In Depth: Buying groups and co-ops

Through participation in buying groups and co-ops, even small LBM dealers can remain competitive against larger dealers.

Cooperation is not a new concept. The earliest cooperatives (or co-ops) appeared in Europe in the late 18th and early 19th centuries during the Industrial Revolution. As people moved from farms into cities, they lost the ability to grow their own food to feed their families. And as the wealthy gained more control over pricing, everyday people like workers, farmers, and producers banded together in co-ops as a way to protect their interests and get the best prices.

Here in the United States, buying groups and co-ops are as old as the country itself. In 1752, Benjamin Franklin, along with volunteer fire departments from Philadelphia, formed the Philadelphia Contributionship for Insurance of Homes from Loss of Fire, a mutual insurance company through which policyholders could share their risks. And in the case of group purchasing organizations, their roots can be traced to the early 1900s when hospital superintendents in New York wanted to collaborate on laundry services.

But how, exactly, does this concept of cooperation benefit the LBM dealer in a modern environment driven by competition? As it turns out, more than you might think.

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Strength in numbers

In case you’re not familiar with them, let’s take a quick look at buying groups and co-ops. Both are membership based, both leverage group power for buying purposes, and both aim to deliver better pricing and terms on goods and services. The difference comes in the organizations’ ownership structure.

In Depth: Buying Groups & Co-ops Gary Nackers
Gary Nackers

For a co-op, it’s the members who own the organization, and as such, they share fully in the organization’s profits which they can then use to reinvest in their individual business growth. “At Do it Best, our team understands that when our member-owners succeed we all succeed,” says Gary Nackers, vice president of LBM for Do it Best Corp. “We act as an extension of their staff and are always looking out for what’s best for them. Further, our board of directors is made up solely of Do it Best member-owners.”

One of the main goals for both buying groups and co-ops is to utilize the collective buying power of its membership in order to secure the best price on LBM products. “The co-op is in business solely for the benefit of the members and they will always have an important voice within the organization,” explains John Somerville, president and CEO of Lumbermens Merchandising Corporation (LMC). “Because of this, there’s also tremendous transparency regarding discounts, rebates, and overall financials so members know what is happening with their investment.”

In Depth: Buying groups & co-ops John Somerville
John Somerville

This type of member-based organization is of particular benefit for LBM dealers. “As a member of a cooperative, a lumber dealer is an owner and takes advantage of 100% of the rebates and profit earned by the cooperative,”points out Stephen Sallah, president and CEO of LBM Advantage. “The ownership structure increases the leverage of the cooperative with suppliers and therefore is able to pass on improved pricing and programs to the membership.”

But it’s not just about better pricing and profits. Buying groups and co-ops can provide tax advantages. As Sallah explains, being fully owned by the membership, the cooperative acts per IRS code as an agent of its members and therefore a single tax entity. “Any rebates and profits distributed to the membership are only taxed once through the dealer tax structure, improving the overall benefit of cooperative membership,” he says.

In Depth: Buying groups & co-ops
Stephen Sallah

As well, buying groups and co-ops provide networking opportunities for its members. “LMC understands the importance of building relationships within our network and encourages interaction between dealers and suppliers,” says Somerville. “In a typical non-COVID-19 setting, we emphasize networking and dealer-to-dealer, or dealer-to-supplier, interaction at our large events to help build and strengthen these relationships. This is why we consistently mention the LMC network. We are proud of the relationships we’ve built and the professionals we’ve connected throughout the industry.”

Bringing service and experience

Beyond looking for organizations that have strong relationships with mills and vendors that allow them to buy competitively while providing strong returns to its members, industry leaders agree that there are a few key areas dealers should look to when choosing a co-op or buying group. Not all organizations are alike, and dealers should look for ones that can bring integrity and experience to the table while providing service across a strong member base.

“Our members look for service—access to our trading staff’s knowledge and time—first and foremost,” says Sallah. “They want the attention of a trader who is going to source the products they need, get a competitive price and have it delivered on time.”

When it comes to delivering on that service, industry leaders agree that experience, integrity and reputation make the difference. “Co-ops and buying groups may have collective purchasing power, but an experienced and seasoned team will know how to best maximize this buying power,” points out LMC’s Somerville. He goes on to explain, “Integrity and reputation within the industry are always important. The integrity gives you confidence that all dealers will be treated as a bigger collective no matter how big or small you are. Reputation will help when utilizing its buying power for pricing and securing product.”

LBM Advantage’s Sallah agrees, and adds, “Dealers should also look for a co-op that is transparent. Are they showing you all of the accounting and keeping you informed about how the rebate programs work so the dealer can make the best decisions for their business? This is crucial for the health of the dealer’s bottom line and it is not a universal philosophy among cooperatives.”

Reacting to trends

Buying groups and co-ops keep close eyes on product trends; they may not be driving the trends themselves, but they want to be able to quickly supply their members with products that are in high demand. “Trends are typically driven by the manufacturers,” explains LMC’s Somerville. “They spend a lot of money in research and development and are constantly looking for a competitive edge, so they know when to adapt to the market before the consumers even do. The LMC team works hand-in-hand with suppliers including extensive training on new products, and helping our team get the right products to the right applications.”

It should come as no surprise, therefore, that buying groups and co-ops are paying particular attention to products that decrease labor and increase efficiency. “We’re seeing more PVC and composite type materials increase in popularity as these materials become more aesthetically pleasing and closer to traditional wood products,” says Somerville. “This, combined with the low cost and low maintenance upon installation, has made it increasingly popular over the last few years.”

“Manufacturers have continued to make products easier to install, increasing their success with the trade,” adds LBM Advantage’s Sallah. “There is also a continued trend to branding on products that have traditionally acted as commodities. It has the potential to differentiate the independent dealer’s product line from the commodity channels and improve their share and profitability.”

One trend that may come as a surprise for the LBM dealer is the DIY category. According to a recent Bank of America poll about homeowners’ shopping habits during the pandemic, more than 70% of those polled indicated they had decided to tackle home improvement projects, with more planned for 2021. As well, a series of consumer surveys by The Farnsworth Group and the Home Improvement Research Institute reveal that almost 80% of homeowners reported that they recently started a DIY home maintenance, replacement, repair, or remodeling project. Therefore, products that are either easy to use or provide a budget-friendly, cost-effective solution for homeowners who choose to do it themselves are in high demand. For example, explains, Somerville, “Southern yellow pine lumber is growing in production and reach as it is becoming increasingly more popular in non-traditional markets. It is abundantly available and cost effective, which has helped in its expansion in the North American lumber basket.”

In Depth: Buying groups & co-ops

Plugging into power

Besides building buying-power critical mass, buying groups and co-ops bring a lot of benefits to the table for their LBM dealer members. “There are obvious benefits to being a part of these groups that other dealers are dying to be a part of,” says LMC’s Somerville. “With LMC, that goes beyond buying power. It includes professional development, continuing education, and networking, among other services provided.” Ultimately, however, it’s up to the individual dealers to take full advantage of those benefits and services, and industry leaders have a few recommendations in that regard.

One way LBM dealers can ensure success is to get involved—not just for their sake but for the benefit of all of the co-op members. “Independent dealers join cooperatives because they want the benefit of the leverage of the membership, but also to be part of a larger organization for the buying power, as well as knowledge of market, legislative participation, pool groups, trade shows and education opportunities,” explains LBM Advantage’s Sallah. “We ask our members to participate in our purchasing programs as well as attending our pool groups and trade shows. When we have a competing product, we ask for an opportunity to demonstrate an alternative. The majority of our members recognize the benefits of participation. To the extent that more members participate, it strengthens a co-op’s position in the market and value to its members.”

Do it Best Corp.’s Gary Nackers agrees with Sallah on the importance of getting involved. “The greatest area for opportunity is to further leverage the team and resources available to member-owners,” he says. “Dealers can also leverage the purchasing power of Do it Best by participating in committed purchase programs. They can also take advantage of education and services like showroom and yard design and customized pro planograms.”

Adapting to a post-pandemic world

While the world was already making the shift towards more of an online shopping experience, the COVID-19 pandemic accelerated that move and radically ramped up both e-commerce and dealer operations.

In the case of e-commerce, customers are looking for more opportunities to research and pre-shop products virtually before entering a brick-and-mortar location, and co-ops are stepping up to provide solutions for their members. “Customers are looking for opportunities to shop home centers and lumberyards before they actually go into the store,” says Nackers. “They are also looking for the convenience and safety of streamlined ordering and curbside pickup. This will be a growing trend driven by builders and contractors looking to efficiently research products and order online and pick up at the yard. Do it Best has a leading platform that provides their member-owners with the ability to showcase their local brand and their products with same day in-store pickup.”

When it comes to dealer operations, buying groups and co-ops are adapting by providing virtual resources for their members to aid in selling, collaborating, and training. For example, LBM Advantage is developing new webinars with expert speakers on topics such as e-commerce, customer service, and front-of-house issues, and it is scheduling small group video chats that will allow members to collaborate and share ideas virtually.

LBM Advantage also launched a member-exclusive “NextGen” program of education and networking for the future leaders of the LBM industry that includes conferences where leaders of industry and trainers meet with participants in a group setting. As well, it’s introduced a 5-day virtual workshop for experienced members to pass on their knowledge to its NextGen participants as well as any dealers who wanted to join. “We broke participation records,” said Sallah, “and have been asked to repeat the program in 2021.”

In the case of LMC, it transitioned three annual events to virtual experiences last year, and rather than see attendance drop, its LMC Hardware Express and LMC Expo events both set record attendance levels with purchases to match, and in March it will be hosting the first virtual LMC Annual Meeting. “LMC has done a tremendous job adapting to the world around us over the last year,” says LMC’s Somerville. “We’ve been able to communicate and interact with each other in a virtual setting while building our relationships in the industry. This speaks in large part to the strength of our existing relationships before the pandemic and the individuals behind the LMC network.”

For Do it Best Corp., it has expanded the functionality of its e-commerce platform to now include same-day in-store pickup, member-sourced inventory, enhanced curbside pickup, and a Pick-N-Pack app to help store associates manage their online order notification, retrieval, and fulfillment, while its “Best Together” initiative in LBM allows the co-op to leverage member-committed purchases for better buying opportunities.

Poised for growth

There has been significant consolidation in the past years—mergers of small lumber yards and  consolidation of buying groups and cooperatives. As an example one need look no further than LBM Advantage which came into being in 2015 when it was formed by the merger of ENAP, Inc. and PAL buying cooperatives and now has merged with the International Builders Supply Association (IBSA).

“LBM Advantage is the product of the merger of three respected cooperatives with successful histories in their markets,” explains LBM Advantage’s Sallah. “Our philosophy of ‘National Buying Power with Regional Expertise’ has allowed us to take advantage of a national dealer footprint while maintaining skills in all the markets where we operate.”

With the rapid pace of consolidation, it’s only natural to wonder what the future looks like. “We believe there is tremendous opportunity for the properly positioned growth-minded independent LBM dealer,” says Do it Best Corp.’s Gary Nackers. He sees aligning with a member-owned co-op as a key part of any dealer’s success. “For Do it Best member-owners, they are going to be most successful when they rely on our professional team of experienced buyers bringing value to large and small LBM dealers,” he explains. “That approach allows them to invest in staff who are customer-facing while our team brings the training, experience, and efficiency to hardlines and LBM product acquisition.”

LMC’s Somerville shares Nackers’ viewpoints on the future health and importance of co-ops. “Consolidation has always been, and will continue to be, a part of the industry, so the recent consolidation isn’t anything new,” he points out, “but the value of the co-op is even more important today and is essential in helping level the playing field against big boxes and national chains. As consolidation occurs and the large organizations continue to grow, it will be more important than ever for independent dealers to utilize the benefits of a co-op or buying group to remain competitive.”

And for LBM Advantage, Sallah sees a future that holds promise for buying groups and co-ops as well as for LBM dealer members. “Individually, our dealers continue to see top-line growth for their business despite consolidation,” he says, “and while ownership changes and consolidation have accelerated, the market for the independent lumber dealer serving the home building, renovation and the overall pro-market remains strong.”

 

Michael Berger is the former managing editor for HANDY Magazine and has been writing about home improvement and construction for the past 20 years.

 

 

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