For an in-depth look at the state of the construction industry, THE CONSTRUCTION SPECIALIST turned to Mark Dancer, vice president and principal with Pembroke Consulting, who gave some great answers to some of the industry's most pressing questions.

THE CONSTRUCTION SPECIALIST: Could you give us a status snapshot of the construction market as you see it now?

MARK DANCER: My view of the construction market is colored by changing customer buying practices, the evolution of the construction market supply chain and channels, and the emergence of new manufacturer branding and go-to-market strategies.

The construction market is fragmented, but is not homogenous. Certainly, the vast majority of contractors and builders are small businesses, locking in a long-term role for traditional distribution. However, there are many flavors of specialty contractors, general contractors, architects, and builders. New construction dynamics are different than remodeling, which in turn is very different from commercial opportunities. Contractors are pragmatic, down-to-earth business people, slow to adopt new practices and slower to invest in new technologies. Large builders are on the move, seeking to leverage their buying power and supply chain clout.

All of this points to a confusing, complicated market—but complacency is death to distributors and manufacturers. According to the answers provided to us by construction industry executives in our research, Facing the Forces of Change: the Road to Opportunity, distributor share of market revenues in contractor-dominated markets will decline from three-quarters to two-thirds within five years! This trend will be devastating for companies that are unprepared to adapt to change.

In the same study, we identified two key customer trends that are ultimately driving this change: self service and strategic sourcing. Self service involves the trend toward customers acting on their own without distributor help. It leads to a questioning of distributor value-add and ever more willingness to buy from alternate channels and online sources.

The term "strategic sourcing" sounds theoretical and perhaps impractical, but in reality, it is simple and powerful: customers want to make fact-based buying decisions with gains locked in by contracts. Distributors and manufacturers often fight this trend by holding back electronic spending data and trying to avoid getting pinned down by service level and price commitments. They do so at their own peril, since other sources in the construction markets are very willing and able to stand and deliver.

STAFDA distributors and manufacturers can look around in the construction market and see broad changes that are visible and ongoing. Certainly, big box competitors have taken a share and are now setting market prices and feature expectations in many product categories. Product categories characterized by down-channel finishing, milling and fabrication have seen a shrinking role for distributors as manufacturers acquire their channels or as products are redesigned to move customization back to the factory. Think windows and kitchen cabinets. Surplus houses and online sources are picking up share as customers already willing to go online for product education and prices are increasingly willing to "click through" and complete the sales.

In short, the construction market is dynamic, difficult, demanding and, above all, changing. Other markets may be changing at a faster pace, but the market for construction products and services is not immune, and it is evolving nonetheless.

TCS: What kind of effect will acquisitions such as The Home Depot's purchase of White Cap Construction Supply have on the industry?

M.D.: Divining the strategies and market impact of The Home Depot is a bit like Kremlin-watching in the days of the now defunct Soviet Union—it's interesting, but never satisfying.

Manufacturers and distributors would do better to understand their own customers and challenge their own status quo view of the market and supply chain roles and responsibilities, and work hard to become leaders, not followers. Otherwise, The Home Depot will not just take share as it grows new business opportunities. This power retailer will also educate buyers, contractor and builders that The Home Depot, not traditional suppliers, is the true innovator and market leader.

TCS: What is the future of integrated supply in the construction market?

M.D.: Integrated supply is important, but only a first step and it must evolve. According to INDUSTRIAL DISTRIBUTION's 58th Annual Survey of Distributor Operations, 47 percent of distributors believe that the importance of integrated supply will continue to grow, but nearly 70 percent answered that customers are already looking for innovative solutions that are different from those offered in current integrated supply contracts. These results were for industrial markets, but they offer an important lesson for construction markets.

Integrated supply contracts are a current response to a broader customer-buying trend termed "strategic sourcing." Large customers, seeking to leverage their buying clout and IT investments, are demanding progress on three fronts: spending analysis, sourcing and contracting, and compliance management. Distributors and manufacturers can offer innovative solutions by providing electronic spend information, purchasing assistance, contractual guarantees of service levels and prices, electronic content and hotlinks, and by helping the customer transition buyers and users to new procurement practices.

Strategic sourcing is big and getting bigger. According to Facing the Forces of Change, distributors with up to $19 million in revenues can expect that 25 percent of total sales will be under contract by 2008. Among the largest distributors, the percentage of contract revenues will grow to nearly 50 percent.

Closer to home in the construction market, labor-only contracting is growing, too. Already, 80 percent of builder contracts for framing only compensate the contractor for labor, with the builder procuring the product and reaping product margins. Doors and windows are 57 percent labor-only contracts. This strategic sourcing trend is important and growing in several other specialty segments.

Finally, strategic sourcing is not just for large customers. Most contractors are small businesses, and while they do not implement the sophisticated buying practices of large customers, they can benefit from better tracking and managing their purchases.

TCS: Distributors are beginning to implement fee-based services, but are having a hard time proving the services' value to the customer. Do you think distributors will be able to provide proof of the value for these services?

M.D.: Customers are very clear and consistent on this critical issue—they will consider fee-based services offered by distributors if the service is related to the distributor's existing competencies, but they will only buy services that can measurably lower the costs of running their business.

Distributors must prove their value by taking costs out of the customer's business. Distributors have some flexibility, in that there are many ways to lower costs, including increasing employee productivity, lowering workmen's compensation costs, eliminating installation problems and rework, decreasing inventory handling and storage requirements, etc.

However, the requirement to measurably demonstrate that the customer has taken costs out of their business is mandatory. This is because customers view for-fee services and incremental and optional expenses, and they will only pay if there is a real, measurable savings for their business.

Associations, such as STAFDA, can play a role by orchestrating a more effective and sophisticated marketing communications strategy. This starts by developing a strategic message, and follows through by providing talking points to distributors, supporting trade journalists with articles and experts, educating investors, and so on. This level of advocacy goes beyond the norm for most associations, but is a powerful force in industries characterized by numerous small distributors.

TCS: According to ID's 58th Survey, distributors count territory protection (81%), new product training (80%), joint sales calls (74%) and low hurdles for discount and other programs (74%) as key characteristics of a true supply channel partner. Are manufacturers providing these services?

M.D.: The answer is both yes and no. Manufacturers resist requests for territory protection, because fewer distributors mean reduced market coverage. More importantly, manufacturers often rely on the natural competition among distributors to motivate distributors to provide excellent customer support and to work hard to gain new customers. Distributors seeking territory protection must come to terms with these perspectives and offer arrangements and services that will ensure acceptable outcomes for their suppliers.

Manufacturers are almost always willing to provide new product training and joint sales calls because better-trained distributors are better at selling their products, and closer coordination means incremental sales and share. However, suppliers are raising the bar in terms of the expected return for their investment. Distributors must deliver a compelling case and be willing to measure and document results.

For manufacturers, lower discounts and program hurdles means increased channel compensation for the same outcome. Distributors that ask for these concessions without offering new services or benefits face near-certain rejection. If distributors are unwilling to put more on the table, a better strategy for distributors is to ask for increased flexibility or reduced complexity.

Frequently, manufacturer programs do not discriminate between segment or purchase occasion, limiting a distributor's ability to be competitive and responsive. Also, manufacturers tend to pile one program on top of another, resulting in confusion and administrative burdens and costs. Carving out solutions that address these issues can be a win/win for the distributor and the supplier.

TCS: How will a distributor grow in today's market?

M.D.: Distributors will grow through a mix of old and new methods. Traditionally, distributors grow by "selling harder." This fact is reinforced by Facing the Force of Change, which found that among distributors that sell to contractors, time spent prospecting for new customers and time spent training the sales forces will grow by 15 percent and 9 percent, respectively.

However, more is needed to achieve higher than average growth. New opportunities for growth will come from improved segmentation of customers, with an eye to finding unmet or underserved needs. Sometimes, for-fee services will be possible, but in many cases, basic distributor value-add and products will suffice. I should be clear—this path to growth will not be easy for most distributors, because they lack deep, analytical marketing expertise, and because distributor information systems and databases are notoriously inaccessible for marketing purposes.

Pembroke Consulting helps executives from wholesale-distribution, manufacturing and B2B technology companies build and sustain market leadership. To contact Mark Dancer, visit www.pembrokeconsulting.com.