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-hat's a commitment we've made to Willamette customers for the retter paft 0f a century and that's not g0ing to change. Tell you why. laving loyal partnerships is what we value most. Everything it takes o deliver products of consistent quality-traditional and engineered vood-is a Willamette priority. As it should be. Because the customers ve work with every day depend on this quali$ standard to do their obs well. A{ter all, they have a vested interest. Which is why making ;apital investments in our plants, keeping pace with new product _levelopment, and responsibly managing our forest resources are s0 mportant to the iob we do now and in the future. lt's a team effort, rnd one we're mighty proud of. lf you'd like to know more, call us at l-800-887-0748 ext. 100 or visit us at www.wii.com.

LTHOUGH overall sales of building products continue rising to meet increasing demand, the number of companies selling those products is not growing but shrinking.

Consolidation is rampant at every level of the building materials industry. Through the entire distribution chain, from wholesaler, treater, co-op, retailer to service providers such as software vendors, the big seem to be getting bigger, often by acquiring smaller competitors or forcing them out of business.

Will the consolidation continue? Who will survive-and what is their secret?

Brand is the chairman of the National Lumber & Building Material Dealers Association and the president of Brands, Int'., a single-unit building supply in Columbus, In., spet'ializing in the professional contractor. Brands u,as estahlished in 1967 by W. Calvert Brand, present thairman of the board.

ONSOLIDATION at all levels of our industry, from producers, distributors and competitors to our cus- tomers, presents a looming threat retailers must recognize and manage.

Among retailers, consolidation has meant the growth and expansion of some strong. aggressive companies and the demise of many others, large and small, that were unwilling or unable to respond to the changing nature of the market and our customers. This will not only continue, but the pace is accelerating.

Because the various sectors of the building materials industry are so interconnected, what is happening at the retail level affects and is affected by the process at all the other levels. We all serve customers and are someone's customers.

The reduction in the number of building materials dealers will continue. Among independents, it will become increasingly difficult to compete against the double assault of the chain/big box competitor and the emerging, pro-oriented specialist such as Carolina Holdings and Pelican. These independent dealers will have to capitalize on the advantages of agility and quick response while looking for every oppoftunity to unite and cooperate with similarly positioned companies if they are to survive and prosper.

The rapidly occurring changes in the distribution of products will provide opportunities if independent dealers work to benefit from rather we have lost the contributions and leadership that these and other locally owned and operated small businesses have provided. These are losses that may never be measured, but are certainly felt in communities across our country. than be hurt by them. The big boxes are waging their own dual-front battles as they wage war against each other while exploring entry into the pro-dealer markets. Their numbers will diminish, but the survivors should be very strong for a time.

Those dealers that are surviving are the best and tend to elevate the standards of service for customers and contributions to their communities. As these dealers "raise the bar" by improving their efficiency and expanding their services, they and their customers benefit.

As fewer companies come through the process, there will be more competition for materials. We already see manufacturers committing most or all of their products to a single company or taking positions with one type of retailer, thereby limiting access for others.

We are also seeing consolidation in the form we used to call vertical integration as at least one major building products manufacturer acquires distribution capability in order to be closer to its customers. Distributors and coops are shrinking their numbers through mergers and acquisitions that should enable them to achieve economies of scale in operations and wield more clout with manufacturers. Key to this improvement will be the willingness of independent dealers to unite in support ofthese efforts.

Consolidation will continue at all levels of the building materials industry. This consolidation will bring tougher competition; competition from fewer but stronger dealers vying for the same customerst competition from suppliers and producers attracted to the large consolidated builders that will look to eliminate the dealers' place in the market, and competition for materials as fewer consolidated producers and distributors choose with whom they will do business.

The disappearance of hundreds of independent building materials dealers has been only one of the results of consolidation in the way products get to consumers. The nature and fabric of our communities has suffered as

The lines of distribution are being redrawn by consolidation. The essential issue is for dealers to identify who these lines of supply serve and support those manufacturers and producers serving the dealers' interests. Dealers must also be willing to provide the value-added, diversified and unconventional services that their customers need. Those companies, large or small, that recognize and capitalize on the opportunities will prosper. Others will find these changes too threatenine and be overwhelmed.

Do it Best Corp. is a $2 billion hardware, building materials and lumber cooperatire with more than 4,000 retail members throughout the U.S. and in more than 30 foreign counlries. Based in Fort Wayne, In., the 53-year-old company has distrihutionfacilities and regional lumber and building materials offices throughout the U.S. On Dec. 31, 1997, Do it Best (then HWI) merged with Our Own Hardware, a similar buying cooperative based in Burnsville, Mn.

Rowth

in the home improvement industry and in the segment relating to lumber and building materials continues to gain strength and challenge distributors throughout the distribution channel (including cooperatives, wholesalers, buying groups and other distributors). Consolidation at the retail level has resulted in significantly reducing the number and increasing the size of lumber and building materials retailers.

In 1990, total retail sales from hardware stores, home centers and lumberyards totaled $87.5 billion. By 1998, that figure had increased 66Vo to $145.3 billion. In addition, it was estimated in 1990 that there were approximately 46,800 independent hardware stores, home centers and lumberyards throughout the U.S. By 1998, the number of independent retailers had declined to 43.600. a decrease of just under 77o. Many expect these trends to continue in the future.

As consolidation continues at both the retail and wholesale levels, it has become clear that several factors continue to stimulate consolidation:

(1) Increased efficiency. The growth and size of wholesalers serving the lumber and building materials industry continues to drive the emphasis for a more efficient model. As more volume is added to the

(Please turn to next page) wholesaler, the company's resources are spread among a larger base enhancing the efficiency of the entire system. In this connection, the wellmanaged distributor that can grow its business can often do so without proportionately growing its cost of operation. As a result, increased efficiency is generated that should benefit both the wholesaler and others in the distributor chain.

The opposite effect can take place, if the wholesaler is not well-managed or the wholesaler ineffectively executes the combination. A poorly planned or implemented combination may result in a larger company which is unable to promptly transition the business and could even result in a less efficient wholesaler due to increased costs or other operational or transaction related expenses.

(2) Price/Leverage. The additional consolidation and expansion allow the wholesaler to bargain with the manufacturer or producer in a way that will enhance pricing and other services. This greater volume can create additional efficiencies for the producer and manufacturer that should translate into lower and more competitive pricing for the wholesaler and distributor.

(3)Availability and product selection. The continued consolidation of purchasing power with fewer, yet larger wholesalers, allows a wholesaler or buying group to go to the marketplace and obtain better product availability and product selection and to deal more effectively with products of limited supply. While much time is locused on pricing. in many market situations product availability is a far more important factor than price, especially when there is a limited supply available in the marketplace. Further consolidation enables the larger and more efficient wholesaler to arrange for better product availability and selection.

(4) Technology enhancements. For any entity, the technology enablement is a key f'actor in the growth and stability of a wholesaler or buying group. Technology can effectively take costs out of the entire distribution system in ways that will provide added benefit at all levels of the chain. In addition, technology allows the retailer to interact with the wholesaler in a more efficient and meaningful way. This could include the electronic placing of orders, the negotiation of pricing or many other uses of technology to enhance the available information and to assure that both the wholesaler and the retailer are able to provide the product in the most efficient way possible. These technology costs are frequently driving forces in merger and acquisition analysis. The savings and increased efficiencies of sharing those costs among the combined organization and the detriment of having those costs born by an efficient, yet smaller organization frequently serve as a catalyst for the combination of wholesalers.

Throughout the 1990s. we have witnessed significant consolidation at the wholesale level that has involved the home improvement industry and the lumber and building materials industry. These mergers, consolidations and alliances have resulted in assuring continued growth and efficiency in the distribution chain. In recent months, we have observed situations where manufacturers or producers are joining fbrces in the marketplace with buying groups. While it is clearly too early to determine the impact of these strategic alliances or mergers, they have attracted much interest within the industry and may result in other transactions that cross traditional lines of wholesalers, cooperatives, buying groups, retailers, etc.

From the retailers' perspective. these strategic moves may create added efficiencies in the distribution system that should enhance the retailers' position and desire to obtain product at a competitive price. It is not clear whether these strategic alliances or consolidations will, in fact, result in better product availability or selection for retailers. Retailers must carefully position themselves in ways which will assure that their distribution partner can provide not only attractive pricing and efficient distribution, but also product availability and selection.

The market forces that have created consolidation remain active, and we anticipate even greater consolidation among wholesalers. cooperatives and buying groups. We also expect to witness transactions that cross traditional lines. with consolidations occurring between buying groups and wholesalers or cooperatives with the objective of capturing greater efficiencies within the distribution system and assuring retailers of better product availability and selection.

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Hossenstah is the rhie.f ?re(utir'( officer of Distribution Managcment Syslems Int., a supplier of softv,are to the v'holesale building products distribution industry.

HE BUILDING products distribution industry, by its nature, lends itself well to the benefits of consolidation. And as the leading provider of software to the wholesale segment of the industry, I can assure you we at DMSI have seen and felt its effects first hand. Not only in our own customer base, but also amongst our peers in the software industry.

Within our customer base, consolidation is paying off. When one of our customers acquires another building product distributor, they quickly experience the synergies and economies that come with consolidating and centralizing.

What drives mergers and acquisitions in the building product industry? Amons our customers. we have seen variety for consolidating.

(l) National distribution. Being able to increase product lines and service areas to meet the nationwide demands of the big boxes.

(2) Capitalizing on resources. It takes substantial financial and technical resource to effectively take advantage of today's industry changes and new technology.

(3) Gaining market share. Too much supply is chasing too little demand and diminishing margins. A well-placed acquisition can increase market share and improve the margin outlook in a given region.

(4) More buying power. Bigger distributors are able to negotiate better prices to offset margin pressure.

Family owned business opportunities. Owners that have no succession plan are not able to pass the business down within their families. Selling becomes their most logical exit strategv.

As building product distributors get into the M&A game, needs change rapidly. Consolidating companies face the challenge of managing more locations, more product lines, and more resources. The risht busi- ness system foundation (processes, controls, and practices) can dramatically impact the ultimate success of a consolidating organization. Some of our customers are aggressively pursuing growth through acquisitions. We at DMSI have worked hard to provide the resources, software foundation, and technology tools our customers need to achieve consolidation efficiencies in the shortest period of time with the least amount of pain.

Unlike our building product distribution customers, software suppliers, by nature, do not find themselves very well suited to consolidation. Where distributors find synergies in consolidation, software providers face difficult challenges. Late last year we all saw some merger activity in retail focused software companies-a likely result of too much supply for a shrinking retail market. These software companies will be challenged to achieve the ultimate benefits of fully integrated products and services. Why? As a software developer, we know just how difficult it must be to truly combine software businesses. For software companies to play in the acquisition game, each enterprise must run as a separate business unit with separate products even though they do essentially the same thing.

Distributors and retailers stand to gain the most from mergers and acquisitions. As their size increases so does buying power, level of resources, market coverage, etc. But as software companies attempt to merge into one cohesive organization. we see more challenges than rewards. Support suffers, focus on core solutions is diminished, and customers become dissatisfied.

In light of all thatwe have observed of late, our forecast is that M&A's will continue in the building products distribution industry.

Software company transactions. on the other hand, are likely to slow while the recent acquirers attempt to unravel the secret of merging past acquisitions in a way that truly results in a better overall enterprise.