Key takeaways

  • U.K. builder’s merchants are experiencing a rapid change in market dynamics, customer behaviours and service expectations, forcing them to engage trade customers with a compelling channel strategy
     
  • Ongoing trends are accelerated by COVID-19, which fundamentally affects how merchants serve their customers and pushes increasing amounts of activity online and for delivery
     
  • Today’s trade customers are digital-savvy.  They are embracing technology for purchasing and research, leading to the growth of disruptive online-focused players
     
  • To respond, merchants must enhance the customer experience, build relationships, and improve their online proposition and digital experience to drive incremental profit
     
  • These new behaviours are reducing the role of the branch and merchants need to resize their networks while creating or upgrading to hub branches that meet customer expectations

 

The recent wave of M&A activity among builder’s merchants has been driven by firms’ desire to realign themselves with the needs of their core trade customers. Examples include Travis Perkins placing its plumbing and heating division up for sale and demerging consumer-focused Wickes. Beyond the national merchants, Huws Gray (with private equity backing) has expanded its geographic scope by acquiring Ridgeons, and Cairngorm is building a trade-focused platform in the south east through M&A. The need to refocus on core trade customers is increased by the continued rise of Toolstation and Screwfix gaining share in ‘man and van’ stock, and Amazon looming.

On top of these underlying market dynamics, the COVID-19 pandemic will fundamentally affect how builder’s merchants serve their customers, with the need for social distancing accelerating the move away from branch-based transactions and pushing increasing amounts of activity online and for delivery. This opens the door for pure-play online distributors and even building product manufacturers to sell direct, increasing competition for the traditional builder’s merchant model.

This rapid change in supply dynamics, and customer behaviours and expectations, means that builder’s merchants now need to create a compelling channel strategy to engage trade customers in a way that suits them. So what do trade customers want from builder’s merchants as we enter the third decade of the 21st century? L.E.K. Consulting carried out a survey of the sector, and this Executive Insights discusses the findings and their implications.

Customers are digital-savvy

Our data shows that trade customers are embracing digital technology. Despite tradespeople and contractors having high levels of experience (62% have more than 10 years’ experience) and generally being older (33% are aged over 50), perceptions that the industry is traditional are outdated. Some 80% of customers use smartphones regularly for work, and 60% use laptops. Over the past 24 months, 25%-40% of customers have increased their use of digital devices (40% transacting more, and 25% doing more online research for how to undertake specific jobs), while only 5% have reduced usage. Of planned purchases, 35%-40% are now made on websites or mobile apps, a figure that is unsurprisingly lower for unplanned purchases (see Figure 1).

Figure 1
Method of ordering building products

Digital orders are typically lower value, so digital still represents a smaller proportion of total spend. However, customers conduct online research for over half of their project purchases, and about 40% of their man and van stock purchases. They use digital devices 80%-90% of the time to gather product information, read reviews, compare prices, and check product quality and availability (see Figure 2).

Figure 2
Reason for using digital channels

Desktop or laptop computers remain the primary devices, with mobile apps and websites together used about 60%-70% of the time. The increasing availability of mobile apps, which enhance the customer experience, means that many customers now use them, with survey respondents citing the leading app providers as Toolstation (36%), Screwfix (35%) and Amazon (35%) — all of which are focused on the man and van sector. Surprisingly, some of the larger merchants do not even have an app — for example, Huws Gray, MKM, Grahams and City Plumbing Supplies.

Tradespeople and contractors are pretty savvy; they draw on a wide range of information and sources in their research. For gathering product information, almost two-thirds (60%) use Google, supplemented by DIY and builder’s merchant websites (used by 40%) and manufacturer websites (also used by 40%).

Merchants will therefore benefit from building customer affinity (so customers go direct to the website or use the app) and upgrading their SEO/SEM. Manufacturers can be important in shaping perceptions of products and are the primary source of information for product reviews, suggesting that builder’s merchant websites should incorporate authoritative and clearly manufacturer-owned/generated content.

To check product availability, customers focus on merchant, DIY and specialist supplier websites. Interestingly, this is an area where Amazon is used less frequently. It remains to be seen whether the expanding geographic reach of Amazon’s one-hour delivery service as an alternative to click and collect will drive a significant change in customer behaviour at work, as it is starting to do in users’ personal lives.

Merchants must enhance the customer experience and build relationships

As digital transactions become more important, good digital experience/interface is a big opportunity for builder’s merchants to drive incremental profit. Recommendation engines can increase share of wallet by capturing personal preferences and encouraging basket building. Digital transactions enforce price/discount discipline, and good UX design will nudge customers away from email ordering, reducing cost to serve.

Personal preference and end-customer preference are the deciding factors for product choice in the majority of cases, with personal (tradesperson) preference particularly important for consumables, tools and equipment. Surprisingly, there are no material differences between planned and unplanned purchases.

Pricing is increasingly transparent, driven both by customer expectations and the need to win volume online. Merchant websites are one of many sources to compare prices and check product quality, including Google and Amazon, so claims to offer the best price will be fact-checked. For more evidence, just contrast the clear headline prices now on national merchant websites with the lack of prices four years ago.

Though 63% of customers review their preferred product suppliers at least every six months, they are surprisingly reluctant to switch brands. Some 40% have not switched product suppliers for more than four years, and only 20% have switched in the past 12 months. As a result, persistent attempts by merchants to prompt customers to switch products may therefore be ineffective at best and could create a negative perception amongst customers. Nevertheless, particularly for own brand, this needs to be balanced against the opportunity for higher margins.

With half of orders still placed in-store, over the phone or by email, merchant staff continue to play an important part in building and maintaining personal relationships and providing advice. A digital equivalent is required for the other half of orders placed digitally, so merchants need to increase digital personalisation, taking a lead from other consumer businesses with repeat customers, such as Sky. This means providing specific and relevant advice tailored to the user’s needs digitally rather than a one-size-fits-all solution. Apps such as PartsArena, which helps heating engineers identify faults and choose the right spares, are a good example. Other sectors use chatbots to address many of the simple questions, with more complex questions triaged for human intervention.

For the 20% of customers who still use email to make purchases, merchants should ultimately try to nudge them towards other digital channels that reduce cost-to-serve and better enforce price/discount discipline. One nudge is to impose a phone/email booking fee, common in other areas of customers’ lives. In the interim, a move to a call centre model may be beneficial, or even necessary, but that can add incremental cost if it is not possible to reduce staffing in the branch (e.g. lone-working restrictions, roster inflexibility).

Rethinking the branch

New customer behaviours are changing the role of the builder’s merchant branch. Traditionally, branches have been central to ordering and fulfilment, with about 50% of planned orders and 40% of unplanned orders still collected in person.

The rise of digital ordering and the increased prevalence of guaranteed and free next-day delivery (typically for orders over £50 or £100 and placed before 5 p.m.) have reduced the need for customers to use a branch. L.E.K.’s survey provides an insight into customer preferences (see Figure 3).

Figure 3
Order and fulfilment choices

Digital orders for delivery comprise 30% of customer orders for planned and, unsurprisingly, a lower proportion (20%) for unplanned purchases. At the other end of the spectrum, 27% and 34% involve the branch for ordering and collection, respectively, with the rest using a combination of branch and digital.

In light of these trends, builder’s merchants must rethink the role of the branch. Specifics depend on the business model or product range, but in plumbing and heating, for example, many branch networks face a number of challenges:

  • Deliveries arrive in the morning but are still being unpacked in the peak 8-9 a.m. slot
  • Goods are often delivered from the warehouse only to be unpacked and repacked for delivery to the customer
  • Branch-based vans complete next-day deliveries, but these deliveries could have been dispatched direct from the warehouse
  • Expertise is buried in the organisation and not made available in the branch when required
  • Staff spend a lot of time taking phone calls rather than serving customers
  • Staff rostering is not flexible enough to align with demand

Branches need to provide genuine high-touch service when customers have complicated problems or order or service issues. But branch networks typically reflect their historical evolution (both organic and through acquisitions) and may have poor operational configuration and insufficient customer focus.

Looking forward, there may now be too many traditional builder’s merchant branches. Over the past three to five years, many of the larger merchants have trimmed their networks as newer, disruptive merchants, such as Screwfix and Toolstation, have expanded to cover the entire country. These new entrants combine smaller, retail-like branches focused on convenience with rapidly growing digital sales including click and collect five minutes later.

Builder’s merchants must continue to shrink their branch networks while creating or upgrading to hub branches that can meet customer expectations for delivery windows (both specific target times and speed), with next-day likely needing to become same-day. Simultaneously, the service and experience provided in the branches will need enhancing to make them worth visiting and justify the incremental fixed cost.

Do not bet against Amazon

The 20%-30% of customers who prefer digital ordering for delivery already exhibit behaviours that are a good fit for an online retailer such as Amazon, which meets many of their research and purchase needs. Unsurprisingly, these customers are more likely to use Amazon, with L.E.K.’s survey suggesting 27% have used Amazon for work in the past 12 months versus 21% for the entire market. Even the 21% is higher than for most other suppliers. The concern for merchants is that customers who prefer a combination of digital ordering and delivery and branch collection will also switch to Amazon.

One of the most interesting findings from our survey is that customers are using Amazon for heavy and light materials, rather than just for tools and consumables. Amazon is not far behind Jewson and Travis Perkins on heavy materials and Screwfix on light materials (see Figure 4).

Figure 4 
Suppliers used in the past year by materials purchased

Our survey indicates that, in the next 12 months, 20% of customers are going to use Amazon much more, and another 35% will migrate there over the next 24 months. So merchants need to urgently rethink their market positioning and redesign their proposition to compete effectively. Some 30%-40% of customers already feel Amazon is better than traditional suppliers on each dimension of the experience (see Figure 5).

Figure 5
The rise of Amazon as a building products supplier

Builder’s merchants are unlikely to match the super-convenience that makes Amazon so popular. But they will need to improve the customer experience in areas such as digital ordering and fulfilment as Amazon continues to raise the bar, as well as maximise their points of differentiation such as expert advice, personal relationships, and local presence and product availability.

Amazon Marketplace makes many of the benefits of Amazon available to other merchants, such as inclusion in the Amazon store (website and app), as well as transactional support and, if they choose, Fulfilment By Amazon (FBA). As retailers have seen these benefits, Amazon Marketplace has grown rapidly in the past decade and now represents 58% of Amazon’s total GMV. Builder’s merchants have that choice too.

There is some solace for merchants in that Amazon’s fulfilment engine constrains both Amazon direct and Marketplace customers using FBA. Products must fit in a box and be deliverable by a single person, so heavy items are probably safe (for now), especially those that are large and require two or more people to deliver. Amazon is also unlikely to appeal to customers who want technical advice.

Nevertheless, it has proven a bad idea to bet against Amazon, and it is therefore important to monitor both Amazon’s actions and how competitors are responding.

A five-point plan to enhance profitability in a digital world

The builder’s merchant sector is changing as customers become increasingly digital savvy. Competition and customer expectations will rise as Amazon becomes more established and grows as it outperforms the competition.

Builder’s merchants need to focus on delivering five strategic imperatives to make them fit to compete, by enhancing profitability, protecting and gaining share, and increasing cost-effectiveness:

  1. Drive customer volume by enhancing digital channels to meet all needs (research, price comparison, ordering)
  2. Expand share of wallet through personalisation and customisation
  3. Enhance user experience to encourage digital ordering and reduce cost to serve (e.g. switching customers from email and phone to digital orders)
  4. Encourage digital transactions to enforce price and discount discipline
  5. Right-size the branch network and rethink the role of the branch (e.g. delivery/service hub) to meet customer expectations for availability/delivery on time and in the right place

Winning in this competitive market requires established merchants to bring about a transformational change in their proposition and operating model to deliver superior experiences and prove their value to customers.

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