Martin Stables is chief executive of the Independent Builders Merchants Group
The building products distribution market has gone through significant change over the past few years. The market structure is changing, and mergers and acquisitions will likely pick up as the repair, maintenance and improvement sector returns to growth. The question is, why all the change?
“The sector needs to get its act together or risk disruptive shocks of its own making”
The builders’ merchant model remained largely unaltered for decades. Clearly there are inbuilt inefficiencies, such as too much silo thinking; too little supply chain integration; and too much waste.
The sector needs to get its act together or risk disruptive shocks of its own making. We must stop blaming the government when our sector is a significant part of the problem. Our market is more cyclical in nature than it needs to be – a sure sign of a supply and demand disconnect.
It is now estimated that 40 per cent of builders’ merchants have some private equity (PE) support. The interest among PE investors is partly to do with underinvestment in the sector previously, and the potential this offers for growth. More important is the goal of PE investment to add value and then sell a stake in a more valuable business. Obvious wins include stronger end-to-end supply chain integration, modernisation of branch and transport networks, digitalisation, and attracting talent.
PE has helped drive improvements across the sector. Competition from well-established, globally-resilient supply chains continues to advance and they may see the opportunity to accelerate. The hunger to disrupt what traditional merchants have been doing, somewhat inefficiently, for decades is evident. Amazon and eBay have dipped into the sector, for example, and B&Q opened its online Marketplace in 2022. These operations excel at picking, packing and delivering smaller items. While merchants and manufacturers still dominate the ‘big stuff’, rising costs could open the door for disruptors to expand.
The nationals’ growth seemed to peak in the mid-2010s. Their efforts to consolidate the sector were followed by divestment without changing fundamentals. Some recent divestments, partnered with PE investors inexperienced in this sector, were likely unprepared for the high fixed costs of merchanting and struggled in tough economic times. This sector favours established, long-term investors who understand and can weather cyclical downturns.
The largest merchant groups have tested new concepts for years with mixed success. Meanwhile, many regional merchants have expanded their branch networks, targeted new geographies and even delved into new customer groups. Many regional operators have bolstered local brands by providing them with platforms to thrive and successfully taken market share. This has precipitated a reshuffling of the leading merchant companies in recent years.
The need for positive change is great. By digitising, standardising, automating, removing no-value activity and, most importantly, by integrating our supply chains, the merchant sector can close the door on disruptive competition.
As a sector, we really know our customers. But if they can get products faster, cheaper and, possibly, greener from somewhere else they might just go there. We need to move quickly, and quite frankly PE investment is needed if we are to achieve this at pace.
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