Amid a cooling housing market, a shift in buying behaviors has the potential to move market share in the building products industry. During Zonda’s most recent Building Products webinar, Todd Tomalak and Matt Samson shared research highlighting how pro contractor behavior shifted in 2022 and the potential ramifications these behaviors could have in the industry.
Over the past two years due to supply chain issues, Tomalak said many contractors sourced from retail channels they had not previously used. Zonda research indicates that contractors who switched channels in 2022 saw their project volume decrease by 8% and experienced a decline in pricing power as well.
“There is a pretty significant difference among these contractors based on where they have shifted. Contractors that had shifted to buying more from lumberyards gained pricing power,” Tomalak, principal of building products advisory at Zonda, said on the webinar. “Contrast that with what we’ve seen [from] large big box retailers. These big box retailers are exceptionally run businesses; however, a lot of the pro contractors that they’ve captured in the last 18 months have been smaller contractors with a smaller book of business. If we look at Lowe’s as a case study, the contractors that switched to Lowe’s that didn’t shop there before, that’s exactly whose book of business has been drying up by 10% or more and their pricing power was eroding really rapidly.”
While contractors are still shopping in most channels, including big box retailers, pro dealers, lumberyards, hardware retailers, e-commerce, and direct from the manufacturer, they are spreading their buying power differently across channels, according to Samson.
“Clear winners are e-commerce and direct [from manufacturer],” Samson, vice president of building products advisory at Zonda, said. “We saw they were getting more customers [in 2022], and we’re seeing they are getting more of the [contractor’s] wallet as well.
According to Zonda research, 9% more pro customers used e-commerce channels to source building products, and those channels gained the largest share of the pro contractor’s wallet relative to other channels. While the construction industry has often not considered e-commerce—channels with no brick and mortar presence—a threat to traditional channels, the data indicates, for certain product categories, pros and consumers are increasingly utilizing e-commerce. Conversely, Samson said while pros are still buying at hardware stores, two-step distributors, and big box retailers, they are buying less relative to other channels.
“Unless we see a real course correction from these channels, we predict these buying behavior shifts are going to result in market share loss for hardware, Lowe’s, and two-step distributors,” Samson said.
Building Product Outlook
Near-term challenges, including shifting backlogs, pricing, and macroeconomic factors, present risks to the building products revenue and support Zonda’s projection that building product spending will decline between 7% and 9% in 2023.
“We see risks culminating for building products in the second half of this year in the backdrop of a pretty exciting longer-term picture. We also see backlogs, pricing, and margins changing pretty rapidly,” Tomalak said.
Zonda data indicates contractors are working through project backlogs without replenishing their pipelines, Tomalak said. A contractor survey conducted in January indicated the average backlog was 3.6 months; the same survey in February yielded an average backlog of 2.8 months.
“That [change] may not sound like a big deal, but when you sample one month apart, that essentially means we’ve seen a big shuffling in terms of people canceling projects or almost no people going into the top end of the funnel,” Tomalak said. “At the current run rate, we think a lot of these contractors will have worked through their backlog, even with new projects coming in, roughly by the new year.”
In addition to shrinking backlogs, declines in real personal income and savings rates suggest households may be prevented from pursuing improvement projects for their homes. After a spike in personal savings during the early period of the pandemic, Tomalak said households are working through excess savings at a time when inflation remains high and real personal income is decreasing.
“At the current pace of drawdown, we have an additional 10 to 12 months of excess savings before we’ve used up that extra savings. We see that as a buffer for the normal effects that decreases in real income should be doing to remodeling,” Tomalak said. “This means there’s a potential risk as that number gets leaner and leaner, we have less of a buffer as inflation eats away at household spending and their ability to choose different types of projects.”
Despite short-term risks, Tomalak affirmed that the time period from 2020 to 2030 will be remembered as the "Golden Age of Remodeling," with “a pretty nasty cyclical slowdown in the middle.” While the industry currently is in the slowdown period, Tomalak said building product companies should not “get complacent” with product pricing or supply chains to benefit when demand rebounds and price stability returns.