Chicago San Francisco One North Wacker Drive 39th Floor Chicago, IL 60606 Telephone: 312.913.6400 Facsimile: 312.782.4583 100 Pine Street Suite 2000 San Francisco, CA 94111 Telephone: 415.676.5500 Facsimile: 415.627.9071 Los Angeles 1100 Glendon Avenue 21st Floor Los Angeles, CA 90024 Telephone: 310.209.9800 Facsimile: 310.209.9125 TM International Offices: Bangkok Beijing Chennai London Melbourne Milan Mumbai Munich New Delhi Paris São Paulo Seoul Shanghai Singapore Sydney Tokyo Wroclaw L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. © 2014 L.E.K. Consulting LLC Page 6 L.E.K. Consulting / Executive Insights Volume XVI, Issue 2 INSIGHTS @ WORK TM LEK.COM