BLDR Taking a Big Swing
Innovation in building material distribution. Takeaways from IRE and IBS.
After two trips to Vegas attending both IRE (the roofing expo) and IBS (the builder show) – two things are quite clear: innovation is in full swing amongst building material distributors … and I should stop playing Blackjack.
In the past few months, a lot of activity has taken place:
ABC Supply invested in Roofr, a tool for roofing contractors
High Arc raised a whole bunch of money from a variety of strategics like Ferguson, Home Depot, and GAF
The distributor making the biggest investments in innovation and taking the biggest swing is easily Builders FirstSource (NYSE: BLDR). It is admirable the efforts and money being invested. And it reminds me of a 100 years ago when American construction was doing things ahead of the entire globe. We need to get back to that place – and hopefully B2B distributors will lead that charge.
Builders FirstSource = Marketplace?
If you read the name: Builders FirstSource – literally, they want to be the first source of supply for builders. And, $450+ million later – after their acquisition of Paradigm in 2021, they are continuing to put their money where their mouth is – with one point of conflict:
BLDR aka BFS is pursuing a closed-loop network.
They want to be the one-stop source of supply for builders and are creating a marketplace with third party-sellers. Quite a bold and ambitious plan, and one that I’m sure Home Depot, Lowe’s, and many other B2B distributors are monitoring closely.
What do builders want?
However, there’s one big point of conflict:
Builders generally don’t like to be locked-in to one distributor and have choice restrained
I spent a lot of time talking to contractors at both shows and hearing their feedback about the different tech tools. The contractors like the tech tools, but they also really value their relationships – including relationships with distributors. I heard from multiple contractors that they deliberately sustain relationships with multiple distributors. Yes, diversifying spend is one reason, but they seemed to have distributors they would go to for different types of jobs. Or different products for a specific job. It was clear that having the ability to run their business they want to run the business was important to them.
So, how can BFS overcome this inherent friction?
Offer builders a linear hook. Offer a suite of tools for the builder to use at no-cost. Offer so much value to the buyer that they overlook the conflict around procurement and supplier selection. And, that’s exactly what BFS is doing:
BFS has invested a lot of money into tools for the builders. But they are competing against a whole network of software solutions for builders. Use HighArc as an example – BFS did not invest in HighArc, yet 10+ other strategics did.
With ~7% market share, BFS holds a lot of weight and influence in the industry, but it’s a far cry from marketplace dominance, as evidenced by only 5,000 monthly active builder users on their software. In a market with over 400,000 builders, according to IBIS, that means BFS’ digital platform has a little over 1% penetration.
Building a winner-take-all marketplace takes a long time, even when starting from a position of strength like BFS. When building a marketplace, you don’t want your business model to be in conflict with demand or supply, at least until AFTER you’ve achieved a dominant position in the market – typically at least 20% market share.
Marketplace = Negative Connotation
It took Amazon over 20 years before its third party sales eclipsed its first party sales. For Amazon, building a marketplace in the early 2000’s was a novel and proud goal. In 2024, however, the narrative has shifted significantly against marketplaces, aka Modern Monopolies. To be branded a marketplace in the world of B2B distribution carries with it a certain connotation – and can be a headwind. Maybe not a headwind with investors, but certainly with suppliers and a portion of builders.
It’s challenging for BFS to continue to invest in digital without a clear path to ROI for its investors. BFS is still in marketplace scaling mode and it’s doing its best to communicate to investors its plans for monetization. However, this is a scenario where the communication is probably better left unsaid.
How to Win at Marketplace
BFS needs to shift its digital business model into one that is NOT in conflict with the market. Builders shouldn’t feel like they could be locked into the BFS ecosystem. It’s too early for that thought to be in their heads.
Don’t tell suppliers you’re going to launch a marketplace. Be everyone’s friend.
Don’t set hard targets of selling $1B in incremental third-party product revenue by 2026. It’s what investors want to hear, but it confirms peoples’ marketplace concerns.
So, besides stopping to talk about marketplace - what should BFS do? Well, you have to pay me to find out (it’s only $6.99 and you have a two week trial to cancel). Here are the four steps for BFS’ marketplace domination:
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