Navigating an unpredictable cycle of spiking then plummeting commodity prices is made that much more daunting when your big box competition responds quickly and aggressively to dramatic drops in the market. This month’s Real Issue question came from two different size dealers in very different markets who both are wrestling with this challenge.
As we do in each issue, we share a question that dealers sent LBM Journal editors with our readers who have opted in to receive our emails (if you’d like to be on the list, contact us at email@example.com).
This month, we heard from more than 150 readers who reached out with answers in response to a brief, three-question survey. Here’s what we asked…
How would you advise a dealer faced with this problem?
“Our biggest challenge right now is dealing with big box pricing on commodity goods to market. They move with the market even when the drop is dramatic. Smaller yards, and even large nationals, have to work inventory down off of average cost. I suspect that mills play different contract games with box stores because of their size. Either way, we’re still shipping lumber for projects, but no panels. Are yards still providing individual pricing for items on estimates, or a lump sum project price, so as not to be shopped by each item? Since the box stores are in most every market, we’d love to know how other dealers navigate this challenge.”
Responses from lumberyards/full-line building material dealers, and specialty dealers/distributors:
“We provide individual pricing to our customers and re-quote every two weeks.”
“We do our best to keep with the pricing, sometimes that means keeping less stock on hand to keep up with the dropping prices.”
“Challenge your vendors and/or buying group to find the pricing and service level you need to stay being a viable supplier in your market area.”
“We’re still pricing by the line for most of our customers. If a contractor gets a reputation of ‘cherry picking’ we’ll start quoting them lump sum or explain that it’s ‘all or none.’”
“We are in drywall distribution, some of the box stores sell $50 to $75 MSF below market. We don’t match numbers; we can deliver the product where they cannot.”
“Our customers have been taking our line item quotes to the big boxes in town for price match guarantees. We do the work, they get the sale. We recently started not showing line-item quantity and pricing on quotes to see if that helps.”
“Bite the bullet and be competitive even if it means losing on panels or lumber. We determined what percentage lumber and panel sales were and decided it was best to lose on those items in order to keep selling all of the other better-margin materials. It also cleans out the high-priced inventory, which the sooner you unload the better.”
“We sell the lump sum package. The package price does not apply for items that are broken out and prices for EWP and long lengths not carried by the boxes is significantly higher. We also remind the customer that we do not have a delivery charge for full project deliveries, including fill-ins.”
“Individual pricing items.”
“We’ve had customers quote us against Home Depot or Lowe’s often. We tell them we don’t compete with them as our service is much different than the big box stores. We’ll still sell to them but if they are going to use us up on little detailed items that the big box stores can’t provide, then we’re not interested. For one-time buyers you can take a tougher stance but regular customers you don’t want to alienate and lose in times like we are coming into or some of us are already in.”
“Line-item pricing for each item locked in once the job starts regardless of market movement or other jobs starting.”
“With the huge increase in all our expenses, (wages are the most) we have to maintain a larger profit margin. If we lose a bid, it is what it is. If we don’t maintain our profits, we will be out of business anyway.”
“Do you offer free shipping? Do you sell mostly to builders or homeowners? A few framing packages will wipe out a big box store’s inventory.”
“People need to realize that these big box dealers lower their prices to put small businesses out of business then jack their prices back up. Ordering online is out of the question for me. I support local businesses and will continue to do so. I offer lump-sum pricing but also service my customers. The way I purchase gives me decent discounts so I can be competitive.”
“Yes, we provide individual pricing. We have always been able to turn inventory fast enough that we can stay with the market as it falls for the most part. You definitely have to lose some margin but you’re going there anyways with the other items. Try to train your customers that you are not only selling a product but also service. We more often struggle during a rising market than in a falling one.”
“I feel you have to follow the market down. Turn that inventory sometimes at a loss, but pick up again at lower price.”
“We offer our totals if we are quoting anyone other than a loyal customer. We do it with windows and doors as well. They don’t get our work. We’ll also note that pricing is based on the entire material list if they provide one.”
“When the market is high, I buy little to none. When the market is low, I buy more. The products I buy are generally better quality than a box store’s, and I run circles around the box store when it comes to service and knowledge. Customers who shop in my store realize you get what you pay for, plain and simple.”
“When going up against the box stores and their pricing, we push our customer service in the will call area as well as prompt delivery service. If a customer wants to load a cart, go through check out, then load their trucks, we let them. We just remind them how much more work it is and how much time and money it takes away from actual work at the jobsite.”
“Quote as a full package deal only. Point out that box stores are not very good at deliveries.”
“We still do individual pricing. I try to buy better and stay competitive with pricing. We offer different products that we specialize in. We offer better service.”
“Offer a 5% discount to contractors who pay on time.”
“Promote and up-sell the things that you can do for the customer—things that the big box stores don’t typically do.”
“We are watching price changes from the Lowe’s website and listening to customer feedback. We are adjusting pricing on blind commodity items while giving up some loss on OSB and studs.”
“At this time, we still provide estimates with piece pricing. Our contractor base will not accept estimates without individual items being priced. On more than one occasion recently we have been approached on our OSB pricing on projects that we had sold and pressed to either lower our price or lose that item to one of the boxes. When we have compromised on the OSB pricing we have been able to salvage the sale almost every time. Margins can get very tight. We would rather accept a small margin and keep the sale along with keeping them out of the box store, versus losing the sale and giving them all the more reason to go to the box store.”
“We’ve had builders purchase their panels from the box stores due to extremely low price when the market drops. But we have found that on a lot of occasions, the box stores do not have the inventory to supply the complete job.”
“In our market the big boxes price their materials on a four-week rolling average of costs which means they lag the changes in the market by a short window. We have been most successful when we can out-maneuver them within that window. When the market moves up, we adjust up with it right away. Let your customers buy out the big box at low prices and then sell your low-cost stock for a better profit when they move up.
“On the way down, move off your high-dollar stock as fast as you can by lowering your price first to get ahead of them and scoop their business. Cue the cliché…‘your first loss is your best loss.’ But now that you’re behind them you have to match their sell price to get out of your overvalued stock. Then rebuy at a better price point to get back in the game.
“You mentioned that you are still selling other items but not sheets so you must be doing okay with your sell prices there. If your customer is willing to split their order, you are likely below the big box sell on those items and might be able to move your numbers up a bit and still make the sale while offsetting your loss on the sheets. That’s just my $0.10 from having been in the same position.”
“Step it down slowly per project to show market reaction, and be ready to override as need be to get the sale!”
“Work through inventory, losing some margin, but stay profitable.”
“This is truly challenging. What works for some may not work for others. I serve a very small area and take pride in the quality of lumber that I purchase from distributors. I have to work down inventory before buying as there is no extra warehouse space. Many of the local people come in because of the product I have, and they have been great during this time of fluctuating prices. I still get calls from some people who are shopping around and willing to drive the 75 miles to the box store for their pricing. I tell them that I cannot sell at the same price as the box store. If a customer comes in with an itemized list for me to price, I will do so. I have very rarely gotten people to buy all the items on the lists.”
“We have found that by riding the market up and down helps us stay competitive. As the market increases and you have inventory that you paid less for, you will make more money on that. But when the market falls, you drop your price and lose money on current inventory. Take the hit on the high price commodities so you can purchase at lower prices. This way you are staying competitive and lowering your loss. When prices increase, we just try and keep a lower inventory, so we don’t get caught with a lot of high-dollar inventory.”
“We have been using a blended average/ market cost in these scenarios to set our retail pricing. Then for larger projects, evaluating the quotes to see if we need to make any further adjustments to ensure that we are priced correctly in the market and still maintaining our standards.”
“This is a challenge in all markets that have one of the three big box stores; ours is no different. Having once been a buyer for one of these chains, I know that they are able to react more quickly based upon most of their inventory being VMI (vendor managed) meaning that their costs adjust with market changes. As noted, most independent yards (ours included) have to sell through ‘owned’ inventory before being able to react to dramatic market changes.
“We are fortunate to have a customer base that we have been able to explain the situation to and while we have had the same issue of some jobs being shipped without panels, overall, we have been able to rely on the relationships that we have built with our customers to be able to sell most jobs complete. We have worked hard to do what we can to keep our overall pricing in line with the boxes and our customers realize the value that we, as local members of the community, who support many local organizations, bring to our area.
“I think that it is also helpful to point out to customers that there are certain items (7/16 OSB, studs) that box stores don’t care if they lose money on, as long as they can sell the 70,000-plus other SKUs that they have and aren’t necessarily market price leaders on.”
“It so depends on the commodity and the timing and many more factors to consider before a decision is made.”
“We are selling premium material instead of #2 and better. We’re also selling our service along with the higher quality of material.”
“We still provide individual pricing on our estimates. However, if we know the customer is going to shop us with the boxes, then we’ll do lump sum. As for pricing, we also go up and down with the market, even if it means losing money on some items. It’s the only way to get rid of high-priced material in order to get your average costs in line with the markets. You take the good with the bad. You made a lot of money when markets are up and sometimes you have to give some of that back when the market goes down. However, I’m betting over the course of the year you did okay.”
“Yes, we’re still reluctantly providing individual item pricing on estimates because our sense is that contractors in our area expect it. We have, on occasion, provided an estimate showing line items but only a total price emphasizing that it’s only an estimate and not a quote. Our rationale is that estimates are not intended to be precise, so indicating the price of line items should not be necessary. The contractor can check line items to see that they’ve been included. I think we will strongly consider following the practice of providing only a total in the future. We purposely do not provide ‘quotes’ except for immediate purchases. We only provide ‘estimates’ for upcoming projects.”
“Even though it is painful, we move with the boxes. We try to sell through the high-cost product as quickly as possible and buy back in at lower costs.”
“We do lump-sum pricing, but we’re competitive on those items that have high counts, like 2x4x16, OSB, studs, etc.”
“I believe it’s the service that the smaller yards offer to their contractors.”
“We price to market on all commodity pricing as well. Average cost plays no part in our pricing model. We do well in a rising market and lose a little on the ride down. The material is worth what it is worth. We want to move high-priced inventory as quickly as possible in order to repurchase at lower prices. You have to anticipate market trends and adjust your inventory level as required. We will vary from 3-26 weeks of inventory on hand in order to achieve our target return.”
“We provide individual prices for each item on our bids. Currently, the box stores in our market are running a little higher on their panels.”
“We do some lump-sum pricing. It depends on the scope and what we are doing on the job. When it comes to buying piecemeal from us as in your question, we will not ship lumber if we are not shipping the panels. Let them buy the whole package from the box stores and do not ship any fill-in orders. Hold your ground and let them get the full experience from buying from the box. Don’t do the hard stuff and let them have the easy stuff. Nine times out of 10, they’ll come back.”
“First of all, we bought heavy to average our panels down. Secondly, if we make a material list, we protect our time and only give a job total estimate. Exceptions are made to our committed customers.”
“We very, very seldom price out projects by ‘individual’ items. We most always give a ‘lump sum’ project price.”
Responses from wholesale distributors, manufacturers, and service providers
“I would generate a complete estimate without the individual pricing. I believe we would get picked to death on the cheaper items.”
“My advice would be right size the pricing as much as possible to be perceived as competitive then lean into your competitive advantage over the big box. This has, and will continue to be, overall customer experience and service platform.”
“Personal contact is crucial. Get to know the customer. Sports, clubs, community all give you a chance to maintain contact with the customer.”
“Yards are still providing individual pricing on items. Box stores are not reducing prices on specialty items aggressively.”
“It’s pretty hard to combat this problem. I can only speak to OSB, but some larger producers that contract with the Big Box stores likely provide them better pricing than everyone else. They will then take product in and sell it for less than their cost to get builders in the door, putting further pressure on market pricing. They are also slow to respond to market changes even if they are getting a margin, so in a up market a lot of builders will be buying their OSB from the big box and only utilize their go-to yard in a down market.
“One way to combat this is to work with your buying group as a whole, to put pressure on manufacturers and work on contracts as a group. This is extremely difficult, however, because every buyer at every lumberyard has to prove their worth and thinks they can buy better than everyone else. The best thing a dealer can do is keep pricing commitments short. It’s not easy as other yards will go out longer to get business when things slow down. What can I say—it’s a crazy business!”
“We have plenty of small independent dealers who when the markets start to fall rapidly will actually purchase their panels from the big boxes. I thought this was crazy until I watched it play out for them. Yes, the big boxes do get much more special pricing on most items than what a small dealer could get for only a handful of units. Most of the dealers that do this have sales between $3 million and $10 million. Sometimes it’s better to join than try to beat them in the commodity game.”
“As a truss manufacturer, I’ve moved to the model of following the market rather than my inventory. It hurts when the prices go down but pays off in an escalating market. It’s on me to purchase correctly to take best advantage of market swings.”